Generation Essentials Group

Thank you, Melissa. Good afternoon, everyone.

We appreciate you joining as we discuss, among other things, the Tallgrass Energy Partners and Tallgrass Energy GP results for the first quarter of 2016, which were released through our joint press release this afternoon. Joining me on the call 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 April 28, 2016. Please refer to our filings with the SEC, which are available on our website, including our 10-Ks, which provide discussions of factors that may cause actual results to differ from management’s projections, forecasts, estimates and expectations.

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

Good afternoon, everybody, and thanks to everyone for joining Tallgrass Energy’s first quarter earnings call. We got a fair amount to discuss today and given the compliance I heard last time around is taking time away from [indiscernible] and its MLP analysis on Thursdays, we’re starting it earlier this time.

Items we will discuss today include a record quarter for TEP and TEGP, the potential acquisition of 25% interest in REX by TEP and the related financial activities at TEP for the first quarter. I’ll address the potential REX transaction and financings later in the call, but first I’d like to review the outstanding financial results at TEP for the first quarter.

With the January 2016 acquisition of an additional 31.3% interest in Pony Express and strong performance in the crude oil transportation and logistics segment, the first quarter produced record adjusted EBITDA and DCF at TEP and led to TEP’s 11th consecutive quarterly distribution increase since its IPO of May of 21, and TEGP’s third consecutive increase since its IPO in May of 2015. We continue to focus on growing distributions and dividends to our unitholders and shareholders while maintaining investment great leverage metric below or within our targeted range.

This is all results in a solid balance sheet, ample liquidity and healthy long-term distribution coverage at Tallgrass. The first quarter adjusted EBITDA for TEP was $83.7 million and this does not include any of our fully collected net deficiency payments under our take or pay contracts on Pony Express.

If you include the quarter’s net deficiency payments and adjusted EBITDA that amount would have been $90.8 million. We’ve again included a table in our press release to show the impact of deficiency payments if we were to have included them in adjusted EBITDA.

Our DCF for the first quarter, which does include deficiency payments, was $81.9 million and beat even our own internal expectations. Coverage from the quarter was a very strong 1.19 times with approximately $13 million of cash generated in excess of distributions.

Our strong quarterly performance in the Pony Express acquisition supported TEP increasing its quarterly distribution by $0.065 per unit to $0.705 or $2.82 annualized. This represents an increase of 10% from the fourth quarter of 2015, 36% year-over-year growth and approximately 145% growth from the annualized minimum quarterly distribution of $1.5 at our May 2013 IPO.

As a result of the $0.705 distribution at TEP, TEGP will receive distributions from Tallgrass equity of approximately $10 million or an increase of $1.7 million from the fourth quarter of 2015. Based on that amount, TEGP declared a distribution to Class A shareholders of $0.21 or $0.84 on an annualized basis, which represents increases of $21.4 from the fourth quarter and 57.9% since the TEGP IPO on May 2015.

That May 2015 IPO is not even a year old. So, I’ll now turn the call back over to Gary to provide additional financial details and then I’ll be back to talk about our other announcements today.

Thanks, David, and good afternoon, everyone. Let’s jump right into the segments and then I’ll spend better time talking about debt and leverage at TEP.

The crude oil segment or Pony Express generated distributable cash flow to TEP of $71.5 million or its 98% ownership interest during the first quarter of 2016. This represents an increase of $21.7 million as compared to the fourth quarter of 2015 and that increase at DCF to TEP is primarily due to the acquisition of an additional 31.3% interest in Pony Express.

And also the incremental barrel shipments contributed to that increase that we talked about last quarter have been also experienced again during Q1. With respect to volumes of Pony Express, average daily throughput during Q1 was approximately 291,000 barrels a day, up slightly from Q4’s average of approximately 288,000 barrels per day.

Preliminary April figures shows that throughput was about 300,000 barrels per day and May shipper nominations would predict that we will again move about 300,000 barrels per day next month or during the month of May. When you compare those throughputs numbers with our current contracted volumes of approximately 291,000 barrels per day, you can see consistent utilization at or above 100% of our take or pay volumes over the last two quarters and effectively last month and May.

I’m intentionally waiting saying to you that the pipeline is running full because I would remind you that we have significant expansion capacity available via the drag reducing agent enhancements and other enhancements we’ve put in place at Pony Express and I know that Bill will talk more about those later. Turning to the natural gas transportation and logistics segment, which includes TIGT and Trailblazer, it produced adjusted EBITDA of $17.2 million, up about $2 billion as compared to Q4 of 2015, but down about $2 million as compared to Q1 of 2015.

The increase and decrease as you compare quarters in this segment are really not all that significant to TEP and typically are due to timing and other fluctuations and operating costs as well as incremental transportation revenue that we’re able to capture from time to time in winter months. Firm contracted capacity averaged 1.49 billion cubic feet a day during the first quarter and while this metric typically move slightly from quarter-to-quarter as well, our natural gas assets at TEP are a stable set of assets that continue to perform in line with our expectations.

As we look to the future upside, we’re seeing very positive recent developments in the ongoing rate case and that’s a subject again I know Bill will also talk more about later. The processing and logistics segment generated adjusted EBITDA of $3.4 million for the first quarter of 2016, representing a decrease of $0.5 million as compared to the fourth quarter of 2015 and a decrease of $5.4 million as compared to the first quarter of 2015.

The decreases are due to lower average inlet volumes at the processing facilities that we fully expected and previously mentioned to you on prior quarterly conference calls. As we look ahead in this segment, the processing volumes are expected to remain low or potentially decrease a bit more this year, but on the other hand, we do expect to see additional contribution late this year and for full year 2017 from the water assets acquired in December of last year as the minimum volumes under those contracts begin to ramp up.

Turning to the balance sheet at March 31, we had $1.2 billion drawn on our $1.5 billion revolver. The $447 increase from the end of year was due to our purchase of the additional 31.3% interest in Pony Express again effective January 1, 2016.

As you recall the cash consideration of $475 million was funded to withdraw on our revolver which was concurrently increased and availability from $1.1 billion to $1.5 billion again in conjunction with third Pony drop. As of April 27 or just yesterday, we had approximately $1.14 billion drawn on the facility giving more than ample liquidity at TEP.

With regard to debt-to-EBITDA, our leverage at the quarter end was approximately 3.6 turns based on Q1 annualized EBITDA and 3.6 turns is squarely within our investment rate target of 3 times to 4 times debt-to-EBITDA on any long term basis. Now, with the segments and the leverage review complete, I’ll turn it back over to David to talk a little bit about some announcements – the other announcements we made today.

Good show. As you saw in the earnings release, TEP has received an offer from TDev to sign its rights and obligation under the purchase agreement with Sempra to a subsidiary of TEP.

Conflicts Committee of the Board of Directors of TEP’s general partners have been formed as evaluating the offer. No agreement has been executed yet, the proposed transaction remains subject to review, negotiations and approval by the Conflicts Committee and by the Board of Directors of TEP’s general partner.

In addition to the ongoing Conflicts Committee process another development in this transaction is that our other partner in REX, Philips 66 has waived their right to first review, paving the way for TEP to potentially purchase Sempra’s entire 25% interest in REX. If as we anticipate TEP closes the transaction in the coming weeks, we intend to provide additional details on the transactions and its positive impact on TEP shortly thereafter, but I can tell you now that we expect the potential transaction to be immediately accretive to TEP unitholders and TEGP shareholders and also expect to raise distributions over the remaining quarters of 2016 based on a conservative estimate of long-term sustainable cash flow from TEP’s interest in REX.

In other words, we’re not going to get ahead of ourselves with regard to distribution growth attributable to REX at TEP. With regard to REX, there is really good news and then there is good news.

The really good news is that its current power up project currently slated to go into service by January 1, 2017. REX should have tremendous cash flow for the next 3.5 years.

The good news is that’s a lot more to be done and a lot of elasticity relative to REX’s ability to move gas in all directions in 2020 and beyond. We expect to prudently, one, raise distributions at TEP based on what REX can do long term, I repeat, long term.

And two, work our butts off to maximize transport volumes and revenues for the long terms and make sure that we sustain as high of TEP distributions as possible, while making sure that REX’s debt remains in that investment grade slot of 4.0 x debt to EBITDA that is so important to TEP’s overall long term financial health. Therefore, if TEP acquires an interest in REX you will probably see very nice growth in our distribution coverage in addition to our expected distribution increases.

While we will have more to share about REX after the transaction closes, suffice it to say that we believe REX is ready for prime time. Now on to the capital structure matters.

We recently sold approximately $47 million of TEP units under our ATM program and also closed today on a sale of approximately $90 million of TEP units to Tortoise Capital Advisors. These equity issuances have helped us fund a potential acquisition on a cost effective way and limit our need to access the public equity markets any further in 2016, absent other transactions.

In addition, TEP recently received commitments from our lending syndicate to increase the size of our revolving credit facility by $250 million for $1.5 billion to $1.75 billion, which is contingent upon the closing of the acquisition of an interest in REX. In addition to the increased commitments, we have also amended certain provisions in the agreement that’s the lending agreement, the revolving facility agreement to facilitate the potential acquisition in future drop downs of REX.

So with about $140 million of equity raised in 2016 and well over $500 million of available revolver capacity we are ready to close the approximately $440 million potential acquisition of 25% of REX at TEP without further need to access the capital markets. With that I’ll turn the call over to Bill and he’ll take you through the asset updates.

Thank you, David. First up is Pony Express, as David and Gary highlighted earlier in the call Pony Express continues to exceed our expectations with volumes that have consistently been at or near our contract and volumes.

With the installation of the DRA skids complete and the additional capacity of up to 100,000 barrels per day available, our commercial team continues to focus on opportunities to connect incremental supply and demand to the Pony Express system. While additional receipt and delivery points may not immediately add incremental revenue they provide optionality for our shippers and positions the pipeline to capture additional barrels as commodity prices continue to recover and drilling activity increases.

One example of this incremental supply is Pony Expresses recent connection to Genesis power river express pipeline at Guernsey. For the month of April, the pipeline delivered approximately 470,000 barrels to Pony Express.

These barrels came from our existing customers and are not incremental barrels of revenue. However, it provides our shippers another option to get barrels into the Pony Express system.

In addition to this new supply connection, our commercial team is working to commercialize a demand connection into Pony Express for a local refiner near our pipeline. No agreement has been executed, but we are hopeful that this one or additional opportunities for similar will be commercialized.

As we continue to see commodity price recovery and stability, Pony Express remains well positioned to capture incremental volumes. Gary mentioned in the earlier call or earlier in the call about the TIGT rate case.

As we reported on the fourth quarter call, TIGT filed a rate case with the FERC in later October. The filing proposed changes to TIGT’s rate structure, updates to its tariff and the implementation of a rate increase for its firm and interruptible transportation and storage services.

The FERC accepted our filing and the rates are scheduled to go into effect on May 1, 2016 subject to refund. While the new rates will go into effect May 1, our top priority has been a neutrally agreeable settlement with our shippers.

To that end our commercial and regulatory teams recently participated in a productive settlement conference with our shipping community in DC. And as of Tuesday, we have an agreement in principle to settle the significant rate issues in this case.

We believe that the potential settlement is fair to our shippers. We will provide incremental revenue to TIGT and will avoid the time consuming costly litigation for both sides.

Let’s turn to REX. As a reminder, Tallgrass Development currently holds our 50% ownership interest in REX and operates the pipeline.

As some of you may know, in February REX received its 7C certificate from the FERC for the capacity enhancement project and shortly thereafter also received the notice to proceed on the project, construction is in full swing with approximately half of the projected capital spent to date. I would remind you that the REX partners have agreed to fund this project with equity capital in excess of $500 million and once it is complete, the partners will have contributed approximately $1.2 billion to the pipeline since Tallgrass began operating in late 2012.

As mentioned on prior calls, REX’s owned three east to west project is fully contracted, operational and flowing at its 1.8 billion cubic feet a day capacity in zone three on most days. It is also interesting to note that the pipeline moved 1.7 billion cubic feet a day from west to east in early April for a total of 3.56 billion cubic feet on that one day, meaning that contrary to the popular belief of some, the west end of REX is not empty and in fact continues to be utilized by its contracted shippers.

Before we move on to Tallgrass terminals, I’d like to briefly touch on the contracted situation with ultra resources, as I know many of you are interested in it. As you may have seen form filings we recently terminated Ultra’s contract for failure to cure a payment default and collateral positing requirement.

While we may have administratively terminated the contract in line with our tariff, it does not obviate their remaining contractual obligations to REX, which are in excess of $300 million through 2019. We have in fact filed a breach of contract suit against Ultra and will continuously pursue all legal remedies available to us.

We expect to recover some amount through this legal process. As for Tallgrass terminals and as we mentioned in the past two quarters we continue to make good progress on the Buckingham truck unloading terminal, construction is well underway and we continue to expect in service during the third quarter of 2016.

We also continue to work on other projects and potential acquisitions we have mentioned on previous calls. While the current commodity environment presents some unique challenges to getting new projects off the ground.

Our terminals team continues to work hard to move these projects and potential acquisitions forward. We continue to be very positive about the terminals business and the opportunities it presents for organic and other future growth.

With that I’ll turn it back over to David for his closing remarks.

Good job, Bill. As we look back on Q1’s exceptional financial performance and look ahead to the potential acquisition of an interest in REX, I’m excited about what this future holds for Tallgrass Energy and its partners.

In the three year since we went public in May 2013, we have executed our strategic plan exponentially although that is probably a very strong word, but let’s just say we’ve 145% increase in distributions by any measure is a well done job, have grown our distributions. We continue to maintain a healthy balance sheet and distribution coverage and grown our asset base in a prudent disciplined manner.

Once again I tell you that our work is not complete, it has only just begun. With that we are about 21 minutes into the call and Q&A doesn’t go for too long we probably will be able to get everybody over there to CNBC for what’s it called the lightening round.

As always we thank all of you, our partners and shareholders for your confidence in investing with us at TEP and TEGP and thank everyone for this call and participating and being interested in what our companies are up to. With that we are going to turn the call back over to the operator to have a Q&A session.

Good afternoon guys.

Hi Brandon.

And for the record I am okay with missing the lightning around on PMBC [ph].

Okay, Thursday is the hot chips.

There you go, on REX, any incremental color on what drove the decision to at least consider the drop to TEP at this time relative to TDev and dropping at some other point in the future.

That’s a good question. We were under considerable time strains trying to work with the seller and timeframes that we had to deal with them.

We’ve always – continually we’ve been thinking what’s the right timing for REX piece to go into TEP. We felt like this presented the good opportunity for us to put it in the TEP.

We just weren’t able to deal with it. At the same time that the existing partner, TDev was contracting with simpler to buy it.

So after we put that to bed and got it contractually put the bed, we made certain could if we deem that appropriate and did our analysis to put it into TEP. So subsequent to that, we’ve all talked about it around here decided like I said in my comments that REX we feel is pretty much ready for prime time and this presented a good opportunity to go ahead and avail TEP of the opportunity to make a great acquisition.

Okay, fair enough. The balance – good news, any thoughts about what permanent financing here will look like as TEP does go ahead with their REX acquisition or is the revolver drop caused the equity what we should expect going forward?

Yes, I think we’ve viewed the deal that we did with Tortoise and closed today as well as the ATM that we did is funding – it’s give or take $150 million, that more or less has funded our equity need here. We went ahead and upsize the revolver, and so with the ability for another half a billion on there we only need another $290 million give or take call it $300 million that we would draw on the revolver to close the simple transaction.

So that is the capital structure. So we feel like we’ve put that to bed.

Having said that, we are – we’ve told everybody that as the credit markets heal going forward, we hope that he will even more later into the year. We do know that at some point, we would like to get a public debt offering offer an inaugural debt offering to TEP, and so we continue to monitor that.

That would simply be doing that and putting more of eight year to 10 year bond in place and paying down the revolver. So hopefully that answers your question.

And in line with Dave’s comments on what he referred to relative to the financing in the 3.6 times debt to EBITDA TEP at the end of the quarter executing on what they have laid out would result in a modest improvement or reduction in that 3.6 times debt to EBITDA just under the 3.5 times mark. So positive in that regard as well.

Okay, good. That makes perfect sense and I’ve commented if I said little bit of balance sheet flexibility that’s all from me.

Thanks guys.

Thank you. We appreciate your questions and we’ve worked hard over the last three and a half years to put ourselves in a position to do that, so thanks.

Who is up next, operator?

Hi, Kristina.

Hi guys, nice job today on the quarter and the potential acquisition as well. So a follow-up question on the latter, when I am thinking about this going forward assuming that it does close, can you just talk about how this shapes the strategy and plan go forward over the next 12 to 18 months relating to things like organic growth program and what not, and how the story is going to shipped from there?

Bill and Gary can chip-in after I put in two sense worth. We have always talked about the 50% that TDev owned at REX being dropped in beginning of 2017, beginning of 2018.

I think with this that probably gets pushed out a little bit. I think the spacing we’ve been thinking about all along continues.

So if you say that we get this closed in May of 2016 here, I would say sometime in the second quarter of 2017 you would look at another piece of REX going in absent anything else. Like Bill said in his comments, we have a $0.5 billion project being spent as we speak at REX right now for the addition of the three compressors.

That’s probably – that will be in place by the end of the year and the contracts that we sign, we’ll start up in those on 01/01/17 in terms of the financial impacts of that. We’ve probably spent half to be may be 60% of the money already on that and that’s all going really well.

So I think again I hope some of this answer is answering your question. There are still a lot of things to do on REX and when I say that I mean positive things.

We are working on a number of commercial initiatives right now that because of situation where it’s competitive we were not able to talk about it but suffice it to say that we are working every day to improve the commercial viability of Rockies Express and I think that will just as this become apparent over the last three years of what we had in mind and what we’ve created in some ways from scratch, I think that will become apparent over the next 18 months as to what we have in mind to showing everybody that REX is indeed a long term tremendous asset for us.

Perfect. And then on the part of the transaction to a nice job getting that done, do you think there is chance for other transactions like that or should I be thinking that’s going to mark on them on the equity side for strategy go forward?

Yes, Kristina, I think we’ll continue to look at transactions both on the equity and the debt side of the house. And I think your question was really more along potential private transactions in the unit etc.

We’ll continue to look at those but as Dave said and we commented here, our equity funding for this transaction is pretty well taken care of give or take and so we can be definitely be opportunistic on – remain opportunistic on that going forward.

Yes, let me follow-up to that just a little bit too. Everybody is going to see that we are filing an S3 today for another additional of self registration really for purposes of our ATM and increasing the size of that.

Do I think our stock – our units are undervalued? Absolutely, they are way undervalued and what I would like to have issued them at $50 instead of wherever we close today $38, $39, $40 absolutely.

Having said that, we are presented with a transaction that we have to fund and we do what’s necessary but like Gary said, that’s effectively we believe to put the bed if this transaction does get closed here in the next couple of weeks. So we are just putting ourselves in a position, it’s our job to raise capital be that debt or equity as efficiently as we can for all of our unit holders and we are very tuned into that.

I think the one thing I would like to tell a little bit with our team is that we’ve been able to avoid perpetual preferred stuff that’s going on out there that everybody seems to have to do and is in bog, and we kept our story pretty simple. I think that’s because we’ve done a good job and maintain a good balance sheet and financial flexibility around all this.

Perfect. So that’s it from me, again a nice job on both quarter and potential transaction today.

Thanks, Kristina.

Thanks a bunch. So operator, we will get in couple more I’m sure, I hope.

Hey, good afternoon. I certainly too would miss my money for knowing what sustainable EBITDA was on REX, but I guess on that note is there any reason you are not giving us what’s your view is on sustainable EBITDA at this point?

I know there is a lot of moving pieces between ultra on one side versus the good things and the expansions, but it would seem like at least ball parking. There is a decent number of known factors.

Couple of things, one is we do – while we’ve made the transaction available to TEP, we do have three independent board members and we’re really not they are doing through their process and we don’t want to put them into a position that would not be appropriate. I think that’s number one.

Number two is, like we said, when it gets closed and if that’s in a couple of weeks, you will have some color to them that will you very specifically. If you go back and look at 2013 and 2014 REX EBITDA, you look at 2015 EBITDA, you look at this year’s 2016 EBITDA and you look at what is going to be in 2017, all those numbers are very, very different, and they are different in a good trajectory.

It’s kind of a contango trajectory and we expect to continue that. But we are not trying to hide anything, we’re trying to do this in an appropriate manner, I suspect you will have much better color here in the next couple of weeks.

Thanks, Dave. And then on – thinking about coverage and raising distributions prudently given the moving parts at REX, which I guess also to some extent fixed into the debate that the MLP sectors having on coverage in general.

Can you just think about ballparking at context, does this change your approach your coverage to retain the cash flow here and how may be the partnership, how much excess you will be carrying?

Yeah, I think that will be part of the more exacting color Gab. But I think as you know REX when we bought it in 2012, 2013 had $3 billion worth of debt.

We and our partners together paid down a tranche of that debt by close to $500 million. So in addition to all the capital that we’ve put in for the growth projects, we’ve also paid down debt.

So today REX [indiscernible] has $2.5 billion worth of debt. Our next tranche is come due in 2018 and 2019.

And like I said, we are – our goal is at some point, if we have all of REX in which would be just 25% plus another 50%, a total of 75%. As you can imagine, we will be consolidating REX in the TEP and so therefore we will be consolidating the debt there.

And so it’s important for us to have the appropriate credit metrics there. Having said that, over the next couple of years as we know what our sizable cash flow is going to be, it will be important for us to perhaps retain more cash than we would otherwise like to.

We always like to pay it all out, but retain more cash with the forethought of eventually paying down some of that debt at REX or contributing capital back into REX, so that debt can be managed down to an appropriate level. And so globally that’s kind of how the thinking goes, so therefore you would expect we would have – we would be running some higher coverage, which helps with a lot of things, but again we will be given a lot more detail about all that once we get the transaction close.

Understood. And then just last one for me on – the debt market is clearly moving your way terming out the leverage at TEP, I’m just curious also in terms of any discussions you may have been having with rating agencies, clearly your targeting investment grade metrics REX itself is below IG, can you talk about getting to IG, whether you think this transaction helps or hurts that and where you may end up?

Yeah, I think this transaction will help it. We haven’t – obviously we talked with rating agencies about REX because at this rate and at TEP we are not although people who would have listened to us carefully know that we went into the rating agencies last year to get a rating.

We didn’t get anything off. And so there isn’t anything public about it out there.

Thing I guess I would share with you is I think if you spread us out like those guys do now and everything seems to be kind of statutory in some respect. We kind of – our IG with the exception of size and I think that’s the great thing now with all of 98% of Pony and as well as first tranche of REX here.

We are very quickly moving to that last thing that we don’t have on an IG metric, which is a kind of size and when I say size, I mean, EBITDA size. And so there’s kind of this $500 million a year EBITDA kind of size that they have out there for minimum IG ratings and we are going to be moving toward that very, very quickly.

Yeah, Dave, I would just add, I mean, you did mention REX’s ratings and how that may impact TEP, I think, Dave, on the other side of the ledger mention the size. The cash flow is coming in to TEP from REX certainly help and are very benefited by the take or pay nature of REX’s contracts, the long-term – the very long-term nature of those contracts and I think the diversity of the cash flows at TEP is strengthened by this drop down at REX, all of those things I think are on the other side of the ledger relative to what you said and I think are going to very helpful to TEP’s credit story.

Got it. Thanks guys.

Thanks, Gab.

Hi, Ted.

Hi, how you doing?

Good.

On the Ultra, are you able to remarket that capacity then, now that you’ve sort of walked away from the contract with Medford [ph], and maybe could you also talk to – I believe Magnum Hunter had 100-day on the east and west side there, are they going to pay that or is that something that you are remark it as well?

Yeah, so first on Ultra, just to be real clear about it. Ultra stop paying us and they had a breach, we gave them an opportunity to cure that, which is all mandated by the tariff.

They didn’t cure it and so they were in breach, we terminated the contract. Having said that, we’ve then filed a lawsuit for breach of contract, which I think we filed on a week or two ago.

And so that’s pending, it’s got a life of its own and you know as far as we are concerned, they owe us $300 million for the remaining life of the contract. Having said that, as you know, legally we probably have a obligation to mitigate and cover and so, yeah, we are to the extent that there is demand out there, we will more remarketing in trying to sell that capacity that Ultra is not using and paying for and obviously that might go into the damage calculation when we eventually get around all that.

But I will just conclude also that just because Ultra stopped paying us doesn’t mean that, hey, we don’t believe that they still – currently, they still owe us money and secondly, we still think that there is going to be a fair amount that we will recover from them. With regard to Magnum Hunter, I guess what I can tell you is we did have a 100-day contract with them on the power up that’s coming in next year.

The bankruptcy court did approve Magnum Hunter retaining 50 of that and so they are going to return 50 of that back to us. We are happy to have that back because frankly we believe that that market is becoming move and constrained that that 50 will continue to have value.

I will tell you additionally although the bankruptcy court did approve it, there are other approvals that are necessary there like the credit – credit or committee, et cetera. We do fully except that that will take the place.

Got it. That’s helpful.

And then just on [indiscernible] and the volumes through the quarter, it sounds like we are running around 300 a day. It feels like you’ve got a lot more room to run a lot more, have you given any thought to – maybe given a benefit discount on the tariff to more some more volume, pick up some more margin there?

We do have more room as we guys talked about with regard to the DRA effects and just the overall dynamics of how the pipeline can actually run. We’ve thought about that.

We are out talking to everybody and beating the sticks, et cetera and we would be open to that for the right amount of term et cetera. I think as you know it’s notwithstanding their crudes kind of – WTI is backup to $45, it’s still just a tough market where people are a little hesitant to – with the forward curve on crude, people got to be willing to contract for a period of time.

So it’s not as though we are just kind of playing big man campus and waiting for everybody to come to us. We are out talking to customers and going to C&M [ph] and Houston, and Oklahoma, et cetera, and trying to get more business, believe me.

And we would be willing to do that if it shows up under the right terms.

Understood. I will leave it at that.

Thank you.

Yeah, Ted, one more thing. Just [indiscernible] is here with us reminded me that the REX transport is actually the only firm transport – interstate firm transport that the bankruptcy court approved for Magnum Hunter.

So just throwing that out there in the for what is worth category.

Great. Thank you.

Okay. Operator, we got some more questions I hope.

Hi, John.

Good afternoon, everybody. And congrats on the announcements here.

Just I’m wondering the fact that – I mean you did speak to the fact that there were some time issues that were pushing you to put the REX piece into TEP and then based on your comments, I mean would it be fair to conclude that you’ve got greater confidence now in the - as far as extending the REX contracts on that. So that the effective multiple would be a lot lower say compared to if those contracts were not extended beyond 2019, I’m just trying to think about and sort of size up sort of the risk trade-off, goes back to the earlier question, why put it in the TEP now versus putting it in the TDev and then dropping at later, which obviously most of us were thinking that was the model you would follow?

Yeah. Good question.

I think this is a good contract – what I am about to tell you is, it’s a good way to similarity and contrasting year. I mean clearly we would be bought frankly - when we bought the asset, we we’re in 2012, everybody was thinking that REX was dingdong, REX was dead and you know we started - we recall with the chicken little pipeline you know the sky is falling and REX is going to be empty.

Clearly, we have I think a team has done an outstanding job of improving the visibility around REX to everything you guys know to date. We talked about that all the time.

Having said that, we know what the next years are going to look like at a minimum in a very conservative manner and we are like I said, in my remarks working our but off every day to improve that and obviously with the east end being fully contracted particular with the power of starting 2017. The rest of our work now gets to focus on zones 1 and 2.

But having said that, I think the thing to contrast what we did we’re doing was REX now relative is what we did with Pony. If you think about when we did our first drop of Pony was just going into service and we had - we put Pony into the value and we did some things around it that kind of gave TEP certainly around its cash flows etcetera.

And then after a while we had Naples [ph] coming on etcetera. We have been running it for a while.

We put the second drop of Pony. You could contrast that and have a parallel there to second drop of REX.

I think as clearly as we continue on in time here we’re going to have greater and greater visibility about what REX looks like on an aged basis and then particularly our interests combined and as soon as we know those it’s coming upon us to give people some visibility into what that is and so, I think it fits nicely with the way we’ve done approach our drops in the past relative to Pony and clearly now with respect to REX.

Okay. So, I’m just trying to sort of read through your comments.

Would you say that compared to when you’re first looking at this transaction, your confidence is better or about the same? I’m just trying to, we are just trying to figure out how do think about because in effect by putting in TEP now obviously puts the contract perfection risk on the TEP as opposed to putting it into TDev and then dropping?

So that’s what we just trying to figure out, how to assess that if you will?

Look, I...

I don’t know how else to ask the question.

Nothing magical has happened in the last 30 days other than the magic has been that we found one of our partners willing to sell an interest in the pipeline and it was what we thought was a good value. I think they think it’s a good value to sell it out.

We happen to think it’s a good value to buy it. We operate and run that pipeline.

We feel really good about all the commercial things we have done on REX and then we continue to do on REX and on balance we just feel like we told everybody on a long that all of our assets in Tallgrass will eventually be in Tallgrass Energy Partners. So we feel like on balance it was appropriate to offer this asset to TEP to get REX again like I said already into the primetime show.

Okay. That’s helpful.

And then as far as you’re mentioning also you got some real nice volumes on the West, East, you know I think you said a day or two. The total volumes was pushing the 35, 36 range.

I’m just curious about the average West, East volumes that you’re seeing these days, what that is trending at?

Would you say the last part about the REX bonds again, I’m sorry John.

Average volumes, the average volumes you were saying that you had some spikes where you actually at 3 and 3.5 flowing because you had some real good West East volumes. So I’m just curious what kind of what that average left these volumes are?

I’ll let Bill answer it, but they are not really spikes. I think you was just - go ahead Bill.

Yeah. Our average volumes west to east are probably between 800 BCF a day.

We had a spike there is a little bit of basis it was called in the North East. We’re seeing some impacts from storage being taken off the market that gases is not loaning necessarily to travel from Rockies to West.

Sockets, a lot of opportunity that gas needs to find a home, but the 1.7 was a great day and I’ll just remind everybody that our Max rate on REX is around $1.80 a dekatherm per month and knowing that rate, if we get one month of a blowout with the polar board for contracts on existing capacity that’s available. We take advantage of those opportunities and this was a situation where we did something just like that.

Okay. That’s helpful and then another one of the call today, one of the companies mentioned this would be on Zone 3, that they are actually capacity constrained and to - as far as being able to ship more volumes out because Zone 3 is essentially full.

And so, I know you’ve done this tremendous work in expanding the capabilities there. I mean, are there additional capabilities or plans perhaps take a higher or is it pretty much you’re pretty much uptake and as far as go as far as the Zone 3 expansion?

Yeah, John. It’s a good question and let me - and I’m going to well answer that, but in addition let me just first clarify one thing on Zone 3 and Eastern apparently there was another call today, where someone said that perhaps are power up capacity expansion wasn’t going to be in service until mid-17 that’s not accurate.

We will be in service by the beginning of 2017 if not by the end of 2016. So just for everybody where you get in the conference calls where people will say in different things.

We’re the one doing the work, we’re the ones doing the operating REX and it’ll be on service by January 1, 2017. So, with regards to what you say you ask John, yeah if you all recall we did – canvas the market at the time about either looping and expanding the pipeline or alternatively powering it up.

We’ve done the power up now. So and we have people standing ready to contract for that, that’s fully contracted.

If indeed the market is capacity constrained there are other things that we can do like looping pipeline there in Zone 3 maybe not the entire pipeline, maybe sections of it etcetera. Bill, anything you want to add to that.

What I would add to that is that the power up bring 600 million a day online on January 1, 2017 as Dave said. I will remind you that we are performing that construction under a turnkey contract.

So, capital risk is minimal and so is in the service risk because there are penalties and bonuses associated with that contract. So, we feel very confident, it’s moving well right now.

I will also remind you that the capacity constraint is there and we expect it to be there for perhaps a significant period of time. So as that constraint starts to have more and more impact on the suppliers.

We believe that we’ll be able to get to a point where we can to do those things that Dave talked about. Other projects in the area if you pay attention aren’t having a lot of success permit wise and certificate wise and other things getting pushed out farther and farther.

So when Dave mentioned that the magnum 150 million a day that’s coming back to us has value we believe it has increasing value and as does any excess power up capacity that we might have at this point. Sockets, we’re going to be service in January and take care about that and that will elevate a little bit of the pain, but we expect Marcellus and Utica gas production to continue to be aluminous and we are going to be there to do something about it at the right time.

Yes, Bill you said another 600 a day in service on the capacity enhancement, I know you meant 800 a day, just to clarify and in addition to the any capacity to Magnum Hunter or Triad Hunter would turn back to us, call it 50 a day, we have almost that same amount of unsold capacity remaining on the capacity enhancer project too. So, it is not a lot in the grand scheme of things, but certainly we have some availability there.

Okay and just the last thing that’s on the rate case, just remind me, what was the revenue on that?

On the Triad rate case we didn’t tell people what that is, John.

Okay.

Well I think what we did tell everybody on our last call was 4, 2016 we budgeted in starting May 1, what we felt was a conservative amount and like Bill said, with an agreement [indiscernible] principle earlier this week we are well within that and frankly expect to do a little bit better than what we had put in our budget.

And John, the documents are being drafted now, so really a little early to talk about it, but handshakes in agreement and principle complete

Okay. Alright.

On the last thing, sorry for so many questions here, but just the - outside of these two customers where there is some counter party risk here, you know Ultra and Magnum is there anything else out there that we should be aware of on counter party?

None that is material John. We’ve got one or two cats and dogs that just don’t have significant volume.

Okay great, thank you. That’s it from me.

Operator we got to keep going this is good.

Hi, Selman.

Hi good afternoon. Very nice announcement.

Couple of quick questions, most of them not around REX. First of all going back to last quarter, I guess you talked about TIDA of having a $100 million to invest help support the stock, did that all get exercised did you guys invest all that?

We authorized, TIDA have authorized up to that much to purchase. We did not buy any.

The price continued to improve and we were happy while we thought it was a raging buy and still think it is a buy we made a decision to kind of let it ride on its own with parties with - and again as you recall we took back a couple of hundred million dollars of units at TIDA when we did the Pony drop at the beginning of the first year. So…

Going back to TIGT and Trailblazer, you guys attributed lower operating cost and G&A cost in the first quarter of 2016, I guess number one is sustainable and then number two is anymore to come out.

Yes, Selman you know TIGT and Trailblazer historically have seen lower operating costs in Q’s, one and Q4 of every year and that’s also true for maintenance CapEx. I think we do expect to see Qs 2 and 3 of this year on the O&M side and the sustaining CapEx side to be heavier than Qs 1 and 4 and having said that the benefit of the rate case outcome that we are working towards will cover a little bit up of that up, but we do see most of that benefit showing up in Q4.

Got you. And then just going back to, you got a non-cash loss to your derivatives of 9 million and is there, it is a little larger than I think I have seen previously, so my question is, is that really just due to the volatility of the environment or was there some change and policy and more contracts any additional hedging that you have been doing there?

No. Selman that’s related to the call option that was part of the Pony Express transaction where TDev granted TEP a call option on the units that it issued to TDev, the accounting rules require that TEP put that on their balance sheet and market to market every quarter, so that is an unrealized loss on that call option and that is going to be obviously a non-cash transaction that we see as long as that call option is outstanding and we kind of expect that to kind of work its way down over time, but that’s exactly what that is.

That is in no way related to the commodity hedging that we do. There was an amount there I think about $40,000 in the quarter, but nothing material at all.

I appreciate that. And then I guess the last question from me, just, on REX, the only thing standing between this and closing is really the Conflicts Committee to get to there be nothing else?

Yes.

Okay. Thanks very much.

You bet.

Hi good afternoon, could you guys provide us with an update on how the retail water business has been progressing since it was acquired in December?

Well, Bill just went out and looked at it yesterday and so he may answer that.

Fantastic assets by the way. The facilities are performing as expected.

We just did a 16 well frac with one of the producers in the area and we should be seeing some nice disposal fees in excess of the minimum volume commitments that we have because of flow back from that very large frac. So, it is - as Dave mentioned earlier or Gary mentioned, on the fresh water side we don’t expect to see huge volumes on that until 2017, but they should be ramping up for Q4 2016 and going into 2017.

And then the disposal side is operating as expected, but we are going to have volumes increase or decrease as fracs are completed in the area. And getting some good interest from counter parties other than lighting and out there pursuing those very aggressively.

Thank you. And then additionally is there any update on the status of the Prairie State Pipeline?

Prairie State is a project waiting to happen and that is where it sits right now. No real good update on it except we hope that as time progresses on here that we will have a shot to not only look at Chicago as a direct connected market, but we’re chasing volumes in St.

Louis in Kansas City and in the other metropolitan area within reach from REX’s main corridor.

Great. Thank you.

Got some more people in the queue operator?

Hi, Chuck.

Hi good afternoon guys. Two quick ones from me.

So, assuming that the drop of 25% interest in REX is complete, is it fair to assume that the incremental CapEx remaining on the enhancement project that would be, you would see - fit the bill for their 25% interest or do you see that pick up that CapEx spend?

No, TEP will pick up its share of it, but as you can imagine we baked all that into the cake when we did our acquisition modeling for purposes of buying it in either entity and so that will again, when it gets close and we kind of give some more granular detail about it you’ll see that we are funding that out of our cash flow from REX and it works very nice indeed.

Got it and last one from me. Just with regard to the step up in this quarter with the deficiency payments can you just kind of walk us through the shippers on when you express and is that all coming from one shipper that are not meeting minimum volumes or if you could just give us sort of a lay of the land and some of the customer activity there and what you are seeing, if it is more than one customer shipping below or any color would be helpful?

Yes, we cannot give you, I mean as for competitive reasons we cannot give you granular stuff on shippers other than we tell you are top two or indicate, but it is basically form one shippers only and everybody else is pretty much shipping their take or pay commitments and we have one shipper who has fallen behind. They can, they are obviously paying us and we obviously have elasticity in the pipeline to allow them to ship it any time in the future without creating incremental cost of burden to us, but it is pretty much more in shipment.

Having said that, like Bill pointed out, we do have one shipper also that is shipping in exact amount of incremental barrels that just so happens to be almost the same amount as efficiencies.

Got it. That’s it from me Gary.

Great. Thank you.

Hi, James, how are you?

Hi, guys, good. Just one quick one from me.

You previously talked about REX as an $800 million EBITDA pipeline in 2017. If ultra is about $75 million, does that will go to the bottom line or there some offsets there that you can mitigate?

The answer to your question, yes, you got it pretty correct. The mitigation is obviously filing suit against ultra and a) either trying to resell the capacity as we go along.

If we resell it today, I think the spreads are $0.15, $0.20 and so if we sell, we’re going to get $0.15, $0.20 may be even less on an IT basis and that goes to mitigate our stuff against ultra.

In terms of O&M, would you see any, if the volumes were lower would that materially impact I guess the expenses associated with running the line.

Not materially. The difference – we might have a little bit of save going in but it’s not anything what you talked about in terms of revenue side.

Gotcha. Okay, that’s helpful.

Having said that let me be clear though too that, when we are buying this additional 25% interest in REX okay, we modeled the financial impacts of this purchase in the most conservative ways possible.

Yes, totally understood. I understood it’s all the price you pay, so the risk is in there.

I didn’t know if maybe there was some since you talked about that $100 million number maybe ultra comes down but maybe there was some other incremental volumes from the east to west side or some incremental rates or some cost reductions that could be associated with making that up if you will. So let’s kind of oblique for I totally understand it, the risk is priced into the price and so…

I guess I would tell you that with one of the earlier questions about capacity constraints on the east end, if you take the 50 we have left at magnum – that magnum owner is turn back on the east and you take the 50 that we redeemed, frankly we think selling that on an IT basis and having a certain amount available to sell into the market in any given time frankly we can make really good money with that. Is that predictable, is that a known-known, absolutely not but we – everyday are waking up trying to figure out how we can make the most money possible.

Okay. Thank you very much.

Yes, thanks a lot.

Michael, how are you?

Good. I’m going to go back to REX with two quick questions I hope.

So one, I don’t know if this is just but is there a reason that you want TEP to acquire the 25% REX directly from Sempra versus hypothetically buying 25% from T Development, TDev completing a transaction with Sempra like a tax issue, is there something else to think about there?

There is nothing to think about there. I guess I would tell you from my – by my way of thinking about it, the transaction that was negotiated with Sempra by TDev at the time is obviously extremely third party negotiation and transaction.

That makes it in our minds a lot simpler relative to the conflicts committee and the banking of the hoops that we have to jump through there. They are still formed and they are still doing their jobs but no, there is nothing semantics or anything different about it.

We just think that the – it’s pretty elegant and simple to turn over the benefit of the bargen to TEP.

Okay. That makes sense.

Second question is just in the press release you talked about how P66, I like to not to exercise its welfare but in exchange for that TDev and Sempra agreed to make certain amendments to the REX limited liability company agreement. Can you elaborate it on and what those amendments are and what that means?

Yeah. We are not going to elaborate in great detail, but I mean I think it’s a just simple concept of there are certain in the part of this transaction being completed, we own 50%, Sempra own 25%, P66 own 25%.

As you can imagine, there were certain things in the LLC agreement where 50% rule the day, 51% or greater rule the day, 75% or 76% rules the day and even higher percentages. So, I think suffice it to say that we’ve, P66 having Sempra as an additional third party owner had a certain degree of control upon certain things that if we were able to buy the 25% without a few modifications, they would lose.

And so effectively I would say it’s simple as we just chose to change the agreements so that P66 continue to have the same degree of control that they did under the present situation.

And Michael, the 8-K - in the body of the 8-K there is a touch more detail on it and then the press release, just obviously given that it wasn’t necessarily material to a transaction, not in the press release, but a bit more detail in the 8-K.

Well, thank you.

Sorry, please.

Go ahead.

I mean just let me say we took over in 2012 and then operating the asset we’ve I think we had a good partnership with both of our partners Sempra and P66. P66 will be our only partner going forward and I think we got a good partnership with them.

We continue to look forward to have them a good effective business relationship with them going forward.

Great. That’s all I have.

Thanks.

Hey, thanks, Mike.

Hi, everyone.

Hi, Christine.

I really need to step up my star one game. So, I just wanted to first go on, you talk about how you expect to recover something from Ultra, is that assuming operating under the assumption that Ultra files for bankruptcy and if they do file bankruptcy, do you guys still think you would be able to recover anything?

I think our ability to recover from them will be whether they file for bankruptcy or not. So if they do file for bankruptcy, I don’t think we view it as any different.

If you follow them all, almost all of their creditors are if not all are unsecured. And so, whatever claim we would have would be pursue with anybody else.

You look at their assets etcetera and what’s available for recovery, we just feel good about our chances of recovering some significant amount from that whether they file for bankruptcy or not.

Okay helpful. And then, on the REX side, I think it would be the debt horse but just wanted to dig into your comments that you’re only going to raise the distribution at TEP based on REX’s long-term outlook.

And I think you’ve said that it’s too early to see recontracting on the first two zones of REX. So, how should we think about modeling in increases for this year?

Should we currently assume no recontracting and what that means for post 2019 EBITDA and associated capital cost to get down to that 4 times leverage, and then modeling any upside as we get more clarity on contracts going forward?

Yeah. I don’t know that again we will on a couple of weeks when we get it closed have some more details to you.

I’m not sure the levels satisfy your need for granularity. But having said that I don’t think I would model in nothing.

Again, REX on the east it is not going to be empty, I mean it doesn’t, you wouldn’t be able to get gas to the appropriate places for people to make food and heat their homes and take warm showers if REX was empty on the west end. So, having said that, I guess I would encourage you to model-in something on the west end at a volume - at a rate that is probably more commensurate with what the market is out there right now for long haul transport.

And so then that leads you to the rest of your model and clearly as we peel back the onion here and get further and further closer to 2018 when people will be willing to talk to us about re-contracting, you will get better and better clarity on that. Having said that, don’t think in the mean time that we’re sitting on our buds and not working on getting people extended now.

We’re talking to some people about maybe a little bit of current rate relief with some amended volumes later into the future. So, when we get all that done, we’ll role it to you and you’ll able to fill in the blanks a lot better.

Okay. And then, I think you guys had just said that one shipper had volumes in excess of their take or pay agreement on PXP equally offsetting the deficiency payments.

Was that just on a barrels basis and if it was, what was the cash flow contribution of that?

You’re focused on cash flow contributions and the DCF contribution or an amount for net deficiency payments is almost exactly that amount for the net incrementals, and those numbers are right in the neighborhood of $7 million to $7.5 million each for the quarter, Christine.

Okay, thank you for that. And then just lastly, how should we think about the revolver balance at TEGP.

At time of IPO I kind of thought that it would be used as an instrument to maybe smooth out your distributions at TEGP, given its very frontend loaded with the growth, but just curious as to any updated thoughts there?

Good question and look, I think we were out on the road or when we were just completing that, I think we gave people with color that we thought at least for a year that we probably wouldn’t do anything with it. We will borrow on it and I think you’re right, our color was been, it hasn’t changed relative to smoothing in the distributions.

So I think we’ve been consistent with what we said and we’re just now coming up on a year, will it be next quarter where perhaps we take a piece of our distributions and pay that revolver down some to smoother more into that kind of 30% to 35% distribution growth rate. I don’t know we’ll deal with that as we come, we don’t have any preconceive plans to do that.

I will note though that lot of people were asking, they do ask, why did you grow your distributions in nine months or basically little less than a year by 54% of the market in – for it well. I don’t – the market does or doesn’t pay it.

We’re generating the same amount of cash flow regardless. Our goal is to pay it out to people on the one hand, but on the other hand, is our security at TEGP undervalued and our minds absolutely particularly compared to other people who have promised more and delivered less.

So, I’m not sure that...

All right. That was helpful.

That answers my question, yeah. Thank you for your time.

You bet. I think we got one or two more operator?

Hi, Ryan.

Hi, guys. Just wanted to get the additional clarifications, see if there is any update around the rack contract with Sempra and being remarketed to Ultra if there is any conversations around potential transaction there or getting additional clarification?

All we can really tell you is that what was in Sempra’s press release that they intend on releasing their capacity, that has no impact to us whatsoever. We will administratively support them accomplishing that, but the rate and the volumes and all that in the revenue influence to us remains the same.

Yeah, Ryan, you also mentioned Ultra in that sentence and perhaps what you’re referring to is a bit of capacity that Sempra had released the Ultra. They did and continue to back stop that piece of capacity.

Okay. I mean, I guess they’re trying or it was mentioned in their release and around the time of the transaction about them incurring a loss for the next few years and front and below that – is there any appetite do transact that remaining capacity and move that cash flow into the timing forward?

Go ahead, Bill.

Sorry. The two are completely distinct and separate.

Sempra Energy marketing and the all of the capacity and Sempra Corporate who held the 25% interest are they’re separate and completely apart. So we bought one does with their capacity that has no impact on REX the pipeline owner.

Yeah. Ryan are you?

That makes sense to me and we really can’t talk about it because of regulated nature of that contract.

Okay. Thank you.

Anything else, Ryan? Okay.

Operator?

All right. Thank you everybody for your time and appreciate the questions and I hope you felt like this was fruitful.

Thanks for your interest in Tallgrass and we’ll see you before next quarter when we get the REX transaction close. Have a good day.

Bye.