Generation Essentials Group

Thank you, Dennis. Good afternoon and thank you for joining the Tallgrass Energy quarterly earnings call.

As we discussed among other things, that TEP and TEGP results for the fourth quarter of 2016 and our 2017 guidance which were released through our joint press release and 10-K this afternoon. Joining me on the call are David Dehaemers, President and Chief Executive Officer; Bill Moler, Executive Vice President and Chief Operating Officer; and Gary Brauchle, Executive Vice President and Chief Financial Officer.

Before turning the call over to David, let me remind you that this event is being recorded and a replay will be available for a limited time on our website. Additionally, our comments today will include forward-looking statements and estimates.

These forward-looking comments are subject to various risks and uncertainties, and reflect management's views as of February 15, 2017. 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.

Note that except to the extent required by law, Tallgrass undertakes no obligation to update any forward-looking statements. Please also refer to our earnings release for reconciliations between the non-GAAP financial measures referenced in this presentation and the most comparable financial measure or measures calculated and presented in accordance with GAAP.

With that, let me now turn the call over to David for his opening remarks.

Good afternoon, everybody and yes that release made is not a recording that we play every time. And I will apologize to everybody in advance; I have what my wife refers to as a man cold.

So a little froggy and have some coughing going on. So with that thanks for joining Tallgrass Energy's fourth quarter earnings call.

Fourth quarter was another strong quarter of financial and operational performance for TEP, which resulted in our 14th consecutive quarterly distribution increase and TEGP's sixth consecutive quarterly distribution increase. A lot has happened since the end of the fourth quarter, which is essentially this year, month and a half in.

On much of this we'll provide additional details later in the call and on Q&A. But for now on January 3, 2017, TEP purchased Tallgrass Terminals and the operator of REX that we call it nat gas operator for gas consideration of $140 million.

On January 5, we announced the completion and full in service of REX Zone 3 capacity enhancement project. On January 17, we announced a settlement with Ultra.

And on February 1, we retired the remaining units under the call option TEP had with TDev for the 6.5 million units issued in January 2016 in connection with the third Pony Express dropdown. Again more on all those items a little later in the call.

Let's review the fourth quarter financial results driving our distribution increases; adjusted EBITDA for TEP was $117.3 million for the quarter again inclusive of three months of distributions from our 25% interest in REX. If you include the quarter's net efficiency payments and adjusted EBITDA again we don't because of GAAP says that's deferred revenue.

It is always included in cash available for distribution. But if you include the net efficiency payments and adjusted EBITDA, the amount would have been $125.9 million.

TEP's DCF for the fourth quarter was $109.7 million and coverage was a very strong 1.24 times with approximately $21.6 million of cash generated in excess of distributions. Since our TEP's IPO in May of 2013, our cumulative excess coverage is $132.4 million and our cumulative coverage ratio is a very healthy 1.21 times.

This quarter's strong financial metrics supported TEP increasing its quarterly distribution by $0.02 per unit to $0.8150 a quarter or $3.26 annualized. This represents an increase of 2.5% from the third quarter of 2016, 27.3% year-over-year growth, and approximately 183% growth from our annualized minimum quarterly distribution of a $1.15 essentially our growth from our IPO three-and-a-half years ago in May of 2013.

As a result of the $0.8150 distribution at TEP, Tallgrass equity received distributions of $45.7 million or 20 million TEP common units, its GP interest and the IDR rights that it owns. Based on that amount, a distribution of $0.2775 for $1.11 on an annualized basis was paid to Class A shareholders and to holders of our Class B shares.

This represents increases of 5.7% from the third quarter, in other words sequentially and 60.4% year-over-year growth, and approximately 109% from the annualized quarterly distribution of $0.532 at our May 2015 IPO that was only a year-and-a-half ago. Before I turn it over to Gary to go through some of his financial metrics, I would like to remind you of the guidance we provided this time, a year ago, just from a comparable sake and to kind of give us what we view as our scorecard.

The updated guidance and the updated -- frankly the updated guidance we also did in May of 2016 when we acquired Sempra's 25% interest in REX. In February of 2016, we guided to TEP DCF of $285 million to $305 million, coverage of 105 to 115 times, and distribution growth of a minimum of 20% at TEP and approximately 40% at TEGP.

We revised that guidance up to $345 million to $375 million in DCF, coverage of 1.15 to 1.20 times, and distribution growth of 27% to 30% at TEP and 54% to 60% at TEGP. We handily beat the original and even the revised guidance for DCF and coverage and easily met the revised guidance for distribution growth.

We did all this just as we have done each and every year of our existence, even in the phase of a very challenging 2016 year for the energy space. I'll now turn the call back to Gary to provide additional financial details and then I will be back to you to wrap up the call.

Good afternoon everyone. Let's jump right into the segment performance and then I'll talk about liquidity, leverage, unit repurchases from Tallgrass development, and our 2017 guidance.

The crude oil transportation and logistics segment which was Pony Express for Q4 and will include Tallgrass Terminals going forward generated DCF to TEP of $75.6 million for its 98% ownership interest during Q4 of 2016. This represents a slight increase as compared to the $73.9 million for the third quarter of 2016 which is primarily attributable for the higher incremental shipments during the fourth quarter.

With respect to volumes at Pony Express average daily throughput during Q4 was approximately 288,000 barrels a day as compared to Q3's average of approximately 276,000 barrels a day. Average throughput for all of 2016 was approximately 286,000 barrels a day.

I would remind you that while average throughput on Pony Express may be an interesting data point for some of you, our cash flows on the system are currently driven in large part by the long-term take or pay contracts and the collections on those contracts. Turning to the Natural Gas Transportation & Logistics segment which includes TIGT, Trailblazer, and a 25% interest in REX for Q4, and will include the operator of REX going forward, that segment produced adjusted EBITDA of $44.5 million, up approximately $3.2 million as compared to Q3 of 2016, and up approximately $29 million as compared to Q4 of 2015.

The increase from Q3 is primarily related to higher transportation revenues at REX when comparing the sequential quarter and against the prior year the increase is related to distributions from REX after our acquisition in May of 2016. Firm contracted volumes for TIGT and Trailblazer averaged 1.58 billion cubic feet a day during Q4 which was roughly equivalent to the 1.6 billion cubic feet a day for Q3.

Since REX's power of project is fully come online at the beginning of this year, REX's Zone 3 has been flowing volumes East-to-West at or near the currently available 2.6 billion cubic feet a day capacity of their project. Processing and logistics.

That segment generated adjusted EBITDA of $5 million for the fourth quarter of 2016 representing an increase of $1.8 million as compared to the third quarter of 2016 and an increase of $1.1 million as compared to the fourth quarter of 2015. While processing volumes picked up slightly in the fourth quarter, it's important to note that we began to realize the additional contributions from our water business that we have been expecting.

We expect this segments results to continue to grow during 2017 as a result of contractually ramping volumes and an expected increase in drilling and completion activities in the DJ and Niobrara. Now turning to the balance sheet.

At the end of the fourth quarter, TEP had just over a $1 billion drawn in its revolver and $400 million of senior notes outstanding both of which were in line with our debt balances at the end of Q3. I'll note that the fourth quarter includes for the first time a full quarter of interest cost associated with our $400 million of senior notes.

As of February 9, we had approximately $1.13 billion drawn on the revolver with the increase since year-end being used for the $140 million acquisition of Tallgrass Terminals and the operator of REX. With liquidity of approximately $620 million, TEP has ample flexibility to continue growing in 2017.

Even with the potential dropdown of an interest in REX later this year, we have no need to access the capital markets in 2017. However we will always consider financing transaction when prices are reasonable.

TEP's leverage as of quarter end was just over three turns at 3.04 times debt-to-adjusted EBITDA based on the trailing 12-months adjusted EBITDA figure. This figure continues to be and our leverage continues to be on the low-end of our investment grade target range of three to four times debt-to-adjusted EBITDA.

Now let's move on to the unit repurchases from TDev. As of our last earnings call in early November there were 1.7 million units remaining that were subject to the call option that was granted by TDev early last year.

From early November through late January, TEP issued approximately 2.4 million additional units under its ATM program and used the net proceeds from the sale of 1.7 million of those units to exercise its right covering the remaining call option unit. The net average issuance price was $47.30 on those 1.7 million units.

In addition TEP also repurchased approximately 736,000 additional units from TDev for a negotiated price of $35.3 million. This all leaves TDev owning at this point approximately 5.6 million TEP units.

In aggregate the call option on the Pony drop units was an all around win for TEP because first, 31 million of additional proceeds were generated by TEP. Second, TEP used those proceeds to reduce its debt.

And finally, TEP's purchase price on the drop was lowered thereby increasing the accretion on the transaction. In short, TDev continues to be a very supportive sponsor to TEP.

The next topic and last one for me before I hand it over to Bill is what to expect from TEP and TEGP in 2017. At TEP, for the year 2017, we expect adjusted EBITDA between $620 million and $680 million.

Distributable cash flow between $570 million and $630 million and distribution coverage between 1.3 and 1.5 times. In addition, we continue to expect about 20% distribution growth for 2017 at TEP.

And at TEGP, we expect Class A distribution growth in excess of 30% potentially even in excess of 40% depending on several factors. Any cash flow received by Tallgrass equity it is not distributed would likely be used to reduce the borrowings on Tallgrass equity's revolving line of credit.

We have about $146 million drawn today on that revolver. It's important to note that our guidance includes the acquisition of Tallgrass Terminals, the operator of REX, the anticipated acquisition of an interest in REX from TDev at some point this year, and it does also assume that Ultra pays REX a $150 million in cash and REX distributes that cash to its partners.

And now Bill will take you through some commercial and other developments on our assets.

Thanks, Gary. Good afternoon everyone.

Last quarter, I opened my comments on the speaking to the challenging environmental, political, and regulatory hurdles facing our industry at the time and likely to continue to face our industry at that time. Its remarkable how that outlook has seemingly changed in little over three months post the election.

While the energy supply demand balance and commodity prices ultimately drive the pace of investment and energy infrastructure, the political and regulatory environment for the oil and gas industry appears to have improved and should support the development of both Greenfield and Brownfield projects moving forward. Now on to our assets with Pony Express being up first.

As you may recall last quarter, I mentioned that our commercial team was working to commercialize an additional demand connection on Pony Express with a local refiner near our pipeline. We are very close to the signing of that agreement and hope to provide an update in the very near future.

In addition to that, additional delivery point off of Pony, our commercial team continues to pursue additional opportunities which would help further diversify both supply and demand into the system. Having mentioned it on the last call, it is a message worth repeating, Pony Express continues to be attractive to our shippers for a number of reasons.

One it has very competitive rates if not the most competitive rates in the basins we get supply from. It has supply diversity from the Bakken, the Powder River, and the DJ Niobrara.

And we've got direct wellhead connectivity through our two joint upstream tariff pipelines Belle Fourche and Highland, it has a multiple common stream back system, it has demand optionality with both direct connected refining and impudent delivery choices at Cushing. It has an additional Tallgrass terminal injection site at Buckingham and importantly it continues to have expansion capacity of up to another 100,000 barrels per day utilizing existing horsepower and drag reducing agents.

In summary, Pony Express is well positioned and poised to compete for barrels both now and in the future. Turning to REX, and as a reminder, Tallgrass development has a 50% ownership in REX and TEP owns a 25% interest in REX.

And as of the first of the year TEP now owns the operator of the Rockies Express pipeline. As many of you saw in our January 5 press release REX has 800 million cubic feet a day Zone 3 capacity enhancement project is now complete and fully in service.

And the original design capacity of 800 million cubic feet per day is sold out for 15 years at an average rate of approximately $0.50 per dekatherm. With this important milestone now complete our team at REX has been working to optimize the system in order to make available incremental capacity in Zone 3, we will get to that more specifically in a few minutes.

Another positive development on REX that Gary talked about is that REX reached an agreement to settle the $303 million breach of contract claim against Ultra. The terms of that settlement stipulate that a cash payment of $150 million be made to REX and we currently expect that to be paid within three to six months after Ultra emerges from bankruptcy but no later than October 30 of 2017.

In addition to that upfront cash payment, Ultra has also agreed to enter into a new seven-year firm transportation agreement with REX commencing on December 1 of 2019 for service from the west-to-east of 200 million cubic feet per day at a rate of approximately $0.37 per dekatherm or about $26.8 million annually. This settlement provides clarity for all parties involved and allows us to continue focusing our commercial efforts on signing new contracts on REX.

With two contracts that extend beyond 2019 both Encana and the Ultra deal, we now have nearly 40% or 700 million cubic feet a day of the west and volumes pre-contracted at average rate of $0.67 per dekatherm. These contracts at a weighted average life of more than five years post 2019.

Combined with the fully contracted Zone 3 volumes of 2.6 billion cubic feet a day, we have now re-contracted greater than 85% of REXs original cash flow on a long-term basis. With more than two-and-a-half years remaining before the rest of the western contracts expire, we are confident in our ability to secure additional transportation volumes on REX.

Now back to the capacity enhancement. We are pleased to report that in the next month or so we will be launching an open season for approximately 150 million cubic feet a day of additional space on REX from east-to-west in Zone 3 as a part of the capacity enhancement project.

We expect that capacity to be available in May of 2017. This capacity is in excess of the 2.6 billion cubic feet a day of contracted capacity we have currently increasing that volume by approximately 5.5%.

As REX continues to refine and operate the facilities, we will make available any incremental capacity we have and we believe this 150 million cubic feet per day represents the vast majority of any expected additional capacity. To the extent any additional capacity is available above the 150 million cubic feet a day open season we will also make it available to the market.

On Tight and Trailblazer, we have talked about it before that we and it's important to note that we have now completed all the steps associated with Tight rate case and have agreement from our customers and approval from the FERC on all issues including the modernization of our tariff, establishing new reservation rates, implementing fuel and power cost trackers, and simplifying our zone rate structure from five zones to two. We are pleased to report that on the new commercial opportunities, we have recently extended a current shipper contract from its remaining two years and $9 million of collective revenue to seven years and $31 million of collective revenue.

Trailblazer is also seeing some positive momentum building in its long-term contracting efforts. At this time, Trailblazer is essentially fully contracted and we expect to execute on new opportunities that will keep the firm subscription level in excess of 90% for at least the next three and five years.

At TMID and BNN Water we have seen some notable activity Gary touched on some of that. The volumes in our TMID segment for the fourth quarter were up from the same period in the prior year.

And as Gary mentioned earlier, we are starting to see the ramp up in the BNN Water business that we have talked about on previous calls that will help propel the DCF of TMID up substantially in 2017. Finally, Tallgrass Terminals, as Dave mentioned earlier in the call, Terminals was purchased by TEP along with the operator of REX on January 3 for cash consideration of $140 million for a multiple of approximately eight times projected 2017 cash flow.

Our team continues to move forward on the South Cushing and Guernsey terminal projects in addition to a host of other opportunities in various stages of development. We expect the EBITDA contribution from terminals for 2017 to be between $10 million and $12 million and we are excited about this business and its potential for organic growth and growth through M&A.

With that, I will now turn it back over to David for his closing remarks.

So before we wrap up the call and go to Q&A, I would just like to share with you actually a paragraph or two from my letter to fellow unitholders that is coming out of our Annual Report. I in fact I think we expect to post that on our website here in the next may be even tonight or tomorrow, next day or two.

And while I don't think I will probably give Warren Buffett a run for his money relative to interest in my letter, fellow unitholders, people that are interested in the story, analysts et cetera may find it interesting. For lawyers, let me take a few more liberties in terms of what I say in there.

But couple parting thoughts for the way we look at things at Tallgrass and the way we're running the company. This is an excerpt of data, at Tallgrass we play long-haul, we are steadying the phase of short-term movements in both the stock and commodities market, we have our eye on the horizon which means we are constantly looking to create long-term value for our unitholders.

We maintain an unwavering focus on the things we can control. We manage our business for long-term success.

Going forward, Tallgrass has the right assets, the right contracts, the right counterparties, the right balance sheet, and ample liquidity to move our company forward and meet our objectives and expectations. Once again, last year, 2016 Tallgrass Energy delivered.

On his date, here in 2017, we at TEP renew our commitment to putting forth an outstanding effort to steward our business to grow the business, to expand our services, and most importantly, to translate all of that into outstanding and sustainable investment returns. As always thank you to all of our partners and shareholders for their confidence in investing in TEP and TEGP and thank you to everyone on this call for your interest in our companies.

With that, operator we will turn the call back to you to kick us off with Q&A portion of the call.

I guess we will start with REX. Nice upside surprise there on the incremental capacity the open season for 150 which mechanically is that the difference between Mcf and Btu the e-content that you guys have talked about previously or is there are some mechanical compression or something else that's happening on this?

Brandon, it has to do with how the units were designed. We designed the facilities for the worst case scenario in terms of receipt, delivery, pairs.

And then when we get customers signed up on agreements and they identify where those volumes intend to go just trans out that, the design, was over designed by that 150 million cubic feet a day. We've been running test on the equipment during the month of January and its proven true that we can move that incremental capacity.

That's great. Call that good news.

And then switching over to the terminals business the organic projects can you size that in terms of potential for CapEx then or just how big could those two projects be?

The two projects being the Cushing terminal and the Guernsey they could be $150 million total between the two of them.

Okay, so quite sizable, thanks.

Thank you and have a good evening.

Right.

So Gary I know you gave me a lot of the components here so maybe you could just fill it out for me again if you don't mind. But can you just help me walk from the calendar year 2016 adjusted EBITDA like the 423 to the midpoint of guidance of 650 just kind of talk to me about what comes from the big buckets to get me there, timing around drops, while I'm thinking about for base business growth that would just be lovely.

I will leave some of that to your imagination but the big component there obviously are the two biggest components again expect -- in addition to expecting solid performance from all of our businesses would be an additional drop or a drop from Tallgrass development of our ownership in REX to TEP. The other thing that is included in that guidance is the cash payment that we expect REX to receive from Ultra in the second half of the year give or take and then REX would be assumed in our guidance to distribute that to its partners.

The other thing that is smaller but is worthy of note that we did note on the call is that being in water does have some upside year-over-year that is included in that guidance and the other businesses are expected to perform solidly across the year.

That's helpful. And you know I know you said that there is no need to access the capital market.

For this coming year but the call option went well, so would you consider doing this again on the REX drop?

We don't need to do it, Kristina, we think -- it's a good question. We don't need to do it for the REX drop I think the message we're trying to send Mr.

Market is, is that if we feel like the market has given us a good price we may opportunistically do it. We're not done by anyway shape or perform with our growth story relative to this year at REX or next year at REX I mean there is going to be a lot more going on.

So if we feel like the market is appropriately pricing our capital either debt or equity we will take advantage of it but right now we have no intension.

And last one for me I know you guys just mentioned the water business, Gary. Can you just talk a little bit about how I should think about the growth of this business overtime?

I mean how big do they could get from an EBITDA basis?

Yes, I mean I think given the assets we have today and the contracts associated with those assets, you could look at BNN to do substantially in excess of what it did in 2016 for the year 2017. We predict volumes to begin coming back to the processing facilities and so that would be incremental to the results posted for TMID in 2016.

Beyond that we are continuing to pursue a number of different growth opportunities for BNN. They are difficult to predict when they come in and certainly acquisitions are a part of that and so difficult to predict that.

I've not really included much of any of that in our 2017 guidance.

If I can Gary, I would just add to that that. Take note of where BNN is located in its existing footprint today.

We have assets in the Permian Basin; we have assets in the DJ Basin, in the Powder River Basin and in the Eagle Ford that pretty much ticks off outside of the Marcellus and Utica, the most growing basins in the country right now. So, yes, you can expect those guys to capture opportunities in those areas where oil and gas production is growing as well.

I guess let me try to see if I can get more color out of you guys. For let's assumed in guidance when you say we should expect sort of a drop for REX is another 25% a fair assumption?

Yes, I think that's a fair assumption.

Okay. And then the GP guidance that you gave for next year the growth of growing more than 30% and potentially in excess of 40%.

I guess what are the factors that you think about with respect to like where you're in the land like what needs to line up for you guys to feel okay about going over 40% versus 30%?

Well again I think we when we have this call, we're doing it for our unitholders and people that are may be interested in being unitholders, analysts that write et cetera and when we IPOed at TEGP, a year-and-a-half ago, we went out at a certain price and a certain yield. And obviously Mr.

Market looked a certain way at that time. And we were told by the investment bankers one of which was you work for Barclays; we would probably never get paid for above a 30% distribution growth.

Well I don't know that's true or not but I will tell you that our feeling and when I say ours, I would say management and the Class B shareholders continue to believe, we are not getting paid for the growth, we obviously grew distributions 110% since IPO less than a year-and-a-half and 60% since last year. And well whatever things that we can do to have that growth be an appropriate amount and get our price to where we think it is appropriate, we will only extend the growth profile at TEGP.

Though one thing that we may do as an example is take the opportunity to pay down some debt and see if they albeit fantastic growth rate, albeit may be smaller unless the market gets appropriately priceless in our minds. Clearly, if we on a comparative basis with some other people that you guys all cover get adequately compensated and our preference would be to lit it all out.

But that's a very straightforward answer.

And just to be in the spear of completeness, the other two factors obviously is TEP's distribution growth rate potentially at around or above 20%. And then obviously if we choose to which we don't need to but if we chose to issue equity at TEP in 2017 that would obviously benefit the IDR cash payment as well.

Okay, great. Thanks for that color.

And then I kind of wanted to move over to REX, the recontracting rate of $0.375, I think that going one to three as far as I know. Should we sort of think that as like base case recontracting made or was there anything specific about that contract with respect to receipt and delivery points that made that $0.375 very specific to Ultra?

I will start and let Bill finish. I think this is consistent with what we've been saying all along, when we first bought these assets we had approximately six, almost seven years to run now we are down to two-and-a-half and three years and Mr.

Market again on the commodity side and transport side is going to be what it's going to be. I think the two takeaways we would have you take from that is that, I think the market for transport is going to be tighter than people think it's going to be and we think the rate is going to be higher than what we think; people think it's going to be.

Beyond that our crystal ball probably is no more clear than yours. You want to add to that?

I think you nailed it. We're still two-and-a-half to three years away from getting to contract expiration on our existing west-to-east contracts and unlikely that we're going to begin renegotiations of those contracts tomorrow.

So any existing spread that you may be trying to calculate exist between point A and point B certainly is going to be different by the time we're appreciating those contract.

Yes, and I'll follow-up with final thing that we keep telling people is we haven't even -- we've talked about it, but we're going to start replanting Zones 1 and 2 and you are right about that transport with Ultra. The one we reclaim replant 1 and 2 the possibilities for there is a lot of possibilities relative to where gas originate and where it goes and what the transportation rates might be.

And the capacity in one and two is effectively double. So we're not dealing with X number of capacity units anymore we would be dealing with two REX.

Okay, that's helpful.

How you didn't say was it?

Last question for me just I think you guys have a deficiency payment balance of $60 million. When does that expire I mean this is probably like it gets booked to revenue when might be actually shift the barrels or the make a period expires; is that right?

Yes, it expires six months after the contracts.

Hey gentlemen kudos on a robust year and the bullish guidance.

Thank you.

With respect to the Pony deficiency payments it looks like they dropped marginally versus the previous quarter is that an inflection point and are those -- should we expect those volumes to get better going forward?

Yes, can you help us with when you said they dropped, what are you seeing or thinking about?

The drop about $1 million, little more than $1 million quarter-over-quarter.

Yes, Ethan I wouldn't say it's an inflection point. I mean it's pretty hard to tell, I will tell you that just as you see other companies that you cover and I'm not big on necessarily name and names but I will in the DJ as an example where we do get a significant amount of volume not just the Bakken on Pony.

People like Noble and DCP and we have seen the words that people are using like green shoots and all the ducts that are going to be coming online et cetera. Sure, we would like people to shift more volume on it, whether it's eating away their deficiencies or it eventually pays us more money it's not anything though that we're concerned about.

And but I wouldn't say and directly answer your question I don't say we can, I don't think we can at this time say it's an inflection point.

Okay, that's fair. And with respect to other interconnects and turning that into not just the bullet line but multiple parties and shippers all along the route, any new connections or points of production or consumption where they have discussion.

Watch Business Wire for the next week.

Fantastic.

What's that?

I said fantastic. Thank you.

A - Gary Brauchle We're working on a lot of stuff. We're at the one yard line on a couple of things.

Okay. And then lastly in the past we talk about are and of potential for LNG exports in the West Coast are getting gap that direction anything middle in that area.

We have, this is Eddie & Mache [ph] we have MSN through the end of 2019. So right now I'm actually focused on the current transformation focus on the finance side and so that's bringing Zone 2.

We will then start to turn our attention to what as Dave talked about in terms of the requirements in Zones 1 and 2, I think the opportunity to capture sort of West Coast opportunities that's going to be there sometime in the future but we are keenly watching it and to the extent there is an opportunity for REX to participate in that when the time is right, contracts allow to do best we can.

Yes good afternoon and congrats on another great year. Just on the range of guidance, what are some of the factors that you're looking at for kind of the high-end versus the low-end, could you talk a little bit about that?

Yes, John again it does hinge somewhat upon the size of the drop, the timing of the drop, the accretion of the drop, the financing assumptions associated with the drop of REX. But of course there are opportunities for all of our businesses to over perform and so we do consider those things in giving the range of Pony, not in significant to that, could be any incremental barrels on Pony Express that we would experience in 2017.

The level of service that BNN Water is able to provide in the region and capture some additional upside there and certainly on the processing assets that we see volumes come back quicker and in a more substantial way that obviously is very additive as well. Tight and Trailblazer are a little bit more predictable at this point but there are a couple of singles and doubles that we referenced and it could contribute to the upside.

And I would just add to that for example this 150 we're going to open season on REX, we can sell that short-term and we are currently how quickly that comes online relative to longer-term kind of we'll see contracts is what we just have to see how that plays out.

Okay that's helpful. And then I mean one of the -- we are out at our Annual Energy Conference and one of the questions that keeps coming up over and over is the structure of the IDRs and such.

As you have been able to grow your distribution so rapidly you're deeper and deeper into the split, I mean how are you thinking about that going forward and is it something that on the radar currently and then related to that anything with respect to what potential changes in tax policy, how is that shaping your thinking?

I mean it's on the radar only because it's an interesting question. I'm not sure how good I think the question it is, it's on our radar only in the sense of people continue to ask it, I do talk about it in the letter a fair amount, it's not anything we're considering, John I mean I suspect you've been a sell side analyst or not allowed to own TEP, am I correct?

We are not allowed to own. We are not allowed to own anything in TEP.

So unfortunately let alone even an index.

I'm sorry for you, John. But I guess what I would ask anybody is probably you may have one-off circumstances but we have been public for three-and-a-half years anybody that bought us at IPO or pretty much bought us at any point, I guess I would ask them the question is again why did you buy us and you probably bought us because you thought we are going to raise our distributions, we are going to pay out our distribution, and we were going to grow.

And what we've done is the last three-and-a-half years, we probably buy my account paid out somewhere in the neighborhood of $8 in distributions. We went out at IPO I think somewhere around 23 bucks, may be 23.50 and today we closed about 51.75.

So my question to them is, are you unhappy with that? So that's number one.

I don't think anybody should be unhappy with that. Number two is again the formation of Kinder Morgan interestingly enough where I was part of for the first five years and I'm proud of it was Valentine's Day in 1997, so it was 20 years ago yesterday and I guess what I would tell you is that I think if you go back and do a Harvard Business School or whatever Business School you want case study on the MLP space.

The ones that have done the best for all the constituencies both LPs and GPs are the ones where you had significant ownership in the GP with IDRs and that is not only just a big corporation and probably not big corporations frankly it's individuals have had huge amount of skin in the game. They've created tremendous value for their LPs and their GPs.

I think it's incumbent upon people to decide where they want to invest, if you want to invest at the LP level or the GP level so that's number two. And I would say finally number three is there is a lot of models out there that analyst write on et cetera.

And on a comparative basis we always tell our employees, don't compare your salaries and don't do this for that. So it's hard to do this on another level but we all have the same map.

It's very funny that you guys think that when I say you guys I'm just talking about generic analysis that one company has a same IDR structure and has this theoretical $1 billion of EBITDA in there is and as mostly a historic E&P company is priced appropriately at a 3% yield when everybody want us to ask us the same question over and over again. Why you have ADRs and you're paying 30% of your cash flow at GP and by the way we're going to torture you with a 6.5% yield.

It doesn't make any sense. I mean one of the two is wrong on a comparative basis.

And so we're not going anywhere. This is early earnings for us.

I've said it before do I think that there is a time and place for the MLP structure to probably wear out its usefulness? Yes, so we in our opinion are long ways from it.

Okay, that's helpful. Thank you for that.

Just my last question is, you just mentioned earlier about the ability to add or expand Pony by 100,000 barrels or so and just I was just curious, what do you think the chances are of being able to make that happen through expanding?

It's there today. I mean we on -- I look back, there have been days where we've run Pony 375 a day which is 75 above our contracted capacity today.

It's there, we can do it, it's a matter of again if you believe the green shoots are happening, if you believe the companies that you guys also follow in the DJ, in the South Bakken, in the Powder are going to be producing their ducts frac and I mean bringing more barrels online it's going to come in, it's going to come into our system. And so obviously it takes again people feeling good about a sustained oil price somewhere around $55 a barrel to hopefully $65 a barrel, $70 a barrel when that happens, I can, which I can tell you.

I would just add to that but to the extent the barrels aren't coming to us from our existing interconnects and existing supply points we're not afraid to go get them from other supply points and other basins and fourth crude streams and those kinds of things, we've have a lot of projects back.

You're going to see us doing that doesn't happen overnight but you will see us doing that this year.

Thanks and just two quick follow-ups on guidance. One in the processing logistic segments you kind of jumped up in the fourth quarter to $5 million you pointed to the water.

So is that kind of like a run rate now and it's going to go higher from there because you've been running at a kind of call it $3.5 million quarterly range and now that seems like you're at $5 million. So tell me if you're, I'm getting that correctly.

Yes, Michael we experience the very beginning of the contractual ramps on the water services business in Q4. We expect that segment to be substantially higher than the number that we posted for Q4 that you referenced.

Okay, great. And then just so I understand this correctly as well so, assuming you get the Ultra makes the payment to REX and then REX distributes that cash to its owners you will report that cash as EBITDA effectively in 2017?

Yes, Mike, it sounds like you got a man cold too maybe.

I do, yes.

So anyway if you think about the Ultra thing they filed, they didn't pay us at all in 2016, they haven't paid so far in 2017. They're paying us I don't know what $9 million a month, $6.7 million -- they are paying us probably $7 million a month right.

So last year they owed us $84 million they didn't pay it, if we get paid by October this year that's another $70 million. Had we getting paid it would have been revenue so it's going to be accounted for just the same exact way.

And so kind of -- relative to our definition of adjusted EBITDA included in TEPs adjusted EBTIDA is -- are distributions from REX. And then of course we obviously back out the equity earnings.

So to the extent that it is distributed from REX, it would be coming in TEPs adjusted EBITDA, Michael.

Okay. And the banks will count that also in their calculations?

Yes.

Okay. All right Thanks.

In case you're worried about, I mean, we're I think starting to file the REX Financials as part of our Qs and Ks.

Yes, they are in Exhibit 2, the 10-Ks.

And the REX debt is not going out it's going to be going down. So it's not like we're borrowing money to distributor.

Hi, guys just a quick follow-up on the guidance do you have any macro assumptions in your guidance on oil gas or differentials or anything else that we should be watching?

No, since we as, since you've been following us for a while since we converted almost all the 2% or less of our business to make whole contracts there really aren't any.

Okay. And Dave we haven't talked in a while about third-party M&A but if you guys been getting any potential deals anything any material third-party transaction that might occur at the end of this year?

Yes, we've -- we're still in that game. And I would even argue again that for those that you followed us, we got a lot to say grace over and we are finally now finding our position find ourselves in a position with all the tools that we find necessary to do that.

If you go back and look at our track record including the acquisition from Kinder in 2013, 2012 -- 2012 we've $2.3 billion in enterprise value. All the projects we've done purchase from Sempra everything all that adds up to about $6.5 billion to $7 billion worth of stuff.

So we are not afraid to do any of that just we had a lot to say grace over putting this altogether. So now we've got all the tools.

We are working on some stuff. We have one process where we have got down to two parties.

We had another party that it be selected and it just so happens that we got to call this week asking us to come back. So there are stuff going on but again it's party and I would be -- I would be doing it in justice to say yes we are going to plan on $500 million or $1 billion worth of stuff this year.

I think we try not to do what everybody else just because they do it and that kind of gets us to the earlier question from John about the IDR stuff. There is a lot of people out there that talk about their backlog and their shadow backlog in there and Animal Health's triple secret backlog and if we don't do that, but I will make an exception here if you look at everything, I think we are looking on it on our radar for Greenfield and Brownfield I would say most of it is Brownfield with us stuff, we probably got about $2 billion worth of stuff on top of the REX stuff that's sitting at the TDev to deal with over the next couple of years.

I wanted you to ask for calls, questions one more time and then we will conclude.

Operator, thank you everybody that tuned in. Thank you very much.

Appreciate all your interest in Tallgrass and thank you for your time today. Bye.