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Edited Transcript of TGE earnings conference call or presentation 31-Jan-19 9:30pm GMT

Q4 2018 Tallgrass Energy LP Earnings Call

Leawood Feb 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Tallgrass Energy LP earnings conference call or presentation Thursday, January 31, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David G. Dehaemers

Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC

* Gary J. Brauchle

Tallgrass Energy, LP - Executive VP & CFO of TEGP Management, LLC

* Nathan Lien

Tallgrass Energy, LP - IR Contact

* William R. Moler

Tallgrass Development, LP - COO, Executive VP & Director

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Conference Call Participants

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* Christine Cho

Barclays Bank PLC, Research Division - Director & Equity Research Analyst

* Colton Westbrooke Bean

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research

* Dennis Paul Coleman

BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD

* Ethan Heyward Bellamy

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Kyle May

Capital One Securities, Inc., Research Division - Associate

* Michael Jacob Blum

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Michael Jay Lapides

Goldman Sachs Group Inc., Research Division - VP

* Rebecca Gill Followill

U.S. Capital Advisors LLC, Research Division - Senior MD & Head of Research

* Selman Akyol

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Tallgrass Energy Fourth Quarter 2018 Earnings Call. Today's call is being recorded. At this time, I'd like to turn the call over to Nate Lien. Please go ahead, sir.

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Nathan Lien, Tallgrass Energy, LP - IR Contact [2]

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Thank you, Christy. Good afternoon, and thank you for joining The Tallgrass Energy quarterly earnings call. As we discuss TGE results for the fourth quarter of 2018, which were released through our press release this morning.

Joining me on the call this afternoon 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 January 31, 2019.

Please refer to our filings with the SEC, which are available on our website, 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 statement.

Please also refer to our earnings release and website 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.

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [3]

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Good afternoon, everybody, and thanks for joining our Tallgrass Energy fourth quarter earnings call. I know many of you are anxious to hear about the Blackstone transaction, and we will get to that in as much detail as we can in a moment. But first, I want to talk about our financial performance in order to highlight the hard work our Tallgrass employees put in each day to produce outstanding results for our company.

As you saw from the headline numbers in our press release, it was another excellent quarter of operational and financial results, which exceeded just about everyone's EBITDA estimates and solidified results above the high end of our 2018 financial guidance.

In addition, 2018 was marked by a number of other notable accomplishments, including the merger of TEGP and TEP, which set the midstream standard for fairness for LP and GP equity owners alike and fully aligned the interest of all of our stakeholders. In 2018, we continued to responsibly grow the company through accretive acquisitions and organic growth projects, and we received investment-grade credit ratings at both Tallgrass and REX.

Importantly, during 2018, we announced a number of projects under development, which we will -- which will further position Tallgrass as one of the leading midstream energy infrastructure companies in North America.

Now let's review the fourth quarter financial results, which were the catalyst for our dividend increase. Adjusted EBITDA was $241 million, cash available for dividends was $199 million, producing a robust dividend coverage ratio of 1.36x for the fourth quarter. This performance drove TGE's 14th consecutive quarterly dividend increase.

Again, I do this every time but we originally started out at an annualized $0.53 and at IPO about 3.5 years ago. Now we're at $2.08. Again, almost 4x in 3.5 years, not too bad. That quarterly dividend increase increases to $0.50 -- $0.52 per share or $2.08 annualized, which is a sequential increase of 2% from the third quarter of 2018 and an increase of 41.5% over the fourth quarter of 2017.

Before I turn the call over to Gary, I'd like to briefly address the Blackstone announcement. Gary will also comment on some financial considerations related to the transaction in his remarks, but we can touch on it now.

Blackstone is a large open-ended fund dedicated to infrastructure with deep access to capital. It's also a firm that takes the long view and builds to last. We like to think they have deep value view of Tallgrass. We believe all these attributes bode well for Tallgrass as we continue our transition from what began as a high-growth MLP into an established large midstream infrastructure company; a company with a number of transformative projects announced under development and on the horizon.

These projects will likely require external capital in the coming years and Blackstone has expressed a keen desire to invest in these type of projects for the long term. This is also a positive transaction for all Tallgrass stakeholders, including our employees from whom we expect business as usual in the short-term and more professional opportunities, again, for the employees in the future as we continue to grow.

The transaction with Blackstone and its coinvestors will transfer control of the general partner to Blackstone and effectively replace Kelso and EMG's Class B ownership. A portion of the management team's ownership in Tallgrass will also be purchased in the transaction and all active members of the team will continue to have significant interests going forward. The team will stay on in their current roles, and I plan to remain CEO, at least through the end of 2019.

The transaction requires no major regulatory approvals, and we expect closing in late February or March. And I should amend that, it will be kind of mid-March to the end of March. We expect no immediate changes to the independent board members and the publicly held Class A shares of TEG will remain outstanding and continue to trade on the New York Stock Exchange. With that, I'll turn the call over to Gary.

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Gary J. Brauchle, Tallgrass Energy, LP - Executive VP & CFO of TEGP Management, LLC [4]

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Thanks, Dave, and good afternoon. Moving to the segment performance for the quarter. The Natural Gas Transportation segment produced adjusted EBITDA of $124 million in the fourth quarter of '18, which is an increase of $3 million from the third quarter of '18. The primary driver was, again, higher distributions from our 75% interest in REX, resulting mainly from lower interest expense at REX due to the retirement of $550 million of debt at the REX level in July.

For the Crude Oil Transportation segment adjusted EBITDA was $88 million for the fourth quarter, matching the adjusted EBITDA for the third quarter of '18. The excellent performance from Pony Express was again the result of strong continued volumetric throughput on the system. As you may have seen in our earnings release, volumes for the quarter averaged 336 barrels a day, and about -- excuse me, 366,000 barrels a day for the quarter and about 336,000 barrels a day for the year. Again, let me repeat that to make it clear. Quarter volumes were 366,000 barrels a day, and 2018 barrels were 336,000 a day.

The Gathering, Processing and Terminalling segment generated adjusted EBITDA of $29 million for the fourth quarter, more than doubling the performance from the third quarter as we began to more fully realize the growth from the water assets that we've been investing in over the course of 2018. Before I get into our capital structure update, I'll just note for you that we expect to file our Form 10-K with the SEC and also make available TEP and REX financial statements, all on an audited basis on Friday, February 8.

Now moving onto capital structure. At the end of the fourth quarter, our leverage was approximately 3.7x based on the trailing 12-month adjusted EBITDA as calculated according to our credit agreements. When including our 75% share of REX's $2.018 billion in debt, our consolidated leverage for the quarter would have been approximately 4.8x.

While these metrics have increased over the past couple of quarters, they remain investment-grade metrics, and importantly, we expect our leverage ratio to decrease throughout 2019 as our adjusted EBITDA is expected to notably grow throughout the year. As for liquidity, today, we have undrawn revolver capacity of over $1.0 billion, representing ample liquidity to fund organic growth in small acquisitions.

One other item of note with respect to REX's capital structure. REX had a bond maturity on January 15 of this year in the amount of $525 million. As we prepared to refinance that maturity in late '18, bond spreads moved materially in the wrong direction, and we elected not to issue at rates so unfavorable for REX. We instead arranged a 364-day term loan with 5 very supportive banks at attractive terms to REX, which will allow us timing flexibility for a more permanent refinancing of that maturity. We will continue to monitor the market in the coming weeks and months for the right opportunity to do just that.

Moving on to our 2019 financial guidance. Tallgrass Energy expects adjusted EBITDA of $965 million to $1.035 billion. Cash available for dividends of $760 million to $835 million, and dividend coverage in excess of 1.25x for the year ending 2019.

Additionally, we expect dividend growth of 6% to 8% for TGE, not a cut-in distributions like some may speculate, and organic growth CapEx in excess of $300 million. This does not include other material projects we are currently working on, such as Seahorse, PLT or a Pony Express expansion.

As Dave mentioned earlier, I'll make a few comments about the financial impacts of the Blackstone transaction but we also -- an opportunity for follow-up questions in the Q&A, but beyond that, Nate and I will not really be able to provide additional details that we suspect, many would like and many have already called to obtain.

The transaction triggers a change of control related to our revolving credit facility, for which we will be seeking a simple majority consent vote from our existing lenders. It does not trigger a change in control in the Tallgrass bond indentures unless there is a ratings downgrade by 2 of the agencies within 60 days of the closing of the transaction for the 2024 and 2028 notes, and a downgrade by all 3 of the agencies for the 2023 notes. While we do not expect downgrades at Tallgrass related to this transaction, I could, however, foresee a scenario where it makes sense to consent -- to seek a consent from Tallgrass bondholders as a precautionary measure.

As for REX, the transaction does not trigger a change in control in the REX revolving credit facility, the newly issued short-term loan and since the REX indentures are investment-grade indentures, there is no change in control concept in those documents. And with that, now I'll turn it over to Bill for commercial updates.

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William R. Moler, Tallgrass Development, LP - COO, Executive VP & Director [5]

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Thank you, Gary, and good afternoon, everyone. It was another positive operational and commercial quarter for Tallgrass as we closed the acquisition of the strategic water assets in the Bakken, closed the land purchase for the Plaquemines Liquids Terminal in Louisiana, signed an agreement with potential anchor ship around Seahorse, continued the build-out of numerous organic growth projects, advanced recontracting discussions on both REX and Pony, and announced a partnership with Kinder Morgan to provide much-needed, cost-effective incremental crude oil takeaway capacity from multiple supply basins to Cushing.

In the gas transportation segment, we continued to see strong volumes on REX, as the west end averaged right about 1 billion cubic feet a day, and the east end averaged approximately 2.7 billion cubic feet a day during the quarter, totaling an average of approximately 3.65 billion cubic feet a day during the quarter.

For 2018, the west end averaged approximately 1.4 billion cubic feet a day and the east end averaged approximately 2.6 billion cubic feet a day for a total of approximately 4 billion cubic feet per day. The decrease in volumes from quarter 3 to quarter 4 is primarily a result of weather staying in the Rockies, and on the West Coast and the ongoing West Coast pipeline outage, which has resulted in increased volumes of gas flowing from the Rockies to the West Coast. We see these lower volumes as a temporary phenomenon, which has not changed our recontracting outlook for, and confidence in, REX.

During the quarter, we made a number of incremental positive steps with new and existing customers towards clarifying the long-term west end contract deck. So stay tuned for a more fulsome update later this year.

As we have previously mentioned, we continue to believe that the Cheyenne Connector and Cheyenne Hub projects will play a key role in providing incremental volumes into the west end of REX. We expect a good portion of those volumes will ultimately flow on REX through contracts with the Cheyenne Connector shippers or other shippers that may purchase gas at the Cheyenne Hub. The projects received their environmental assessments in December and continue to progress on schedule with an expected in-service date in the fourth quarter of 2019.

In the Crude Oil Transportation segment, we recently closed the expansion of our joint venture with Silver Creek Midstream, which will operate under the name Powder River Gateway. Tallgrass now owns 51% of and operates the JV, which owns the Powder River Express Pipeline, the Iron Horse pipeline and terminal assets at Guernsey that will serve both pipelines. We continue to see the Powder River Basin as an important area of current and future growth for our Crude Oil Transportation business.

In addition to our enhanced PRB footprint, Powder River footprint, on January 22, we announced an exclusive agreement with Kinder Morgan to jointly develop additional crude oil takeaway capacity from the Powder River, DJ and Williston Basins and for Western Canadian production. The proposed venture would include both existing and newly constructed assets, with Tallgrass contributing its Pony Express system, Kinder Morgan contributing portions of its WIC and Cheyenne Plains systems, which would be converted to crude oil service.

An additional 200 miles of new pipeline would be constructed to provide crude oil deliveries into Cushing. The combined system is expected to be capable of delivering up to 800,000 barrels per day of light crude oil from Wyoming and Colorado, and 150,000 barrels per day of heavy crude oil all to Cushing. While we expect the total capacity could be 950,000 barrels, the commitments we need in order to get to FID are far less than the 550,000 barrels of incremental capacity for the project.

In Q4, the average daily throughput on Pony was a robust 366,000 barrels per day, with an average of 336,000 barrels per day for all of 2018.

These figures, in combination with recent contracts we have signed on Pony and agreement to build another significant lateral on the DJ to connect additional volumes, continue to support not only our ongoing recontracting discussions, but also the additional expansion plans being proposed, and of course, the Seahorse and PLT projects.

At Tallgrass midstream, our gathering and processing margins continue to grow in the fourth quarter, and we recently signed a new 15-year agreement with a significant producer to gather and process their future volumes.

Turning to BNN Water Solutions. As I mentioned earlier, in December, we closed the acquisition of the Bakken water assets from NGL, and our combined North Dakota systems are performing well as you can see from the strong results in our Gathering, Processing and Terminalling segment.

Water services continues to see strong organic growth opportunities, and we are actively pursuing several exciting opportunities, which would further expand our footprint in basins we currently serve and give us entry into new basins.

Finally, for a quick update on the Seahorse and PLT projects. We continue to have productive conversations with potential Seahorse shippers, and as we announced in November, we have one potential anchor shipper signed, which has continued to generate additional interest and momentum for the project. The standalone open season for Seahorse was recently extended to February 15 and the joint-open season with Pony Express was extended to February 28.

With regard to PLT and Plaquemines Parish, Louisiana, in November, the land acquisition was closed, and we are in ongoing discussions with a number of potential counterparties that are looking to anchor the project. And now David will conclude our remarks ahead of Q&A.

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [6]

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Thanks, Bill. As we communicate another outstanding quarter and full year for 2018, our team has already been hard at work on delivering for our partners again in 2019, I should say partners/shareholders.

Our 2019 financial guidance that we just announced, coupled with a new partnership with Blackstone, are just a couple of reasons why Tallgrass' future is so promising.

In the past 6 years, we have grown from a small, primarily Natural Gas Transportation MLP, into a large diversified midstream energy infrastructure company that is on the verge of taking the next step in our life cycle.

Fueling the next phase of growth will be the transformative projects we have under development, such as Seahorse, PLT and the partnership with Kinder Morgan. Blackstone's long-term vision and deep capital will lend further strength to our strategy. Most importantly, I believe, we have the brightest, hardest working and most efficient team in the industry that will continue to lead and transform this company going forward.

As always, thank you to our employees for what they do every day to keep themselves and our community safe and our assets operating reliably. Thank you as well to our shareholders for their confidence in investing in TGE, and to everyone on this call for your interest in our company.

And with that, operator, we will turn the call back to you to begin the Q&A portion of our call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Dennis Coleman from Bank of America Merrill Lynch.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [2]

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I guess, if we can start with the Blackstone transaction, and I guess, the broad question is, what changes in strategy, if any, distribution policy, those kind of things that we might expect as a result, if you can talk about that at this early state? And then also, it seems like you're indicating that they're interested in funding a good bit of the growth projects that you do see on the horizon, if you can talk about that a little bit as well?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [3]

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Yes, is this Dennis?

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [4]

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It is, yes.

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [5]

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Dennis, thank you for the questions. So relative to Blackstone -- so that -- we expect that to close in March. Kelso and EMG today have 4 board seats between -- they have 2 each, so that's 4. Bill and I sit on the board, and we have 3 independent board directors.

Strategy has been set all along by not only the management team, Bill, I, Gary, Chris, et cetera, a much broader team than just us, but also, clearly our Board of Directors. Really don't see anything changing there. It's just instead of having 2 Kelso and 2 EMG guys, we're going to have 4 Blackstone folks, which is great.

In terms of distribution, nothing has changed. You saw our guidance for 2019, actually getting to the closing of the transaction in March, do not anticipate any of that changing, any of that.

In terms of funding, yes, this is -- this investment, by my way of understanding, would be in Blackstone's new -- the fund that they believe they're going to raise $40 billion in, which is their infrastructure fund. And so I -- we've gotten to know those guys. We believe Tallgrass is a platform for them relative to investing capital. So that's kind of how I would answer that.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [6]

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Great, thanks for hitting on all those. I guess, as a follow-up. In terms of structuring the transaction, I just want to make sure I understand. So they are buying the general -- 100% of the general partner interest, and so they effectively have control of Tallgrass? Is that sort of the traditional general partner control, because I've had some questions about that and whether that structure had gone away at some point?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [7]

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Yes, that structure has not gone away. I mean, just to kind of take you through it, if the transaction closes, Blackstone would be buying all of the private Tallgrass Hold Co., which is the general partner that you speak of.

I probably take a little bit of exception relative to control. The control of the company is, by the Board of Directors, and again, I indicated to you, we have a board of 9. Bill and I sit on it, we have 3 independents as required by the New York Stock Exchange, that adds up to 5, and then we would have the 4 Blackstone folks, so that's 9. The company is controlled by the board.

Blackstone, in addition to buying the general partner, is pretty much taking out Kelso and EMG relative to their investment in the B units that are there. And then management also, to some degree, is participating in that. I would add that, again, repeating from our prepared comments at management, that is still staying here, which is everybody, and that has been invested in the past will still have fairly significant investments.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [8]

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And then just, I guess, the last one. Was there any consideration about taking out the public unitholders at the upper price? Blackstone have any interest in that?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [9]

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Yes, I don't want to answer for them. The transaction kind of speaks for itself. So I mean, that's probably more a question to ask them. So yes, I mean -- I think, we would like everybody to view the transaction at this point if -- when it closes in March, as if though this is just a infrastructure/private equity group replacing other private equity that have been our partners for the last 7 years.

The Kelso and EMG relationship has been fantastic. Those guys supported us with big checks 6.5 years ago. They've made a great investment. As you know, most private equity funds have a limited life, and while we weren't necessarily at the end of theirs, 7 years is a fairly long investment for them. And so this turned out to be the right transaction at the right time.

One interesting thing about the Blackstone infrastructure fund is it's kind of a open-ended fund and it's very long tailed, so the questions that we have gotten over the years of how long will Kelso and EMG stay in as your financial partners, we don't expect to have that here because their fund is kind of an indefinite time frame. So Dennis, I hope that answers your question, and we really appreciate your...

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Operator [10]

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And we'll take our next question from Colton Bean from Tudor, Pickering, Holt.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [11]

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So I'll probably follow up with one on the deal and then hopefully switch over to ops here. But yes, just wanted to touch on the announcement, is there any interest in participating in Blackstone's existing infrastructure assets and kind of general thoughts along those lines?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [12]

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Yes, my understanding from getting to know these guys is that the -- I'm suspecting the existing infrastructure assets you're talking about perhaps are their minority interest in Rover, et cetera. Those are in different funds there, that creates issues internally for them. And then obviously, to the extent there would ever be anything where those might come into Tallgrass, we have -- we would have to go through our conflicts committee and, kind of, arm's length type transactions, et cetera.

Blackstone does also own private pipelines. Again, typically in different funds and there would be a number of hurdles that they would have to jump through being in a different fund as well as our company kind of having the independent directors basically deciding what is a fair transaction.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [13]

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That's helpful. I mean, just in regard to the JV announced with KMI, any additional commentary you could offer on sourcing barrels from both the Bakken and the WCSB would be particularly helpful? Is it expectation to maybe pulling barrels off Express or kind of how are you guys thinking about that?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [14]

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Yes, I'll let Bill take that one.

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William R. Moler, Tallgrass Development, LP - COO, Executive VP & Director [15]

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It's a good question and the answer is, off of Express, barrels in and around Casper, wherever we can find a heavy barrel, we're proposing to have a route out, and we're in discussions with folks in Calgary and others about accomplishing that very thing.

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Colton Westbrooke Bean, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Midstream Research [16]

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Got it. And just a last one, if I could. Gary, maybe on the processing and logistics segment. Any additional breakout you can provide on the deficiency payments there would be great.

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Gary J. Brauchle, Tallgrass Energy, LP - Executive VP & CFO of TEGP Management, LLC [17]

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Yes, we don't break out really the deficiency payments by segment, but I will tell you that there was, in Q4, a significant uptick in the volumetric deficiencies that we realized relative to the water segment there. And that is by virtue of MVCs, et cetera, and things like that. But also, just the investments we've been doing over the course of 2018 and those bearing fruit as well on a non-deficiency basis too.

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [18]

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Yes, So I'd just add little bit -- said just slightly a little bit differently. Like he said, like Gary said, these are typically minimum volume commitments with take-or-pay contracts, and we're getting paid just because somebody necessarily hasn't produced water in this instance relative to this example.

And so we've got plenty of bandwidth relative to our water systems, and on any given quarter, when somebody may not have had the produced water for disposal or be using the fresh water for injection, that doesn't mean that they won't soon be ramping that up. So the deficiency thing is, in our view, not a bad thing, it's just a classification type thing.

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Operator [19]

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And we'll take our next caller, Michael Lapides from Goldman Sachs.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [20]

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Real quick, two items. One on the JV with Kinder. Can you just remind us, I want to make sure we've got this. How much of the total capacity is actually new capacity versus capacity that's just being contributed into the JV?

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William R. Moler, Tallgrass Development, LP - COO, Executive VP & Director [21]

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Michael, I'm not sure what -- how about if I tell -- how to characterize your question. Today, Pony can move 400,000 barrels of light volume, and it's intended upon completion of conversion and extension that, that light volume move over to the bigger line of the converted gas line and 200 miles of laid to Cushing. And that pipe will have at least 800,000 barrels a day of capacity. And then Pony, our intention is to use it for heavy movements and it moving heavy can move between 150,000 to 200,000 barrels a day of capacity.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [22]

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Got it. And then, can you talk a little bit about the dialogue you're having with shippers, both for the recontracting of both Pony right now but also, REX. When you expect to have a little bit more clarity on, especially on the REX side given the year-end contract roll-off? And kind of, just what shippers are saying to you about the recontracting and potentially, even the recontracting rates for Pony?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [23]

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Can I take REX and you do Pony. So Michael, this is Dave. On REX, we continue to have a lot of conversations. Like we said, last quarter, it's really difficult to, in the environment we're in, to kind of constantly be giving updates.

Having said that, we understand why everybody is interested in it. I will tell you that I think we had somewhere around 1.1 Bcf, and it all doesn't roll off this year in November, some of it is actually, I believe, February of 2020. But we've either already signed up or have basically things waiting on final approvals by management teams or board teams, where we probably have already recontracted.

Catch this, right? 10 months in advance, roughly about 30% of our uncontracted capacity by the end of the year. So that's the best we're going to give you. That's a pretty good amount almost a year in advance, and we continue to make more progress. And again, we have a number of shippers that are committed on the Cheyenne Connectors as an example that haven't necessarily yet committed on REX.

So we feel really good about it. We're unworried about it. I can understand why everybody has the keen interest in it. At the end of the day, our belief is this is going to be a nothingburger. And I guess, I would also tell you just while we're sharing good information here that the rates that what I have told you we've recontracted on are almost there on -- are right smack in the middle, if not better than the range that we've kind of given everybody publicly. So you want to talk about Pony?

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William R. Moler, Tallgrass Development, LP - COO, Executive VP & Director [24]

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Yes. Relative to Pony recontracting, we talked about some of the incremental projects that we have underway. The Platteville line that we did in '18, we are laying an extension into the Hereford area here in short order. And when we do that, that -- all of those come with associated contracts, which is good news.

But really, our deal with Kinder is allowing us to do a number of things. One, it's allowing us through just the sheer volume that can be placed on the larger diameter pipe, it's allowing us to offer rates to folks in the future that are competitive, if not better than competitive than others, who are out there pitching greenfield projects. Secondly, it allows us to get in service way sooner than anyone, who is pitching a greenfield project coming, bringing crude, light crude specifically out of the Rocky Mountains.

How are we faster and how are we competitive? Converting a line versus laying a new line, avoiding environmental consequence and avoiding land owner issues, avoiding permitting issues, it's just going to be an easier road to hoe. And laying 200 miles of pipe in Kansas and Oklahoma is always looked upon favorably. So we expect that contracting will take care of itself as we roll out this new strategy with lights and heavies.

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Operator [25]

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And we'll go next to Christine Cho from Barclays.

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [26]

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Dave, I was just wondering if you can talk about your involvement going forward. You talk about running the company at least through the end of this year. What happens afterward and what would determine whether or not you would stay longer?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [27]

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Well, Christine. Appreciate you calling me out specifically here. I've been doing this for 6.5, 7 years. We have a great team here. We're keen to keep it going. Our new partners are keen to have the same people who have been running the company, keep it going. So I've just -- I'm committed through the end of this year, to at least be the CEO for that period of time. I'm not really thinking beyond that at this point.

And again, I think one point is, I'm -- it's not like I'm being required or they're kicking me out after that. I've agreed to kind of be on the board for a minimum of 2 years. And so I think it's just never let -- natural evolution and creating opportunity. I've got great group of people here, you've met them all and can't all do everything forever. And so I mean, that's it, I mean, I may find out that I'm reenergized a year from now, and I want to do it another 10 years. I'm just going to play it a year at a time, I suppose, at this point.

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [28]

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Okay. And then, are you able to, at least, give us some idea of how we got here? Can you just sort of talk about the process? I'm sure there were other funds, other infrastructure funds that were interested. Why is this the one that got the deal?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [29]

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Yes, I know inquiring minds want to know, and it's probably really not too appropriate to talk about that. Whether other funds were involved or not, I mean, I know that there was that December rumor out there, we don't comment on rumors. So that's -- any of that is just absolutely pure speculation.

I guess, I would characterize it as most good things in life, right time, right place, right party. We weren't necessarily actively looking to have Kelso and EMG get a liquidity event. But we've always talked to everybody, and it just so happened that with this rather large infrastructure fund that Blackstone was raising, they wanted to start making investments and putting their money to work.

So I think, again, kind of right time, right place, right group of people after we got to know them. And so that's kind of at a very high level the background story.

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Christine Cho, Barclays Bank PLC, Research Division - Director & Equity Research Analyst [30]

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So like you say, they weren't -- it wasn't -- it doesn't sound like there was a formal process run, but would you say, you guys were talking to funds because you're -- as you say, there is like a deep bench for projects and you were looking at potential ways to fund it, was that part of the equation at all?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [31]

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Yes. Again, I'm not going to talk about other funds and whether we were talking to more or not, it's -- we are where we're at. But I would say that every -- I don't want to put words in Blackstone's mouth, but I mean, I think it speaks for itself that, yes, they're interested in a company with a good management team, a great set of assets that what they think is stable and long-term infrastructure and that people they have executed on growth in the past and can execute on it in the future.

So again, I'm providing you as much color as I think, kind of, appropriate given also that I just -- I've gotten to know our potential new partners here and really like them, but I always hesitate to speak for other people.

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Operator [32]

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And next, we'll go to Becca Followill from U.S. Capital Advisors.

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Rebecca Gill Followill, U.S. Capital Advisors LLC, Research Division - Senior MD & Head of Research [33]

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As a segue to that, you talked about keeping -- you're keen to keep the group together. Are there any retention agreements that keep Gary and Bill and the 3 heads of the business units there? And how long is that for?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [34]

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Yes. Clearly, in my comments, Becca, the Blackstone being this potential significant new partner of ours is interested in that. I think to the -- while I'd like to share all that, I think when the transaction closes relative to whatever documentation we have to file at that point that may become apparent.

I don't think it's just -- I don't think it's appropriate that I should kind of go into the detail of that right now. But I guess the overall arching answer is, yes, they're absolutely interested in keeping the team together and the team's interested in continuing on.

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Rebecca Gill Followill, U.S. Capital Advisors LLC, Research Division - Senior MD & Head of Research [35]

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And for a sustained period?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [36]

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Oh, yes. Absolutely.

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Operator [37]

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And next, we'll go to Michael Blum from Wells Fargo.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [38]

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Just a few more questions, so I apologize. So one, just I want to make sure I understand it. So post -- so effectively, management is selling their Class B shares but you'll still own your Class A shares? Is that the right way to look -- think about it?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [39]

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Yes, it's not a general rule. I think, Mike, the right way to think about it relative to what I said earlier, Mike, is that -- or, Michael, is that management is going to participate, and by participation, while there is some liquidity for management on their B shares. We also all are retaining some significant relative to each of us, significant investment -- investment/interest in the company.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [40]

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Okay. And then, it looks like, in rough math, relative to if we assume the B and As trade at the same price, it looks like there is roughly a 10% premium, and I'm wondering was that the control premium for the GP? Or should we think of that as like a premium for the stock or any thoughts on that?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [41]

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Yes, I mean, you -- yes, and I would caution you against, dumbing it down to where's the As trade at, and therefore, the Bs are kind of the same. And then, gross purchase price divided by some number, which again you don't even really know the denominator of yet.

I guess, the point being, I would caution you a little bit against that and we're not in a position right now. When we file -- we will have to file Form 4s on the closing, so you'll have more details about who sold what then. And I guess I would tell you that, again, from keeping it at a high level here, clearly, the general partner and the private control entity is part of the deal and so there is a portion of that being in the consideration, but we're just not at liberty right now to share that.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [42]

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Okay. And then last question for me. Just with Blackstone being the new owner, is there a plan for them to communicate to the public? They're obviously not on this call but do you think there'll something post the close or at some point in the future?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [43]

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Yes, we filed a joint press release real early this morning, and it's my understanding that 9:00 Eastern, Blackstone actually had their public earnings call this morning and the -- this transaction was referenced by them a couple times.

Again, I don't know them that well. I would be surprised if there is any plan with that and that wouldn't -- frankly, it doesn't surprise me, and I don't think it should surprise you because just like Kelso and EMG the last 7 years, never publicly participated in anything we did or had their own private conference call or talked about what they were going to do this or that. I would be surprised if Blackstone plans on doing that.

So that -- but honestly I don't view that as being particularly strange. On the other hand, if they choose to, particularly, as we get toward closing or at closing, if they want to talk about it more, that's their prerogative.

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Operator [44]

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And next, we'll go to Ethan Bellamy from RW Baird.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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With respect to Blackstone's willingness and ability to commit capital going forward, is it appropriate to view Tallgrass as a drop-down story again? And is it safe to say that your equity financing needs are covered for the foreseeable future?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [46]

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Look, that's a good -- those are good questions, and fairly well put forward. I don't know that I would blanket answer them with kind of unequivocal yes or no. I think the good news -- here's the way I choose to view it, right? Is that, we all know that there's not been a lot of equity raises in the midstream space. The mid-MLP space and now the midstream space for us. And so -- and it's questionable about what the -- at least in my view, what the pricing dynamics are for that.

Blackstone, like any investor, to the extent they put additional capital into something is going to look for appropriate level of returns. And so I don't expect that to be any different. I do, however, believe that there is a read through that, again, large infrastructure fund incented to get that money put to work. I do think that, again, I think my view after getting to know these folks, is that they do see deep value here that the public is not seeing in my view. And so while I cannot unequivocally say all of our equity needs are met forever, I do think that that's, in some ways, a fair conclusion.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [47]

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That's excellent. And Dave, do you anticipate having a noncompete when you leave?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [48]

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I'm, with one exception, which is a very -- it's not worth going into. For the last 6.5 years, I'm the only employee in this company that has had an employment agreement, and my existing employment agreement for the last 6.5 years has had a noncompete provision in it. My -- that employment agreement is still in effect today and I frankly don't see any of that changing so...

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [49]

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Congrats on the deal.

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Operator [50]

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And next, we'll go to Selman Akyol from Stifel.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [51]

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A lot's been covered, but just real quickly. You talked about the PLT land acquisitions and you said you've closed that, and you're speaking to a number of potential anchors. And I'm just wondering if you could put -- maybe add some goalposts that we should be looking for on future updates?

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William R. Moler, Tallgrass Development, LP - COO, Executive VP & Director [52]

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On PLT specifically?

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [53]

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Yes.

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William R. Moler, Tallgrass Development, LP - COO, Executive VP & Director [54]

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We are completing permitting, and like we said in Q4, we completed the land acquisition. We are in daily discussions with customers, both domestically and internationally. And people like the idea of PLT. Can I tell you with any specificity when they're going to commit to the project? I'd like to say it would be in Q1 of this year, '19, and that's what we're working hard to achieve in Q1.

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Operator [55]

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(Operator Instructions) We'll go back to Michael Lapides from Goldman Sachs.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [56]

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Guys, easy question for you. Is there a way to get -- to quantify, like if the KMI joint -- if the Kinder Morgan joint venture goes through, if you get Seahorse and Plaquemines done. Is there a way to think about what kind of the total backlog of projects you have that you're working on now? Just trying to quantify the capital investment opportunity and think about what that would imply as a -- if you put a range of EBITDA multiples on it, what it would imply as kind of a future earnings, power earnings growth?

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [57]

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Yes, Michael, I mean, I think we've talked about all those in different forms, if you added them up at multi billions of dollars, somewhere in maybe the $4 billion to $5 billion backload range, because we are working with Kinder to figure out what works for both of us and kind of makes 2 and 2 equal 5. We're not in a position competitively nor kind of want to front run that process to where we would talk about what those potential economics might be, it's just not fair to Kinder, it's not fair to us.

Relative to the other ones, I would think -- I guess, I would just tell you, so I've given you kind of an overall capital number if you want to risk weight that we'll get some of that done, then you just take it, times our historical return on invested capital that we have in our presentations, and I would say that's our expected future set relative to those large projects.

And again, I tell everybody to also look at just kind of our add-on stuff that's not the large stuff, I mean, we've got probably we say in the K that we're just -- we're going to file here in the next week, I think, somewhere around $270 million to $300 million of unspent CapEx proved already, and we're constantly adding to that. I think our probably run rate, absent the big investments that we've made in the past, has probably been closer to $400 million or $500 million a year. So I hope that's helpful to you.

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [58]

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No, completely helpful. And finally, can you just remind us, this is really nuts and boltsy. What maintenance or sustaining CapEx is for 2019?

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Gary J. Brauchle, Tallgrass Energy, LP - Executive VP & CFO of TEGP Management, LLC [59]

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Yes, Michael, it's Gary. It's in the neighborhood of $35 million to $40 million, which is pretty consistent with prior years, plus an embedded amount for the asset growth that we've experienced over time. So give or take, $35 million to $40 million.

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [60]

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Just to be clear, does that include REX?

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Gary J. Brauchle, Tallgrass Energy, LP - Executive VP & CFO of TEGP Management, LLC [61]

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That does not include REX, right? This is not consolidated into that number. So did you follow all that, Michael?

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Michael Jay Lapides, Goldman Sachs Group Inc., Research Division - VP [62]

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Yes, yes. I did.

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [63]

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Operator, would you give an opportunity to the audience one more time for additional questions and if there is any, we'd be glad to take them, and...

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Operator [64]

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(Operator Instructions) And we'll go next to Kyle May from Capital One Securities.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [65]

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Apologies if I missed this already, but you've already announced a lot of projects that could potentially flow into Seahorse. Is there anything that you could give us as like goalposts of what else you may need to move forward with that project?

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William R. Moler, Tallgrass Development, LP - COO, Executive VP & Director [66]

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With the Seahorse project?

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Kyle May, Capital One Securities, Inc., Research Division - Associate [67]

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Yes.

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William R. Moler, Tallgrass Development, LP - COO, Executive VP & Director [68]

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There are a number of open seasons that are open today, we think, not only by getting the superhighway of lights out of the Rockies and the heavies brought to Cushing together, that would be close to 950,000 barrels of incremental coming into Cushing. Those barrels getting to the coast, it's a matter of, do you want to go to Corpus Christi or do you want to go to, Saint James area?

We believe that our project has better flexibility, diversity, it's got refinery connections of significant offtakes that should a boat not show up or weather be a problem, folks have a place to take their barrels.

What we need now is we need commitment, we need barrels to be committed to the project. I will tell you that our costs are coming down. We see an ability to rightsize our line and we believe that we're going to be competitive with every other project that's out there and have the potential to be in service far earlier and in a way that is going to expedite the whole process.

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [69]

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And look, Kyle, I know you asked for goalposts and your goalposts were really on timing, and it really is hard to say that. We're working it hard, we have those opening seasons I think that running through February, and we have told everybody that we have signed up a anchor shipper, we probably need another anchor shipper.

And so we're not -- it's probably not very satisfying relative to saying, by March 31 or May 31, we'll have FID. We're trying to just give you the color about what goes on in the process.

I think one read through relative to what Bill said is that probably working on, as he called it the superhighway joint venture with Kinder maybe pushes back Seahorse just a little bit because that's critical to get even more volumes to Cushing, which will then -- is going to -- is suspected of being constrained in the future relative to getting those barrels to the water.

And I'm not saying it pushes it out a year, I'm just saying -- I think what I'm trying to say is that we -- that's probably more prudent to figure that piece out first, and we're working on it. We've got teams and Kinder does too that have met -- days long, each week for the last couple weeks.

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Kyle May, Capital One Securities, Inc., Research Division - Associate [70]

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Okay, got it. That helps and I appreciate the color. And one other thing. As you're looking at the guidance range that you gave for the year, can you give us any additional color on how you see the different segments rolling up to that?

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Gary J. Brauchle, Tallgrass Energy, LP - Executive VP & CFO of TEGP Management, LLC [71]

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Yes, Kyle, it's Gary. We don't give guidance at the actual segment level. But I think what you can look at is another very strong year from Pony Express, increases from REX on a significant basis year-over-year within the Natural Gas Transportation segment, in part because of the Encana contract step up.

And then, Gathering, Processing and Terminalling, again, I won't get into the specific assets but there are nice growth opportunities. You know that we have made a lot of water investments and those are bearing fruit. And so without getting too specific on water, there is a very nice increment coming in 2019 from that as well. So I think those are the big pieces at the lower segment level but beyond that we probably choose not to get too granular.

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [72]

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Any more calls, Nate?

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Nathan Lien, Tallgrass Energy, LP - IR Contact [73]

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No.

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David G. Dehaemers, Tallgrass Energy, LP - President, CEO & Director of TEGP Management, LLC [74]

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Well, look, everybody, I appreciate you calling in today. Thank you for your continued interest in Tallgrass. We're very excited about what's going on around here and energized about it. And we look forward to continuing to produce outstanding results for our stakeholders. So with that, thank you, and we'll talk to you next quarter. Thank you.

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Operator [75]

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That concludes our call for today. Thank you for your participation. You may now disconnect.