Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Tallgrass Energy Partners, LPFinancial_Report.xls
EX-31.1 - EXHIBIT - Tallgrass Energy Partners, LPexhibit311.htm
EX-31.2 - EXHIBIT - Tallgrass Energy Partners, LPexhibit312.htm
EX-32.1 - EXHIBIT - Tallgrass Energy Partners, LPexhibit321.htm
EX-32.2 - EXHIBIT - Tallgrass Energy Partners, LPexhibit322.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 FORM 10-Q
 
 
 
 (Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-35917
 
 
 
 
 Tallgrass Energy Partners, LP
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
4,922
 
46-1972941
(State or other Jurisdiction of Incorporation or Organization)
 
(Primary Standard Industrial Classification Code Number)
 
(IRS Employer
Identification Number)
4200 W. 115th Street, Suite 350
Leawood, Kansas 66211
(913) 928-6060
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
George E. Rider
4200 W. 115th Street, Suite 350
Leawood, Kansas 66211
(913) 928-6060
(Address, including zip code, and telephone number, including area code, of Agent for service)
 
 
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
On August 1, 2014, the Registrant had 32,735,140 Common Units, 16,200,000 Subordinated Units, and 834,391 General Partner Units outstanding.




TALLGRASS ENERGY PARTNERS, LP
TABLE OF CONTENTS
 
1

1

1

1

2

3

4

5

20

30

32

34

34

34

34

34

34

34

35

36





Glossary of Common Industry and Measurement Terms
Base Gas (or Cushion Gas): The volume of gas that is intended as permanent inventory in a storage reservoir to maintain adequate pressure and deliverability rates.
BBtu: One billion British Thermal Units.
Bcf: One billion cubic feet.
British Thermal Units or Btus: the amount of heat energy needed to raise the temperature of one pound of water by one degree Fahrenheit.
Condensate: A NGL with a low vapor pressure, mainly composed of propane, butane, pentane and heavier hydrocarbon fractions.
Delivery point: the point at which product in a pipeline is delivered to the end user.
Dry gas: A gas primarily composed of methane and ethane where heavy hydrocarbons and water either do not exist or have been removed through processing.
Dth: A dekatherm, which is a unit of energy equal to 10 therms or one million British thermal units.
End-user markets: The ultimate users and consumers of transported energy products.
FERC: Federal Energy Regulatory Commission.
Firm transportation and storage services: Those services pursuant to which customers receive firm assurances regarding the availability of capacity and deliverability of natural gas on our assets up to a contracted amount at specified receipt and delivery points.
GAAP: Generally accepted accounting principles in the United States of America.
GHGs: Greenhouse gases.
Header system: Networks of medium-to-large-diameter high pressure pipelines that connect local gathering systems to large diameter high pressure long-haul transportation pipelines.
HP: Horsepower.
Interruptible transportation and storage services: Those services pursuant to which customers receive only limited assurances regarding the availability of capacity and deliverability in transportation or storage facilities, as applicable, and pay fees based on their actual utilization of such assets.
Local distribution company or LDC: LDCs are involved in the delivery of natural gas to consumers within a specific geographic area.
Liquefied natural gas or LNG: Natural gas that has been cooled to minus 161 degrees Celsius for transportation, typically by ship. The cooling process reduces the volume of natural gas by 600 times.
MMBtu: One million British Thermal Units.
Mcf: One thousand cubic feet.
MMcf: One million cubic feet.
Natural gas liquids or NGLs: Those hydrocarbons in natural gas that are separated from the natural gas as liquids through the process of absorption, condensation, adsorption or other methods in natural gas processing or cycling plants. Generally such liquids consist of propane and heavier hydrocarbons and are commonly referred to as lease condensate, natural gasoline and liquefied petroleum gases. Natural gas liquids include natural gas plant liquids (primarily ethane, propane, butane and isobutane) and lease condensate (primarily pentanes produced from natural gas at lease separators and field facilities).
No-notice service: Those services pursuant to which customers receive the right to transport or store natural gas on assets outside of the daily nomination cycle without incurring penalties.
NYMEX: New York Mercantile Exchange.




Park and loan services: Those services pursuant to which customers receive the right to store natural gas in (park), or borrow gas from (loan), our facilities on a seasonal basis.
PHMSA: The United States Department of Transportation’s Pipeline and Hazardous Materials Safety Administration.
Play: A proven geological formation that contains commercial amounts of hydrocarbons.
Receipt point: The point where production is received by or into a gathering system or transportation pipeline.
Reservoir: A porous and permeable underground formation containing an individual and separate natural accumulation of producible hydrocarbons (crude oil and/or natural gas) which is confined by impermeable rock or water barriers and is characterized by a single natural pressure system.
Residue gas: The natural gas remaining after being processed or treated.
Shale gas: Natural gas produced from organic (black) shale formations.
Tailgate: The point at which processed natural gas and NGLs leave a processing facility for end-user markets.
TBtu: One trillion British Thermal Units.
Tcf: One trillion cubic feet.
Throughput: The volume of natural gas transported or passing through a pipeline, plant, terminal or other facility during a particular period.
Wellhead: The equipment at the surface of a well that is used to control the well’s pressure; also, the point at which the hydrocarbons and water exit the ground.
Working gas: The volume of gas in the storage reservoir that is in addition to the cushion or base gas. It may or may not be completely withdrawn during any particular withdrawal season. Conditions permitting, the total working capacity could be used more than once during any season.
Working gas storage capacity: The maximum volume of natural gas that can be cost-effectively injected into a storage facility and extracted during the normal operation of the storage facility. Effective working gas storage capacity excludes cushion gas and non-cycling working gas.
X/d: The applicable measurement metric per day. For example, MMcf/d means one million cubic feet per day.




PART 1—FINANCIAL INFORMATION
Item 1. Financial Statements
TALLGRASS ENERGY PARTNERS, LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) 
 
June 30, 2014
 
December 31, 2013
 
(in thousands)
ASSETS
 
Current Assets:
 
 
 
Cash and cash equivalents
$
16

 
$

Accounts receivable, net
27,698

 
30,033

Gas imbalances
1,336

 
3,128

Inventories
8,122

 
5,549

Prepayments and other current assets
1,788

 
16,986

Total Current Assets
38,960

 
55,696

Property, plant and equipment, net
660,251

 
657,780

Goodwill
343,288

 
334,715

Intangible asset, net
7,495

 

Unconsolidated investment

 
1,255

Deferred financing costs
6,273

 
4,512

Deferred charges and other assets
11,048

 
11,299

Total Assets
$
1,067,315

 
$
1,065,257

LIABILITIES AND PARTNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
27,940

 
$
60,240

Accounts payable to related parties
3,963

 
7,137

Gas imbalances
4,407

 
3,664

Derivative liabilities at fair value
439

 
184

Accrued taxes
3,871

 
5,520

Accrued other current liabilities
16,988

 
16,748

Total Current Liabilities
57,608

 
93,493

Long-term debt
281,000

 
135,000

Other long-term liabilities and deferred credits
6,933

 
4,572

Total Long-term Liabilities
287,933

 
139,572

Commitments and Contingencies (Note 13)

 

Equity:
 
 
 
Predecessor Equity

 
88,251

Common unitholders (24,685,140 and 24,300,000 units issued and outstanding at June 30, 2014 and December 31, 2013)
475,227

 
455,197

Subordinated unitholder (16,200,000 units issued and outstanding at June 30, 2014 and December 31, 2013)
275,554

 
274,666

General partner (834,391 and 826,531 units issued and outstanding at June 30, 2014 and December 31, 2013)
(30,352
)
 
14,078

Total Partners’ Equity
720,429

 
832,192

Noncontrolling interests
$
1,345

 
$

Total Equity
$
721,774

 
$
832,192

Total Liabilities and Equity
$
1,067,315

 
$
1,065,257


The accompanying notes are an integral part of these condensed consolidated financial statements.
1



TALLGRASS ENERGY PARTNERS, LP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per unit amounts)
Revenues:
 
 
 
 
 
 
 
Natural gas liquids sales
$
36,329


$
31,690


$
85,236


$
65,091

Natural gas sales
2,713


4,248


7,521


4,698

Transportation services
30,569


30,909


64,673


60,527

Processing and other revenues
7,709


2,500


14,669


4,719

Total Revenues
77,320

 
69,347

 
172,099

 
135,035

Operating Costs and Expenses:
 
 
 
 
 
 
 
Cost of sales and transportation services
41,172


35,257


93,240


66,443

Operations and maintenance
10,055


9,229


18,068


16,592

Depreciation and amortization
8,768


9,332


16,320


18,722

General and administrative
7,124


6,517


13,773


12,544

Taxes, other than income taxes
1,639


1,663


3,595


3,709

Total Operating Costs and Expenses
68,758

 
61,998

 
144,996

 
118,010

Operating Income
8,562

 
7,349

 
27,103

 
17,025

Other (Expense) Income:
 
 
 
 
 
 
 
Interest (expense) income, net
(2,140
)

(3,495
)

(3,433
)

(9,059
)
Gain on remeasurement of unconsolidated investment
9,388

 

 
9,388

 

Loss on extinguishment of debt


(17,526
)



(17,526
)
Equity in earnings of unconsolidated investment
273




717



Other income, net
729


445


1,669


801

Total Other Expense
8,250

 
(20,576
)
 
8,341

 
(25,784
)
Net Income (Loss)
16,812

 
(13,227
)
 
35,444

 
(8,759
)
Net loss attributable to noncontrolling interests
55




55



Net Income (loss) attributable to partners
$
16,867

 
$
(13,227
)
 
$
35,499

 
$
(8,759
)
Total comprehensive income attributable to partners
$
16,867

 
$
(13,227
)
 
$
35,499

 
$
(8,759
)
Allocation of income (loss) to the limited partners:

 

 

 

Net income (loss) attributable to partners
$
16,867

 
$
(13,227
)
 
$
35,499

 
$
(8,759
)
Predecessor operations interest in net loss (income)

 
1,500

 
(5,732
)
 
2,103

Net income (loss) attributable to partners
16,867

 
(11,727
)
 
29,767

 
(6,656
)
Net income attributable to partners prior to May 17, 2013

 
(1,911
)
 

 
(6,982
)
Net income (loss) attributable to partners subsequent to May 17, 2013
16,867

 
(13,638
)
 
29,767

 
(13,638
)
General partner interest in net (income) loss subsequent to May 17, 2013
(1,096
)
 
273

 
(1,477
)
 
273

Common and subordinated unitholders' interest in net income (loss) subsequent to May 17, 2013
$
15,771

 
$
(13,365
)
 
$
28,290

 
$
(13,365
)
Basic net income (loss) per common and subordinated unit
$
0.39

 
$
(0.33
)
 
$
0.70

 
$
(0.33
)
Diluted net income (loss) per common and subordinated unit
$
0.38

 
$
(0.33
)
 
$
0.68

 
$
(0.33
)
Basic average number of common and subordinated units outstanding
40,885

 
40,246

 
40,694

 
40,246

Diluted average number of common and subordinated units outstanding
41,905

 
40,246

 
41,624

 
40,246


The accompanying notes are an integral part of these condensed consolidated financial statements.
2



TALLGRASS ENERGY PARTNERS, LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended June 30,
 
2014
 
2013
 
(in thousands)
Cash Flows from Operating Activities:
 
 
 
Net income (loss)
$
35,444

 
$
(8,759
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:

 

Depreciation and amortization
16,956

 
19,940

Gain on remeasurement of unconsolidated investment
(9,388
)
 

Loss on extinguishment of debt

 
17,526

Noncash compensation expense
2,249

 
85

Changes in components of working capital:

 

Accounts receivable and other
4,144

 
18,683

Gas imbalances
831

 
2,517

Inventories
(867
)
 
(2,592
)
Accounts payable and accrued liabilities
(17,249
)
 
(9,484
)
Other operating, net
2,833

 
(5,233
)
Net Cash Provided by Operating Activities
34,953

 
32,683

Cash Flows from Investing Activities:
 
 
 
Acquisition of Trailblazer
(150,000
)
 

Capital expenditures
(19,851
)
 
(20,724
)
Acquisition of additional equity interests in Water Solutions
(7,600
)
 

Unconsolidated investment
(1,999
)
 

Other investing, net
358

 
(341
)
Net Cash Used in Investing Activities
(179,092
)
 
(21,065
)
Cash Flows from Financing Activities:
 
 
 
Borrowings under revolving credit facility
146,000

 
224,000

Contribution from TD
27,488

 

Distributions to unitholders
(26,770
)
 

Reimbursement of stock compensation expense from TD
2,392

 

Distributions to Predecessor Member, net
(2,893
)
 
(1,215
)
Payments for deferred financing costs
(2,325
)
 
(4,988
)
Repayment of debt assumed from TD

 
(400,000
)
Proceeds from initial public offering, net of offering costs

 
290,706

Distributions to Member, net

 
(118,538
)
Other financing, net
263

 
(308
)
Net Cash Provided by (Used in) Financing Activities
144,155

 
(10,343
)
Net Change in Cash and Cash Equivalents
16

 
1,275

Cash and Cash Equivalents, beginning of period

 

Cash and Cash Equivalents, end of period
$
16

 
$
1,275

 
 
 
 
Supplemental Disclosures:
 
 
 
Cash payments for interest
$
2,239

 
$
561

Schedule of Noncash Investing and Financing Activities:


 


Increase in accrual for payment of property, plant and equipment
$

 
$
484

Receivable for unreimbursed stock compensation from TD
$
413

 
$

Fair value of TIGT and TMID assets contributed by TD
$

 
$
1,027,127

Fair value of TIGT and TMID liabilities contributed by TD
$

 
$
(566,849
)

The accompanying notes are an integral part of these condensed consolidated financial statements.
3



TALLGRASS ENERGY PARTNERS, LP
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(UNAUDITED)
 
 
Predecessor Equity
 
Limited Partners
 
General Partner
 
Total Partners’ Equity
 
Noncontrolling interests
 
Total Equity
 
 
Common
 
Subordinated
 
 
 
Balance at January 1, 2014
$
88,251

 
$
455,197

 
$
274,666

 
$
14,078

 
$
832,192

 
$

 
$
832,192

Net Income
5,732

 
17,034

 
11,256

 
1,477

 
35,499

 
(55
)
 
35,444

Distributions to Predecessor Member, net
(2,893
)
 

 

 

 
(2,893
)
 

 
(2,893
)
Acquisition of Trailblazer
(91,090
)
 
14,023

 

 

 
(77,067
)
 

 
(77,067
)
Excess purchase price over carrying value of acquired interests in Trailblazer

 

 

 
(72,933
)
 
(72,933
)
 

 
(72,933
)
Acquisition of Water Solutions

 

 

 

 

 
1,400

 
1,400

Contribution from Tallgrass Development, LP

 

 

 
27,488

 
27,488

 

 
27,488

Issuance of general partner units

 

 

 
263

 
263

 

 
263

Distributions to unitholders

 
(15,677
)
 
(10,368
)
 
(725
)
 
(26,770
)
 

 
(26,770
)
Noncash compensation expense

 
4,650

 

 

 
4,650

 

 
4,650

Balance at June 30, 2014
$

 
$
475,227

 
$
275,554

 
$
(30,352
)
 
$
720,429

 
$
1,345

 
$
721,774


The accompanying notes are an integral part of these condensed consolidated financial statements.
4



TALLGRASS ENERGY PARTNERS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Description of Business
Tallgrass Energy Partners, LP (“TEP” or the “Partnership”) is a Delaware limited partnership formed in February 2013.
On May 17, 2013, TEP closed its initial public offering (“IPO”). The 14,600,000 common units held by the public constitute approximately 36% of TEP’s aggregate outstanding common and subordinated units and approximately 35% of TEP’s aggregate outstanding common, subordinated and general partner units at June 30, 2014. Tallgrass Development, LP (“TD”) held 10,085,140 common units and 16,200,000 subordinated units at June 30, 2014, which comprised approximately 64% of TEP’s aggregate outstanding common and subordinated units and approximately 63% of TEP’s aggregate outstanding common, subordinated and general partner units. In addition, 834,391 general partner units, representing a 2% general partner interest in TEP at June 30, 2014, and all of the incentive distribution rights (“IDRs”) are held by Tallgrass MLP GP, LLC (the “general partner”). In connection with the IPO, TEP entered into a revised partnership agreement on May 17, 2013. The amended and restated partnership agreement requires TEP to distribute its available cash on a quarterly basis, subject to certain terms and conditions, beginning with the quarter ending June 30, 2013. For additional information, see Note 9 – Partnership Equity and Distributions. As discussed in Note 15 – Subsequent Events, TEP closed on a public offering of an additional 8,050,000 common units on July 25, 2014.
The term “TEP Predecessor” refers to Tallgrass Energy Partners Predecessor, which is comprised of the businesses described below that were owned by TD, from November 13, 2012 through the completion of the IPO on May 17, 2013.
The businesses included in the TEP Predecessor consist of:
Tallgrass Interstate Gas Transmission, LLC (“TIGT”), which owns an interstate gas pipeline and storage system (the “TIGT System”) that is regulated by the FERC. TIGT currently has approximately 4,645 miles of varying diameter natural gas transmission lines in Colorado, Kansas, Missouri, Nebraska and Wyoming.
Tallgrass Midstream, LLC (“TMID”), which owns and operates one treating and two processing plants in Wyoming.
The term "Predecessor Entity" refers to Trailblazer Pipeline Company LLC ("Trailblazer"), which TEP acquired on April 1, 2014, as further discussed in Note 2 – Summary of Significant Accounting Policies. Financial results for all prior periods have been recast to reflect the operations of the Predecessor Entity.
2.
Summary of Significant Accounting Policies
Basis of Presentation
These unaudited condensed consolidated financial statements and related notes for the three and six months ended June 30, 2014 and 2013 were prepared in accordance with the accounting principles contained in the Financial Accounting Standards Board’s Accounting Standards Codification, the single source of generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The year-end balance sheet data was derived from audited financial statements but does not include disclosures required by GAAP for annual periods. The unaudited condensed consolidated financial statements for the three and six months ended June 30, 2014 and 2013 include all normal, recurring adjustments and disclosures that we believe are necessary for a fair presentation of the results for the interim periods. In this report, the Financial Accounting Standards Board is referred to as the FASB and the FASB Accounting Standards Codification is referred to as the Codification or ASC. Certain prior period amounts have been reclassified to conform to the current presentation.
TEP’s financial results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014. These unaudited condensed consolidated financial statements should be read in conjunction with TEP’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”) filed with the United States Securities and Exchange Commission (the “SEC”) on March 11, 2014.

5



The accompanying consolidated financial statements of TEP include historical cost-basis accounts of the assets of TEP Predecessor, contributed to TEP by TD in connection with the IPO, for the periods prior to May 17, 2013, the closing date of TEP’s IPO, as well as Trailblazer for the periods prior to April 1, 2014, the date TEP acquired Trailblazer from TD, and include charges from TD for direct costs and allocations of indirect corporate overhead. Management believes that the allocation methods are reasonable, and that the allocations are representative of costs that would have been incurred on a stand-alone basis. Both TEP and TEP Predecessor are considered “entities under common control” as defined under GAAP and, as such, the transfers between the entities of the assets and liabilities has been recorded by TEP at historical cost. TEP, or the Partnership, as used herein refers to the consolidated financial results and operations for TEP Predecessor from its inception through its contribution to TEP and thereafter.
As further discussed in Note 3 – Business Combinations, TEP closed the acquisition of Trailblazer on April 1, 2014. As the acquisition of Trailblazer is considered a transaction between entities under common control, and a change in reporting entity, the financial information presented for prior periods has been recast to include Trailblazer for all periods presented.
The condensed consolidated financial statements include the accounts of TEP and its subsidiaries. Significant intra-entity items have been eliminated in the presentation. Net equity distributions of the TEP Predecessor and the Predecessor Entity included in the Consolidated Statements of Cash Flows represent transfers of cash as a result of TD’s centralized cash management systems prior to May 17, 2013, and prior to April 1, 2014 for Trailblazer, under which cash balances were swept daily and recorded as loans from the subsidiaries to TD. These loans were then periodically recorded as equity distributions.
Use of Estimates
Certain amounts included in or affecting these condensed consolidated financial statements and related disclosures must be estimated, requiring management to make certain assumptions with respect to values or conditions which cannot be known with certainty at the time the financial statements are prepared. These estimates and assumptions affect the amounts reported for assets, liabilities, revenues, and expenses during the reporting period, and the disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates these estimates on an ongoing basis, utilizing historical experience, consultation with experts and other methods it considers reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from these estimates. Any effects on TEP’s business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
Accounting Pronouncements Issued But Not Yet Effective
Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a comprehensive and converged set of principles-based revenue recognition guidelines which supersede the existing industry and transaction-specific standards. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, entities must apply a five step process to (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 also mandates disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The disclosure requirements include qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.
The amendments in ASU 2014-09 are effective for public entities for annual reporting periods beginning after December 15, 2016, and for interim periods within that reporting period. Early application is not permitted. The adoption of ASU 2014-09 is not expected to have a material impact on TEP's financial position and results of operations.

6



ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period"
In June 2014, The FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 provides explicit guidance on accounting for share-based payments requiring a specific performance target to be achieved in order for employees to become eligible to vest in the awards when that performance target may be achieved after the requisite service period for the award. The ASU requires that such performance targets be treated as a performance condition, and should not be reflected in the estimate of the grant-date fair value of the award. Instead, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2014-12 is not expected to have a material impact on TEP's financial position and results of operations.
3.
Business Combinations
On April 1, 2014, TEP closed the acquisition of Trailblazer from a wholly owned subsidiary of TD for total consideration valued at approximately $164 million, consisting of $150 million in cash and the issuance of 385,140 common units (valued at approximately $14 million based on the March 31, 2014 closing price of TEP’s common units). On that same date, the general partner contributed additional capital in the amount of approximately $263,000 in exchange for the issuance of 7,860 general partner units in order to maintain its 2% general partner interest. The acquisition of Trailblazer represents a change in reporting entity and a transaction between entities under common control. The excess purchase price over the net book value of Trailblazer's assets and liabilities was accounted for as a deemed distribution as discussed further in Note 9 – Partnership Equity and Distributions.

7



Historical Financial Information
The results of our acquisition of Trailblazer are included in the consolidated balance sheets as of June 30, 2014 and December 31, 2013. The following table presents the previously reported December 31, 2013 consolidated balance sheet, adjusted for the acquisition of Trailblazer from TD:
 
 
As of December 31, 2013
 
 
TEP
 
Consolidate Trailblazer Pipeline Company LLC
 
TEP (as currently reported)
 
 
(in thousands)
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Accounts receivable, net
 
$
27,615

 
$
2,418

 
$
30,033

Gas imbalances
 
2,598

 
530

 
3,128

Inventories
 
5,148

 
401

 
5,549

Prepayments and other current assets
 
16,986

 

 
16,986

Total Current Assets
 
52,347

 
3,349

 
55,696

Property, plant and equipment, net
 
594,911

 
62,869

 
657,780

Goodwill
 
304,474

 
30,241

 
334,715

Unconsolidated investment
 
1,255

 

 
1,255

Deferred financing costs
 
4,512

 

 
4,512

Deferred charges and other assets
 
10,299

 
1,000

 
11,299

Total Assets
 
$
967,798

 
$
97,459

 
$
1,065,257

LIABILITIES AND PARTNERS’ EQUITY
 

 

 
 
Current Liabilities:
 

 

 
 
Accounts payable
 
$
54,621

 
$
5,619

 
$
60,240

Accounts payable to related parties
 
7,134

 
3

 
7,137

Gas imbalances
 
3,142

 
522

 
3,664

Derivative liabilities at fair value
 
184

 

 
184

Accrued taxes
 
4,427

 
1,093

 
5,520

Accrued other current liabilities
 
14,777

 
1,971

 
16,748

Total Current Liabilities
 
84,285

 
9,208

 
93,493

Long-term debt
 
135,000

 

 
135,000

Other long-term liabilities and deferred credits
 
4,572

 

 
4,572

Total Long-term Liabilities
 
139,572

 

 
139,572

Partners’ Equity:
 
 
 
 
 
 
Net Equity
 
743,941

 
88,251

 
832,192

Total Partners’ Equity
 
743,941

 
88,251

 
832,192

Total Liabilities and Partners’ Equity
 
$
967,798

 
$
97,459

 
$
1,065,257


8



The results of our acquisition of Trailblazer are included in the condensed consolidated statements of income for the three and six months ended June 30, 2014 and 2013. The following tables present the previously reported condensed consolidated statements of income for the three and six months ended June 30, 2013, adjusted for the acquisition of Trailblazer from TD:
 
 
Three Months Ended June 30, 2013
 
 
TEP
 
Consolidate Trailblazer Pipeline Company LLC
 
TEP (as currently reported)
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
Natural gas liquids sales
 
$
31,690

 
$

 
$
31,690

Natural gas sales
 
3,888

 
360

 
4,248

Transportation services
 
25,324

 
5,585

 
30,909

Processing and other revenues
 
2,500

 

 
2,500

Total Revenues
 
63,402

 
5,945

 
69,347

Operating Costs and Expenses:
 

 

 
 
Cost of sales and transportation services
 
32,358

 
2,899

 
35,257

Operations and maintenance
 
8,305

 
924

 
9,229

Depreciation and amortization
 
7,436

 
1,896

 
9,332

General and administrative
 
5,039

 
1,478

 
6,517

Taxes, other than income taxes
 
1,394

 
269

 
1,663

Total Operating Costs and Expenses
 
54,532

 
7,466

 
61,998

Operating Income (Loss)
 
8,870

 
(1,521
)
 
7,349

Other (Expense) Income:
 

 

 
 
Interest (expense) income, net
 
(3,500
)
 
5

 
(3,495
)
Loss on extinguishment of debt
 
(17,526
)
 

 
(17,526
)
Other income, net
 
429

 
16

 
445

Total Other (Expense) Income
 
(20,597
)
 
21

 
(20,576
)
Net Loss
 
$
(11,727
)
 
$
(1,500
)
 
$
(13,227
)

9



 
 
Six Months Ended June 30, 2013
 
 
TEP
 
Consolidate Trailblazer Pipeline Company LLC
 
TEP (as currently reported)
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
Natural gas liquids sales
 
$
65,091

 
$

 
$
65,091

Natural gas sales
 
4,189

 
509

 
4,698

Transportation services
 
49,661

 
10,866

 
60,527

Processing and other revenues
 
4,719

 

 
4,719

Total Revenues
 
123,660

 
11,375

 
135,035

Operating Costs and Expenses:
 

 

 
 
Cost of sales and transportation services
 
61,828

 
4,615

 
66,443

Operations and maintenance
 
14,840

 
1,752

 
16,592

Depreciation and amortization
 
14,982

 
3,740

 
18,722

General and administrative
 
9,673

 
2,871

 
12,544

Taxes, other than income taxes
 
3,171

 
538

 
3,709

Total Operating Costs and Expenses
 
104,494

 
13,516

 
118,010

Operating Income (Loss)
 
19,166

 
(2,141
)
 
17,025

Other (Expense) Income:
 

 

 
 
Interest (expense) income, net
 
(9,064
)
 
5

 
(9,059
)
Loss on extinguishment of debt
 
(17,526
)
 

 
(17,526
)
Other income, net
 
768

 
33

 
801

Total Other (Expense) Income
 
(25,822
)
 
38

 
(25,784
)
Net Loss
 
$
(6,656
)
 
$
(2,103
)
 
$
(8,759
)
Formation of BNN Water Solutions, LLC
On November 26, 2013, TEP, through its wholly-owned subsidiary Tallgrass Energy Investments, LLC (“TEI”), entered into a joint venture agreement with BNN Energy LLC (“BNN”) to form Grasslands Water Services I, LLC (“GWSI”). GWSI subsequently built and began operating an intrastate water pipeline in Colorado. TEP accounted for its 50% equity interest in GWSI as an equity method investment. On May 13, 2014, TEI entered into a contribution agreement with BNN and several other parties to form a new entity known as BNN Water Solutions, LLC (“Water Solutions”). Under the terms of the contribution agreement, TEI agreed to contribute its existing 50% interest in GWSI, along with $7.6 million cash, in exchange for an 80% equity interest in Water Solutions. As part of the transaction, GWSI was renamed BNN Redtail, LLC (“Redtail”), became a subsidiary of Water Solutions, and issued preferred equity interests to TEI. Among the assets contributed by BNN and the other parties to the transaction were the other 50% interest in GWSI and a 100% equity interest in Alpha Reclaim Technology, LLC (“Alpha”), a company which sources treated wastewater from municipalities. Alpha is wholly-owned by Redtail.
Upon closing of the transaction, TEP obtained a controlling financial interest in Water Solutions and accordingly has accounted for the transaction as a step acquisition under ASC 805. On the acquisition date, TEP remeasured its previously held 50% equity interest in GWSI to its fair value of $11.9 million, recognized a gain of $9.4 million, and consolidated Water Solutions. The 20% equity interest in Water Solutions held by noncontrolling interests was recorded at its acquisition date fair value of $1.4 million. The fair values of the previously held equity interest and the noncontrolling interest were determined using a discounted cash flow based on forecasted cash flows for the business. These fair value measurements are based on significant inputs that are not observable in the market and thus represent fair value measurements categorized within Level 3 of the fair value hierarchy under ASC 820.

10



The following represents the fair value of assets acquired and liabilities assumed at May 13, 2014:
Accounts receivable
$
790

 
Property, plant and equipment
4,100

 
Intangible assets
8,200

(1) 
Accounts payable and accrued liabilities
(134
)
 
Distribution payable
(634
)
 
Net identifiable assets acquired
12,322

 
Goodwill
8,573

 
Net assets acquired
$
20,895

 
(1) 
The $8.2 million intangible asset acquired represents a major customer contract and is subject to amortization over the remaining contract term (approximately 1.6 years). Amortization of $0.7 million was recorded during the period from May 13, 2014 to June 30, 2014.
At June 30, 2014, the assets acquired and liabilities assumed in the acquisition were recorded at provisional amounts based on the preliminary purchase price allocation. TEP is in the process of obtaining additional information to identify and measure all assets acquired and liabilities assumed in the acquisition within the measurement period. Such provisional amounts will be adjusted if necessary to reflect any new information about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of these amounts.
Actual revenue and net loss attributable to TEP from Water Solutions of $0.9 million and $0.2 million, respectively, was recognized in the accompanying Condensed Consolidated Statements of Income for the period from May 13, 2014 to June 30, 2014.
Pro Forma revenue and net income attributable to TEP for the three and six months ended June 30, 2014 is presented in the following table. No pro forma information is presented for the three and six months ended June 30, 2013 as Water Solutions did not begin commercial operations until the first quarter of 2014.
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
 
(in thousands)
Revenue
$
78,084

 
$
174,540

Net income attributable to TEP
$
7,642

 
$
26,541

This unaudited pro forma financial information for TEP is presented as if the acquisition of Water Solutions had been completed on January 1, 2013. The pro forma financial information is not necessarily indicative of what the actual results of operations or financial position of TEP would have been if the transactions had in fact occurred on the date or for the period indicated, nor do they purport to project the results of operations or financial position of TEP Predecessor for any future periods or as of any date. The pro forma financial information does not give effect to any cost savings, operating synergies, or revenue enhancements expected to result from the transactions or the costs to achieve these cost savings, operating synergies, and revenue enhancements. The pro forma revenue and net income includes adjustments for the three and six months ended June 30, 2014 to give effect to the following:
(a)
Reduction in net income attributable to TEP to remove equity in earnings of GWSI recorded for the period from January 1, 2014 to May 13, 2014.
(b)
Increase in revenue and net income attributable to TEP to reflect TEP's consolidated 80% equity interest in the operations of GWSI for the period from January 1, 2014 to May 13, 2014.
(c)
Reduction in net income attributable to TEP to remove gain on remeasurement of previously held equity interest in GWSI.

11



Reconciliation of Goodwill
The following table presents a reconciliation of the carrying amount of goodwill by reportable segment for the reporting period:
 
Three Months Ended June 30, 2014
 
Three Months Ended June 30, 2013
 
Gas Transportation and storage
 
Processing
 
Total
 
Gas Transportation and storage
 
Processing
 
Total
 
 
 
(in thousands)
 
 
 
 
 
(in thousands)
 
 
Balance at beginning of period
$
255,558

 
$
79,157

 
$
334,715

 
$
255,100

 
$
78,057

 
$
333,157

Goodwill acquired

 
8,573

(1) 
8,573

 

 

 

Balance at end of period
$
255,558

 
$
87,730

 
$
343,288

 
$
255,100

 
$
78,057

 
$
333,157

 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2013
 
Gas Transportation and storage
 
Processing
 
Total
 
Gas Transportation and storage
 
Processing
 
Total
 
 
 
(in thousands)
 
 
 
 
 
(in thousands)
 
 
Balance at beginning of period
$
255,558

 
$
79,157

 
$
334,715

 
$
255,100

 
$
78,057

 
$
333,157

Goodwill acquired

 
8,573

(1) 
8,573

 

 

 

Balance at end of period
$
255,558

 
$
87,730

 
$
343,288

 
$
255,100

 
$
78,057

 
$
333,157

(1)    The $8.6 million of goodwill was recorded in connection with the acquisition of a controlling interest in Water Solutions on May 13, 2014.
4.
Related Party Transactions
TEP has no employees. Beginning November 13, 2012, TD, through its wholly-owned subsidiary Tallgrass Operations, LLC ("Tallgrass Operations"), provided and charged TEP for all direct and indirect costs of services provided to us or incurred on our behalf including employee labor costs, information technology services, employee health and life benefits, and all other expenses necessary or appropriate to the conduct of our business. TEP recorded these costs on the accrual basis in the period in which TD incurred them. Each of the wholly-owned companies comprising TEP had an agency arrangement with TD under which TD paid costs and expenses incurred by TEP, acted as an agent for TEP, and was reimbursed by TEP for such payments.
On May 17, 2013, in connection with the closing of TEP’s IPO, TEP and its general partner entered into an Omnibus Agreement with TD and certain of its affiliates, including Tallgrass Operations (the “Omnibus Agreement”). The Omnibus Agreement provides that, among other things, TEP will reimburse TD and its affiliates for all expenses they incur and payments they make on TEP’s behalf, including the costs of employee and director compensation and benefits as well as the cost of the provision of certain centralized corporate functions performed by TD, including legal, accounting, cash management, insurance administration and claims processing, risk management, health, safety and environmental, information technology and human resources in each case to the extent reasonably allocable to TEP.
For the calendar year 2014, TEP’s annual cost reimbursements to TD for costs discussed above, are expected to be $20.4 million, inclusive of costs associated with our acquisition of Trailblazer in April 2014 and our consolidation of Water Solutions in May 2014. TEP also pays a quarterly reimbursement to TD for costs associated with being a public company. The quarterly public company reimbursement was $625,000 for the second quarter of 2014 and TEP currently expects it to remain the same for each subsequent quarter in 2014. However, these reimbursement amounts will be periodically reviewed and adjusted as necessary to continue to reflect reasonable allocation of costs to TEP.
Due to the cash management agreement discussed in Note 2 – Summary of Significant Accounting Policies, intercompany balances at the Predecessor Entity were periodically settled and treated as equity distributions prior to the completion of the IPO on May 17, 2013 and prior to April 1, 2014 for Trailblazer.

12



Totals of transactions with affiliated companies are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Charges to TEP: (1)
 
 
 
 
 
 
 
Operation and maintenance
$
4,608

 
$
4,597

 
$
8,956

 
$
8,716

General and administrative (2)
$
4,305

 
$
6,247

 
$
8,887

 
$
12,200

(1) 
Charges to TEP include directly charged wages and salaries, other compensation and benefits, and shared services.
(2) 
During the three and six months ended June 30, 2014 and 2013, TEP reimbursed TD for general and administrative expenses as discussed above, resulting in allocated amounts for general and administrative costs.
There were no balances with affiliates included in "Accounts receivable" in the Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013. Details of balances with affiliates included in “Accounts payable” in the Condensed Consolidated Balance Sheets are as follows: 
 
June 30, 2014
 
December 31, 2013
 
(in thousands)
Payables to affiliated companies:
 
 
 
Accounts payable to Tallgrass Operations, LLC
$
3,921

 
$
7,106

Accounts payable to Rockies Express Pipeline LLC
42

 
31

Total payables to affiliated companies
$
3,963

 
$
7,137

Balances of gas imbalances with affiliated shippers are as follows:
 
June 30, 2014
 
December 31, 2013
 
(in thousands)
Affiliate gas balance receivables
$

 
$
137

Affiliate gas balance payables
$
803

 
$
122

Pursuant to the terms of a Purchase and Sale Agreement dated August 1, 2012, TD, on behalf of its wholly-owned subsidiary, Tallgrass Pony Express Pipeline, LLC (“Pony Express”), is reimbursing TIGT for all costs TIGT incurs with respect to the Pony Express Abandonment, as defined in Note 12 – Regulatory Matters, including, but not limited to, development costs, capital costs and related interest costs associated with the construction of certain gas facilities necessary to maintain existing natural gas service on the TIGT System (the “Replacement Gas Facilities”). The Replacement Gas Facilities are required as part of the Pony Express Abandonment in order for TIGT to continue service to existing customers after having sold approximately 430 miles of natural gas pipeline, and associated rights of way and certain other equipment, to Pony Express in 2013. For more information, see Note 12 – Regulatory Matters.
TIGT’s expenditures for the Replacement Gas Facilities are captured in “Prepayments and other current assets” in the Condensed Consolidated Balance Sheets as they are incurred and interest is accrued until reimbursement takes place (which is typically monthly). During the six months ended June 30, 2014 we received proceeds from TD of $67.1 million and incurred expenditures of $39.2 million. We recognized a contribution of $27.5 million from TD in our Condensed Consolidated Statement of Partners' Capital which represents the difference between the carrying amount of the Replacement Gas Facilities and the proceeds received from TD, and $0.4 million in "Accrued and other current liabilities" related to the timing of cash expenditures and reimbursement from TD. At December 31, 2013, TEP had $17.0 million in “Prepayments and other current assets” related to this project that were cash settled by TD in the first quarter of 2014.

13



5.
Inventory
The components of inventory at June 30, 2014 and December 31, 2013 consisted of the following:
 
June 30, 2014
 
December 31, 2013
 
(in thousands)
Materials and supplies
$
2,187

 
$
2,137

Natural gas liquids
1,210

 
1,009

Gas in underground storage
4,725

 
2,403

Total inventory
$
8,122

 
$
5,549

6.
Property, Plant and Equipment
A summary of net property, plant and equipment by classification is as follows:
 
June 30, 2014
 
December 31, 2013
 
(in thousands)
Natural gas pipelines
$
419,409

 
$
397,287

Processing and treating assets
237,964

 
209,329

General and other
30,606

 
26,076

Construction work in progress
7,843

 
47,352

Accumulated depreciation and amortization
(35,571
)
 
(22,264
)
Total property, plant and equipment, net
$
660,251

 
$
657,780

7.
Risk Management
TEP occasionally enters into derivative contracts with third parties for the purpose of hedging exposures that accompany its normal business activities. TEP’s normal business activities expose it to risks associated with changes in the market price of commodities, including, among others, natural gas. Specifically, the risks associated with changes in the market price of natural gas, include, among others (i) pre-existing or anticipated physical natural gas sales, (ii) natural gas purchases and (iii) natural gas system use and storage. TEP has elected not to apply hedge accounting and changes in the fair value of all derivative contracts are recorded in earnings in the period in which the change occurs.
Fair Value of Derivative Contracts
The following table summarizes the fair values of TEP’s derivative contracts included in the accompanying Condensed Consolidated Balance Sheets: 
 
Balance Sheet
Location
 
June 30, 2014
 
December 31, 2013
 
 
 
(in thousands)
Energy commodity derivative contracts
Current liabilities
 
$
439

 
$
184

TEP had no derivative contracts in asset positions as of June 30, 2014 or December 31, 2013. As of June 30, 2014, the fair value shown for commodity contracts was comprised of derivative volumes for short and long fixed-price swaps totaling 0.6 Bcf and 0.6 Bcf, respectively.

14



Effect of Derivative Contracts on the Income Statement
The following table summarizes the impact of derivative contracts included in the accompanying Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2014 and 2013:
 
Location of
gain (loss) recognized
in income on
derivatives
 
Amount of gain (loss) recognized in income on derivatives
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
(in thousands)
Derivatives not designated as hedging contracts:
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
Natural gas sales
 
$
(106
)
 
$
635

 
$
(458
)
 
$
(284
)
Credit Risk
TEP has counterparty credit risk as a result of its use of derivative contracts. TEP’s counterparties consist of major financial institutions. This concentration of counterparties may impact TEP’s overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions.
TEP maintains credit policies that it believes minimize its overall credit risk. These policies include (i) an evaluation of potential counterparties’ financial condition (including credit ratings), (ii) collateral requirements under certain circumstances and (iii) the use of standardized agreements which allow for netting of positive and negative exposure associated with a single counterparty. Based on its policies and exposure, TEP’s management does not currently anticipate a material adverse effect on TEP’s financial position, results of operations, or cash flows as a result of counterparty performance.
TEP’s over-the-counter swaps are entered into with counterparties outside central trading organizations such as a futures, options or stock exchange. These contracts are with financial institutions with investment grade credit ratings. While TEP enters into derivative transactions principally with investment grade counterparties and actively monitors their ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk in the future. As of June 30, 2014, the fair value of TEP’s derivative contracts was a liability, resulting in no credit exposure from TEP’s counterparties as of that date.
In addition, when the market value of TEP’s derivative contracts with specific counterparties exceeds established limits, TEP is required to provide collateral to its counterparties, which may include posting letters of credit or placing cash in margin accounts. Accordingly, entity valuation adjustments are necessary to reflect the effect of TEP’s own credit quality on the fair value of TEP’s net liability position with each counterparty. The methodology to determine this adjustment is consistent with how TEP evaluates counterparty credit risk, taking into account current credit spreads for its comparative industry sector, as well as any change in such spreads since the last measurement date. As of June 30, 2014 and December 31, 2013, TEP did not have any outstanding letters of credit or cash in margin accounts in support of its hedging of commodity price risks associated with the sale of natural gas nor did TEP have margin deposits with counterparties associated with energy commodity contract positions.
Fair Value
Derivative assets and liabilities are measured and reported at fair value. Derivative contracts can be exchange-traded or over-the-counter (“OTC”). Exchange-traded derivative contracts typically fall within Level 1 of the fair value hierarchy if they are traded in an active market. TEP values exchange-traded derivative contracts using quoted market prices for identical securities.
OTC derivatives are valued using models utilizing a variety of inputs including contractual terms and commodity and interest rate curves. The selection of a particular model and particular inputs to value an OTC derivative contract depends upon the contractual terms of the instrument as well as the availability of pricing information in the market. TEP uses similar models to value similar instruments. For OTC derivative contracts that trade in liquid markets, such as generic forwards and swaps, model inputs can generally be verified and model selection does not involve significant management judgment. Such contracts are typically classified within Level 2 of the fair value hierarchy.
Certain OTC derivative contracts trade in less liquid markets with limited pricing information; as such, the determination of fair value for these derivative contracts is inherently more difficult. Such contracts are classified within Level 3 of the fair value hierarchy. The valuations of these less liquid OTC derivatives are typically impacted by Level 1 and/or Level 2 inputs that can be observed in the market, as well as unobservable Level 3 inputs. Use of a different valuation model or different valuation input values could produce a significantly different estimate of fair value. However, derivative contracts valued using inputs unobservable in active markets are generally not material to TEP’s financial statements.

15



When appropriate, valuations are adjusted for various factors including credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.
The following tables summarize the fair value measurements of TEP’s energy commodity derivative contracts in a liability position as of June 30, 2014 and December 31, 2013 based on the fair value hierarchy established by the Codification:
 
 
 
Liability fair value measurements using
 
Total
 
Quoted prices in
active markets
for identical
assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
(in thousands)
TEP as of June 30, 2014
 
 
 
 
 
 
 
Energy commodity derivative contracts
$
439

 
$

 
$
439

 
$

TEP as of December 31, 2013
 
 
 
 
 
 
 
Energy commodity derivative contracts
$
184

 
$

 
$
184

 
$

8.
Long-term Debt
Revolving Credit Facility
TEP has a senior secured revolving credit facility with Barclays Bank PLC, as administrative agent, and a syndicate of lenders (the "Credit Agreement") which will mature on May 17, 2018. On June 25, 2014, TEP and certain of its subsidiaries entered into Amendment No. 1 (the "Amendment") to the Credit Agreement dated as of May 17, 2013. The Amendment modifies certain provisions of the Credit Agreement to, among other things, (i) increase the amount of the revolving facility from $500 million to $850 million, (ii) increase the sublimit for swing line loans to $60 million, (iii) increase the sublimit for letters of credit to $75 million, (iv) increase the accordion feature to allow the Partnership to borrow up to an additional $250 million, subject to the Partnership's receipt of increased or new commitments from lenders and satisfaction of certain other conditions, and (v) reduce the applicable margin for loans by 0.25%.
The following table sets forth the outstanding borrowings, letters of credit issued, and available borrowing capacity under the revolving credit facility as of June 30, 2014 and December 31, 2013:
 
June 30, 2014
 
December 31, 2013
 
(in thousands)
Total capacity under the revolving credit facility
$
850,000

 
$
500,000

Less: Outstanding borrowings under the revolving credit facility
(281,000
)
 
(135,000
)
Less: Letters of credit issued under the revolving credit facility

 
(654
)
Available capacity under the revolving credit facility
$
569,000

 
$
364,346

The credit facility contains various covenants and restrictive provisions that, among other things, limit or restrict TEP’s ability (as well as the ability of TEP’s restricted subsidiaries) to incur or guarantee additional debt, incur certain liens on assets, dispose of assets, make certain distributions (including distributions from available cash, if a default or event of default under the credit agreement then exists or would result from making such a distribution), change the nature of TEP’s business, engage in certain mergers or make certain investments and acquisitions, enter into non-arms-length transactions with affiliates and designate certain subsidiaries as “Unrestricted Subsidiaries.” Currently, no subsidiaries have been designated as Unrestricted Subsidiaries. In addition, TEP is required to maintain a consolidated leverage ratio of not more than 4.75 to 1.00 (which will be increased to 5.25 to 1.00 for certain measurement periods following the consummation of certain acquisitions) and a consolidated interest coverage ratio of not less than 2.50 to 1.00. As of June 30, 2014, TEP is in compliance with the covenants required under the revolving credit facility.
The unused portion of the credit facility is subject to a commitment fee, which was initially 0.375%, and after June 25, 2014, ranges from 0.300% to 0.500%, based on TEP’s total leverage ratio. As of June 30, 2014, the weighted average interest rate on outstanding borrowings was 1.95%.

16



Long-term Debt Allocated from TD
On November 13, 2012, TD entered into a credit agreement with a syndicate of lenders which included a term loan, a delayed draw term loan and a revolving credit facility. Prior to May 17, 2013, the long-term debt held by TD was guaranteed by TIGT and TMID, and $400 million of that debt was expected to be assumed by TEP in connection with the IPO. As such, $400 million of the term loan, along with the corresponding discount and deferred financing costs, was allocated to TEP as of November 13, 2012. The term loan is an obligation of TD and prior to May 17, 2013, was guaranteed by TIGT and TMID.
Upon the closing of the IPO on May 17, 2013, TEP legally assumed the previously allocated $400 million portion of the TD term loan and used a portion of the IPO proceeds, along with borrowings under TEP’s revolving credit agreement, to repay its $400 million portion of the term loan, at which time TIGT and TMID were released as guarantors of the TD debt. TEP recognized a loss on extinguishment of debt of $17.5 million during the year ended December 31, 2013 associated with the portion of deferred financing costs and unamortized discount on the amount of the TD term loan that was allocated to TEP.
Fair Value
The following table sets forth the carrying amount and fair value of TEP’s long-term debt, which is not measured at fair value in the Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, but for which fair value is disclosed:
 
Fair Value
 
 
 
Quoted prices
in active markets
for identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
 
Carrying
Amount
 
(in thousands)
 
 
June 30, 2014
$

 
$
281,000

 
$

 
$
281,000

 
$
281,000

December 31, 2013
$

 
$
135,000

 
$

 
$
135,000

 
$
135,000

The long-term debt borrowed under the revolving credit facility is carried at amortized cost. As of June 30, 2014 and December 31, 2013, the fair value approximates the carrying amount for the borrowings under the revolving credit facility using a discounted cash flow analysis. TEP is not aware of any factors that would significantly affect the estimated fair value subsequent to June 30, 2014.
9.
Partnership Equity and Distributions
TEP’s partnership agreement requires TEP to distribute its available cash, as defined below, to unitholders of record on the applicable record date within 45 days after the end of each quarter, beginning with the quarter ended June 30, 2013. TEP’s partnership agreement provides that available cash, each quarter, is first distributed to the common unitholders and the general partner on a pro rata basis until each common unitholder has received $0.2875 per unit, which amount is defined in TEP’s partnership agreement as the minimum quarterly distribution (“MQD”). During the subordination period, defined below, holders of the subordinated units are not entitled to receive a distribution of available cash until each holder of common units has received the MQD, and if the MQD is not paid for any quarter, the cumulative amount of any arrearages in the payment of the MQD from prior quarters.
The following table shows the distributions for the year ended 2013 and six months ended June 30, 2014:
 
 
 
 
Distributions
 
 
 
  
 
 
 
Limited Partners
Common and
Subordinated
 
General Partner
 
 
 
Distributions
per Limited
Partner Unit
 
Three Months Ended
 
Date Paid
 
Incentive
 
2%
 
Total
 
 
 
 
 
 
(in thousands, except per unit amounts)
 
 
 
June 30, 2014
 
August 14, 2014 (1)
 
$
18,596

 
$
758

 
$
330

 
$
19,684

 
$
0.3800

 
March 31, 2014
 
May 14, 2014
 
13,288

 
126

 
274

 
13,688

 
0.3250

 
December 31, 2013
 
February 12, 2014
 
12,757

 
63

 
262

 
13,082

 
0.3150

 
September 30, 2013
 
November 13, 2013
 
12,049

 

 
245

 
12,294

 
0.2975

 
June 30, 2013
 
August 13, 2013
 
5,759

 

 
118

 
5,877

 
0.1422

(2) 
(1) 
The distribution declared on July 1, 2014 for the second quarter of 2014 is expected to be paid August 14, 2014 subsequent to the date of this Quarterly Report on 48,935,140 common units and subordinated units of record at the close of business on July 30, 2014.

17



(2) 
The distribution declared on July 18, 2013 for the second quarter of 2013 represented a prorated amount of the MQD of $0.2875 per common unit, based upon the number of days between the closing of the IPO on May 17, 2013 to June 30, 2013.
Subordinated Units
All subordinated units are currently held by TD. The principal difference between the common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not entitled to receive a distribution of available cash until the holders of common units have received the MQD (inclusive of any cumulative arrearages of previously unpaid MQD from previous quarters). Furthermore, subordinated unitholders are not entitled to receive arrearages from previous quarterly distributions. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be available cash to be distributed on the common units. The subordination period will end, and the subordinated units will convert to common units, on a one-for-one basis, when certain distribution milestones described in the partnership agreement have been met.
Incentive Distribution Rights
As of June 30, 2014, the general partner owns a 2% general partner interest in TEP, which was represented by 834,391 general partner units. As discussed in Note 3 – Business Combinations, in April 2014, in connection with TEP’s acquisition of Trailblazer, the general partner contributed capital in exchange for the issuance of an additional 7,860 general partner units in order to continue to maintain its 2% general partner interest. The general partner also owns all of the IDRs. IDRs represent the right to receive an increasing percentage (13%, 23% and 48%) of quarterly distributions of available cash from operating surplus after the MQD and the target distribution levels have been achieved. The general partner may transfer these rights separately from its general partner interest, subject to restrictions in TEP’s partnership agreement. Under TEP’s partnership agreement, the general partner may at any time contribute additional capital to TEP in order to maintain its 2% general partner interest.
The following discussion related to incentive distributions assumes that TEP’s general partner maintains its 2.0% general partner interest and continues to own all of the IDRs.
If for any quarter:
TEP has distributed available cash from operating surplus to all of the common unitholders (and during the subordination period, to the subordinated unitholders) in an amount equal to the MQD for each outstanding unit for such quarter; and
TEP has distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in the payment of the MQD to common unitholders;
then, TEP will distribute additional available cash from operating surplus for that quarter among the unitholders and the general partner in the following manner:
first, 98% to all unitholders, pro rata, and 2% to TEP’s general partner, until each unitholder receives a total of $0.3048 per unit for that quarter (the “first target distribution”);
second, 85% to all unitholders, pro rata, and 15% to TEP’s general partner, until each unitholder receives a total of $0.3536 per unit for that quarter (the “second target distribution”);
third, 75% to all unitholders, pro rata, and 25% to TEP’s general partner, until each unitholder receives a total of $0.4313 per unit for that quarter (the “third target distribution”); and
thereafter, 50% to all unitholders, pro rata, and 50% to TEP’s general partner.
Definition of Available Cash
Available cash generally means, for any quarter, all cash and cash equivalents on hand at the end of that quarter:
less, the amount of cash reserves established by TEP’s general partner to:
provide for the proper conduct of TEP’s business (including reserves for future capital expenditures, for anticipated future credit needs subsequent to that quarter, for legal matters and for refunds of collected rates reasonably likely to be refunded as a result of a settlement or hearing related to FERC rate proceedings);
comply with applicable law or regulation, any of TEP’s debt instruments or other agreements; or
provide funds for distributions to unitholders and to TEP’s general partner for any one or more of the next four quarters (provided that TEP’s general partner may not establish cash reserves for

18



distributions if the effect of the establishment of such reserves will prevent TEP from distributing the MQD on all common units and any cumulative arrearages on such common units for the current quarter);
plus, if TEP’s general partner so determines, all or any portion of the cash on hand on the date of distribution of available cash for the quarter, including cash on hand resulting from working capital borrowings made subsequent to the end of such quarter.
Other Distributions
As discussed in Note 2 – Summary of Significant Accounting Policies, prior to May 17, 2013 for TIGT and TMID and prior to April 1, 2014 for Trailblazer, the net amount of transfers for loans made each day through the centralized cash management system, less reimbursement payments under the agency agreement described in Note 4 – Related Party Transactions, was recognized as equity distributions during that time period. During the three and six months ended June 30, 2014, TEP was deemed to have made a noncash, net capital distribution of $72.9 million to the general partner, which represents the excess purchase price over the carrying value of the Trailblazer net assets acquired on April 1, 2014. See Note 3 – Business Combinations for additional information regarding the Trailblazer acquisition. During the period from January 1, 2014 to March 31, 2014, Trailblazer made net distributions to TD of$2.9 million. There were no equity distributions made to TD subsequent to Trailblazer's acquisition by TEP on April 1, 2014.
Net distributions from TEP to TD for the six months ended June 30, 2013 were approximately $119.8 million, respectively, and included the $85.5 million to TD related to the contribution of TIGT and TMID to TEP, the $31.2 million net proceeds from the exercise of the underwriter’s option to purchase additional common units as part of the Offering, and $1.2 million net distributions from Trailblazer to TD.
10.
Net Income per Limited Partner Unit
The Partnership’s net income is allocated to the general partner and the limited partners, including the holders of the subordinated units, in accordance with their respective ownership percentages, after giving effect to incentive distributions paid to the general partner. Basic and diluted net income per limited partner unit is calculated by dividing limited partners’ interest in net income, less general partner incentive distributions, by the weighted average number of outstanding limited partner units during the period.
TEP computes earnings per unit using the two-class method for Master Limited Partnerships as prescribed in the FASB guidance. The two-class method requires that securities that meet the definition of a participating security be considered for inclusion in the computation of basic earnings per unit. Under the two-class method, earnings per unit is calculated as if all of the earnings for the period were distributed under the terms of the partnership agreement, regardless of whether the general partner has discretion over the amount of distributions to be made in any particular period, whether those earnings would actually be distributed during a particular period from an economic or practical perspective, or whether the general partner has other legal or contractual limitations on its ability to pay distributions that would prevent it from distributing all of the earnings for a particular period.
TEP calculates net income available to limited partners based on the distributions pertaining to the current period’s net income. After adjusting for the appropriate period’s distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to the general partner and limited partners in accordance with the contractual terms of the partnership agreement and as further prescribed in the FASB guidance under the two-class method.
The two-class method does not impact TEP’s overall net income or other financial results; however, in periods in which aggregate net income exceeds its aggregate distributions for such period, it will have the impact of reducing net income per limited partner unit. This result occurs as a larger portion of TEP’s aggregate earnings, as if distributed, is allocated to the incentive distribution rights of the general partner, even though TEP makes distributions on the basis of available cash and not earnings. In periods in which TEP’s aggregate net income does not exceed its aggregate distributions for such period, the two-class method does not have any impact on our calculation of earnings per limited partner unit.
Basic earnings per unit is computed by dividing net earnings attributable to unitholders by the weighted average number of units outstanding during each period. Diluted earnings per unit reflects the potential dilution of common equivalent units that could occur if equity participation units are converted into common units.
As the IPO was completed on May 17, 2013, no income from the period from January 1, 2013 to May 16, 2013 is allocated to the limited partner units that were issued on May 17, 2013 and all income for such period was allocated to the general partner or predecessor operations. All net income or loss from Trailblazer prior to its acquisition on April 1, 2014 is allocated to predecessor operations in the table below.
The following table illustrates the Partnership’s calculation of net income per common and subordinated unit for the three and six months ended June 30, 2014 and 2013:
 
Three Months Ended June 30, 2014
 
Three Months Ended June 30, 2013
 
Period from April 1, 2013 to May 16, 2013
 
Period from May 17, 2013 to June 30, 2013
 
(in thousands, except per unit amounts)
Net income (loss)
$
16,812

 
$
(13,227
)
 
$
1,722

 
$
(14,949
)
Net loss attributable to noncontrolling interests
55

 

 

 

Net income (loss) attributable to partners
16,867

 
(13,227
)
 
1,722

 
(14,949
)
Predecessor operations interest in net loss

 
1,500

 
189

 
1,311

General partner interest in net (income) loss
(1,096
)
 
(1,638
)
 
(1,911
)
 
273

Net income (loss) available to common and subordinated unitholders
$
15,771

 
$
(13,365
)
 
$

 
$
(13,365
)
Basic net income (loss) per common and subordinated unit
$
0.39

 
$
(0.33
)
 
 
 
$
(0.33
)
Diluted net income (loss) per common and subordinated unit
$
0.38

 
$
(0.33
)
 
 
 
$
(0.33
)
Basic average number of common and subordinated units outstanding
40,885

 
40,246

 
 
 
40,246

Equity Participation Unit equivalent units
1,020

 

 
 
 

Diluted average number of common and subordinated units outstanding
41,905

 
40,246

 
 
 
40,246

 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2013
 
Period from January 1, 2013 to May 16, 2013
 
Period from May 17, 2013 to June 30, 2013
 
(in thousands, except per unit amounts)
Net income (loss)
$
35,444

 
$
(8,759
)
 
$
6,190

 
$
(14,949
)
Net loss attributable to noncontrolling interests
55

 

 

 

Net income (loss) attributable to partners
35,499

 
(8,759
)
 
6,190

 
(14,949
)
Predecessor operations interest in net (income) loss
(5,732
)
 
2,103

 
792

 
1,311

General partner interest in net (income) loss
(1,477
)
 
(6,709
)
 
(6,982
)
 
273

Net income (loss) available to common and subordinated unitholders
$
28,290

 
$
(13,365
)
 
$

 
$
(13,365
)
Basic net income (loss) per common and subordinated unit
$
0.70

 
$
(0.33
)
 
 
 
$
(0.33
)
Diluted net income (loss) per common and subordinated unit
$
0.68

 
$
(0.33
)
 
 
 
$
(0.33
)
Basic average number of common and subordinated units outstanding
40,694

 
40,246

 
 
 
40,246

Equity Participation Unit equivalent units
930

 

 
 
 

Diluted average number of common and subordinated units outstanding
41,624

 
40,246

 
 
 
40,246

11.
Equity-Based Compensation
Long-term Incentive Plan
Effective May 13, 2013, the general partner adopted a Long-term Incentive Plan (“LTIP”) pursuant to which awards in the form of unrestricted units, restricted units, equity participation units, options, unit appreciation rights or distribution equivalent rights may be granted to employees, consultants, and directors of the general partner and its affiliates who perform services for or on behalf of TEP or its affiliates, including TD. Vesting and forfeiture requirements are at the discretion of the board of directors of the general partner at the time of the grant.

19



The LTIP limits the number of units that may be delivered pursuant to vested awards to 10,000,000 common units. Common units canceled, forfeited or withheld to satisfy exercise prices or tax withholding obligations will be available for delivery pursuant to other awards. The plan is administered by the board of directors of TEP’s general partner or a committee thereof, which is referred to as the plan administrator.
The plan administrator may terminate or amend the LTIP at any time with respect to any units for which a grant has not yet been made. The plan administrator also has the right to alter or amend the LTIP or any part of the plan from time to time, including increasing the number of units that may be granted subject to the requirements of the exchange upon which the common units are listed at that time. However, no change in any outstanding grant may be made that would materially reduce the rights or benefits of the participant without the consent of the participant. The LTIP will expire on the earliest of (i) the date common units are no longer available under the plan for grants, (ii) termination of the plan by the plan administrator or (iii) May 13, 2023.
Equity Participation Units
On June 26, 2013, TEP’s general partner approved the grant of up to 1.5 million equity participation units (“EPUs”) for issuance to employees and 177,500 EPUs to certain Section 16 officers under the LTIP. Effective the same date, an aggregate of 1.49 million EPUs were granted to employees and certain Section 16 officers of the general partner and its affiliates. Vesting of the EPUs granted to employees is contingent upon the mainline portion of the Pony Express Project, as defined in Note 15 – Subsequent Events, being placed into service and will generally occur in two parts, with one-third vesting on the later of the Pony Express Project in-service date or May 13, 2015, and the remaining two-thirds vesting on the later of the Pony Express Project in-service date or May 13, 2017. If the Pony Express Project has not been placed in service by May 13, 2018, the EPUs will expire and no vesting of the EPUs will occur. Beginning in the second quarter of 2014, new EPUs granted will vest in two parts, with one-third vesting on the later of the Pony Express Project in-service date or two years from issuance, and the remaining two-thirds vesting on the later of the Pony Express Project in-service date or four years from issuance.
The EPU grants under the LTIP plan are measured at their grant date fair value. The EPUs granted are non-participating with respect to distributions, therefore the grant date fair value is discounted from the grant date fair value of TEP’s common units for the present value of the expected future distributions during the vesting period. Total equity-based compensation cost related to the EPU grants of approximately $2.5 million and $4.7 million was recognized during the three and six months ended June 30, 2014. Of the total compensation cost, $1.3 million and $2.2 million was recognized as compensation expense at TEP for the three and six months ended June 30, 2014 and the remainder was allocated to TD. Total equity-based compensation cost related to the EPU grants of approximately $85,000 was recognized during the three and six months ended June 30, 2013. As of June 30, 2014, $17.9 million of total compensation cost related to non-vested EPUs is expected to be recognized over a weighted average period of 2.4 years, a portion of which will be charged to TD.
The following table summarizes the changes in the EPUs outstanding for the three and six months ended June 30, 2014:
 
Three Months Ended June 30, 2014
 
Three Months Ended June 30, 2013
 
Shares
 
Weighted Average
Grant Date Fair Value
 
Shares
 
Weighted Average
Grant Date Fair Value
Beginning of period
1,486,750

 
$
17.67

 

 
$

Granted
111,000

 
31.63

 
1,490,000

 
17.49

Forfeited
(30,250
)
 
(17.62
)
 

 

End of period
1,567,500

 
$
18.66

 
1,490,000

 
$
17.49

 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2013
 
Shares
 
Weighted Average
Grant Date Fair Value
 
Shares
 
Weighted Average
Grant Date Fair Value
Beginning of period
1,474,250

 
$
17.54

 

 
$

Granted
142,500

 
29.86

 
1,490,000

 
17.49

Forfeited
(49,250
)
 
(17.57
)
 

 

End of period
1,567,500

 
$
18.66

 
1,490,000

 
$
17.49


20



12.
Regulatory Matters
TIGT
Pony Express Abandonment – FERC Docket CP12-495
On August 6, 2012, TIGT filed an application to: (1) abandon for FERC purposes approximately 432 miles of mainline natural gas pipeline facilities, along with associated rights of way and other related equipment (collectively, the "Pony Express Assets"), and the natural gas service therefrom, by transferring those assets to Pony Express, which will convert the Pony Express Assets into crude oil pipeline facilities; and (2) construct and operate the Replacement Gas Facilities in order to continue service to existing natural gas firm transportation customers following the proposed conversion. This project is referred to as the “Pony Express Abandonment.” The FERC abandonment does not constitute an abandonment for accounting purposes. Pursuant to the terms of the Purchase and Sale Agreement filed with the FERC and cited by the FERC in approving the Pony Express Abandonment, Pony Express is required to reimburse TIGT for the net book value of the Pony Express Assets plus other TIGT incurred costs required to construct the Replacement Gas Facilities and to arrange substitute gas transportation services to certain TIGT shippers.
The Pony Express Abandonment and completion of the Pony Express Project by Pony Express will re-deploy existing pipeline assets to meet the growing market need to transport oil supplies from the Bakken Shale while at the same time continuing to operate TIGT’s natural gas transportation facilities to meet all current and expected needs of its natural gas customers. By a FERC order issued September 12, 2013, TIGT was granted authorization to abandon the Pony Express Assets and construct the Replacement Gas Facilities. On October 7, 2013 TIGT commenced the mobilization of personnel and equipment for the construction of the Replacement Gas Facilities necessary to complete the Pony Express Abandonment to continue service to existing TIGT customers. In December 2013, TIGT removed the Pony Express Assets from gas service and sold those assets to Pony Express. Additional phases of the Pony Express Abandonment are expected to be completed during the third quarter of 2014. On May 1, 2014, TIGT commenced commercial service through all of the Replacement Gas Facilities, with the exception of Units 3 and 4 at the Tescott Compressor Station. Service through Units 3 and 4 at the Tescott Compressor Station commenced on May 30, 2014.
Trailblazer
2013 Rate Case Filing - Docket No. RP13-1031
On July 1, 2013, Trailblazer made a rate filing with the FERC pursuant to Section 4 of the Natural Gas Act in Docket No. RP13-1031. In this filing, Trailblazer proposed an overall cost of service of $25.7 million, an increase of the base rates, rolled-in base and fuel rates, an overall rate of return of 10.94% and new depreciation rates. On July 31, 2013, the FERC issued an order accepting Trailblazer’s filing and suspending the filed tariff rates, subject to refund, for the full statutorily permitted five-month suspension period and setting certain issues for hearing. The FERC resolved the non-rate aspects of Trailblazer’s rate case in an order dated December 30, 2013.
In conjunction with this filing for rolled-in fuel rates, Trailblazer elected to not seek recovery of unrecovered fuel costs incurred prior to January 1, 2014. Consequently, Trailblazer has recognized expenses related to unrecovered fuel costs of $578,000 for the period from November 13, 2012 to December 31, 2012, $6.0 million for period from January 1, 2012 to November 12, 2012 and $8.4 million during the year ended December 31, 2013.
On January 22, 2014, Trailblazer, FERC’s Trial Staff, and the active parties in the pipeline’s general rate case finalized a settlement in principle resolving the pending rate issues, including: (i) establishing transportation rates, as well as fuel and lost and unaccounted for charges; (ii) providing a limited profit sharing arrangement for certain revenues earned from interruptible and short-term firm transport; and (iii) setting the minimum and maximum time that can elapse before Trailblazer’s next rate case at the FERC. Trailblazer filed a motion with the FERC’s Chief Administrative Law Judge to accept the settlement rates on an interim basis (“Interim Rates”) while the participants finalized a definitive settlement. The Chief Administrative Law Judge accepted the Interim Rates effective February 1, 2014. On February 24, 2014, Trailblazer filed an uncontested offer of settlement (“Stipulation and Agreement”) among active party shippers. The Stipulation and Agreement established the Interim Rates as final settlement rates effective February 1, 2014, subject to the issuance of refunds to certain shippers for January 2014 transportation services and revised fuel and lost and unaccounted for rates, effective July 1, 2014. On March 11, 2014, the Presiding Administrative Law Judge certified the Stipulation and Agreement. On May 29, 2014, the FERC approved the Stipulation and Agreement. On June 30, 2014, Trailblazer filed tariff sheets to implement the Stipulation and Agreement effective July 1, 2014. Estimated refunds have been reserved from revenues recorded in January 2014. On July 1, 2014, Trailblazer submitted refunds to its customers for amounts collected in excess of amounts that would have been collected under the Settlement Rates, with interest, and on July 18, 2014, filed a report of refunds with the FERC. On July 25, 2014, the FERC accepted the tariff sheets with the requested effective date of July 1, 2014.

21



Other Regulatory Matters
There are currently no proceedings challenging the rates of Trailblazer. Regulators, as well as shippers on Trailblazer, do have rights, under circumstances prescribed by applicable regulations, to challenge the rates Trailblazer charges. Trailblazer can provide no assurance that current rates will remain unchallenged. Any successful challenge could have a material, adverse effect on Trailblazer’s future earnings and cash flows.
13.
Legal and Environmental Matters
Legal
In addition to the matters discussed below, TEP is a defendant in various lawsuits arising from the day-to-day operations of its business. Although no assurance can be given, TEP believes, based on its experiences to date, that the ultimate resolution of such routine items will not have a material adverse impact on its business, financial position, results of operations or cash flows.
TEP has evaluated claims in accordance with the accounting guidance for contingencies that it deems both probable and reasonably estimable and, accordingly, has aggregate reserves for legal claims of approximately $0.6 million and $0.3 million as of June 30, 2014 and December 31, 2013, respectively.
TIGT
Prairie Horizon
On July 3, 2014, Prairie Horizon Agri-Energy LLC ("Prairie Horizon") filed an action in the District Court of Phillips County, Kansas against TIGT seeking damages from an alleged intrusion of foreign material and oil from TIGT into Prairie Horizon's ethanol plant. Prairie Horizon asserts that this intrusion caused substantial damage to Prairie Horizon's ethanol production facilities and resulted in corresponding business income losses. Prairie Horizon also claims that the intrusion was a violation of TIGT's FERC Gas Tariff. Prairie Horizon alleges that it has suffered damages in the amount of approximately $2.0 million. TIGT believes Prairie Horizon's claims are without merit and plans to vigorously contest all of the claims in this matter.
System Failures
On May 4, 2013 and on June 13, 2013, a failure occurred on two separate segments of the TIGT pipeline system; one in Kimball County, Nebraska and one in Goshen County, Wyoming. Both failures resulted in the release of natural gas. Both lines were promptly brought back into service and neither failure caused any known injuries, fatalities, fires or evacuations. The costs to repair or replace the damaged section in Kimball County, Nebraska were not material. In February 2014, TEP communicated to PHMSA that TEP’s investigation of the pipeline involved in the Kimball County failure is complete and TEP intends to restore pressure to full maximum allowable operating pressure. TEP is currently scheduled to start hydrostatic testing the pipeline related to the Goshen County failure in the third quarter of 2014 as required by the Corrective Action Order received from PHMSA. TEP currently expects the cost of remaining remediation activities related to the Goshen County failure to approximate $0.8 million.
Environmental
TEP is subject to a variety of federal, state and local laws that regulate permitted activities relating to air and water quality, waste disposal, and other environmental matters. TEP believes that compliance with these laws will not have a material adverse impact on its business, cash flows, financial position or results of operations. However, there can be no assurances that future events, such as changes in existing laws, the promulgation of new laws, or the development of new facts or conditions will not cause TEP to incur significant costs. TEP has environmental accruals of $5.2 million and $5.0 million at June 30, 2014 and December 31, 2013, respectively.
TMID
Casper Plant, U.S. EPA Notice of Violation
In August 2011, the U.S. EPA and the WDEQ conducted an inspection of the Leak Detection and Repair (“LDAR”) Program at the Casper Gas Plant in Wyoming. In September 2011, TMID received a letter from the U.S. EPA alleging violations of the Standards of Performance of Equipment Leaks for Onshore Natural Gas Processing Plant requirements under the Clean Air Act. TMID received a letter from the U.S. EPA concerning settlement of this matter in April 2013 and received an additional settlement communication from the U.S. EPA and Department of Justice in July 2014. Settlement negotiations are continuing, including attempted resolution of more recently identified LDAR issues.

22



Casper Mystery Bridge Superfund Site
The Casper Gas Plant is part of the Mystery Bridge Road/U.S. Highway 20 Superfund Site also known as Casper Mystery Bridge Superfund Site. Remediation work at the Casper Gas Plant has been completed and TEP has requested that the portion of the site attributable to TEP be delisted from the National Priorities List.
14.
Reporting Segments
TEP’s operations are located in the United States and are organized into two reporting segments: (1) Gas Transportation and Storage, and (2) Processing.
Gas Transportation and Storage
The Gas Transportation and Storage segment is engaged in ownership and operation of FERC-regulated interstate natural gas pipelines and integrated natural gas storage facilities that provide services to on-system customers (such as third-party LDCs), industrial users and other shippers. As discussed in Note 2 Summary of Significant Accounting Policies, results for prior periods have been recast to reflect the operations of Trailblazer.
Processing
The Processing segment is engaged in ownership and operation of natural gas processing, treating and fractionation facilities that produce NGLs and residue gas that is sold in local wholesale markets or delivered into pipelines for transportation to additional end markets, as well as water business services provided primarily to the oil and gas exploration and production industry.
Corporate and Other
Corporate and Other includes corporate overhead costs incurred subsequent to the IPO on May 17, 2013 that are not directly associated with the operations of TEP’s reportable segments, such as interest and fees associated with TEP’s revolving credit facility, public company costs reimbursed to TD, and equity-based compensation expense.
These segments are monitored separately by management for performance and are consistent with internal financial reporting. These segments have been identified based on the differing products and services, regulatory environment and the expertise required for their respective operations.
TEP considers Adjusted EBITDA as its primary segment performance measure as TEP believes it is the most meaningful measure to assess TEP’s financial condition and results of operations as a public entity. Adjusted EBITDA, a non-GAAP measure, is defined as net income excluding the impact of interest, income taxes, depreciation and amortization, non-cash income or loss related to derivative instruments, non-cash long-term compensation expense, impairment losses, gains or losses on asset or business disposals or acquisitions, gains or losses on the repurchase, redemption or early retirement of debt, and earnings from unconsolidated investments, but including the impact of distributions from unconsolidated investments.

23



The following tables set forth TEP’s segment information for the periods indicated:
 
Three Months Ended June 30, 2014
 
Three Months Ended June 30, 2013
 
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
 
 
(in thousands)
 
 
 
 
 
(in thousands)
 
 
Gas transportation and storage
$
32,610

 
$

 
$
32,610

 
$
33,834

 
$
(199
)
 
$
33,635

Processing
44,710

 

 
44,710

 
35,712

 

 
35,712

Corporate and other

 

 

 

 

 

Total revenue
$
77,320

 
$

 
$
77,320

 
$
69,546

 
$
(199
)
 
$
69,347

 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2013
 
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
 
 
(in thousands)
 
 
 
 
 
(in thousands)
 
 
Gas transportation and storage
$
70,986

 
$

 
$
70,986

 
$
62,861

 
$
(370
)
 
$
62,491

Processing
101,113

 

 
101,113

 
72,544

 

 
72,544

Corporate and other

 

 

 

 

 

Total revenue
$
172,099

 
$

 
$
172,099

 
$
135,405

 
$
(370
)
 
$
135,035

 
Three Months Ended June 30, 2014
 
Three Months Ended June 30, 2013
 
Total
Adjusted
EBITDA
 
Inter-
Segment
 
External
Adjusted
EBITDA
 
Total
Adjusted
EBITDA
 
Inter-
Segment
 
External
Adjusted
EBITDA
 
(in thousands)
 
(in thousands)
Gas transportation and storage
$
15,066

 
$

 
$
15,066

 
$
11,434

 
$
(199
)
 
$
11,235

Processing
5,511

 

 
5,511

 
5,236

 
199

 
5,435

Corporate and other
(625
)