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EX-32.1 - EXHIBIT 32.1 - Tallgrass Energy Partners, LPtep201493010qexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Tallgrass Energy Partners, LPtep201493010qexhibit312.htm
EX-10.3 - EXHIBIT 10.3 - Tallgrass Energy Partners, LPtep201493010qexhibit103.htm
EX-32.2 - EXHIBIT 32.2 - Tallgrass Energy Partners, LPtep201493010qexhibit322.htm
EX-31.1 - EXHIBIT 31.1 - Tallgrass Energy Partners, LPtep201493010qexhibit311.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 September 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 October 28, 2014, the Registrant had 32,805,480 Common Units, 16,200,000 Subordinated Units, and 834,391 General Partner Units outstanding.




TALLGRASS ENERGY PARTNERS, LP
TABLE OF CONTENTS
 
1

1

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1

2

3

4

5

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34

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36





Glossary of Common Industry and Measurement Terms
Bakken oil production area: Montana and North Dakota in the United States and Saskatchewan and Manitoba in Canada.
Barrel (or bbl): Forty two U.S. gallons.
Bbl/d: Barrels per day.
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.
Contract barrel: Customers that commit to ship a contracted quantity of crude oil in exchange for assurance of capacity and deliverability to delivery points.
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.
Line fill: The volume of oil, in barrels, in the pipeline from the origin to the destination.
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.
Local distribution company or LDC: LDCs are involved in the delivery of natural gas to consumers within a specific geographic area.
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).
Non-contract barrel: Customers subject to the transportation of crude oil based on availability of capacity and deliverability with no assurance of future capacity.
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) 
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
ASSETS
 
Current Assets:
 
 
 
Cash and cash equivalents
$
885

 
$

Accounts receivable, net
29,194

 
30,033

Receivable from related parties
237,537

 

Gas imbalances
1,778

 
3,128

Inventories
91,793

 
5,549

Prepayments and other current assets
23,120

 
16,986

Total Current Assets
384,307

 
55,696

Property, plant and equipment, net
1,779,749

 
1,116,806

Goodwill
343,288

 
334,715

Intangible asset, net
106,556

 
102,567

Unconsolidated investment

 
1,255

Deferred financing costs
5,914

 
4,512

Deferred charges and other assets
15,721

 
15,862

Total Assets
$
2,635,535

 
$
1,631,413

LIABILITIES AND PARTNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable, including $96,831 and $89,212 related to variable interest entities
$
122,616

 
$
149,452

Accounts payable to related parties, including $20,519 and $0 related to variable interest entities
23,596

 
7,137

Gas imbalances
2,785

 
3,664

Derivative liabilities at fair value
44

 
184

Accrued taxes
4,156

 
5,520

Accrued other current liabilities, including $92,922 and $0 related to variable interest entities
105,619

 
16,783

Total Current Liabilities
258,816

 
182,740

Long-term debt
568,000

 
135,000

Other long-term liabilities and deferred credits
6,776

 
4,572

Total Long-term Liabilities
574,776

 
139,572

Commitments and Contingencies

 

Equity:
 
 
 
Predecessor Equity

 
247,221

Common unitholders 32,805,480 and 24,300,000 units issued and outstanding at September 30, 2014 and December 31, 2013
795,315

 
455,197

Subordinated unitholder 16,200,000 units issued and outstanding at September 30, 2014 and December 31, 2013
273,394

 
274,666

General partner 834,391 and 826,531 units issued and outstanding at September 30, 2014 and December 31, 2013
(38,659
)
 
14,078

Total Partners’ Equity
1,030,050

 
991,162

Noncontrolling interests
$
771,893

 
$
317,939

Total Equity
$
1,801,943

 
$
1,309,101

Total Liabilities and Equity
$
2,635,535

 
$
1,631,413


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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per unit amounts)
Revenues:
 
 
 
 
 
 
 
Natural gas liquids sales
$
47,321


$
32,216


$
132,557


$
97,307

Natural gas sales
1,809


3,381


9,330


8,079

Transportation services
30,745


28,916


95,418


89,443

Processing and other revenues
10,078


4,205


24,747


8,924

Total Revenues
89,953

 
68,718

 
262,052

 
203,753

Operating Costs and Expenses:
 
 
 
 
 
 
 
Cost of sales and transportation services
49,096


35,004


144,921


101,447

Operations and maintenance
9,961


9,277


28,029


25,869

Depreciation and amortization
10,071


9,870


27,905


30,106

General and administrative
7,448


7,321


21,221


19,867

Taxes, other than income taxes
1,797


1,845


5,392


5,554

Total Operating Costs and Expenses
78,373

 
63,317

 
227,468

 
182,843

Operating Income
11,580

 
5,401

 
34,584

 
20,910

Other (Expense) Income:
 
 
 
 
 
 
 
Interest expense, net
(1,058
)

(1,376
)

(4,492
)

(10,435
)
Gain on remeasurement of unconsolidated investment

 

 
9,388

 

Loss on extinguishment of debt






(17,526
)
Equity in earnings of unconsolidated investment




717



Other income, net
731


1,070


2,400


1,871

Total Other (Expense) Income
(327
)
 
(306
)
 
8,013

 
(26,090
)
Net Income (Loss)
11,253

 
5,095

 
42,597

 
(5,180
)
Net loss attributable to noncontrolling interests
191

 
505

 
1,256

 
1,516

Net Income (Loss) attributable to partners
$
11,444

 
$
5,600

 
$
43,853

 
$
(3,664
)
Allocation of income (loss) to the limited partners:

 

 

 

Net income (loss) attributable to partners
$
11,444

 
$
5,600

 
$
43,853

 
$
(3,664
)
Predecessor operations interest in net loss (income)
1,134

 
1,406

 
(1,508
)
 
4,014

Net income attributable to partners
12,578

 
7,006

 
42,345

 
350

Net income attributable to partners prior to May 17, 2013

 

 

 
(6,982
)
Net income (loss) attributable to partners subsequent to May 17, 2013
12,578

 
7,006

 
42,345

 
(6,632
)
General partner interest in net (income) loss subsequent to May 17, 2013
(1,435
)
 
(140
)
 
(2,912
)
 
133

Common and subordinated unitholders' interest in net income (loss) subsequent to May 17, 2013
$
11,143

 
$
6,866

 
$
39,433

 
$
(6,499
)
Basic net income (loss) per common and subordinated unit
$
0.24

 
$
0.17

 
$
0.92

 
$
(0.16
)
Diluted net income (loss) per common and subordinated unit
$
0.23

 
$
0.17

 
$
0.90

 
$
(0.16
)
Basic average number of common and subordinated units outstanding
46,855

 
40,500

 
42,770

 
40,417

Diluted average number of common and subordinated units outstanding
47,948

 
40,863

 
43,771

 
40,417


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)
 
Nine Months Ended September 30,
 
2014
 
2013
 
(in thousands)
Cash Flows from Operating Activities:
 
 
 
Net income (loss)
$
42,597

 
$
(5,180
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:

 

Depreciation and amortization
28,946

 
31,584

Gain on remeasurement of unconsolidated investment
(9,388
)
 

Loss on extinguishment of debt

 
17,526

Noncash compensation expense
3,724

 
948

Changes in components of working capital:

 

Accounts receivable and other
2,592

 
11,688

Gas imbalances
1,392

 
2,208

Prepayments
(2,566
)
 
(193
)
Inventories
(4,661
)
 
(166
)
Accounts payable and accrued liabilities
(14,990
)
 
(3,035
)
Other operating, net
(402
)
 
(5,038
)
Net Cash (Used In) Provided by Operating Activities
47,244

 
50,342

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

Capital expenditures
(642,216
)
 
(237,059
)
Acquisition of additional equity interests in Water Solutions
(7,600
)
 

Acquisition of Pony Express membership interest
(27,000
)
 

Issuance of related party loan
(270,000
)
 

Other investing, net
(2,268
)
 
(301
)
Net Cash Used in Investing Activities
(1,099,084
)
 
(237,360
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from public offering, net of offering costs
319,588

 
290,498

Borrowings under revolving credit facility
433,000

 
226,000

Distributions to unitholders
(46,454
)
 
(5,877
)
Contribution from TD
27,488

 

Contributions from Predecessor Member, net
312,125

 
200,262

Contributions from noncontrolling interest
5,429

 

Payments for deferred financing costs
(2,373
)
 
(5,157
)
Repayment of debt assumed from TD

 
(400,000
)
Distributions to Member, net

 
(118,538
)
Other financing, net
3,922

 
450

Net Cash Provided by (Used in) Financing Activities
1,052,725

 
187,638

Net Change in Cash and Cash Equivalents
885

 
620

Cash and Cash Equivalents, beginning of period

 

Cash and Cash Equivalents, end of period
$
885

 
$
620

 
 
 
 
Supplemental Disclosures:
 
 
 
Cash payments for interest
$
4,414

 
$
2,155

Schedule of Noncash Investing and Financing Activities:


 


Property, plant and equipment acquired via the cash management agreement with TD
$
32,479

 
$

Increase in accrual for payment of property, plant and equipment
$
2,903

 
$
39,866

Receivable for unreimbursed stock compensation from TD
$
426

 
$
373

Increase in accrual for reimbursable construction in progress projects
$

 
$
3,516

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
$
247,221

 
$
455,197

 
$
274,666

 
$
14,078

 
$
991,162

 
$
317,939

 
$
1,309,101

Net Income
1,508

 
24,181

 
15,252

 
2,912

 
43,853

 
(1,256
)
 
42,597

Equity issuance, net of offering costs

 
319,588

 

 

 
319,588

 

 
319,588

Noncash compensation expense

 
7,443

 

 

 
7,443

 

 
7,443

Distributions to unitholders

 
(28,117
)
 
(16,524
)
 
(1,813
)
 
(46,454
)
 

 
(46,454
)
Contribution from TD

 

 

 
27,488

 
27,488

 

 
27,488

(Distributions to) Contributions from Predecessor Member, net
(97,887
)
 

 

 

 
(97,887
)
 
410,012

 
312,125

Distributions to Noncontrolling Interests

 

 

 

 

 
(37
)
 
(37
)
Issuance of general partner units

 

 

 
263

 
263

 

 
263

Acquisition of Trailblazer
(91,090
)
 
14,023

 

 
(72,933
)
 
(150,000
)
 

 
(150,000
)
Acquisition of Water Solutions

 

 

 

 

 
1,400

 
1,400

Acquisition of Pony Express membership interest
(59,752
)
 
3,000

 

 
(8,654
)
 
(65,406
)
 
38,406

 
(27,000
)
Contributions from noncontrolling interest

 

 

 

 

 
5,429

 
5,429

Balance at September 30, 2014
$

 
$
795,315

 
$
273,394

 
$
(38,659
)
 
$
1,030,050

 
$
771,893

 
$
1,801,943


 
TEP Predecessor Member's Capital
 
Predecessor Equity
 
Limited Partners
 
General Partner
 
Total Partners’ Equity
 
Noncontrolling Interests
 
Total Equity
 
 
 
Common
 
Subordinated
 
 
 
 
Balance at January 1, 2013
$
571,834

 
$
121,446

 
$

 
$

 
$

 
$
693,280

 
$
70,397

 
$
763,677

Net income (loss) attributable to to the period from January 1, 2013 to May 16, 2013
6,982

 
(1,172
)
 

 

 

 
5,810

 
(761
)
 
5,049

Distributions to Member, net
(118,538
)
 

 

 

 

 
(118,538
)
 

 
(118,538
)
Contribution of net assets of TIGT and TMID
(460,278
)
 

 
167,051

 
278,992

 
14,235

 

 

 

Issuance of units to public (including underwriter over-allotment), net of offering and other costs

 

 
290,498

 

 

 
290,498

 

 
290,498

Net loss attributable to the period from May 17, 2013 to September 30, 2013

 
(2,842
)
 
(3,899
)
 
(2,600
)
 
(133
)
 
(9,474
)
 
(755
)
 
(10,229
)
Distributions to unitholders

 

 
(3,455
)
 
(2,304
)
 
(118
)
 
(5,877
)
 

 
(5,877
)
Noncash compensation expense

 

 
2,078

 

 

 
2,078

 

 
2,078

Contributions from Predecessor Member, net

 
68,574

 

 

 

 
68,574

 
131,688

 
200,262

Balance at September 30, 2013
$

 
$
186,006

 
$
452,273

 
$
274,088

 
$
13,984

 
$
926,351

 
$
200,569

 
$
1,126,920



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.
TEP closed its initial public offering (“IPO”) on May 17, 2013 and on July 25, 2014 closed a public offering of an additional 8,050,000 common units. The 22,650,000 common units held by the public constitute approximately 46.2% of TEP’s aggregate outstanding common and subordinated units and approximately 45.4% of TEP’s aggregate outstanding common, subordinated and general partner units at September 30, 2014. Tallgrass Development, LP (“TD”) held 10,155,480 common units and 16,200,000 subordinated units at September 30, 2014, which comprised approximately 53.8% of TEP’s aggregate outstanding common and subordinated units and approximately 52.9% of TEP’s aggregate outstanding common, subordinated and general partner units. In addition, 834,391 general partner units, representing a 1.7% general partner interest in TEP at September 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 11 - Partnership Equity and Distributions.
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 "Trailblazer Predecessor" refers to Trailblazer Pipeline Company LLC ("Trailblazer"), which TEP acquired on April 1, 2014, and the term "Pony Express Predecessor" refers to Tallgrass Pony Express Pipeline, LLC ("Pony Express"), of which TEP acquired a 33.3% membership interest effective September 1, 2014 (TEP Predecessor, Trailblazer Predecessor and Pony Express Predecessor are collectively, the "Predecessor Entities"), as further discussed in Note 2Summary of Significant Accounting Policies. Financial results for all prior periods have been recast to reflect the operations of the Predecessor Entities. Predecessor Equity as presented in the condensed consolidated financial statements represents the capital account activity of Trailblazer Predecessor prior to April 1, 2014 and of Pony Express Predecessor prior to September 1, 2014.
Trailblazer is an approximately 436-mile FERC regulated natural gas pipeline system that begins along the border of Wyoming and Colorado and extends to Beatrice, Nebraska. Pony Express owns and is developing an oil pipeline project, which we collectively refer to as the Pony Express Project. That project consists of two components that include (i) the conversion of an approximately 430-mile natural gas pipeline and the construction of an approximately 260-mile southward pipeline extension that result in an oil pipeline from Guernsey, Wyoming to Cushing, Oklahoma ("the Pony Express Mainline"), and (ii) the construction of an approximately 66-mile lateral in northeast Colorado that will interconnect with the mainline ("the Northeast Colorado Lateral"). The project is being completed in stages, with the Pony Express Mainline placed in service in October 2014, while the Northeast Colorado Lateral is expected to be in service sometime during the first half of 2015.
2. Summary of Significant Accounting Policies
Basis of Presentation
These unaudited condensed consolidated financial statements and related notes for the three and nine months ended September 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 has not been audited as recast for Trailblazer and Pony Express and does not include disclosures required by GAAP for annual periods. The unaudited condensed consolidated financial statements for the three and nine months ended September 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.

5



TEP’s financial results for the three and nine months ended September 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.
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 Pony Express for the periods prior to September 1, 2014, the date TEP acquired a 33.3% membership interest in Pony Express, 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 have 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 4Acquisitions, TEP closed the acquisition of Trailblazer on April 1, 2014 and the acquisition of a 33.3% membership interest in Pony Express effective September 1, 2014. As the acquisitions of Trailblazer and Pony Express are considered transactions between entities under common control, and a change in reporting entity, the financial information presented for prior periods has been recast to include Trailblazer and Pony Express for all periods presented.
The condensed consolidated financial statements include the accounts of TEP and its subsidiaries and controlled affiliates. Significant intra-entity items have been eliminated in the presentation. TEP was determined to be the primary beneficiary of Pony Express and has consolidated Pony Express accordingly. Net equity distributions of the TEP Predecessor and the Predecessor Entities 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 and September 1, 2014 for Pony Express, 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. Pony Express participates in a cash management agreement with TD, which holds a 66.7% common membership interest in Pony Express, under which cash balances are swept daily and recorded as loans from Pony Express to TD.
A variable interest entity ("VIE") is a legal entity that possesses any of the following characteristics: an insufficient amount of equity at risk to finance its activities, equity owners who do not have the power to direct the significant activities of the entity (or have voting rights that are disproportionate to their ownership interest), or equity owners who do not have the obligation to absorb expected losses or the right to receive the expected residual returns of the entity. Companies are required to consolidate a VIE if they are its primary beneficiary, which is the enterprise that has a variable interest that could be significant to the VIE and the power to direct the activities that most significantly impact the entity’s economic performance. TEP has presented separately on its condensed consolidated balance sheets, to the extent material, the assets of its consolidated VIE that can only be used to settle specific obligations of the consolidated VIE, and the liabilities of TEP's consolidated VIE for which creditors do not have recourse to TEP's general credit. Pony Express is considered to be a VIE under the applicable authoritative guidance. Based on a qualitative analysis in accordance with the applicable authoritative guidance, TEP has determined that it has the power to direct matters that most significantly impact the activities of Pony Express and has the right to receive benefits of Pony Express that could potentially be significant to Pony Express. TEP has consolidated Pony Express as TEP is the primary beneficiary. For additional information see Note 3Variable Interest Entities.
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.

6



Income Taxes
Prior to September 1, 2014, TEP was comprised solely of limited liability companies that have elected to be treated as partnerships for income tax purposes. As discussed above, effective September 1, 2014 TEP acquired a 33.3% membership interest in Pony Express, which in turn owns 99.8% of Tallgrass Pony Express Pipeline (Colorado), Inc. ("PXP Colorado"), a C corporation. PXP Colorado is currently in the process of constructing the Northeast Colorado Lateral and has not yet commenced operations or generated any income. Accordingly, no provision for federal or state income taxes has been recorded in the financial statements of TEP.
Accounting Pronouncements Issued But Not Yet Effective
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. TEP is currently evaluating the impact of ASU 2014-09, however it is not expected to have a material impact on TEP's financial position and results of operations.
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. Variable Interest Entities
TEP, as the managing member of Pony Express, has voting rights disproportionate to its ownership interest. In addition, TEP does not have the obligation to absorb expected losses as a result of the minimum quarterly preference payments as discussed in Note 4Acquisitions. As a result, TEP has determined that Pony Express is a VIE of which TEP is the primary beneficiary and consolidates Pony Express accordingly.
TEP has not provided any additional financial support to Pony Express other than its initial capital contribution of $570 million and has no contractual commitments or obligations to provide additional financial support. In the event that the costs of construction of the Pony Express Mainline and Northeast Colorado Lateral exceed the $270 million retained by Pony Express as discussed in Note 4Acquisitions, TD is obligated to fund the remaining costs.

7



The carrying amounts and classifications of the Pony Express assets and liabilities included in TEP's condensed consolidated balance sheet at September 30, 2014 and December 31, 2013 are as follows:
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Current assets
$
341,417

 
$

Noncurrent assets
1,225,638

 
566,156

Total assets
$
1,567,055

 
$
566,156

Current liabilities
$
210,944

 
$
89,247

Noncurrent liabilities

 

Total liabilities
$
210,944

 
$
89,247

4. Acquisitions
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 11Partnership Equity and Distributions.
Effective September 1, 2014, TEP acquired a 33.3% membership interest in Pony Express for total consideration of approximately $600 million. At closing, Pony Express, TD, and TEP entered into a Second Amended and Restated Limited Liability Company Agreement of Pony Express effective September 1, 2014, which sets forth the relative rights of TD and TEP as the owners of Pony Express. Of the total consideration of $600 million, TEP directly paid TD $30 million, consisting of $27 million in cash and 70,340 TEP common units with an aggregate fair value of approximately $3 million, in exchange for the transfer by TD to TEP of a 1.9585% membership interest in Pony Express (as such percentage is computed before giving effect to the issuance of the new membership interest by Pony Express to TEP). TEP also contributed cash of $570 million to Pony Express in exchange for a newly issued membership interest which, when combined with the membership interest transferred from TD and the parties' entry at closing into the Second Amended and Restated Limited Liability Company Agreement of Pony Express, constitutes TEP's 33.3% membership interest in Pony Express, which represents 100% of the preferred membership units issued by Pony Express. Of the $570 million cash consideration received by Pony Express, $300 million was immediately distributed to TD at closing and $270 million is maintained by Pony Express to fund the estimated remaining costs of construction for the Pony Express Mainline and the Northeast Colorado Lateral. The $270 million cash balance was subsequently swept to TD under a cash management agreement between Pony Express and TD and was recorded as a related party loan which bears interest at TD's incremental borrowing rate.
The terms of the transaction provide TEP a minimum quarterly preference payment of $16.65 million through the quarter ending September 30, 2015 (pro-rated to approximately $5.4 million for the quarter ending September 30, 2014) with distributions thereafter shared in accordance with the terms of the Second Amended and Restated Limited Liability Company Agreement of Pony Express. TEP has determined that Pony Express is a VIE of which TEP is the primary beneficiary, and consolidates Pony Express accordingly. For additional discussion and disclosure, see Note 3Variable Interest Entities. The acquisition of Pony Express represents a transaction between entities under common control and a change in reporting entity.

8



Historical Financial Information
The results of our acquisitions of Trailblazer and Pony Express are included in the consolidated balance sheets as of September 30, 2014 and December 31, 2013. The following table presents the previously reported December 31, 2013 consolidated balance sheet, adjusted for the acquisitions of Trailblazer and Pony Express:
 
 
As of December 31, 2013
 
 
TEP
 
Consolidate Trailblazer Pipeline Company LLC
 
Consolidate Tallgrass Pony Express Pipeline, 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

 
459,026

 
1,116,806

Goodwill
 
304,474

 
30,241

 

 
334,715

Intangible asset, net
 

 

 
102,567

 
102,567

Unconsolidated investment
 
1,255

 

 

 
1,255

Deferred financing costs
 
4,512

 

 

 
4,512

Deferred charges and other assets
 
10,299

 
1,000

 
4,563

 
15,862

Total Assets
 
$
967,798

 
$
97,459

 
$
566,156

 
$
1,631,413

LIABILITIES AND PARTNERS’ EQUITY
 

 

 
 
 
 
Current Liabilities:
 

 

 
 
 
 
Accounts payable
 
$
54,621

 
$
5,619

 
$
89,212

 
$
149,452

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

 
35

 
16,783

Total Current Liabilities
 
84,285

 
9,208

 
89,247

 
182,740

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

 
476,909

 
1,309,101

Total Partners’ Equity
 
743,941

 
88,251

 
476,909

 
1,309,101

Total Liabilities and Partners’ Equity
 
$
967,798

 
$
97,459

 
$
566,156

 
$
1,631,413


9



The results of our acquisitions of Trailblazer and Pony Express are included in the condensed consolidated statements of income for the three and nine months ended September 30, 2014 and 2013. The following tables present the previously reported condensed consolidated statements of income for the three and nine months ended September 30, 2013, adjusted for the acquisitions of Trailblazer and Pony Express:
 
 
Three Months Ended September 30, 2013
 
 
TEP
 
Consolidate Trailblazer Pipeline Company LLC
 
Consolidate Tallgrass Pony Express Pipeline, LLC
 
TEP (As currently reported)
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
Natural gas liquids sales
 
$
32,216

 
$

 
$

 
$
32,216

Natural gas sales
 
3,053

 
328

 

 
3,381

Transportation services
 
23,785

 
5,131

 

 
28,916

Processing and other revenues
 
4,205

 

 

 
4,205

Total Revenues
 
63,259

 
5,459

 

 
68,718

Operating Costs and Expenses:
 

 

 
 
 
 
Cost of sales and transportation services
 
32,307

 
2,697

 

 
35,004

Operations and maintenance
 
8,588

 
689

 

 
9,277

Depreciation and amortization
 
7,342

 
1,771

 
757

 
9,870

General and administrative
 
6,071

 
1,249

 
1

 
7,321

Taxes, other than income taxes
 
1,577

 
268

 

 
1,845

Total Operating Costs and Expenses
 
55,885

 
6,674

 
758

 
63,317

Operating Income (Loss)
 
7,374

 
(1,215
)
 
(758
)
 
5,401

Other (Expense) Income:
 

 

 
 
 
 
Interest (expense) income, net
 
(1,422
)
 
46

 

 
(1,376
)
Loss on extinguishment of debt
 

 

 

 

Other income, net
 
1,054

 
16

 

 
1,070

Total Other (Expense) Income
 
(368
)
 
62

 

 
(306
)
Net Income (Loss)
 
$
7,006

 
$
(1,153
)
 
$
(758
)
 
$
5,095

Net loss attributable to noncontrolling interests
 

 

 
505

 
505

Net Income (Loss) attributable to partners
 
$
7,006

 
$
(1,153
)
 
$
(253
)
 
$
5,600


10



 
 
Nine Months Ended September 30, 2013
 
 
TEP
 
Consolidate Trailblazer Pipeline Company LLC
 
Consolidate Tallgrass Pony Express Pipeline, LLC
 
TEP (As currently reported)
 
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
Natural gas liquids sales
 
$
97,307

 
$

 
$

 
$
97,307

Natural gas sales
 
7,242

 
837

 

 
8,079

Transportation services
 
73,446

 
15,997

 

 
89,443

Processing and other revenues
 
8,924

 

 

 
8,924

Total Revenues
 
186,919

 
16,834

 

 
203,753

Operating Costs and Expenses:
 

 

 
 
 
 
Cost of sales and transportation services
 
94,135

 
7,312

 

 
101,447

Operations and maintenance
 
23,428

 
2,441

 

 
25,869

Depreciation and amortization
 
22,324

 
5,511

 
2,271

 
30,106

General and administrative
 
15,744

 
4,120

 
3

 
19,867

Taxes, other than income taxes
 
4,748

 
806

 

 
5,554

Total Operating Costs and Expenses
 
160,379

 
20,190

 
2,274

 
182,843

Operating Income (Loss)
 
26,540

 
(3,356
)
 
(2,274
)
 
20,910

Other (Expense) Income:
 

 

 
 
 
 
Interest (expense) income, net
 
(10,486
)
 
51

 

 
(10,435
)
Loss on extinguishment of debt
 
(17,526
)
 

 

 
(17,526
)
Other income, net
 
1,822

 
49

 

 
1,871

Total Other (Expense) Income
 
(26,190
)
 
100

 

 
(26,090
)
Net Income (Loss)
 
350

 
(3,256
)
 
(2,274
)
 
(5,180
)
Net loss attributable to noncontrolling interests
 

 

 
1,516

 
1,516

Net Income (Loss) attributable to partners
 
$
350

 
$
(3,256
)
 
$
(758
)
 
$
(3,664
)
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.

11



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.
The following represents the fair value of assets acquired and liabilities assumed at May 13, 2014 (in thousands):
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. See Note 8Goodwill and Other Intangible Assets for additional information.
At September 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 $3.1 million and $0.2 million, respectively, was recognized in the accompanying Condensed Consolidated Statements of Income for the period from May 13, 2014 to September 30, 2014. Pro Forma revenue and net income attributable to TEP for the nine months ended September 30, 2014 was $264.9 million and $34.9 million, respectively. No pro forma information is presented for the three and nine months ended September 30, 2013 as Water Solutions did not begin commercial operations until the first quarter of 2014.
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 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 nine months ended September 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.
5. 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.

12



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 third quarter of 2014 and TEP currently expects it to remain the same through the end of 2014. However, these reimbursement amounts will be periodically reviewed and adjusted as necessary to continue to reflect reasonable allocation of costs to TEP.
The Pony Express annual reimbursement amount will be determined in the fourth quarter of 2014 after the Pony Express pipeline is placed in service. Pony Express will also reimburse TD for costs incurred on its behalf.
Due to the cash management agreement discussed in Note 2Summary 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. Balances lent to TD under the Pony Express cash management agreement effective September 1, 2014 are classified as related party receivables on the condensed consolidated balance sheet and will be cash settled. TEP recognized interest income from TD of $0.5 million during the three and nine months ended September 30, 2014 on the receivable balance under the Pony Express cash management agreement.
Totals of transactions with affiliated companies are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Charges to TEP: (1)
 
 
 
 
 
 
 
Property, plant and equipment, net
$
7,926

 
$
319

 
$
14,534

 
$
5,212

Operation and maintenance
$
4,701

 
$
4,401

 
$
13,657

 
$
13,117

General and administrative (2)
$
5,783

 
$
7,237

 
$
14,670

 
$
19,531

(1) 
Charges to TEP include directly charged wages and salaries, other compensation and benefits, and shared services.
(2) 
During the three and nine months ended September 30, 2014 and 2013, TEP reimbursed TD for general and administrative expenses as discussed above, resulting in allocated amounts for general and administrative costs.
Details of balances with affiliates included in “Accounts receivable” and “Accounts payable” in the Condensed Consolidated Balance Sheets are as follows: 
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Receivables from affiliated companies:
 
 
 
Tallgrass Operations, LLC
$
237,537

 
$

Total receivables from affiliated companies
$
237,537

 
$

Payables to affiliated companies:
 
 
 
Tallgrass Operations, LLC
$
23,579

 
$
7,106

Rockies Express Pipeline LLC
17

 
31

Total payables to affiliated companies
$
23,596

 
$
7,137


13



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

 
$
137

Affiliate gas balance payables
$
648

 
$
122

Pursuant to the terms of a Purchase and Sale Agreement dated August 1, 2012, TD, through August 31, 2014, reimbursed TIGT for all costs TIGT incurred with respect to the Pony Express Abandonment, as defined in Note 15Regulatory 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 15Regulatory Matters. Any costs incurred by TIGT subsequent to August 31, 2014 will be reimbursed directly by Pony Express.
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 nine months ended September 30, 2014 we received proceeds from TD of $69.2 million and incurred expenditures of $41.7 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. 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.
6. Inventory
The components of inventory at September 30, 2014 and December 31, 2013 consisted of the following:
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Crude oil
$
82,504

 
$

Materials and supplies
2,461

 
2,137

Natural gas liquids
1,872

 
1,009

Gas in underground storage
4,956

 
2,403

Total inventory
$
91,793

 
$
5,549

In July 2014, Pony Express entered into an agreement with Shell Trading (US) Company (“Shell”) for the purchase of 800,000 barrels of crude oil for initial line fill on the Pony Express Mainline, which will be sold back to Shell in November 2014. To support the resale obligation of Pony Express, in July 2014 TD paid Shell a deposit of $20 million and issued a letter of credit for $20 million and a parent guarantee of $40 million to Shell on behalf of Pony Express. As of September 30, 2014, TEP has a liability of $86.8 million for the return of the crude oil to Shell included in "Accrued and other current liabilities," a deposit of $20 million in "Prepayments and other current assets," and a related party payable to TD of $20 million included in "Accounts payable to related parties" for the repayment of the funds deposited by TD on behalf of Pony Express on the condensed consolidated balance sheet in addition to the crude oil included in the inventory balance.
7. Property, Plant and Equipment
A summary of net property, plant and equipment by classification is as follows:
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Natural gas pipelines
$
420,658

 
$
397,287

Processing and treating assets
239,083

 
209,329

General and other
31,000

 
26,076

Construction work in progress
1,131,991

 
506,378

Accumulated depreciation and amortization
(42,983
)
 
(22,264
)
Total property, plant and equipment, net
$
1,779,749

 
$
1,116,806


14



8. Goodwill and Other Intangible Assets
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 September 30, 2014
 
Three Months Ended September 30, 2013
 
Natural Gas Transportation & Logistics
 
Processing & Logistics
 
Total
 
Natural Gas Transportation & Logistics
 
Processing & Logistics
 
Total
 
 
 
(in thousands)
 
 
 
 
 
(in thousands)
 
 
Balance at beginning of period
$
255,558

 
$
87,730

 
$
343,288

 
$
255,100

 
$
78,057

 
$
333,157

Goodwill acquired

 

 

 

 

 

Balance at end of period
$
255,558

 
$
87,730

 
$
343,288

 
$
255,100

 
$
78,057

 
$
333,157

 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
Natural Gas Transportation & Logistics
 
Processing & Logistics
 
Total
 
Natural Gas Transportation & Logistics
 
Processing & Logistics
 
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.
Annual Goodwill Impairment Analysis
TEP evaluates goodwill for impairment on an annual basis and whenever events or changes in circumstances necessitate an evaluation for impairment. Examples of such facts and circumstances include the excess of fair value over carrying amount in the last valuation or changes in the business environment. TEP’s annual impairment testing date is August 31st. TEP evaluates goodwill for impairment at the reporting unit level, which is an operating segment as defined in the segment reporting guidance of the Codification, using either the qualitative assessment option or the two-step test approach depending on facts and circumstances of the reporting unit. If TEP, after performing the qualitative assessment, determines it is “more likely than not” that the fair value of a reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. When goodwill is evaluated for impairment using the two-step test, the carrying amount of the reporting unit is compared to its fair value in Step 1 and if the fair value exceeds the carrying amount, Step 2 is unnecessary. If the carrying amount exceeds the reporting unit’s fair value, this could indicate potential impairment and Step 2 of the goodwill evaluation process is required to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. When Step 2 is necessary, the fair value of individual assets and liabilities is determined using valuations, or other observable sources of fair value, as appropriate. If the carrying amount of goodwill exceeds its implied fair value, the excess is recognized as an impairment loss.
TEP did not elect to apply the qualitative assessment option during our 2014 annual goodwill impairment testing, instead we proceeded directly to the two-step quantitative test. In Step 1 of the two-step quantitative test, we compared the fair value of each reporting unit with its respective book value, including goodwill, by using an income approach based on a discounted cash flow analysis. For the purposes of goodwill impairment testing, goodwill was allocated to our reporting units based on the enterprise value of each reporting unit at the date of acquisition. The fair value of each reporting unit was determined on a stand-alone basis from the perspective of a market participant and included a sensitivity analysis of the impact of changes in various assumptions. This approach required us to make long-term forecasts of future operating results and various other assumptions and estimates, the most significant of which are gross margin, operating expenses, general and administrative expenses, long-term growth rates and the weighted average cost of capital. The fair value of the reporting units was determined using significant unobservable inputs, considered Level 3 under the fair value hierarchy in the Codification. For each reporting unit, the results of the Step 1 impairment analysis indicated no potential impairment as the fair value of the reporting units was greater than their respective book values. As a result, in accordance with the Codification guidance, Step 2 of the impairment analysis was not necessary as part of the annual impairment analysis in 2014. Unpredictable events or deteriorating market or operating conditions could result in a future change to the discounted cash flow models and cause impairments in the future. We continue to monitor potential impairment indicators to determine if a triggering event occurs and will perform additional goodwill impairment analyses as necessary.

15



Other Intangible Assets
A summary of amortized intangible assets is as follows:
    
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Pony Express oil conversion use rights
$
105,973

 
$
105,973

Redtail customer contract
8,200

 

Accumulated amortization
(7,617
)
 
(3,406
)
     Intangible assets, net
$
106,556

 
$
102,567

We account for intangible assets in accordance with ASC 805, which established that an intangible asset is identifiable if it meets either the separability criterion or the contractual-legal criterion. Further, in accordance with ASC 805, contract-based intangible assets represent the value of rights that arise from contractual arrangements. Use rights such as drilling, water, air, timber cutting, and route authorities are an example of contract-based intangible assets. Intangible assets arose at Pony Express from the acquisition of rights associated with the ability and regulatory permissions to convert a section of TIGT’s natural gas pipeline, which was subsequently purchased by Pony Express, to crude oil and includes the operational and financial benefits that accrue due to those rights and the ability to make that asset more valuable (“Pony Express oil conversion use rights”). These intangible assets are amortized on a straight-line basis over a period of 35 years, the period of expected future benefit. Intangible assets arose at BNN Redtail, LLC ("Redtail") as a result of a significant customer contract with favorable market terms which was acquired as part of the Water Solutions transaction discussed in Note 4Acquisitions. These intangible assets are amortized on a straight-line basis over a period of 1.6 years, the remaining term of the contract at the time of acquisition.
Amortization of intangible assets was approximately $2.0 million and $4.2 million for the three and nine months ended September 30, 2014, respectively, and $0.8 million and $2.3 million for the three and nine months ended September 30, 2013, respectively.
9. 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 and crude oil. 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
 
September 30, 2014
 
December 31, 2013
 
 
 
(in thousands)
Energy commodity derivative contracts
Current liabilities
 
$
44

 
$
184

TEP had no derivative contracts in asset positions as of September 30, 2014 or December 31, 2013. As of September 30, 2014, the fair value shown for commodity contracts was comprised of derivative volumes for short fixed-price swaps totaling 0.2 Bcf.

16



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 nine months ended September 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 September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
(in thousands)
Derivatives not designated as hedging contracts:
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
Natural gas sales
 
$
9

 
$
(91
)
 
$
(449
)
 
$
(375
)
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 September 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 September 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

17



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.
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 September 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 September 30, 2014
 
 
 
 
 
 
 
Energy commodity derivative contracts
$
44

 
$

 
$
44

 
$

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

 
$

 
$
184

 
$

10. 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 modified 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 September 30, 2014 and December 31, 2013:
 
September 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
(568,000
)
 
(135,000
)
Less: Letters of credit issued under the revolving credit facility

 
(654
)
Available capacity under the revolving credit facility
$
282,000

 
$
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 September 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 September 30, 2014, the weighted average interest rate on outstanding borrowings was 2.18%.

18



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 September 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)
 
 
September 30, 2014
$

 
$
568,000

 
$

 
$
568,000

 
$
568,000

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 September 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 September 30, 2014.
11. Partnership Equity and Distributions
Public Offering
On July 25, 2014, TEP sold 8,050,000 common units representing limited partner interests in an underwritten public offering at a price of $41.07 per unit, or $39.74 per unit net of the underwriter's discount, for net proceeds of approximately $319.6 million after deducting the underwriter's discount and offering expenses paid by TEP. TEP used the net proceeds from the offering to fund a portion of the consideration for the acquisition of a 33.3% membership interest in Pony Express as discussed in Note 4Acquisitions.
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.

19



The following table shows the distributions for the year ended 2013 and nine months ended September 30, 2014:
 
 
 
 
Distributions
 
 
 
  
 
 
 
Limited Partners
Common and
Subordinated Units
 
General Partner
 
 
 
Distributions
per Limited
Partner Unit
 
Three Months Ended
 
Date Paid
 
Incentive Distribution Rights
 
General Partner Units
 
Total
 
 
 
 
 
 
(in thousands, except per unit amounts)
 
 
 
September 30, 2014
 
November 14, 2014(1)
 
$
20,092

 
$
1,208

 
$
363

 
$
21,663

 
$
0.4100

 
June 30, 2014
 
August 14, 2014
 
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 October 7, 2014 for the third quarter of 2014 will be paid November 14, 2014 subsequent to the date of this Quarterly Report on 49,005,480 common units and subordinated units of record at the close of business on October 31, 2014.
(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 and 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.
General Partner Units
As of September 30, 2014, the general partner owns a 1.7% general partner interest in TEP, which was represented by 834,391 general partner units. Under TEP’s partnership agreement, the general partner may at any time, but is under no obligation to contribute additional capital to TEP in order to maintain its 2% general partner interest. As discussed in Note 4Acquisitions, 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. TEP subsequently issued additional units in July 2014 and September 2014 to fund a portion of the consideration and as consideration for the acquisition of Pony Express, respectively. The general partner did not contribute additional capital to maintain its 2% general partner interest at the time of either issuance.
Incentive Distribution Rights
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.
The following discussion related to incentive distributions assumes that TEP’s general partner maintains its 2% 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;

20



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 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.

21



Other Contributions and Distributions
During the nine months ended September 30, 2014, TEP received net contributions of $312.1 million, $27.5 million, and $5.4 million from the Predecessor Member, TD, and noncontrolling interests, respectively. Net contributions of $312.1 million from the Predecessor Member is composed of net contributions of $612.1 million relating to the cash management agreements with TD, as well as a cash distribution of $300 million of the proceeds from the issuance of the preferred membership interest to TEP from Pony Express to TD pursuant to the Pony Express Contribution and Sale Agreement. As discussed in Note 2Summary of Significant Accounting Policies, prior to May 17, 2013 for TIGT and TMID, prior to April 1, 2014 for Trailblazer, and prior to September 1, 2014 for Pony Express, the net amount of transfers for loans made each day through the centralized cash management system with TD, less reimbursement payments under the agency agreement described in Note 5Related Party Transactions, was recognized as net equity contributions or distributions during that time period. There were no equity contributions or distributions made to TD subsequent to Trailblazer's acquisition by TEP on April 1, 2014 or the acquisition of Pony Express effective September 1, 2014. The $27.5 million contribution from TD represents the difference between the carrying amount of the Replacement Gas Facilities and the proceeds received from TD, as discussed in Note 5Related Party Transactions. The $5.4 million contribution from noncontrolling interests represents the cash contributed to Pony Express from TD to fund the quarterly preference payment to TEP as discussed in Note 4Acquisitions.
During the nine months ended September 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. Also during the nine months ended September 30, 2014, TEP was deemed to have made a capital distribution of $8.7 million to the general partner, which represents the excess purchase price, consisting of $27 million in cash and limited partner common units valued at $3.0 million issued directly to TD, over the net book value of the 1.9585% membership interest in Pony Express transferred from TD to TEP in accordance with the Pony Express Contribution and Sale Agreement. See Note 4Acquisitions for additional information regarding the Trailblazer and Pony Express acquisitions.
During the nine months ended September 30, 2013, net distributions from TEP Predecessor to TD were approximately $118.5 million, and included the $85.5 million to TD related to the contribution of TIGT and TMID to TEP as well as the $31.2 million net proceeds from the exercise of the underwriter’s option to purchase additional common units as part of the IPO. During the nine months ended September 30, 2013, the Trailblazer Predecessor and Pony Express Predecessor recognized net contributions from TD of $200.3 million.
12. Commitments & Contingent Liabilities
Leases
Pony Express entered into a lease agreement with Deeprock Development, LLC (“Deeprock”), an unconsolidated affiliate of TD, on November 7, 2012. The agreement is for the use by Pony Express of storage capacity at the Deeprock tank storage facility near Cushing, Oklahoma and will commence on the first day of the first month immediately following the day the pipeline becomes operational. The lease has a five year term. Lease payments will have two components; a fixed charge of $1.3 million per month and a volumetric charge for barrels delivered in excess of a base volume. Pony Express will also make an upfront payment of $10.9 million, of which $4.6 million was paid in 2013 and the remainder of which will be paid when the lease goes into effect. The upfront payments are recorded as “Deferred charges and other assets” on the accompanying condensed consolidated balance sheets and will be amortized over the lease term. Pony Express has the right to extend the term of the lease for additional periods of five or two years, not to exceed a total of twenty years from when the lease commences.
On August 26, 2014, Pony Express entered into a lease agreement with Tallgrass Sterling Terminal, LLC ("Sterling"), an indirect wholly-owned subsidiary of TD. The agreement is for the use by Pony Express of storage capacity at the Sterling tank storage facility in north