NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
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Description of Business
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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 TEPs aggregate outstanding common and subordinated units and approximately 35% of TEPs aggregate outstanding common, subordinated and general partner units at March 31, 2014. TD
held 9,700,000 common units and 16,200,000 subordinated units at March 31, 2014 which comprised approximately 64% of TEPs aggregate outstanding common and subordinated units and approximately 63% of TEPs aggregate outstanding
common, subordinated and general partner units. In addition, as part of the contribution transaction, 826,531 general partner units, representing a 2% general partner interest in TEP at March 31, 2014, and all of the incentive distribution
rights (IDRs) were issued to 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 8
Partnership Equity and
Distributions
.
The term Predecessor Entity refers to Tallgrass Energy Partners Predecessor (TEP
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 Predecessor Entity consist of:
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Tallgrass Interstate Gas Transmission, LLC (TIGT), which owns an interstate gas pipeline and storage 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 (the TIGT System).
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Tallgrass Midstream, LLC (TMID), which owns and operates one treating and two processing plants in Wyoming.
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2.
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Summary of Significant Accounting Policies
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Basis of Presentation
These unaudited condensed consolidated financial statements and related notes for the three months ended March 31, 2014 and 2013 were prepared in accordance with the accounting principles contained
in the Financial Accounting Standards Boards 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 months ended March 31, 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.
TEPs financial results for the three months ended March 31,
2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014. These unaudited condensed
5
consolidated financial statements should be read in conjunction with TEPs 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 Securities 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 TEPs IPO, 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 transfer 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.
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 Predecessor Entity included in the Consolidated Statements of Cash Flows represent transfers of cash as a result of TDs centralized cash management systems prior
to May 17, 2013, 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 TEPs 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.
3.
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Related Party Transactions
|
TEP has no employees. Beginning November 13, 2012, TD 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 TEPs IPO, TEP and its
subsidiaries entered into an Omnibus Agreement with TD and certain of its affiliates (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 TEPs 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.
6
For the calendar year 2014, TEPs annual cost reimbursements to TD for costs discussed
above, are expected to be $19.9 million, inclusive of costs associated with our acquisition of Trailblazer Pipeline Company, LLC (Trailblazer) in April 2014, as discussed in Note 14
Subsequent Events
. TEP also pays a
quarterly reimbursement to TD for costs associated with being a public company. The quarterly public company reimbursement was $625,000 for the first quarter of 2014 and TEP currently expects it to remain the same for each subsequent quarter in
2014. However, these reimbursement amounts will be periodically reviewed and adjusted as necessary to continue to reflect reasonable allocation of costs to TEP.
Due to the cash management agreement discussed in Note 2
Summary of Significant Accounting Policies
, intercompany balances at the Predecessor Entity were periodically settled and treated as
equity distributions prior to the completion of the IPO on May 17, 2013.
Totals of transactions with affiliated
companies are as follows:
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Three Months
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Three Months
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Ended
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Ended
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March 31, 2014
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March 31, 2013
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(in thousands)
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Charges to TEP:
(1)
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Property, plant and equipment, net
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$
|
5,316
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|
|
$
|
4,709
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|
Other deferred charges
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|
$
|
582
|
|
|
$
|
1,038
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Operation and maintenance
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$
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3,840
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|
|
$
|
3,586
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General and administrative
(2)
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$
|
4,224
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|
|
$
|
4,634
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(1)
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Charges to TEP include directly charged wages and salaries, other compensation and benefits, and shared services.
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(2)
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During the three months ended March 31, 2014 and 2013, TEP reimbursed TD for general and administrative expenses as discussed above, resulting in
allocated amounts for general and administrative costs.
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Details of balances with affiliates included in
Accounts receivable and Accounts payable in the Condensed Consolidated Balance Sheets are as follows:
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March 31, 2014
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December 31, 2013
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(in thousands)
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Accounts receivable from affiliated companies:
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Rockies Express Pipeline LLC
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$
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29
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$
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Total accounts receivable from affiliated companies
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$
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29
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$
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Payables to affiliated companies:
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Accounts payable to Tallgrass Operations, LLC
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$
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3,655
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$
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7,106
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Accounts payable to Rockies Express Pipeline LLC
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28
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Total payables to affiliated companies
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$
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3,655
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$
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7,134
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Balances of gas imbalances with affiliated shippers are as follows:
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March 31, 2014
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December 31, 2013
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(in thousands)
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Affiliate gas balance receivables
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$
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$
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7
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|
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Affiliate gas balance payables
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$
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1,633
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$
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116
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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 (PXP), is reimbursing TIGT for all costs TIGT incurs with respect to the Pony Express Abandonment, as defined in Note 11
Regulatory Matters
, inclusive of
7
development costs, capital costs and related interest costs associated with securing regulatory approvals for 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 PXP in 2013. For more information, see Note 5
Property, Plant and Equipment
and Note 11
Regulatory Matters
.
TIGTs expenditures for the Replacement Gas Facilities are being 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 usually monthly). At March 31, 2014, TEP had $4.0 million in Prepayments and other current assets related
to this project due to $26.2 million of expenditures during the three months ended March 31, 2014, which were partially offset by reimbursements of $22.2 million that were cash settled by TD. At December 31, 2013, TEP had $17.0 million in
Prepayments and other current assets related to this project that were cash settled by TD in the first quarter of 2014.
The components of inventory at March 31, 2014 and December 31, 2013 consisted of the following:
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March 31, 2014
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December 31, 2013
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(in thousands)
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Materials and supplies
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$
|
1,730
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$
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1,736
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Natural gas liquids
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1,164
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1,009
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Gas in underground storage
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8,458
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2,403
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Total inventory
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$
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11,352
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$
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5,148
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5.
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Property, Plant and Equipment
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A summary of net property, plant and equipment by classification is as follows:
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March 31, 2014
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December 31, 2013
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(in thousands)
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Natural gas pipelines
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$
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348,481
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$
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339,430
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Processing and treating assets
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234,541
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209,329
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General and other
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25,202
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24,859
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Construction work in progress
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7,984
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39,369
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Accumulated depreciation and amortization
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(22,907
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)
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(18,076
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)
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Total property, plant and equipment, net
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$
|
593,301
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$
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594,911
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TEP occasionally enters into derivative contracts with third parties for the purpose of hedging exposures that
accompany its normal business activities. TEPs 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.
8
Fair Value of Derivative Contracts
The following table summarizes the fair values of TEPs derivative contracts included in the accompanying Condensed Consolidated
Balance Sheets:
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Balance Sheet
Location
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March 31, 2014
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December 31, 2013
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|
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(in thousands)
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Energy commodity derivative contracts
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Current liabilities
|
|
$
|
535
|
|
|
$
|
184
|
|
As of March 31, 2014, the fair value shown for commodity contracts was comprised of derivative
volumes totaling 0.9 Bcf of fixed-price swaps. TEP did not recognize any derivative contracts in asset positions as of March 31, 2014 or December 31, 2013.
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 months ended March 31, 2014 and 2013:
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Amount of loss recognized in
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income on derivatives
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Location of
loss recognized
in income
on
derivatives
|
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Three Months
Ended
March 31,
2014
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Three Months
Ended
March 31,
2013
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(in thousands)
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(in thousands)
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Derivatives not designated as hedging contracts:
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|
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Energy commodity derivative contracts
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Natural gas sales
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$
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(351
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)
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$
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(919
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)
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Credit Risk
TEP has counterparty credit risk as a result of its use of financial derivative contracts. TEPs counterparties consist of major financial institutions. This concentration of counterparties may
impact TEPs 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, TEPs management does not currently anticipate a material adverse effect on TEPs financial position, results of operations, or cash flows as a result of
counterparty performance.
TEPs 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 a financial institution with an investment grade credit rating. 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 March 31, 2014, the fair value of TEPs derivative contracts was a liability,
resulting in no credit exposure from TEPs counterparty as of that date.
In addition, when the market value of
TEPs 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. Additionally,
entity valuation adjustments are necessary to reflect the effect of TEPs own credit quality on the fair value of TEPs net liability position with each counterparty. The
9
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 March 31, 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, commodity and interest rate curves and measures of volatility. 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 TEPs 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, managements best estimate is used.
The following tables summarize the fair value measurements of TEPs energy commodity derivative contracts in a liability position as
of March 31, 2014 and December 31, 2013 based on the fair value hierarchy established by the Codification:
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Liability fair value measurements using
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Total
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Quoted prices in
active markets
for identical
assets
(Level 1)
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Significant
other observable
inputs
(Level 2)
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Significant
unobservable
inputs
(Level
3)
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(in thousands)
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TEP as of March 31, 2014
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|
|
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|
|
|
|
|
|
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Energy commodity derivative contracts
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|
$
|
535
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|
|
$
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|
|
|
$
|
535
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|
|
$
|
|
|
|
|
|
|
|
TEP as of December 31, 2013
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy commodity derivative contracts
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|
$
|
184
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|
|
$
|
|
|
|
$
|
184
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|
|
$
|
|
|
TEP did not recognize any derivative contracts in asset positions as of March 31, 2014 or
December 31, 2013.
10
Revolving Credit Facility
TEP has a $500 million senior secured revolving credit facility with Barclays Bank PLC, as administrative agent, and a syndicate of lenders which will mature on May 17, 2018. As of March 31,
2014 and December 31, 2013, TEP had outstanding borrowings of $135.0 million, had issued letters of credit totaling $0.7 million and had available borrowing capacity under the revolving credit facility of $364.3 million.
The credit facility contains various covenants and restrictive provisions that, among other things, limits or restricts TEPs
ability (as well as the ability of TEPs 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 therefrom), change the nature of TEPs 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. 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 March 31, 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
September 30, 2013, is either 0.375% or 0.500%, based on TEPs total leverage ratio. As of March 31, 2014, the weighted average interest rate on outstanding borrowings was 2.15%.
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
TEPs $500 million credit agreement effective May 17, 2013, 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 TEPs long-term debt, which is not measured at fair value in the Condensed Consolidated Balance Sheets as of March 31, 2014
and December 31, 2013, but for which fair value is disclosed:
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|
|
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Fair Value
|
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|
|
|
|
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Quoted prices
in active markets
for identical assets
(Level
1)
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|
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Significant
other observable
inputs
(Level 2)
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Significant
unobservable
inputs
(Level
3)
|
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Total
|
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Carrying
Amount
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
March 31, 2014
|
|
$
|
|
|
|
$
|
135,000
|
|
|
$
|
|
|
|
$
|
135,000
|
|
|
$
|
135,000
|
|
December 31, 2013
|
|
$
|
|
|
|
$
|
135,000
|
|
|
$
|
|
|
|
$
|
135,000
|
|
|
$
|
135,000
|
|
11
The long-term debt borrowed under the revolving credit facility is carried at amortized
cost. As of March 31, 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 March 31, 2014.
8.
|
Partnership Equity and Distributions
|
TEPs 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. TEPs 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 TEPs 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 three months ended March 31, 2014:
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|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
LimitedPartners
Common
and
Subordinated
|
|
|
General Partner
|
|
|
|
|
|
Distributions
per
Limited
Partner Unit
|
|
Three Months Ended
|
|
Date Paid
|
|
|
Incentive
|
|
|
2%
|
|
|
Total
|
|
|
|
|
|
|
(in thousands, except per unit amounts)
|
|
|
|
|
March 31, 2014
|
|
May 14, 2014
(2)
|
|
$
|
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
|
(1)
|
(1)
|
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.
|
(2)
|
The distribution declared on April 1, 2014 for the first quarter of 2014 is expected to be paid May 14, 2014 subsequent to the date of this
Quarterly Report to 40,885,140 common unitholders of record at the close of business on April 30, 2014.
|
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
The general partner owns a 2% general partner interest in TEP which, as of March 31, 2014, was represented by 826,531 general partner units. As discussed in Note 14
Subsequent Events
,
in April 2014, in connection with TEPs acquisition of Trailblazer, the general partner contributed capital in exchange for the
12
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 TEPs partnership agreement. Under TEPs 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 TEPs 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 TEPs 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 TEPs 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 TEPs 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 TEPs 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 TEPs general partner to:
|
|
|
|
provide for the proper conduct of TEPs 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 TEPs debt instruments or other agreements; or
|
|
|
|
provide funds for distributions to unitholders and to TEPs general partner for any one or more of the next four quarters (provided that
TEPs 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 TEPs 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.
|
13
Distributions to TD
As discussed in Note 2
Summary of Significant Accounting Policies
, prior to May 17, 2013, 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 3
Related Party Transactions
, was recognized as equity distributions during that time
period. Net distributions from TEP to TD for the three months ended March 31, 2013 were approximately $23.1 million. Excluding the cash distributions paid to TD as a common and subordinated unitholder, as discussed above, there were no net
distributions from TEP to TD for the quarter ended March 31, 2014.
9.
|
Net Income per Limited Partner Unit
|
The Partnerships 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 periods net
income. After adjusting for the appropriate periods 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 TEPs 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 TEPs 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 TEPs 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. Net income per limited partner unit is only calculated for the three months ended March 31, 2014 as no units
were outstanding during the same period in 2013.
14
The following table illustrates the Partnerships calculation of net income per common
and subordinated unit for the three months ended March 31, 2014:
|
|
|
|
|
|
|
Three Months
Ended
March 31, 2014
|
|
|
|
(in thousands, except
per unit amounts)
|
|
Net Income
|
|
$
|
12,900
|
|
General partner interest in net income
|
|
|
382
|
|
|
|
|
|
|
Net income available to common and subordinated unitholders
|
|
$
|
12,518
|
|
|
|
|
|
|
Basic net income per common and subordinated unit
|
|
$
|
0.31
|
|
|
|
|
|
|
Diluted net income per common and subordinated unit
|
|
$
|
0.30
|
|
|
|
|
|
|
Basic average number of common and subordinated units outstanding
|
|
|
40,500
|
|
Equity Participation Unit equivalent units
|
|
|
772
|
|
|
|
|
|
|
Diluted average number of common and subordinated units outstanding
|
|
|
41,272
|
|
|
|
|
|
|
10.
|
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.
The LTIP limits the number of units that may be delivered pursuant to vested awards to 10,000,000 common units. Common units cancelled, 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 TEPs 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, TEPs general
partner approved the grant of up to 1.5 million equity participation units (EPUs) for issuance to employees and 177,500 EPUs to Section 16 officers under the LTIP. Effective the same date, an aggregate of 1.49 million EPUs
were granted to employees and Section 16 officers of the general partner and its affiliates. Vesting of the EPUs granted to employees is contingent upon TDs Pony Express Pipeline, which upon completion will consist of an approximately
690-mile oil pipeline connecting the Bakken Shale to Cushing, Oklahoma, being placed into service (the Pony Express Project) and will 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.
15
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 TEPs 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 $2.2 million was recognized for the quarter ended March 31, 2014. Of the total compensation cost, $0.9 million was recognized as compensation expense at TEP
for the quarter ended March 31, 2014 and the remainder was allocated to TD. As of March 31, 2014, $17.1 million of total compensation cost related to non-vested EPUs is expected to be recognized over a weighted average period of 2.5 years,
a portion of which will be charged to TD.
The following table summarizes the changes in the EPUs outstanding for the three
months ended March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2014
|
|
|
|
Shares
|
|
|
Weighted Average
Grant Date Fair Value
|
|
Beginning of period
|
|
$
|
1,474,250
|
|
|
$
|
17.54
|
|
Granted
|
|
|
31,500
|
|
|
|
23.68
|
|
Forfeited
|
|
|
(19,000
|
)
|
|
|
(17.49
|
)
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,486,750
|
|
|
$
|
17.67
|
|
|
|
|
|
|
|
|
|
|
TIGT
Pony Express Abandonment FERC Docket CP12-495
On August 6,
2012, TIGT filed an application to: (1) abandon for FERC purposes the Pony Express Assets, and the natural gas service therefrom, by transferring those assets to PXP, 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, PXP 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 PXP 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 TIGTs 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 PXP.
Additional phases of the Pony Express Abandonment are expected to be completed during the third quarter of 2014. TIGTs estimated commencement date to start commercial service of the Replacement Gas Facilities is projected to be in the second
quarter of 2014.
12.
|
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 their 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.
16
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 all claims of approximately $0.6 million and $0.3 million as of March 31, 2014 and December 31, 2013, respectively.
TIGT
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 TEPs 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 expects the cost of remaining remediation activities related to the Goshen County failure to approximate $0.5 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 $4.9 million and $5.0 million at March 31,
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. In April 2013, TMID received a letter from the U.S. EPA concerning settlement of
this matter. Settlement negotiations with the U.S. EPA are continuing, including resolution of more recently identified LDAR issues.
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.
TEPs 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.
17
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 transportation services provided to producers.
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 TEPs reportable segments, such as interest and fees associated with TEPs 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.
Beginning in the second quarter of 2013, TEP considers Adjusted EBITDA as its primary segment performance measure as TEP believes it
provides a more meaningful measure to assess TEPs 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 disposals, 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.
The
following tables set forth TEPs segment information for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2014
|
|
|
Three Months Ended March 31, 2013
|
|
|
|
Total
Revenue
|
|
|
Inter-
Segment
|
|
|
External
Revenue
|
|
|
Total
Revenue
|
|
|
Inter-
Segment
|
|
|
External
Revenue
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Gas transportation and storage
|
|
$
|
28,559
|
|
|
$
|
|
|
|
$
|
28,559
|
|
|
$
|
23,597
|
|
|
$
|
(171
|
)
|
|
$
|
23,426
|
|
Processing
|
|
|
56,403
|
|
|
|
|
|
|
|
56,403
|
|
|
|
36,832
|
|
|
|
|
|
|
|
36,832
|
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
84,962
|
|
|
$
|
|
|
|
$
|
84,962
|
|
|
$
|
60,429
|
|
|
$
|
(171
|
)
|
|
$
|
60,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2014
|
|
|
Three Months Ended March 31, 2013
|
|
|
|
Total
|
|
|
|
|
|
External
|
|
|
Total
|
|
|
|
|
|
External
|
|
|
|
Adjusted
|
|
|
Inter-
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
Inter-
|
|
|
Adjusted
|
|
|
|
EBITDA
|
|
|
Segment
|
|
|
EBITDA
|
|
|
EBITDA
|
|
|
Segment
|
|
|
EBITDA
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Gas transportation and storage
|
|
$
|
13,123
|
|
|
$
|
|
|
|
$
|
13,123
|
|
|
$
|
12,266
|
|
|
$
|
(171
|
)
|
|
$
|
12,095
|
|
Processing
|
|
|
9,596
|
|
|
|
|
|
|
|
9,596
|
|
|
|
6,834
|
|
|
|
171
|
|
|
|
7,005
|
|
Corporate and other
|
|
|
(625
|
)
|
|
|
|
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net
|
|
|
|
|
|
|
|
|
|
|
1,324
|
|
|
|
|
|
|
|
|
|
|
|
5,564
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
|
6,514
|
|
|
|
|
|
|
|
|
|
|
|
7,546
|
|
Non-cash loss (gain) related to derivative instruments
|
|
|
|
|
|
|
|
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
|
919
|
|
Non-cash compensation expense
|
|
|
|
|
|
|
|
|
|
|
941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from unconsolidated investment
|
|
|
|
|
|
|
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated investment
|
|
|
|
|
|
|
|
|
|
|
(444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
$
|
12,900
|
|
|
|
|
|
|
|
|
|
|
$
|
5,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
(in thousands)
|
|
Gas transportation and storage
|
|
$
|
627,894
|
|
|
$
|
636,686
|
|
Processing
|
|
|
326,886
|
|
|
|
326,599
|
|
Corporate and other
|
|
|
4,297
|
|
|
|
4,513
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
959,077
|
|
|
$
|
967,798
|
|
|
|
|
|
|
|
|
|
|
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 TEPs 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.
19