10-Q 1 tegp201563010q.htm 10-Q TEGP 2015.6.30 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 FORM 10-Q
 
 
 
 (Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-37365
 
 
 
 
 Tallgrass Energy GP, LP
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
 
 
47-3159268
(State or other Jurisdiction of Incorporation or Organization)
 
 
 
(IRS Employer Identification Number)
 
 
 
 
 
4200 W. 115th Street, Suite 350
 
 
 
 
Leawood, Kansas
 
 
 
66211
(Address of Principal Executive Offices)
 
 
 
(Zip Code)
(913) 928-6060
(Registrant's Telephone Number, Including Area Code)
 
 
 
 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  ¨    No  ý
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 July 30, 2015, the Registrant had 47,725,000 Class A shares and 109,504,440 Class B shares outstanding.




TALLGRASS ENERGY GP, LP
TABLE OF CONTENTS
 




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.
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 barrels: Barrels of crude oil that our customers have contractually agreed to ship 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.
EPA: The United States Environmental Protection Agency.
Fee Based Processing Contracts: Natural gas processing contracts that are primarily based upon a fixed fee and/or a volumetric-based fee rate, which is typically tied to reserved capacity or inlet volumes.
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. Firm transportation contracts obligate our customers to pay a fixed monthly reservation charge to reserve an agreed upon amount of pipeline capacity for transportation regardless if the contracted capacity is used by the customer during each month. Firm storage contracts obligate our customers to pay a fixed monthly charge for the firm right to inject, withdraw and store a specified volume of natural gas regardless if the contracted storage capacity is actually utilized by the customer.
Fractionation: The process by which NGLs are further separated into individual, more valuable components including ethane, propane, butane, isobutane and natural gasoline.
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. Under interruptible service contracts, our customers pay fees based on their actual utilization of assets for transportation and storage services. These customers are not assured capacity or service.
Keep Whole Processing Contracts: Natural gas processing contracts in which we are required to replace the Btu content of the NGLs extracted from inlet wet gas processed with purchased dry natural gas.




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).
Natural Gas Processing: The separation of natural gas into pipeline-quality natural gas and a mixed NGL stream.
Non-contract barrels (or walk-up barrels): Barrels of crude oil that our customers ship based solely 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.
Percent of Proceeds Processing Contracts: Natural gas processing contracts in which we process our customer’s natural gas, sell the resulting NGLs and residue gas and divide the proceeds of those sales between us and the customer. Some percent of proceeds contracts may also require our customers to pay a monthly reservation fee for processing capacity.
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 or crude oil transported or passing through a pipeline, plant, terminal or other facility during a particular period.
Uncommitted shippers (or walk-up shippers): Customers that have not signed long-term shipper contracts and have rights under the FERC tariff as to rates and capacity allocation that are different than long-term committed shippers.
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 base 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 GP, LP
CONDENSED CONSOLIDATED BALANCE SHEETS 
(UNAUDITED)
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
ASSETS
 
Current Assets:
 
 
 
Cash and cash equivalents
$
2,278

 
$
867

Accounts receivable, net
51,521

 
39,768

Receivable from related party

 
73,393

Gas imbalances
1,017

 
2,442

Inventories
15,162

 
13,045

Prepayments and other current assets
3,768

 
2,766

Total Current Assets
73,746

 
132,281

Property, plant and equipment, net
1,943,016

 
1,853,081

Goodwill
343,288

 
343,288

Intangible asset, net
100,506

 
104,538

Deferred tax asset
441,584

 

Deferred financing costs, net
6,371

 
5,528

Deferred charges and other assets
16,651

 
18,481

Total Assets
$
2,925,162

 
$
2,457,197

LIABILITIES AND PARTNERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable (including $15,945 and $45,534, respectively, related to VIEs)
$
28,583

 
$
62,329

Accounts payable to related parties
3,772

 
3,915

Gas imbalances
2,812

 
3,611

Derivative liabilities at fair value
41

 

Accrued taxes
12,206

 
3,989

Accrued liabilities
6,915

 
9,384

Deferred revenue
9,882

 
5,468

Other current liabilities
4,247

 
7,872

Total Current Liabilities
68,458

 
96,568

Long-term debt (including $147,000 and $0, respectively, related to VIEs)
853,000

 
559,000

Other long-term liabilities and deferred credits
6,342

 
6,478

Total Long-term Liabilities
859,342

 
565,478

Commitments and Contingencies

 

Equity:
 
 
 
TEGP Predecessor

 
146,866

Class A Shareholders (47,725,000 and no shares outstanding, respectively)
408,685

 

Class B Shareholders (109,504,440 and no shares outstanding, respectively)

 

Total Partners' Capital
408,685

 
146,866

Noncontrolling interests
1,588,677

 
1,648,285

Total Equity
$
1,997,362

 
$
1,795,151

Total Liabilities and Equity
$
2,925,162

 
$
2,457,197


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



TALLGRASS ENERGY GP, LP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per unit amounts)
Revenues:
 
 
 
 
 
 
 
Sales of natural gas, NGLs, and crude oil
$
20,011

 
$
39,042

 
$
41,880

 
$
92,757

Natural gas transportation services
29,041

 
30,569

 
61,189

 
64,673

Crude oil transportation services
74,022

 

 
124,403

 

Processing and other revenues
9,896

 
7,709

 
20,173

 
14,669

Total Revenues
132,970

 
77,320

 
247,645

 
172,099

Operating Costs and Expenses:
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation and amortization shown below)
17,180

 
37,214

 
36,773

 
85,420

Cost of transportation services (exclusive of depreciation and amortization shown below)
13,492

 
5,288

 
24,207

 
10,405

Operations and maintenance
12,408

 
10,055

 
21,983

 
18,068

Depreciation and amortization
20,355

 
9,525

 
40,960

 
17,834

General and administrative
13,701

 
7,124

 
26,390

 
13,773

Taxes, other than income taxes
(271
)
 
1,639

 
11,026

 
3,595

Loss on sale of assets

 

 
4,483

 

Total Operating Costs and Expenses
76,865

 
70,845

 
165,822

 
149,095

Operating Income
56,105

 
6,475

 
81,823

 
23,004

Other (Expense) Income:
 
 
 
 
 
 
 
Interest expense, net
(4,479
)
 
(2,137
)
 
(7,919
)
 
(3,433
)
Gain on remeasurement of unconsolidated investment

 
9,388

 

 
9,388

Equity in earnings of unconsolidated investment

 
273

 

 
717

Other income, net
769

 
729

 
1,481

 
1,669

Total Other (Expense) Income
(3,710
)
 
8,253

 
(6,438
)
 
8,341

Net income before tax
52,395

 
14,728

 
75,385

 
31,345

Deferred income tax expense
(1,772
)
 

 
(1,772
)
 

Net income
50,623

 
14,728

 
73,613

 
31,345

Net (income) loss attributable to noncontrolling interests
(45,889
)
 
(12,295
)
 
(63,757
)
 
(26,274
)
Net income attributable to TEGP
$
4,734

 
$
2,433

 
$
9,856

 
$
5,071

Allocation of income for the three and six months ended June 30, 2015:
 
 
 
 
 
 
 
Net income attributable to TEGP from the beginning of the period to May 11, 2015
$
2,271

 
 
 
$
7,393

 
 
Net income attributable to TEGP from May 12, 2015 to June 30, 2015
2,463

 
 
 
2,463

 
 
Basic and diluted net income per Class A share
$
0.05

 
 
 
$
0.05

 
 
Basic and diluted average number of Class A shares outstanding
47,725

 
 
 
47,725

 
 

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



TALLGRASS ENERGY GP, LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended June 30,
 
2015
 
2014
 
(in thousands)
Cash Flows from Operating Activities:
 
 
 
Net income
$
73,613

 
$
31,345

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
44,677

 
18,470

Gain on remeasurement of unconsolidated investment

 
(9,388
)
Noncash compensation expense
3,254

 
2,249

Loss on sale of assets
4,483

 

Changes in components of working capital:
 
 
 
Accounts receivable and other
(10,215
)
 
4,142

Inventories
(6,068
)
 
(867
)
Accounts payable and accrued liabilities
2,389

 
(17,077
)
Deferred revenue
4,198

 
1,673

Other operating, net
(4,708
)
 
578

Net Cash Provided by Operating Activities
111,623

 
31,125

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(49,544
)
 
(479,309
)
Acquisition of Trailblazer

 
(150,000
)
Acquisition of additional equity interests in Water Solutions

 
(7,600
)
Acquisition of additional 33.3% membership interest in Pony Express
(700,000
)
 

Other investing, net
(4,648
)
 
(1,638
)
Net Cash Used in Investing Activities
(754,192
)
 
(638,547
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from initial public offering of Class A shares, net
1,315,383

 

Acquisition of Acquired TEP Units
(953,600
)
 

Proceeds from public offering of TEP common units, net
551,673

 

Distribution of Excess Proceeds to Exchange Right Holders
(334,068
)
 

Proceeds from revolver borrowings, net
294,000

 
146,000

Acquisition of additional Tallgrass Equity units
(171,948
)
 

Distributions to TEP unitholders
(46,082
)
 
(13,244
)
Contributions from noncontrolling interests
16,294

 

(Distributions to) Contributions from TEGP Predecessor, net
(13,533
)
 
446,874

Contribution from TD

 
27,488

Other financing, net
(14,139
)
 
330

Net Cash Provided by Financing Activities
643,980

 
607,448

Net Change in Cash and Cash Equivalents
1,411

 
26

Cash and Cash Equivalents, beginning of period
867

 

Cash and Cash Equivalents, end of period
$
2,278

 
$
26

 
 
 
 
Schedule of Noncash Investing and Financing Activities:
 
 
 
Property, plant and equipment acquired via the cash management agreement with TD
$
103,239

 
$

Contributions from noncontrolling interests settled via the cash management agreement with TD
$
21,525

 
$

Distribution to noncontrolling interests settled via the cash management agreement with TD
$
22,266

 
$

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

 
$
10,148


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



TALLGRASS ENERGY GP, LP
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(UNAUDITED)
 
TEGP Predecessor
 
Partners' Capital (excluding noncontrolling interests)
 
Noncontrolling Interests
 
Total Equity
 
 
Class A Shares
 
Class B Shares
 
 
 
(in thousands)
Balance at January 1, 2015
$
146,866

 
$

 
$

 
$
1,648,285

 
$
1,795,151

Net income for the period from January 1, 2015 to May 11, 2015
7,393

 

 

 
32,196

 
39,589

Issuance of TEP units to public, net of offering costs
63,520

 

 

 
488,153

 
551,673

Acquisition of additional 33.3% membership interest in Pony Express
(98,446
)
 

 

 
(601,554
)
 
(700,000
)
Distributions to TEGP Predecessor
(4,108
)
 

 

 
(9,425
)
 
(13,533
)
Consolidation of TEGP Predecessor assets
(115,225
)
 
115,225

 

 

 

Issuance of Class A shares to the public, net of offering costs

 
1,315,383

 

 

 
1,315,383

Acquisition of Acquired TEP Units from TD

 
(953,600
)
 

 

 
(953,600
)
Distribution of excess Offering proceeds to Exchange Right Holders

 
(334,068
)
 

 

 
(334,068
)
Acquisition of Tallgrass Equity units from Exchange Right Holders

 
(171,948
)
 

 

 
(171,948
)
Deferred tax asset

 
443,356

 

 

 
443,356

Net income for the period from May 12, 2015 to June 30, 2015

 
2,463

 

 
31,561

 
34,024

Issuance of common units under TEP LTIP plan

 
(661
)
 

 
(5,901
)
 
(6,562
)
Distributions to TEP unitholders

 

 

 
(46,082
)
 
(46,082
)
Noncash compensation expense

 

 

 
6,000

 
6,000

Contributions from noncontrolling interest

 

 

 
68,651

 
68,651

Distributions to noncontrolling interest

 

 

 
(22,607
)
 
(22,607
)
Distributions to TEP GP Members

 
(7,465
)
 

 

 
(7,465
)
Acquisition of noncontrolling interests

 

 

 
(600
)
 
(600
)
Balance at June 30, 2015
$

 
$
408,685

 
$

 
$
1,588,677

 
$
1,997,362

 
 
 
 
 
 
 
 
 
 
 
TEGP Predecessor
 
Partners' Capital (excluding noncontrolling interests)
 
Noncontrolling Interests
 
Total Equity
 
 
Class A Shares
 
Class B Shares
 
 
 
(in thousands)
Balance at January 1, 2014
$
150,871

 
$

 
$

 
$
1,158,230

 
$
1,309,101

Net income
5,071

 

 

 
26,274

 
31,345

Noncash compensation expense

 

 

 
4,650

 
4,650

Distributions to TEP unitholders

 

 

 
(13,244
)
 
(13,244
)
Contributions from TEGP Predecessor
18,969

 

 

 
427,905

 
446,874

Contribution from TD
8,344

 

 

 
19,144

 
27,488

Issuance of TEP general partner units to TEGP Predecessor
80

 

 

 
183

 
263

Acquisition of Trailblazer
(33,916
)
 

 

 
(116,084
)
 
(150,000
)
Acquisition of Water Solutions

 

 

 
1,400

 
1,400

Balance at June 30, 2014
$
149,419

 
$

 
$

 
$
1,508,458

 
$
1,657,877


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



TALLGRASS ENERGY GP, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Description of Business
Tallgrass Energy GP, LP ("TEGP" or the "Partnership") is a Delaware limited partnership formed in February 2015 that has elected to be treated as a corporation for U.S. federal income tax purposes. TEGP was formed as part of the reorganization of entities controlled by Tallgrass Equity, LLC ("Tallgrass Equity") to effect the initial public offering of Class A shares of TEGP (the "Offering"), which was completed on May 12, 2015. Prior to closing the Offering, Tallgrass Equity held a 100% membership interest in Tallgrass Energy Holdings, LLC ("Holdings"). Holdings, in turn, held a 100% limited partner interest in TEGP and a 100% membership interest in TEGP Management, LLC ("TEGP Management"), the general partner of TEGP.
In connection with the closing of the Offering on May 12, 2015, the following transactions (the “Reorganization Transactions”) occurred:
Tallgrass Equity distributed its membership interest in Holdings to its members, pro rata, and Holdings distributed its 100% limited partner interest in TEGP, respectively, to its members, pro rata, which are referred to as the “Exchange Right Holders”;
TEGP issued 47,725,000 Class A shares to the public for net proceeds of approximately $1.3 billion, including 6,225,000 Class A shares issued in connection with the underwriters' exercise of the overallotment option;
The existing limited partner interests in TEGP held by the Exchange Right Holders were converted into 115,729,440 Class B shares, 6,225,000 of which were automatically canceled in connection with the underwriters’ exercise of the overallotment option, resulting in the Exchange Right Holders owning 109,504,440 Class B shares;
Tallgrass Equity issued 41,500,000 Tallgrass Equity units to TEGP in exchange for approximately $1.1 billion in net proceeds from the issuance of TEGP’s Class A shares to the public and amended the limited liability company agreement of Tallgrass Equity to, among other things, provide that TEGP is the managing member of Tallgrass Equity;
TEGP used the net proceeds from the purchase of the 6,225,000 overallotment option shares to purchase Tallgrass Equity units from the Exchange Right Holders; and
Tallgrass Equity entered into a $150 million revolving credit facility and borrowed $150 million thereunder, using the aggregate proceeds from such borrowings together with the net proceeds from the Offering that Tallgrass Equity received from TEGP, to purchase 20,000,000 common units, representing limited partner interests in Tallgrass Energy Partners, LP ("TEP"), from Tallgrass Development, LP ("TD") at $47.68 per TEP common unit (the “Acquired TEP Units”) and pay offering expenses and other transaction costs. Tallgrass Equity distributed substantially all of the remaining proceeds (the "Excess Proceeds") to the Exchange Right Holders, retaining approximately $3 million for short term working capital needs.
TEGP's sole cash-generating asset is an approximate 30.35% controlling interest in Tallgrass Equity. Tallgrass Equity's sole cash-generating assets consist of direct and indirect partnership interests in TEP, described below, that were historically owned by entities controlled by Tallgrass Equity, including TD:
100% of the outstanding membership interests in Tallgrass MLP GP, LLC ("TEP GP"), which owns the general partner interest in TEP as well as all of the TEP incentive distribution rights ("IDRs"). The general partner interest in TEP is represented by 834,391 general partner units, representing a 1.36% general partner interest in TEP at June 30, 2015.
The Acquired TEP Units, representing an approximately 32.57% limited partner interest in TEP at June 30, 2015.
The term "TEGP Predecessor" refers to TEGP, as recast to show the effects of the Reorganization Transactions, for the periods prior to completion of the Offering on May 12, 2015. "We," "us," "our" and similar terms refer to TEGP together with its consolidated subsidiaries or to TEGP Predecessor together with its consolidated subsidiaries, as the context requires, including, in both cases, Tallgrass Equity and TEP (and their respective subsidiaries).

5



2. Summary of Significant Accounting Policies
Basis of Presentation
These unaudited condensed consolidated financial statements and related notes for the three and six months ended June 30, 2015 and 2014 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 unaudited condensed consolidated financial statements for the three and six months ended June 30, 2015 and 2014 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.
Our financial results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with our final prospectus dated May 6, 2015 (the “Prospectus”) included in our Registration Statement on Form S-1, as amended (SEC File No. 333-202258) and filed with the United States Securities and Exchange Commission (the “SEC”) pursuant to Rule 424 on May 7, 2015.
The unaudited condensed consolidated financial statements of TEGP as of December 31, 2014 and for the three and six months ended June 30, 2014, include historical cost basis accounts of the assets of TEGP and were prepared in contemplation of TEGP’s initial public offering of Class A shares completed on May 12, 2015 and the acquisition of an approximately 30.35% interest in Tallgrass Equity as described in Note 1Description of Business, which was accounted for as a transaction between entities under common control in accordance with ASC 805. Significant intra-entity items have been eliminated in the presentation. Both TEGP and TEGP Predecessor are considered entities under common control and, as such, the transfer between the entities of the assets and liabilities has been recorded by TEGP at historical cost. TEGP, as used herein, refers to the consolidated financial results and operations for TEGP Predecessor prior to the completion of the Offering and to TEGP thereafter.
Net income or loss from consolidated subsidiaries that are not wholly-owned by TEGP are attributed to TEGP and noncontrolling interests. This is done in accordance with substantive profit sharing arrangements, which generally follow the allocation of cash distributions and may not follow the respective ownership percentages held by TEGP. Concurrent with TEP's acquisition of an initial 33.3% membership interest in Tallgrass Pony Express Pipeline, LLC ("Pony Express") effective September 1, 2014, TEP, TD, and Pony Express entered into the Second Amended and Restated Limited Liability Agreement of Tallgrass Pony Express Pipeline, LLC ("the Second Amended Pony Express LLC Agreement"), which provided TEP a minimum quarterly preference payment of $16.65 million (prorated to approximately $5.4 million for the quarter ended September 30, 2014) through the quarter ending September 30, 2015. Effective March 1, 2015 with TEP's acquisition of an additional 33.3% membership interest in Pony Express, the Second Amended Pony Express LLC Agreement was further amended (as amended, "the Pony Express LLC Agreement") to increase the minimum quarterly preference payment to $36.65 million (prorated to approximately $23.5 million for the quarter ended March 31, 2015) and extend the term of the preference period through the quarter ending December 31, 2015. The Pony Express LLC Agreement provides that the net income or loss of Pony Express be allocated, to the extent possible, consistent with the allocation of Pony Express cash distributions. Under the terms of the Pony Express LLC Agreement, Pony Express distributions and net income for periods beginning after December 31, 2015 will be attributed to TEP and its noncontrolling interests in accordance with the respective ownership interests.
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. We have presented separately in our condensed consolidated balance sheets, to the extent material, the assets of our consolidated VIEs that can only be used to settle specific obligations of the consolidated VIEs, and the liabilities of our consolidated VIEs for which creditors do not have recourse to our general credit. Tallgrass Equity and Pony Express are considered to be VIEs under the applicable authoritative guidance. Based on a qualitative analysis in accordance with the applicable authoritative guidance, we have determined that we have the power to direct matters that most significantly impact the activities of Tallgrass Equity and Pony Express and have the right to receive benefits of Tallgrass Equity and Pony Express that could potentially be significant to the respective entities. We have consolidated Tallgrass Equity as we are the primary beneficiary. We also consolidate Pony Express through our indirect investment in TEP, as TEP is the primary beneficiary of Pony Express. For additional information see Note 3Variable Interest Entities.

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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 our 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. During the second quarter of 2015, we recorded a reduction in our property tax accrual for the first quarter of 2015 of $5.7 million as a result of revised property tax estimates due to successful appeals with state taxing authorities on the assessed value of property, which resulted in a net credit of $0.3 million in taxes, other than income taxes for the three months ended June 30, 2015.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Net equity contributions and distributions included in the condensed consolidated statements of cash flows represent transfers of cash as a result of TD’s centralized cash management systems prior to April 1, 2014 for Trailblazer Pipeline Company LLC ("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 33.3% common membership interest in Pony Express, under which cash balances are swept daily and recorded as loans from Pony Express to TD.
All payable and receivable balances between TEGP and TD are cash settled with the exception of certain balances payable from Pony Express to TD, which have been settled against the receivable from TD via the Pony Express cash management agreement discussed in the prior paragraph.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are carried at their estimated collectible amounts. We make periodic reviews and evaluations of the appropriateness of the allowance for doubtful accounts based on a historical analysis of uncollected amounts, and adjustments are recorded as necessary for changed circumstances and customer-specific information. When specific receivables are determined to be uncollectible, the reserve and receivable are relieved. Our allowance for doubtful accounts totaled $0.5 million at June 30, 2015 and December 31, 2014.
Inventories
Inventories primarily consist of gas in underground storage, materials and supplies, natural gas liquids and crude oil. Gas in underground storage, sometimes referred to as working gas, and natural gas liquids are recorded at the lower of historical cost or market using the average cost method. As discussed further under "Revenue Recognition" below, a loss allowance is factored into the crude oil tariffs to offset losses in transit. As crude oil is transported, we earn oil for our services as pipeline allowance oil, which we can then sell. As pipeline allowance oil is accumulated, it is recorded as inventory at the lower of historical cost or market using the average cost method. Materials and supplies are valued at weighted average cost and periodically reviewed for physical deterioration and obsolescence. For additional information, see "Gas in Underground Storage" below.
Accounting for Regulatory Activities
Regulated activities are accounted for in accordance with the "Regulated Operations" Topic of the Codification. This Topic prescribes the circumstances in which the application of GAAP is affected by the economic effects of regulation. Regulatory assets and liabilities represent probable future revenues or expenses associated with certain charges and credits that will be recovered from or refunded to customers through the ratemaking process. We had recorded regulatory assets of approximately $1.2 million and $1.4 million included in "Deferred charges and other assets" in the condensed consolidated balance sheets at June 30, 2015 and December 31, 2014, respectively. Regulatory assets at June 30, 2015 and December 31, 2014 were primarily attributable to costs associated with Trailblazer’s 2013 Rate Case Filing as more fully described in Note 12 – Regulatory Matters.

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Property, Plant and Equipment
Property, plant and equipment is stated at historical cost, which for constructed plants includes indirect costs such as payroll taxes, other employee benefits, allowance for funds used during construction for regulated assets and other costs directly related to the projects. Expenditures that increase capacities, improve efficiencies or extend useful lives are capitalized and depreciated over the remaining useful life of the asset or major asset component. We also capitalize certain costs directly related to the construction of assets, including internal labor costs, interest and engineering costs.
Routine maintenance, repairs and renewal costs are expensed as incurred. The cost of normal retirements of the regulated depreciable utility property, plant and equipment, plus the cost of removal less salvage value and any gain or loss recognized, is recorded in accumulated depreciation with no effect on current period earnings. Gains or losses are recognized upon retirement of non-regulated or regulated property, plant and equipment constituting an operating unit or system, and land, when sold or abandoned and costs of removal or salvage are expensed when incurred.
Intangible Assets
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 the Tallgrass Interstate Gas Transmission, LLC ("TIGT") 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 ("the 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 BNN Water Solutions, LLC ("Water Solutions") transaction discussed in Note 4 – Acquisitions. This intangible asset is amortized on a straight-line basis over a period of 1.6 years, the remaining term of the contract at the time of acquisition.
Impairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss results when the estimated undiscounted future net cash flows expected to result from the asset’s use and its eventual disposition are less than its carrying amount. We assess our long-lived assets for impairment in accordance with the relevant Codification guidance. A long-lived asset is tested for impairment whenever events or changes in circumstances indicate its carrying amount may exceed its fair value.
Examples of long-lived asset impairment indicators include:
a significant decrease in the market value of a long-lived asset or group;
a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition;
a significant adverse change in legal factors or in the business climate could affect the value of long-lived asset or asset group, including an adverse action or assessment by a regulator which would exclude allowable costs from the rate-making process;
an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the long-lived asset or asset group;
a current period operating cash flow loss combined with a history of operating cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; and
a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
When an impairment indicator is present, we first assesses the recoverability of the long-lived assets by comparing the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset to the carrying amount of the asset. If the carrying amount is higher than the undiscounted future cash flows, the fair value of the assets is assessed using a discounted cash flow analysis and used to determine the amount of impairment, if any, to be recognized.
Gas in Underground Storage
Gas in underground storage represents the cost of base gas, which refers to the volumes necessary to maintain pressure and deliverability requirements in our storage facilities. We record base gas as a component of property, plant and equipment.

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We maintain working gas in our underground storage facilities on behalf of certain third parties. We receive a fee for our storage services but do not reflect the value of third party gas in the accompanying condensed consolidated financial statements. We occasionally acquire volumes of working gas for our own account. These volumes of working gas are recorded as natural gas inventory at the lower of cost or market.
Depreciation and Amortization - Regulated Assets
For our regulated assets at TIGT and Trailblazer, we have elected to compute depreciation using a composite method employed by applying a single, FERC approved depreciation rate to a group of assets with similar economic characteristics. This composite method of depreciation approximates a straight-line method of depreciation. The annualized rate of depreciation ranges from 0.70% to 12.00% for the various classes of depreciable, regulated assets.
Depreciation and Amortization - Non-regulated Assets
For non-regulated assets, we have elected to use the straight-line method of depreciation. The useful lives for the various classes of non-regulated depreciable assets are as follows:
 
Range of Useful Lives
 
(in years)
Crude oil pipelines
35
Processing & Treating
30
Natural gas pipelines (1)
10
General & Other
3-13 1/3
(1) 
Includes the Replacement Gas Facilities as discussed in Note 5 – Related Party Transactions and Note 12 – Regulatory Matters.
Gas Imbalances
Gas imbalances receivable and payable represent the difference between customer nominations and actual gas receipts from, and gas deliveries to, interconnecting pipelines under various operational balancing and imbalance agreements. Gas imbalances are either made up in-kind or settled in cash, subject to the terms and valuations of the various agreements. Imbalances are valued at applicable average market index prices.
Deferred Financing Costs
Costs incurred in connection with the issuance of long-term debt are deferred and amortized over the related financing period using the effective interest method.
Goodwill
We evaluate 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 magnitude of the excess of the fair value over the carrying amount in the last valuation or changes in the business environment. Our annual impairment testing date is August 31st. We evaluate 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 we, after performing the qualitative assessment, determine 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.
Investment in Unconsolidated Affiliates
We use the equity method to account for investments in greater than 20% owned affiliates that are not variable interest entities and where we do not have the ability to exercise control, and for investments in less than 20% owned affiliates where we have the ability to exercise significant influence.

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We evaluate our investments in unconsolidated affiliates for impairment whenever events or changes in circumstances indicate that the carrying value of such investments may have experienced a decline in value. When there is evidence of loss in value, we compare the estimated fair value of the investment to the carrying value of the investment to determine whether impairment has occurred. We assess the fair value of our investments in unconsolidated affiliates using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales and discounted cash flow models. The difference between the carrying amount of the unconsolidated affiliates and their estimated fair value is recognized as an impairment loss when the loss in value is deemed to be other-than-temporary.
Our investment in Grasslands Water Services I, LLC ("GWSI"), which owns a water transportation pipeline, was initially recorded under the equity method of accounting as we had the ability to exercise significant influence, but not control, over this investment. There was $0.3 million and $0.7 million equity in earnings recognized for the three and six months ended June 30, 2014, respectively. There were no equity in earnings recognized for the three and six months ended June 30, 2015. As discussed in Note 4 –  Acquisitions, during the year ended December 31, 2014, TEGP acquired a controlling interest in GWSI, which was subsequently renamed BNN Redtail, LLC ("Redtail"), and consolidated its investment in Redtail as of May 13, 2014 accordingly.
Revenue Recognition
We recognize revenues as services are rendered or goods are sold to a purchaser at a fixed and determinable price, delivery has occurred, title has transferred and collectability is reasonably assured. We provide various types of natural gas storage and transportation services and crude oil transportation services to our customers in which the commodity remains the property of these customers at all times.
Natural gas liquids sales occur in the Processing & Logistics segment and consist of the sale of outputs from our processing plants and the marketing of natural gas liquids that are delivered by our suppliers under either fee-based arrangements or percent-of-proceeds arrangements. Under these arrangements, we treat and process the natural gas delivered by our suppliers, and then sell the resulting NGLs and condensate based on published index market prices. We remit to the producers an agreed-upon percentage of the actual proceeds that we receive from our sales of the NGLs and condensate. We keep the difference between the proceeds received and the amount remitted back to the producer. We generally report gross revenues in the condensed consolidated statements of income, as we typically act as the principal in these transactions, take custody to the product, and incur the risks and rewards of ownership. Processing and other revenues primarily represent fees for processing, treating and fractionation of natural gas and NGLs earned under fee-based arrangements and revenue from water services earned in the Processing & Logistics segment.
Natural gas sales occur in both the Natural Gas Transportation & Logistics segment and in the Processing & Logistics segment. In the Natural Gas Transportation & Logistics segment, transportation services revenue is recognized when a portion of the natural gas transported by customers is collected as a contractual fee to compensate us for fuel consumed by pipeline and storage operations. We take title and record revenue at market prices when the volumes included in the contractual fee are delivered from the customer and injected into our storage facility. When the excess volumes are eventually sold we record natural gas sales revenue at the contractual sales price and cost of sales at average cost. In addition, when operational conditions allow, we occasionally sell "base gas," which refers to the minimum volume of natural gas required in order to operate the storage facility. In the Processing & Logistics segment, we purchase natural gas primarily for use in our operations and for meeting contractual requirements to deliver natural gas to certain customers. In addition, some of our contractual arrangements allow us to keep a portion of the processed natural gas as compensation for processing services. We generate revenue by selling the volumes of natural gas received or purchased that exceed our business needs.
Natural gas transportation and storage services occur in the Natural Gas Transportation & Logistics segment. In many cases (generally described as "firm service"), the customer pays a two-part rate that includes (i) a fee reserving the right to transport or store natural gas in our facilities and (ii) a per-unit rate for volumes actually transported or injected into/withdrawn from storage. The fee-based component of the overall rate is recognized as revenue in the period the service is provided. The per-unit charge is recognized as revenue when the volumes are delivered to the customers’ agreed upon delivery point, or when the volumes are injected into/withdrawn from our storage facilities. In other cases (generally described as "interruptible service"), there is no fixed fee associated with the services because the customer accepts the possibility that service may be interrupted at our discretion in order to serve customers who have purchased firm service. In the case of interruptible service, revenue is recognized in the same manner utilized for the per-unit rate for volumes actually transported under firm service agreements. In addition to "firm" and "interruptible" transportation services, we also provide natural gas park and loan services to assist customers in managing short-term gas surpluses or deficits. Revenues are recognized as services are provided, based on the terms negotiated under these contracts.

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Crude oil transportation services occur in the Crude Oil Transportation & Logistics segment. We provide various types of crude oil transportation services to our customers and, other than pipeline allowance oil, do not take title to the crude oil and do not incur the risks and rewards of ownership. In many cases the customer has committed to ship a fixed quantity of oil barrels per month. For barrels physically received by us and delivered to the customers’ agreed upon destination point, revenue is recognized in the period the service is provided. Shipper deficiencies, or barrels committed by the customer to be transported in a month but not physically received by us for transport or delivered to the customers’ agreed upon destination point, are charged at the committed tariff rate per barrel and recorded as a deferred liability until the barrels are physically transported and delivered. In the case of non-committed shippers, revenue is recognized in the same manner utilized for the barrels physically transported and delivered. A loss allowance is factored into the crude oil tariffs to offset losses in transit. As crude oil is transported, we earn oil for our services as pipeline allowance oil. Any pipeline allowance oil that remains after replacing losses in transit can be sold. We take title and record revenue at market prices when the volumes included in the pipeline loss allowance are delivered from the customer. When pipeline loss allowance oil is eventually sold we record revenue at the contractual sales price and cost of sales at average cost as discussed in "Inventories" above. During the three and six months ended June 30, 2015, we recognized revenue of $1.2 million on the sale of pipeline allowance oil, which is included in "Sales of natural gas, NGLs, and crude oil" in the condensed consolidated statements of income.
Commitments and Contingencies
We recognize liabilities for other commitments and contingencies when, after fully analyzing the available information, we determine it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. When a range of probable loss can be estimated, we accrue the most likely amount, or if no amount is more likely than another, we accrue the minimum of the range of probable loss.
Environmental Costs
We expense or capitalize, as appropriate, environmental expenditures that relate to current operations. We expense amounts that relate to an existing condition caused by past operations that do not contribute to current or future revenue generation. We do not discount environmental liabilities to a net present value, and record environmental liabilities when environmental assessments and/or remedial efforts are probable and costs can be reasonably estimated. Recording of these accruals coincides with the completion of a feasibility study or a commitment to a formal plan of action. Estimates of environmental liabilities are based on currently available facts and presently enacted laws and regulations taking into consideration the likely effects of other factors including our prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by government organizations. Our estimates are subject to revision in future periods based on actual cost or new information.
Fair Value
Fair value, as defined in the Codification, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or exit price. We apply the fair value measurement guidance to financial assets and liabilities in determining the fair value of derivative assets and liabilities, and to nonfinancial assets and liabilities upon the acquisition of a business or in conjunction with the measurement of an impairment loss on an asset group or goodwill under the accounting guidance for the impairment of long-lived assets or goodwill.
The fair value measurement accounting guidance requires that we make assumptions that market participants would use in pricing an asset or liability based on the best information available. These factors include nonperformance risk (the risk that the obligation will not be fulfilled) and credit risk of the reporting entity (for liabilities) and of the counterparty (for assets). The fair value measurement guidance prohibits the inclusion of transaction costs and any adjustments for blockage factors in determining the instruments’ fair value. The principal or most advantageous market should be considered from the perspective of the reporting entity.
Fair value, where available, is based on observable market prices. Where observable market prices or inputs are not available, different valuation models and techniques are applied. These models and techniques attempt to maximize the use of observable inputs and minimize the use of unobservable inputs. The process involves varying levels of management judgment, the degree of which is dependent on the price transparency of the instruments or market and the instruments’ complexity.
To increase consistency and enhance disclosure of fair value, the Codification creates a fair value hierarchy to prioritize the inputs used to measure fair value into three categories. An asset or liability’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement, where Level 1 is the highest and Level 3 is the lowest. The three levels are defined as follows:
Level 1 Inputs-quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

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Level 2 Inputs-inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and
Level 3 Inputs-unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).
Any transfers between levels within the fair value hierarchy are recognized at the end of the reporting period.
For information regarding financial instruments measured at fair value on a recurring basis, see Note 8 – Risk Management. For information regarding the fair value of financial instruments not measured at fair value in the condensed consolidated balance sheets, see Note 9 – Long-term Debt.
Risk Management Activities
We utilize energy derivatives for the purpose of mitigating our risk resulting from fluctuations in the market price of natural gas. We record derivative contracts at their estimated fair values as of each reporting date. For more information on our risk management activities, see Note 8 – Risk Management.
Equity-Based Compensation
Equity-based compensation grants are measured at their grant date fair value and related compensation cost is recognized over the vesting period of the grant. Compensation cost for awards with graded vesting provisions is recognized on a straight-line basis over the requisite service period of each separately vesting portion of the award. A portion of the expense recognized relating to equity-based compensation grants is charged to TD.
Income Taxes
TEGP is comprised solely of limited liability companies that have elected to be treated as partnerships for income tax purposes. Accordingly, no provision for federal or state income taxes was recorded in the financial statements of TEGP Predecessor and the tax effects of our activities accrued to their parents for periods prior to the completion of the Offering on May 12, 2015. Although TEGP is organized as a limited partnership, we have elected to be treated as a corporation for U.S. federal income tax purposes and are therefore subject to both U.S. federal and state income taxes for periods beginning May 12, 2015. We recognized a deferred tax asset of $443.4 million as a result of the Reorganization Transactions in connection with the Offering, $1.8 million of which was recognized as deferred income tax expense during the period from May 12, 2015 to June 30, 2015.
We estimate an annual effective income tax rate based on projected results for the year and apply this rate to income before taxes to calculate income tax expense. All earnings from TEGP's consolidated subsidiaries are included in our net income, however we are not required to record income tax expense with respect to the portion of our earnings allocated to noncontrolling interests, which reduces our effective tax rate.
Our effective income tax rate for the period from May 12, 2015 to June 30, 2015 was 4.79%. We are projecting a tax loss for both U.S. Federal and State income taxes for the year ended December 31, 2015. As a result, there is no current provision for income taxes for the three and six months ended June 30, 2015.
Pursuant to the applicable guidance related to accounting for uncertainty in income taxes, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the tax position and also the past administrative practices and precedents of the taxing authority. As of June 30, 2015, we had not recognized any material amounts in connection with uncertainty in income taxes.

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Accounting Pronouncements Issued But Not Yet Effective
Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)"
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a comprehensive and converged set of principles-based revenue recognition guidelines which supersede the existing industry and transaction-specific standards. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, entities must apply a five step process to (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 also mandates disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The disclosure requirements include qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.
The amendments in ASU 2014-09 are effective for public entities for annual reporting periods beginning after December 15, 2017, and for interim periods within that reporting period. Early application is permitted for annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of ASU 2014-09.
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 our financial position and results of operations.
ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis"
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis. ASU 2015-02 will change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. ASU 2015-02 will modify the evaluation of whether limited partnerships and other similar legal entities are considered VIEs or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership, and change certain aspects of the consolidation analysis for reporting entities that are involved with VIEs, particularly for those with fee arrangements and related party relationships.
The amendments in ASU 2015-02 are effective for public entities for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early application is permitted, including adoption in an interim period. We are currently evaluating the impact of ASU 2015-02.
ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory"
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory. ASU 2015-11 establishes a "lower of cost and net realizable value" model for the measurement of most inventory balances. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
The amendments in ASU 2015-11 are effective for public entities for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of ASU 2015-11.
3. Variable Interest Entities
TEGP, as the managing member of Tallgrass Equity, has voting rights disproportionate to its ownership interest. As a result, we have determined that Tallgrass Equity is a VIE of which we are the primary beneficiary and we consolidate Tallgrass

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Equity accordingly. We have not provided any additional financial support to Tallgrass Equity other than our initial capital contribution and have no contractual commitments or obligations to provide additional financial support.
We also consolidate Pony Express through our indirect ownership of TEP. TEP does not have the obligation to absorb losses from Pony Express during the preference period as a result of the minimum quarterly preference payments as discussed in Note 4Acquisitions. In addition, for the period from our acquisition of the initial 33.3% membership interest effective September 1, 2014 to our acquisition of an additional 33.3% membership interest effective March 1, 2015, TEP, as the managing member of Pony Express, had voting rights disproportionate to its ownership interest. As a result, we determined that Pony Express is a VIE of which TEP is the primary beneficiary and consolidated 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 crude oil pipeline system owned and operated by Pony Express, which we refer to as the Pony Express System, including the lateral on the Pony Express System in Northeast Colorado, exceed the $270 million retained by Pony Express as discussed in Note 4Acquisitions, TD is obligated to fund the remaining costs.
The carrying amounts and classifications of the Tallgrass Equity consolidated assets and liabilities, including the assets and liabilities of Pony Express, included in our condensed consolidated balance sheets at June 30, 2015 and December 31, 2014 are as follows:
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Current assets
$
73,744

 
$
132,281

Noncurrent assets
2,409,833

 
2,324,916

Total assets
$
2,483,577

 
$
2,457,197

Current liabilities
$
68,458

 
$
96,568

Noncurrent liabilities
859,342

 
565,478

Total liabilities
$
927,800

 
$
662,046

4. Acquisitions
TEP Acquisition of Trailblazer
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 TEP 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 TEP 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 to TEP GP.
TEP Acquisitions of 66.7% of Pony Express
Effective September 1, 2014, TEP acquired a controlling 33.3% membership interest in Pony Express for total consideration of approximately $600 million. At closing, Pony Express, TD, and TEP entered into the Second Amended Pony Express LLC Agreement, 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 (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 Pony Express LLC Agreement, constituted TEP's 33.3% membership interest in Pony Express, which represented 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 was retained by Pony Express to fund the estimated remaining costs of construction for the Pony Express System and the lateral in Northeast Colorado. 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. There was no remaining balance outstanding on the related party loan at June 30, 2015.

14



The terms of TEP's first acquisition of a 33.3% membership interest in Pony Express provided TEP a minimum quarterly preference payment of $16.65 million through the quarter ending September 30, 2015 (prorated to approximately $5.4 million for the quarter ended September 30, 2014) with distributions thereafter shared in accordance with the terms of the Second Amended Pony Express LLC Agreement. At the effective date of that transaction, TEP determined that Pony Express was a VIE of which TEP was the primary beneficiary, and consolidated Pony Express accordingly. For additional discussion and disclosure, see Note 3Variable Interest Entities. The acquisition of the initial 33.3% membership interest in Pony Express represented a transaction between entities under common control and a change in reporting entity.
Effective March 1, 2015, TEP acquired an additional 33.3% membership interest in Pony Express for cash consideration of $700 million. At closing, Pony Express, TD, and TEP entered into the Pony Express LLC Agreement, which sets forth the relative rights of TD and TEP as the owners of Pony Express. The terms of the transaction increased the minimum quarterly preference payment provided to TEP to $36.65 million through the quarter ending December 31, 2015 (prorated to approximately $23.5 million for the quarter ended March 31, 2015) with distributions thereafter shared in accordance with the terms of the Pony Express LLC Agreement.
Upon the effective date of the transaction, TEP reevaluated its VIE assessment and determined that Pony Express continues to be considered a VIE of which TEP is the primary beneficiary. The acquisition of the additional 33.3% membership interest in Pony Express represents a transaction between entities under common control and an acquisition of noncontrolling interests. As a result, financial information for periods prior to the transaction have not been recast to reflect the additional 33.3% membership interest.
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"), which 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 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% membership 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 Redtail and a 100% equity interest in Alpha Reclaim Technology, LLC ("Alpha"), a company which sources treated wastewater from municipalities in Texas. Alpha is wholly-owned by Redtail.
Upon closing of the transaction, TEP obtained a controlling financial interest in Water Solutions and accordingly has accounted for the transaction as a step acquisition under ASC 805. On the acquisition date, TEP remeasured its previously held 50% equity interest in Redtail 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 analysis. 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.
At December 31, 2014, the assets acquired and liabilities assumed in the acquisition were recorded at provisional amounts based on the preliminary purchase price allocation. During the three months ended June 30, 2015, the preliminary purchase price allocation with respect to Water Solutions was finalized with no material adjustments.
On May 20, 2015, TEP acquired an additional 12% equity interest in Water Solutions from NR2, LLC for cash consideration of $600,000, which was accounted for as an acquisition of noncontrolling interest. As of June 30, 2015, TEP's aggregate membership interest in Water Solutions was 92%.

15



5. Related Party Transactions
We have no employees. TD, through its wholly-owned subsidiary Tallgrass Operations, LLC ("Tallgrass Operations"), provided and charged us for direct and indirect costs of services  provided to us or incurred on our behalf including employee labor costs, information technology services, employee health and retirement benefits, and all other expenses necessary or appropriate to the conduct of our business. We recorded these costs on the accrual basis in the period in which TD incurred them. On May 17, 2013, in connection with the closing of TEP’s initial public offering, TEP and its general partner entered into an Omnibus Agreement with TD and certain of its affiliates, including Tallgrass Operations (the "TEP Omnibus Agreement"). The TEP 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. In addition, in connection with the closing of the Offering, TEGP entered into an Omnibus Agreement (the “TEGP Omnibus Agreement”) with TEGP Management, LLC, Tallgrass Equity and Holdings (which acts as the general partner of TD).
TEP’s general and administrative costs under the TEP Omnibus Agreement were $5.5 million and $10.9 million for the three and six months ended June 30, 2015, respectively, excluding costs attributable to Pony Express. Pony Express had general and administrative costs of $5.2 million and $10.3 million for the three and six months ended June 30, 2015, respectively. TEP also pays a quarterly reimbursement to TD for costs associated with being a public company. The quarterly public company reimbursement was $635,000 for the second quarter of 2015. Pursuant to the TEGP Omnibus Agreement, Tallgrass Equity pays a reimbursement to TD for costs associated with TEGP being a public company beginning in the second quarter of 2015. For the period from May 12, 2015 to June 30, 2015, the reimbursement was $250,000. These amounts will be periodically reviewed and adjusted as necessary to continue to reflect reasonable allocation of costs to TEP and TEGP, respectively.
Due to the cash management agreements discussed in Note 2Summary of Significant Accounting Policies, intercompany balances were periodically settled and treated as equity distributions prior to April 1, 2014 for Trailblazer and prior to September 1, 2014 for Pony Express. Balances lent to TD under the Pony Express cash management agreement effective September 1, 2014 are classified as related party receivables in the condensed consolidated balance sheets. We recognized interest income from TD of $0.4 million during the three and six months ended June 30, 2015 on the receivable balance under the Pony Express cash management agreement.
Totals of transactions with affiliated companies are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Cost of transportation services
$
6,233

 
$

 
$
10,591

 
$

Charges to TEGP: (1)
 
 
 
 
 
 
 
Property, plant and equipment, net
$
1,594

 
$
3,186

 
$
2,901

 
$
6,586

Operation and maintenance
$
5,825

 
$
4,608

 
$
11,248

 
$
8,956

General and administrative
$
9,565

 
$
4,676

 
$
18,821

 
$
9,603

(1) 
Charges to TEGP, inclusive of Tallgrass Equity, TEP, and Pony Express, include directly charged wages and salaries, other compensation and benefits, and shared services.

16



Details of balances with affiliates included in "Receivable from related party" and "Accounts payable to related parties" in the condensed consolidated balance sheets are as follows: 
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Receivable from related party:
 
 
 
Tallgrass Operations, LLC
$

 
$
73,393

Total receivable from related party
$

 
$
73,393

Accounts payable to related parties:
 
 
 
Tallgrass Operations, LLC
$
3,688

 
$
3,894

Rockies Express Pipeline LLC
84

 
21

Total accounts payable to related parties
$
3,772

 
$
3,915

Balances of gas imbalances with affiliated shippers are as follows:
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Affiliate gas balance receivables
$
11

 
$
275

Affiliate gas balance payables
$
405

 
$
455

6. Inventory
The components of inventory at June 30, 2015 and December 31, 2014 consisted of the following:
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Crude oil
$
2,855

 
$
581

Materials and supplies
5,415

 
3,049

Natural gas liquids
386

 
519

Gas in underground storage
6,506

 
8,896

Total inventory
$
15,162

 
$
13,045

7. Property, Plant and Equipment
A summary of net property, plant and equipment by classification is as follows:
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Crude oil pipelines
$
1,154,685

 
$
939,536

Natural gas pipelines
553,595

 
548,482

Processing and treating assets
237,045

 
241,671

General and other
63,530

 
42,719

Construction work in progress
28,615

 
139,873

Accumulated depreciation and amortization
(94,454
)
 
(59,200
)
Total property, plant and equipment, net
$
1,943,016

 
$
1,853,081

8. Risk Management
We occasionally enter into derivative contracts with third parties for the purpose of hedging exposures that accompany our normal business activities. Our normal business activities directly and indirectly expose us to risks associated with changes in the market price of crude oil and natural gas, among other commodities. 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. We have 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.

17



Fair Value of Derivative Contracts
The following table summarizes the fair values of our derivative contracts included in the condensed consolidated balance sheets: 
 
Balance Sheet
Location
 
June 30, 2015
 
December 31, 2014
 
 
 
(in thousands)
Energy commodity derivative contracts
Current liabilities
 
$
41

 
$

As of June 30, 2015, the fair value shown for commodity contracts was comprised of derivative volumes for short natural gas fixed-price swaps totaling 0.9 Bcf. As of December 31, 2014 there were no derivative contracts outstanding.
Effect of Derivative Contracts in the Statements of Income
The following table summarizes the impact of derivative contracts for the three and six months ended June 30, 2015 and 2014:
 
 
 
Amount of Gain (Loss) Recognized in Income on Derivatives
 
Location of
gain (loss) recognized
in income on derivatives
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
 
(in thousands)
Derivatives not designated as hedging contracts:
 
 
 
 
 
 
 
 
 
Energy commodity derivative contracts
Sales of natural gas, NGLs, and crude oil
 
$
(131
)
 
$
(106
)
 
$
(41
)
 
$
(458
)
Credit Risk
We have counterparty credit risk as a result of our use of derivative contracts. Our counterparties consist of major financial institutions. This concentration of counterparties may impact our 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.
We maintain credit policies that we believe minimize our overall credit risk. These policies include (i) 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 our policies and exposure, our management does not currently anticipate a material adverse effect on our financial position, results of operations, or cash flows as a result of counterparty performance.
Our over-the-counter swaps are entered into with counterparties outside central trading organizations such as a futures, options or stock exchanges. These contracts are with financial institutions with investment grade credit ratings. While we enter into derivative transactions principally with investment grade counterparties and actively monitor their credit ratings, it is nevertheless possible that from time to time losses will result from counterparty credit risk in the future. As of June 30, 2015, 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 our derivative contracts with specific counterparties exceeds established limits, we are required to provide collateral to our 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 our own credit quality on the fair value of our net liability position with each counterparty. The methodology to determine this adjustment is consistent with how we evaluate counterparty credit risk, taking into account current credit spreads for its comparative industry sector, as well as any change in such spreads since the last measurement date. As of June 30, 2015 and December 31, 2014, we did not have any outstanding letters of credit or cash in margin accounts in support of our hedging of commodity price risks associated with the sale of natural gas nor did we 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. We value exchange-traded derivative contracts using quoted market prices for identical securities.

18



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. We use 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 our 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 table summarizes the fair value measurements of our energy commodity derivative contracts as of June 30, 2015 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)
TEGP as of June 30, 2015
 
 
 
 
 
 
 
Energy commodity derivative contracts
$
41

 
$

 
$
41

 
$

9. Long-term Debt
Tallgrass Equity Credit Facility
The following table sets forth the outstanding borrowings, letters of credit issued, and available borrowing capacity under the Tallgrass Equity revolving credit facility as of June 30, 2015 and December 31, 2014:
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Total capacity under Tallgrass Equity the revolving credit facility
$
150,000

 
$

Less: Outstanding borrowings under the Tallgrass Equity revolving credit facility
(147,000
)
 

Available capacity under the Tallgrass Equity revolving credit facility
$
3,000

 
$

In connection with the Offering, Tallgrass Equity entered into a $150 million senior secured revolving credit facility with Barclays Bank PLC, as administrative agent, and a syndicate of lenders, which will mature on May 12, 2020. The Tallgrass Equity credit facility includes a $10 million sublimit for letters of credit and a $10 million sublimit for swing line loans. The Tallgrass Equity revolving credit facility may be used (i) to pay transaction costs and any fees and expenses incurred in connection with the revolving credit facility and certain transactions relating to the Offering, (ii) to fund the purchase of the Acquired TEP Units and (iii) for general Partnership purposes, including distributions. The Tallgrass Equity revolving credit facility also contains an accordion feature whereby Tallgrass Equity can increase the size of the credit facility to an aggregate of $200 million, subject to receiving increased or new commitments from lenders and the satisfaction of certain other conditions precedent. In addition, Tallgrass Equity is required to maintain a total leverage ratio of not more than 3.00 to 1.00. As of June 30, 2015, Tallgrass Equity was in compliance with the covenants required under the revolving credit facility.
Upon the close of the Offering, Tallgrass Equity had $150 million in outstanding borrowings under the credit facility, of which $3 million was subsequently repaid using proceeds from the Offering retained from the distribution of Excess Proceeds to the Exchange Right Holders for short term working capital needs, leaving $3 million in remaining capacity available for future borrowings or letter of credit issuances as of June 30, 2015. The initial borrowings under the credit facility were used to fund a portion of the purchase of the Acquired TEP Units and to pay origination and arrangement fees associated with the new revolving credit facility and transaction costs associated with the Offering. Tallgrass Equity’s obligations under the revolving credit facility are secured by a first priority lien on all of the present and after acquired equity interests held by Tallgrass Equity

19



in TEP GP and TEP. Borrowings under the credit facility bear interest, at Tallgrass Equity’s option, at either (a) a base rate, which will be a rate equal to the greatest of (i) the prime rate, (ii) the U.S. federal funds rate plus 0.5% and (iii) a one-month reserve adjusted Eurodollar rate plus 1.00% or (b) a reserve adjusted Eurodollar rate, plus, in each case, an applicable margin. For loans bearing interest based on the base rate, the applicable margin is 1.50%, and for loans bearing interest based on the reserve adjusted Eurodollar rate, the applicable margin is 2.50%. The unused portion of the revolving credit facility is subject to a commitment fee of 0.50%. As of June 30, 2015, the weighted average interest rate on outstanding borrowings was 2.72%.
TEP Credit Facility
The following table sets forth the outstanding borrowings, letters of credit issued, and available borrowing capacity under the TEP revolving credit facility as of June 30, 2015 and December 31, 2014:
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Total capacity under the TEP revolving credit facility
$
850,000

 
$
850,000

Less: Outstanding borrowings under the TEP revolving credit facility
(706,000
)
 
(559,000
)
Available capacity under the TEP revolving credit facility
$
144,000

 
$
291,000

The TEP revolving 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." In addition, TEP is required to maintain a consolidated leverage ratio of not more than 4.75 to 1.00 (which will be increased to 5.25 to 1.00 for certain measurement periods following the consummation of certain acquisitions) and a consolidated interest coverage ratio of not less than 2.50 to 1.00. As of June 30, 2015, TEP is in compliance with the covenants required under the TEP revolving credit facility. The unused portion of the revolving credit facility is subject to a commitment fee, which ranges from 0.300% to 0.500%, based on TEP’s total leverage ratio. As of June 30, 2015, the weighted average interest rate on outstanding borrowings was 1.94%.
Fair Value
The following table sets forth the carrying amount and fair value of our long-term debt, which is not measured at fair value in the condensed consolidated balance sheets as of June 30, 2015 and December 31, 2014, but for which fair value is disclosed:
 
Fair Value
 
 
 
Quoted prices
in active markets
for identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total
 
Carrying
Amount
 
(in thousands)
 
 
June 30, 2015
$

 
$
853,000

 
$

 
$
853,000

 
$
853,000

December 31, 2014
$

 
$
559,000

 
$

 
$
559,000

 
$
559,000

The long-term debt borrowed under the revolving credit facility is carried at amortized cost. As of June 30, 2015 and December 31, 2014, the fair value approximates the carrying amount for the borrowings under the revolving credit facility using a discounted cash flow analysis. We are not aware of any factors that would significantly affect the estimated fair value subsequent to June 30, 2015.

20



10. Partnership Equity and Distributions
TEP February Public Offering
On February 27, 2015, TEP sold 10,000,000 common units representing limited partner interests in an underwritten public offering at a price of $50.82 per unit, or $49.29 per unit net of the underwriter's discount, for net proceeds of approximately $492.4 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 an additional 33.3% membership interest in Pony Express as discussed in Note 4Acquisitions. Pursuant to the underwriters' option to purchase additional units, TEP sold an additional 1,200,000 common units representing limited partner interests to the underwriters at a price of $50.82 per unit, or $49.29 per unit net of the underwriter’s discount, for net proceeds of approximately $59.3 million after deducting the underwriter’s discount and offering expenses paid by TEP. TEP used the net proceeds from this additional purchase of common units to reduce borrowings under its revolving credit facility, a portion of which were used to fund the March 2015 acquisition of an additional 33.3% membership interest in Pony Express as discussed in Note 4Acquisitions.
TEGP Partnership Agreement and Distributions to Holders of Class A Shares
On May 12, 2015, TEGP closed the Offering and completed the Reorganization Transactions as outlined in Note 1Description of Business. In connection with the Offering, TEGP entered into an amended and restated partnership agreement on May 12, 2015. The partnership agreement requires TEGP to distribute its available cash to Class A shareholders on a quarterly basis, subject to certain terms and conditions, beginning with the quarter ending June 30, 2015. The first quarterly distribution, which was prorated for the period from May 12, 2015 to June 30, 2015, in the amount of $0.073 per share, was declared on July 15, 2015 and is payable on August 17, 2015 to Class A shareholders of record on July 31, 2015.
Exchange Rights
The Exchange Right Holders and any permitted transferees of their Tallgrass Equity units each have the right to exchange all or a portion of their Tallgrass Equity units for Class A shares at an exchange ratio of one Class A share for each Tallgrass Equity unit exchanged, which we refer to as the Exchange Right. The Exchange Right may be exercised only if, simultaneously therewith, an equal number of our Class B shares are transferred by the exercising party to us. Upon such exchange, we will cancel the Class B shares received from the exercising party.
Noncontrolling Interests
As of June 30, 2015, noncontrolling interests in our subsidiaries consisted of a 69.65% interest in Tallgrass Equity held by the Exchange Right Holders, the 66.07% limited partner interest in TEP held by TD and the public TEP unitholders, the 33.3% membership interest in Pony Express held by TD, and an 8% membership interest in Water Solutions. During the six months ended June 30, 2015, we recognized contributions to and distributions from noncontrolling interests of $68.7 million and $22.6 million, respectively, consisting primarily of contributions and distributions between Pony Express and TD.
Subsidiary Distributions    
TEP Distributions. The following table details the distributions paid by TEP during the six months ended June 30, 2015 (in thousands, except per unit data):
 
 
 
 
Distributions
 
 
  
 
 
 
Limited Partner 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)
 
 
June 30, 2015
 
August 14, 2015 (1)
 
$
35,135

 
$
10,418

 
$
627

 
$
46,180

 
$
0.5800

March 31, 2015
 
May 14, 2015
 
31,322

 
6,934

 
530

 
38,786

 
0.5200

December 31, 2014
 
February 13, 2015
 
23,782

 
4,039

 
473

 
28,294

 
0.4850

(1) 
The distribution for the second quarter of 2015 will be paid on August 14, 2015 on 60,576,357 TEP common units of record at the close of business on July 31, 2015.

21



Other Contributions and Distributions
During the six months ended June 30, 2015, we distributed the Excess Proceeds from the Offering of $334.1 million to the Exchange Right Holders as part of the Reorganization Transactions. In addition, we received $7.5 million of TEP general partner and IDR distributions received related to periods prior to the Offering which were distributed to the previous TEP GP Members. During the six months ended June 30, 2014, we recognized net contributions from the TEGP Predecessor of $446.9 million. This activity represents transfers of cash as a result of TD’s centralized cash management systems as discussed in Note 1 – Description of Business, as well as the TEP distributions paid on the Acquired TEP Units and distributions paid for excess offering proceeds. We also recognized a $27.5 million contribution from TD representing the difference between the carrying amount of the Replacement Gas Facilities, as discussed in Note 12Regulatory Matters, and the proceeds received from TD.
11. Net Income per Class A Share
Basic net income per Class A share is determined by dividing net income attributable to TEGP by the weighted average number of outstanding Class A shares during the period. Class B shares do not share in the earnings of the Partnership. Accordingly, basic and diluted net income per Class B share has not been presented.
Diluted net income per Class A share is determined by dividing net income attributable to TEGP by the weighted average number of outstanding diluted Class A shares during the period. For purposes of calculating diluted net income per Class A share, both the net income attributable to TEGP and the weighted average number of outstanding diluted Class A shares, consider the impact of possible future exercises of the Exchange Right by the Exchange Right Holders. In addition, pursuant to the TEGP partnership agreement and the Tallgrass Equity limited liability company agreement, our capital structure and the capital structure of Tallgrass Equity will generally replicate one another in order to maintain the one-for-one exchange ratio between the Tallgrass Equity units and Class B shares, on the one hand, and our Class A shares, on the other hand. As a result, the potential exchange of any Class B shares does not have a dilutive effect on basic net income per Class A share. There were no potentially dilutive securities outstanding during the three and six months ended June 30, 2015.
Net income per Class A share is not presented for the three and six months ended June 30, 2014 as there were no Class A shares outstanding during those periods. The following table illustrates the calculation of basic and diluted net income per Class A share for the three and six months ended June 30, 2015 (in thousands, except per share data):
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
 
(in thousands, except per unit amounts)
Net income attributable to TEGP
$
4,734

 
$
9,856

Net income attributable to TEGP from the beginning of the period to May 11, 2015
2,271

 
7,393

Net income attributable to TEGP from May 12, 2015 to June 30, 2015
$
2,463

 
$
2,463

Basic and diluted net income per Class A share
$
0.05

 
$
0.05

Basic and diluted average number of Class A shares outstanding
47,725

 
47,725

The calculation of net income per Class A share is the same for the three and six months ended June 30, 2015 because the Offering became effective during the second quarter of 2015. As a result, no income from the period from January 1, 2015 through May 11, 2015 is allocated to the Class A shares that were issued on May 12, 2015.
12. Regulatory Matters
There are currently no proceedings challenging the rates of Pony Express, TIGT, or Trailblazer. Regulators, as well as shippers, do have rights, under circumstances prescribed by applicable regulations, to challenge the rates that we charge at our regulated entities. Further, the statute governing service by Pony Express allows parties having standing to file complaints in regard to existing tariff rates and provisions. If the complaint is not resolved, the FERC may conduct a hearing and order a crude oil pipeline to make reparations going back for up to two years prior to the date on which a complaint was filed if a rate is found to be unjust and unreasonable. We can provide no assurance that current rates will remain unchallenged. Any successful challenge could have a material, adverse effect on our future earnings and cash flows.

22



TIGT
Pony Express Abandonment – FERC Docket CP12-495
On August 6, 2012, TIGT filed an application to: (1) abandon for FERC purposes approximately 433 miles of mainline natural gas pipeline facilities, along with associated rights of way and other related equipment (collectively, the "Pony Express Assets"), and the natural gas service therefrom, by transferring those assets to Pony Express, which subsequently converted the Pony Express Assets into crude oil pipeline facilities; and (2) construct and operate certain replacement-type facilities necessary to continue service to existing natural gas firm transportation customers following the conversion, which we refer to as the Replacement Gas Facilities. This project is referred to as the "Pony Express Abandonment." The FERC abandonment does not constitute an abandonment for accounting purposes. Pursuant to the terms of the Purchase and Sale Agreement filed with the FERC and cited by the FERC in approving the Pony Express Abandonment, Pony Express is required to reimburse TIGT for the net book value of the Pony Express Assets plus other TIGT incurred costs required to construct the Replacement Gas Facilities and to arrange substitute gas transportation services to certain TIGT shippers.
The Pony Express Abandonment and completion of the Pony Express Project by Pony Express re-deployed existing pipeline assets to meet the growing market need to transport oil supplies while at the same time continuing to operate TIGT’s natural gas transportation facilities to meet all current and expected needs of its natural gas customers. By a FERC order issued September 12, 2013, TIGT was granted authorization to abandon the Pony Express Assets and construct the Replacement Gas Facilities. On October 7, 2013 TIGT commenced the mobilization of personnel and equipment for the construction of the Replacement Gas Facilities necessary to complete the Pony Express Abandonment to continue service to existing TIGT customers. In December 2013, TIGT removed the Pony Express Assets from gas service and sold those assets to Pony Express. On May 1, 2014, TIGT commenced commercial service through all of the Replacement Gas Facilities, with the exception of Units 3 and 4 at the Tescott Compressor Station. Service through Units 3 and 4 at the Tescott Compressor Station commenced on May 30, 2014.
Trailblazer
2013 Rate Case Filing - Docket No. RP13-1031
On January 22, 2014, Trailblazer, the FERC’s Trial Staff, and the active parties in the pipeline’s general rate case finalized a settlement in principle resolving the pending rate issues, including: (i) establishing transportation rates, as well as fuel and lost and unaccounted for charges; (ii) providing a limited profit sharing arrangement for certain revenues earned from interruptible and short-term firm transport; and (iii) setting the minimum and maximum time that can elapse before Trailblazer’s next rate case at the FERC. Trailblazer filed a motion with the FERC’s Chief Administrative Law Judge to accept the settlement rates on an interim basis ("Interim Rates") while the participants finalized a definitive settlement. The Chief Administrative Law Judge accepted the Interim Rates effective February 1, 2014. On February 24, 2014, Trailblazer filed an uncontested offer of settlement ("Stipulation and Agreement") among active party shippers. The Stipulation and Agreement established the Interim Rates as final settlement rates effective February 1, 2014, subject to the issuance of refunds to certain shippers for January 2014 transportation services and revised fuel and lost and unaccounted for rates, effective July 1, 2014. On March 11, 2014, the Presiding Administrative Law Judge certified the Stipulation and Agreement. On May 29, 2014, the FERC approved the Stipulation and Agreement. On June 30, 2014, Trailblazer filed tariff sheets to implement the Stipulation and Agreement effective July 1, 2014. Estimated refunds were reserved from revenues recorded in January 2014. On July 1, 2014, Trailblazer submitted refunds to its customers for amounts collected in excess of amounts that would have been collected under the Settlement Rates, with interest, and on July 18, 2014, filed a report of refunds with the FERC. The FERC issued orders accepting the tariff sheets with the requested effective date of July 1, 2014 and accepting the refund report filing on July 25, 2014 and August 7, 2014, respectively.
2015 Annual Fuel Tracker Filing - Docket No. RP15-841-000
On April 1, 2015, Trailblazer made its annual fuel tracker filing with a proposed effective date of May 1, 2015 in Docket No. RP15-841-000. This filing incorporates the revised fuel tracker and power cost tracker mechanisms agreed to in the 2013 Rate Case Filing settlement, which resolves all outstanding issues related to Trailblazer fuel recoveries. The FERC approved this filing on April 23, 2015.
Pony Express
On September 19, 2014, Pony Express filed with the FERC to adopt a tariff for initial local non-contract rates as well as initial Rules and Regulations in accordance with the Interstate Commerce Act to be effective starting on October 1, 2014. Local Contract Tariff rates were filed with the FERC on October 29, 2014 to be effective starting November 1, 2014. Joint Contract Tariff rates for oil received into the Pony Express System from the Belle Fourche Pipeline were filed on October 16, 2014 to be effective starting November 1, 2014. Joint Contract Tariff rates for oil received into the Pony Express pipeline system from Hiland Pipeline Company were filed on February 27, 2015 and effective April 1, 2015.

23



On May 18, 2015, Pony Express filed with the FERC to implement tariff contract rates for Pony Express’ newly constructed lateral in Northeast Colorado effective June 1, 2015.
On May 29, 2015, tariff filings were made with the FERC in Docket No. IS15-492-000 to increase the Pony Express local contract rates for service from the Guernsey origin, and for local non-contract rates from all origins, by amounts reflecting the FERC annual index adjustment of approximately 4.6% effective July 1, 2015. A tariff filing was also made in Docket No. IS15-493-000 on that date to increase joint tariff contract rates for service on Pony Express, Belle Fourche Pipeline Company, and Bridger Pipeline, LLC by approximately 4.6% effective July 1, 2015.
13. Legal and Environmental Matters
Legal
In addition to the matters discussed below, we are a defendant in various lawsuits arising from the day-to-day operations of our business. Although no assurance can be given, we believe, based on our experiences to date, that the ultimate resolution of such routine items will not have a material adverse impact on our business, financial position, results of operations or cash flows.
We have evaluated claims in accordance with the accounting guidance for contingencies that we deem both probable and reasonably estimable and, accordingly, had reserves for legal claims of approximately $0.6 million as of June 30, 2015 and December 31, 2014.
Prairie Horizon
On July 3, 2014, Prairie Horizon Agri-Energy LLC ("Prairie Horizon") filed an action in the District Court of Phillips County, Kansas against TIGT seeking damages from an alleged intrusion of foreign material and oil from TIGT into Prairie Horizon's ethanol plant. The matter was removed to the US District Court for the District of Kansas. Prairie Horizon asserts that this intrusion caused substantial damage to Prairie Horizon's ethanol production facilities and resulted in corresponding business income losses. Prairie Horizon also claims that the intrusion was a violation of TIGT's FERC gas tariff. Prairie Horizon alleges that it has suffered damages in the amount of approximately $2.0 million. TIGT believes Prairie Horizon's claims are without merit and plans to vigorously contest all of the claims in this matter.
Environmental, Health and Safety
We are 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. We believe that compliance with these laws will not have a material adverse impact on our 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 us to incur significant costs. We had environmental reserves of $5.1 million and $5.3 million at June 30, 2015 and December 31, 2014, respectively.
TMID
Casper Plant, U.S. EPA Notice of Violation
In August 2011, the U.S. EPA and the Wyoming Department of Environmental Quality ("WDEQ") conducted an inspection of the Leak Detection and Repair ("LDAR") Program at the Casper Gas Plant in Wyoming. In September 2011, Tallgrass Midstream, LLC ("TMID") received a letter from the U.S. EPA alleging violations of the Standards of Performance of Equipment Leaks for Onshore Natural Gas Processing Plant requirements under the Clean Air Act. TMID received a letter from the U.S. EPA concerning settlement of this matter in April 2013 and received additional settlement communications from the U.S. EPA and Department of Justice beginning in July 2014. Settlement negotiations are continuing, including attempted resolution of more recently identified LDAR issues and the possible inclusion of TIGT as a party to any possible settlement as a result of TIGT owning a compressor that is located adjacent to the Casper Gas Plant site.
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 we have requested that the portion of the site attributable to us be delisted from the National Priorities List.

24



Casper Gas Plant
On November 25, 2014, WDEQ issued a Notice of Violation for violations of Part 60 Subpart OOOO related to the Depropanizer project (wv-14388, issued 7/9/13) in Docket No. 5506-14. TMID had discussed the issues in a meeting with WDEQ in Cheyenne on November 17, 2014, and submitted a disclosure on November 20, 2014 detailing the regulatory issues and potential violations. The project triggered a modification of Subpart OOOO for the entire plant. The project equipment as well as plant equipment subjected to Subpart OOOO was not monitored timely, and initial notification was not made timely. Settlement negotiations with WDEQ are currently ongoing.
TIGT
System Failure
On June 13, 2013, a failure occurred on a segment of the TIGT pipeline system in Goshen County, Wyoming, resulting in the release of natural gas. The line was promptly brought back into service and the failure did not cause any known injuries, fatalities, fires or evacuations. We are currently working with PHMSA to develop a plan to close the Corrective Action Order received from PHMSA regarding the Goshen County failure and do not believe the cost of anticipated remediation activities will be material.
Trailblazer
Pipeline Integrity Management Program
Trailblazer recently completed smart tool surveys and preliminary analysis on segments of its natural gas pipeline to evaluate the growth rate of corrosion downstream of compressor stations. Trailblazer currently believes that approximately 25 - 35 miles of pipe will likely need to be repaired or replaced in order for the pipeline to operate at its maximum allowable operating pressure of 1,000 pounds per square inch, or psig. Such repair or replacement may occur over a period of years, depending upon final assessment of corrosion growth rates and the remediation and repair plan adopted by Trailblazer. Until then, Trailblazer is operating at a reduced pressure, public notice of which was first provided in June 2014. The current pressure reduction is not expected to prevent Trailblazer from fulfilling its firm service obligations at existing subscription levels and to date it has not had a material adverse financial impact on TEP.
During 2015, Trailblazer is scheduled to complete approximately 25 excavation digs at an aggregate cost of approximately $850,000 (all of which is included in Trailblazer’s 2015 budget) to confirm the corrosion growth rates suggested by the smart tool surveys and preliminary analysis. Segments of the Trailblazer Pipeline that require full replacement are currently expected to cost in the range of approximately $2.2 million to $2.7 million per mile. Repair costs on sections of the pipeline that do not require full replacement are expected to be less on a per mile basis. Trailblazer is currently devising a remediation and repair plan, which involves, among other things, finalizing cost recovery options, establishing project scope and timing and setting an overall project budget. Trailblazer is currently exploring all possible cost recovery options. It may not ultimately be able to recover any or all of such out of pocket costs unless and until Trailblazer recovers them through a general rate increase or other FERC-approved recovery mechanism, or through negotiated rate agreements with its customers.
In connection with TEP’s acquisition of the Trailblazer Pipeline, TD agreed to contractually indemnify TEP for any out of pocket costs TEP incurs between April 1, 2014 and April 1, 2017 related to repairing or remediating the Trailblazer Pipeline, to the extent that such actions are necessitated by external corrosion caused by the pipeline’s disbonded Hi-Melt CTE coating. The contractual indemnity provided to TEP by TD is currently capped at $20 million and is subject to TEP’s first paying an annual $1.5 million deductible.
Pony Express
System Failures
On August 31, 2014, a leak occurred at the Sterling Pump Station on the Pony Express System in Logan County, Colorado, which resulted in a release of approximately 200 bbls of crude oil. The spill was entirely contained on our property and the costs to remediate were not material. In April 2015, PHSMA granted our request to consider the Sterling Pump Station incident closed with no further action.
On March 12, 2015, an event occurred at the Yoder Pump Station in Goshen County, Wyoming, related to repair and replacement activities resulting in a spill of approximately 300 bbls of crude oil. We have presented our incident investigation findings to PHMSA and are currently working with PHMSA to resolve the matter. We do not believe the cost of anticipated remediation activities will be material.
14. Reporting Segments
Our operations are located in the United States. We are organized into three reporting segments: (1) Natural Gas Transportation & Logistics, (2) Crude Oil Transportation & Logistics, and (3) Processing & Logistics.

25



Natural Gas Transportation & Logistics
The Natural Gas Transportation & Logistics segment is engaged in ownership and operation of FERC-regulated interstate natural gas pipelines and integrated natural gas storage facilities that provide services to on-system customers (such as third-party LDCs), industrial users and other shippers. As discussed in Note 2 Summary of Significant Accounting Policies, results for prior periods have been recast to reflect the operations of Trailblazer.
Crude Oil Transportation & Logistics
The Crude Oil Transportation & Logistics segment is engaged in ownership, construction, and operation of the Pony Express System, which is a FERC-regulated crude oil pipeline serving the Bakken Shale and other nearby oil producing basins. The mainline portion of the Pony Express System was placed in service in October 2014. The Pony Express System also includes a lateral pipeline in Northeast Colorado, which interconnects with the Pony Express System just east of Sterling, Colorado and was placed in service in April 2015. As discussed in Note 2 Summary of Significant Accounting Policies, results for prior periods have been recast to reflect the operations of Pony Express.
Processing & Logistics
The Processing & Logistics segment is engaged in ownership and operation of natural gas processing, treating and fractionation facilities that produce NGLs and residue gas that is sold in local wholesale markets or delivered into pipelines for transportation to additional end markets, as well as water business services provided primarily to the oil and gas exploration and production industry.
Corporate and Other
Corporate and Other includes corporate overhead costs that are not directly associated with the operations of our reportable segments, such as interest and fees associated with our revolving credit facilities, 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. We measure segment profit using Operating Income.
The following tables set forth our segment information for the periods indicated:
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
Revenue:
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
(in thousands)
 
(in thousands)
Natural Gas Transportation & Logistics
$
30,969

 
$
(1,344
)
 
$
29,625

 
$
33,940

 
$
(1,330
)
 
$
32,610

Crude Oil Transportation & Logistics
75,219

 

 
75,219

 

 

 

Processing & Logistics
28,126

 

 
28,126

 
44,710

 

 
44,710

Corporate and Other

 

 

 

 

 

Total Revenue
$
134,314

 
$
(1,344
)
 
$
132,970

 
$
78,650

 
$
(1,330
)
 
$
77,320

 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
Revenue:
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
(in thousands)
 
(in thousands)
Natural Gas Transportation & Logistics
$
64,579

 
$
(2,690
)
 
$
61,889

 
$
73,571

 
$
(2,585
)
 
$
70,986

Crude Oil Transportation & Logistics
125,600

 

 
125,600

 

 

 

Processing & Logistics
60,156

 

 
60,156

 
101,113

 

 
101,113

Corporate and Other

 

 

 

 

 

Total Revenue
$
250,335

 
$
(2,690
)
 
$
247,645

 
$
174,684

 
$
(2,585
)
 
$
172,099



26



 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2014
Operating Income:
Total
Operating Income
 
Inter-
Segment
 
External
Operating Income
 
Total
Operating Income
 
Inter-
Segment
 
External
Operating Income
 
 
 
(in thousands)
 
 
 
 
 
(in thousands)
 
 
Natural Gas Transportation & Logistics
$
9,937

 
$
(1,344
)
 
$
8,593

 
$
8,318

 
$
(1,330
)
 
$
6,988

Crude Oil Transportation & Logistics
45,515

 
1,344

 
46,859

 
(757
)
 

 
$
(757
)
Processing & Logistics
3,666

 

 
3,666

 
2,177

 

 
$
2,177

Corporate and Other
(3,013
)
 

 
(3,013
)
 
(1,933
)
 

 
$
(1,933
)
Total Operating Income
$
56,105

 
$

 
$
56,105

 
$
7,805

 
$
(1,330
)
 
$
6,475

Reconciliation to Net Income:
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
 
 
 
(4,479
)
 
 
 
 
 
(2,137
)
Gain on remeasurement of unconsolidated investment
 
 
 
 

 
 
 
 
 
9,388

Equity in earnings of unconsolidated investment
 
 
 
 

 
 
 
 
 
273

Other income, net
 
 
 
 
769

 
 
 
 
 
729

Net Income before income tax
 
 
 
 
$
52,395

 
 
 
 
 
$
14,728

 
Six Months Ended June 30, 2015
 
Six Months Ended June 30, 2014
Operating Income:
Total
Operating Income
 
Inter-
Segment
 
External
Operating Income
 
Total
Operating Income
 
Inter-
Segment
 
External
Operating Income
 
 
 
(in thousands)
 
 
 
 
 
(in thousands)
 
 
Natural Gas Transportation & Logistics
$
22,490

 
$
(2,690
)
 
$
19,800

 
$
21,284

 
$
(2,585
)
 
$
18,699

Crude Oil Transportation & Logistics
59,788

 
2,690

 
$
62,478

 
(1,514
)
 

 
$
(1,514
)
Processing & Logistics
4,720

 

 
$
4,720

 
9,318

 

 
$
9,318

Corporate and Other
(5,175
)
 

 
$
(5,175
)
 
(3,499
)
 

 
$
(3,499
)
Total Operating Income
$
81,823

 
$

 
$
81,823

 
$
25,589

 
$
(2,585
)
 
$
23,004

Reconciliation to Net Income:
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
 
 
 
(7,919
)
 
 
 
 
 
(3,433
)
Gain on remeasurement of unconsolidated investment
 
 
 
 

 
 
 
 
 
9,388

Equity in earnings of unconsolidated investment
 
 
 
 

 
 
 
 
 
717

Other income, net
 
 
 
 
1,481

 
 
 
 
 
1,669

Net Income before income tax
 
 
 
 
$
75,385

 
 
 
 
 
$
31,345

 
Six Months Ended June 30,
Capital Expenditures:
2015
 
2014
 
 
 
(in thousands)
Natural Gas Transportation & Logistics
$
7,061

 
$
13,956

Crude Oil Transportation & Logistics
32,501

 
459,457

Processing & Logistics
9,982

 
5,896

Corporate and Other

 

Total capital expenditures
$
49,544

 
$
479,309


27



Assets:
June 30, 2015
 
December 31, 2014
 
(in thousands)
Natural Gas Transportation & Logistics
$
716,147

 
$
716,106

Crude Oil Transportation & Logistics
1,423,163

 
1,394,793

Processing & Logistics
336,818

 
340,620

Corporate and Other
449,034

 
5,678

Total assets
$
2,925,162

 
$
2,457,197

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The historical financial statements included in this Quarterly Report reflect the consolidated results of operations of Tallgrass Energy GP, LP ("TEGP")'s 30.35% interest in Tallgrass Equity, LLC ("Tallgrass Equity"), Tallgrass Equity's 100% membership interest in Tallgrass MLP GP, LLC ("TEP GP"), which owns all of the Incentive Distribution Rights, or IDRs, and all of the outstanding general partner units in Tallgrass Energy Partners, LP ("TEP"), and Tallgrass Equity's 20 million TEP common units it acquired at the closing of the initial public offering of Class A shares of TEGP (the "Offering"). In connection with the closing of the Offering on May 12, 2015, the following transactions (the “Reorganization Transactions”) occurred (i) Tallgrass Equity distributed its interests in Tallgrass Energy Holdings, LLC ("Holdings") and Holdings distributed its existing limited partner interest in TEGP, respectively, to the owners of Tallgrass Equity that also collectively own 100% of the voting power of Holdings, which are referred to as the “Exchange Right Holders;” (ii) TEGP issued 47,725,000 Class A shares to the public (including 6,225,000 Class A shares issued in connection with the underwriters' exercise of the overallotment option) for net proceeds of approximately $1.3 billion; (iii) the existing limited partner interests in TEGP held by the Exchange Right Holders were converted into 115,729,440 Class B shares, 6,225,000 of which were automatically cancelled in connection with the underwriters’ exercise of its overallotment option; (iv) Tallgrass Equity issued 41,500,000 Tallgrass Equity units to TEGP in exchange for approximately $1.1 billion in net proceeds from the issuance of TEGP’s Class A shares to the public and amended the limited liability company agreement of Tallgrass Equity to, among other things, provide that TEGP is the managing member of Tallgrass Equity; (v) TEGP used the net proceeds from the purchase of the 6,225,000 overallotment option shares to purchase a like amount of Tallgrass Equity units from the Exchange Right Holders; and (vi) Tallgrass Equity entered into a $150 million revolving credit facility and borrowed $150 million thereunder, using the aggregate proceeds from such borrowings, together with the net proceeds from the Offering that Tallgrass Equity received from TEGP, to purchase 20 million TEP common units from Tallgrass Development, LP ("TD") at $47.68 per TEP common unit (the “Acquired TEP Units”) and pay offering expenses and other transaction costs. Tallgrass Equity distributed the remaining proceeds (the "Excess Proceeds") to the Exchange Right Holders. The following discussion analyzes the financial condition and results of operations of TEGP, which for periods prior to the completion of the Offering on May 12, 2015 includes the financial condition and results of operations of TEGP Predecessor, which refers to TEGP as recast to show the effects of the Reorganization Transactions.
In certain circumstances and for ease of reading we discuss the financial results of these entities prior to their respective acquisitions as being "our" financial results during historic periods, although Trailblazer Pipeline Company LLC ("Trailblazer") was owned by TD from November 13, 2012 to March 31, 2014, and Tallgrass Pony Express Pipeline, LLC ("Pony Express") was wholly-owned by TD from November 13, 2012 to August 31, 2014. As used in Item 2 of this Quarterly Report, unless the context otherwise requires, "we," "us," "our," the "Partnership," "TEGP" and similar terms refer to Tallgrass Energy GP, LP, together with its consolidated subsidiaries (including Tallgrass Equity, TEP and their respective subsidiaries). The term our "general partner" refers to TEGP Management, LLC. References to "TD" refer to Tallgrass Development, LP.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report and the audited TEP financial statements and notes thereto, the related "Management's Discussion and Analysis of Financial Condition and Results of Operations," the discussion of "Risk Factors" and the discussion of TEGP's "Business" in our final prospectus dated May 6, 2015 (the “Prospectus”) and filed with the United States Securities and Exchange Commission (the “SEC”) on May 7, 2015.
A reference to a "Note" herein refers to the accompanying Notes to Condensed Consolidated Financial Statements contained in Item 1.Financial Statements. In addition, please read "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" for information regarding certain risks inherent in our business.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report and the documents incorporated by reference herein contain forward-looking statements concerning our operations, economic performance and financial condition. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition, or forecasts of future events. Words such as "could,"

28



"will," "may," "assume," "forecast," "position," "predict," "strategy," "expect," "intend," "plan," "estimate," "anticipate," "believe," "project," "budget," "potential," or "continue," and similar expressions are used to identify forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this Quarterly Report include our expectations of plans, strategies, objectives, growth and anticipated financial and operational performance, including guidance regarding our and TD’s infrastructure programs, revenue projections, capital expenditures and tax position. Forward-looking statements can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, when considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
our ability to complete and integrate acquisitions from TD or from third parties, including our acquisition of an additional 33.3% interest in Pony Express that was completed in March 2015;
changes in general economic conditions;
competitive conditions in our industry;
actions taken by third-party operators, processors and transporters;
the demand for natural gas transportation, storage and processing services and crude oil transportation services;
our ability to successfully implement our business plan;
our ability to complete internal growth projects on time and on budget;
the price and availability of debt and equity financing;
the availability and price of natural gas and crude oil, and fuels derived from both, to the consumer compared to the price of alternative and competing fuels;
competition from the same and alternative energy sources;
energy efficiency and technology trends;
operating hazards and other risks incidental to transporting crude oil and transporting, storing and processing natural gas;
natural disasters, weather-related delays, casualty losses and other matters beyond our control;
interest rates;
labor relations;
large customer defaults;
changes in tax status;
the effects of existing and future laws and governmental regulations;
the effects of future litigation; and
certain factors discussed elsewhere in this Quarterly Report.
Forward-looking statements speak only as of the date on which they are made. While we may update these statements from time to time, we are not required to do so other than pursuant to the securities laws.
Overview
TEGP is a recently formed Delaware limited partnership that has elected to be treated as a corporation for U.S. federal income tax purposes. TEGP's only cash-generating assets consist of an approximately 30.35% controlling interest in Tallgrass Equity. Tallgrass Equity owns, through its ownership of TEP GP, all of TEP's IDRs and 834,391 TEP general partner units, representing an approximate 1.36% general partner interest in TEP as of June 30, 2015. Tallgrass Equity also directly owns the Acquired TEP Units, representing an approximate 32.57% limited partner interest in TEP as of June 30, 2015.

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TEP is a publicly traded, growth-oriented Delaware limited partnership formed in 2013 to own, operate, acquire and develop midstream energy assets in North America. We currently provide natural gas transportation and storage services for customers in the Rocky Mountain and Midwest regions of the United States through the Tallgrass Interstate Gas Transmission system, a FERC-regulated natural gas transportation and storage system located in Colorado, Kansas, Missouri, Nebraska and Wyoming (the “TIGT System”), and a FERC-regulated natural gas pipeline system extending from the Colorado and Wyoming border to Beatrice, Nebraska (the “Trailblazer Pipeline”). We provide crude oil transportation to customers in Wyoming, Colorado, and the surrounding regions through our membership interest in Pony Express, which owns a crude oil pipeline commencing in Guernsey, Wyoming and terminating in Cushing, Oklahoma (the “Pony Express System”). We also provide services for customers in Wyoming at the Casper and Douglas natural gas processing facilities and the West Frenchie Draw natural gas treating facility, or, collectively, the Midstream Facilities, and we provide water business services to customers in Colorado and Texas through BNN Water Solutions, LLC ("Water Solutions"). Our operations are strategically located in and provide services to certain key United States hydrocarbon basins, including the Denver-Julesburg, Powder River, Wind River, Permian and Hugoton-Anadarko Basins and the Niobrara, Mississippi Lime, Eagle Ford and Bakken shale formations.
We intend to continue to leverage our relationship with TD and utilize the significant experience of our management team to execute our growth strategy of acquiring midstream assets from TD and third parties, increasing utilization of our existing assets and expanding our systems through construction of additional assets. Our reportable business segments are:
Natural Gas Transportation & Logistics—the ownership and operation of FERC-regulated interstate natural gas pipelines and integrated natural gas storage facilities;
Crude Oil Transportation & Logistics—the ownership and operation of a crude oil pipeline system; and
Processing & Logistics—the ownership and operation of natural gas processing, treating and fractionation facilities, as well as water business services provided primarily to the oil and gas exploration and production industry.
Financial Presentation
TEGP has no operations outside of its indirect ownership interests in TEP. TEGP is the managing member of and therefore controls Tallgrass Equity. Tallgrass Equity, in turn, controls TEP through the direct ownership of 100% of TEP GP, TEP’s general partner. As a result, under generally accepted accounting principles, TEGP consolidates Tallgrass Equity, TEP GP, TEP, and TEP's subsidiaries. As such, TEGP's results of operations will not differ materially from the results of operations of TEP. The most noteworthy reconciling items between TEGP's condensed consolidated financial statements and TEP's condensed consolidated financial statements primarily relate to (i) the inclusion of the Tallgrass Equity revolving credit facility, (ii) the impact of TEGP's election to be treated as a corporation for U.S. federal income tax purposes and (iii) the presentation of noncontrolling interests in Tallgrass Equity and TEP. The interests in Tallgrass Equity and TEP that are not directly or indirectly owned by TEGP will be reflected as being attributable to noncontrolling interests in TEGP's condensed consolidated financial statements.
In addition, TEP’s historical results of operations do not reflect TEGP's incremental general and administrative costs associated with becoming a separate publicly traded entity, including expenses associated with (i) compensation for new directors, (ii) incremental director and officer liability insurance, (iii) listing on the NYSE, (iv) investor relations, (v) legal, (vi) tax and (vii) accounting.
Recent Developments
TEGP Distribution Declared
On July 15, 2015, the Board of Directors of our general partner declared a cash distribution for the quarter ended June 30, 2015 of $0.073 per Class A share. The distribution will be paid on August 17, 2015, to shareholders of record on July 31, 2015.
TEP Distribution Declared
On July 15, 2015, the Board of Directors of TEP's general partner declared a cash distribution for the quarter ended June 30, 2015 of $0.58 per common unit. The distribution will be paid on August 14, 2015, to unitholders of record on July 31, 2015. 
U.S. Crude Oil and Natural Gas Supply and Demand Dynamics
Crude oil, natural gas and products derived from both continue to be critical components of energy supply and demand in the United States. Although crude oil and natural gas prices have declined in the latter part of 2014 and into 2015, we believe that the long-term prospects for continued crude oil and natural gas production increases are favorable and will be driven in part by increased domestic demand resulting from population and economic growth, higher industrial consumption in the U.S. and a desire to reduce domestic reliance on imports. We expect natural gas to continue to displace coal-fired electricity generation due to the low prices of natural gas and stricter environmental regulations on the mining and burning of coal. For additional information, please read Item 3 – Quantitative and Qualitative Disclosures About Market Risk.

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How We Evaluate Our Operations
We evaluate our results using, among other measures, cash distributions received from Tallgrass Equity, TEP's contract profile and volumes, and operating costs and expenses of TEGP and its consolidated subsidiaries.
Cash Distributions Received from Tallgrass Equity
TEGP's cash flow is currently generated solely by distributions received from Tallgrass Equity. Tallgrass Equity currently receives all of its cash flows from distributions on its direct and indirect partnership interests in TEP. Tallgrass Equity is therefore currently entirely dependent upon the ability of TEP to make cash distributions to its partners.
TEP's Contract Profile and Volumes
Our results are driven primarily by the volume of crude oil transportation capacity under firm contracts, the volume of natural gas transportation and storage capacity under firm contracts, the volume of natural gas that we process and the fees assessed for such services.
Operating Costs and Expenses
The primary components of our operating costs and expenses that we evaluate include cost of sales, cost of transportation services, operations and maintenance and general and administrative costs. Our operating expenses are driven primarily by expenses related to the operation, maintenance and growth of our asset base.

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Results of Operations
The following provides a summary of our consolidated results of operations for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except operating data)
Revenues:
 
 
 
 
 
 
 
Sales of natural gas, NGLs, and crude oil
$
20,011

 
$
39,042

 
$
41,880

 
$
92,757

Natural gas transportation services
29,041

 
30,569

 
61,189

 
64,673

Crude oil transportation services
74,022

 

 
124,403

 

Processing and other revenues
9,896

 
7,709

 
20,173

 
14,669

Total Revenues
132,970

 
77,320

 
247,645

 
172,099

Operating Costs and Expenses:
 
 
 
 
 
 
 
Cost of sales
17,180

 
37,214

 
36,773

 
85,420

Cost of transportation services
13,492

 
5,288

 
24,207

 
10,405

Operations and maintenance
12,408

 
10,055

 
21,983

 
18,068

Depreciation and amortization
20,355

 
9,525

 
40,960

 
17,834

General and administrative
13,701

 
7,124

 
26,390

 
13,773

Taxes, other than income taxes
(271
)
 
1,639

 
11,026

 
3,595

Loss on sale of assets

 

 
4,483

 

Total Operating Costs and Expenses
76,865

 
70,845

 
165,822

 
149,095

Operating Income
56,105

 
6,475

 
81,823

 
23,004

Other (Expense) Income:
 
 
 
 
 
 
 
Interest expense, net
(4,479
)
 
(2,137
)
 
(7,919
)
 
(3,433
)
Gain on remeasurement of unconsolidated investment

 
9,388

 

 
9,388

Equity in earnings of unconsolidated investment

 
273

 

 
717

Other income, net
769

 
729

 
1,481

 
1,669

Total Other (Expense) Income
(3,710
)
 
8,253

 
(6,438
)
 
8,341

Net income before tax
52,395

 
14,728

 
75,385

 
31,345

Deferred income tax expense
(1,772
)
 

 
(1,772
)
 

Net income
50,623

 
14,728

 
73,613

 
31,345

less: Net income attributable to noncontrolling interests
(45,889
)
 
(12,295
)
 
(63,757
)
 
(26,274
)
Net income attributable to TEGP
$
4,734

 
$
2,433

 
$
9,856

 
$
5,071

Operating Data:
 
 
 
 
 
 
 
Gas transportation firm contracted capacity (MMcf/d)
1,520

 
1,494

 
1,564

 
1,549

Crude oil transportation average throughput (Bbls/d)
237,184

 
N/A

 
201,495

 
N/A

Natural gas processing inlet volumes (MMcf/d)
130

 
136

 
138

 
144

Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014
Revenues. Total revenues were $133.0 million for the three months ended June 30, 2015, compared to $77.3 million for the three months ended June 30, 2014, which represents an increase of $55.7 million, or 72%, in total revenues. The overall increase in revenue was largely driven by revenues of $75.2 million in the Crude Oil Transportation & Logistics segment for the three months ended June 30, 2015. There were no revenues in that segment for the three months ended June 30, 2014 as Pony Express had not yet commenced commercial operations. The Crude Oil Transportation & Logistics segment revenue was partially offset by decreased revenues of $16.6 million and $3.0 million in the Processing & Logistics and Natural Gas Transportation & Logistics segments, respectively.

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Operating costs and expenses. Operating costs and expenses were $76.9 million for the three months ended June 30, 2015 compared to $70.8 million for the three months ended June 30, 2014, which represents an increase of $6.0 million, or 8%. The increase in operating costs and expenses is primarily driven by increased operating costs and expenses of $28.9 million at Pony Express, reflecting the commencement of commercial operations at Pony Express, partially offset by decreased operating costs and expenses of $18.1 million and $4.6 million in the Processing & Logistics and Natural Gas Transportation & Logistics segments, respectively, primarily driven by decreased cost of sales related to lower natural gas and NGL prices.
Interest expense, net. Interest expense of $4.5 million and $2.1 million for the three months ended June 30, 2015 and 2014 was primarily composed of interest and fees associated with TEP’s revolving credit facility. Interest expense for the three months ended June 30, 2015 also includes interest and fees associated with Tallgrass Equity's revolving credit facility. The increase in interest and fees associated with TEP's revolving credit facility is primarily due to increased borrowings during the