10-Q 1 tegp201663010q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 FORM 10-Q
 
 
 
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2016
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
 
 
 
46-3159268
(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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    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  x
On August 3, 2016, 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.
Commodity sensitive contracts or arrangements: contracts or other arrangements, including tariff provisions, that directly expose our cash flows to increases and decreases in the price of commodities such as crude oil, natural gas and NGLs. Examples are Keep Whole Processing Contracts and Percent of Proceeds Processing Contracts, as well as pipeline loss allowances on our pipelines.
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 firm service assurance of capacity and deliverability to delivery points.
Delivery point: any point at which product in a pipeline is delivered to or for the account of a customer.
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.
FERC: Federal Energy Regulatory Commission.
Firm fee contracts: firm fee contracts generally obligate our customers to pay a fixed recurring charge to reserve an agreed upon amount of capacity and/or deliverability on our assets, regardless if the contracted capacity is actually used by the customer. Such contracts are also commonly known as "take-or-pay" contracts.
Firm services: services pursuant to which customers receive firm assurances regarding the availability of capacity and/or deliverability of natural gas, crude oil or other hydrocarbons or water on our assets up to a contracted amount.
Fractionation: the process by which NGLs are further separated into individual, typically 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.
Interruptible services: services pursuant to which customers receive limited, or no, assurances regarding the availability of capacity and deliverability in our assets.
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.
Long-term: with respect to any contract, a contract with an initial duration greater than one year.
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.
Produced water: all water removed from a well as a byproduct of the production of hydrocarbons and water removed from a well in connection with operations being conducted on the well, including naturally occurring water in the recovery formation, flow back water recovered during completion and fracturing operations and water entering the recovery formation through water flooding techniques.
Receipt point: the point where a product is received by or into a gathering system, processing facility, or transportation pipeline.
Reservoir: a porous and permeable underground formation containing an individual and separate natural accumulation of producible hydrocarbons (such as 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 transportation to end-user markets.
TBtu: one trillion British Thermal Units.
Tcf: one trillion cubic feet.




Throughput: the volume of products, such as crude oil, natural gas or water, 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.
Volumetric fee contracts: volumetric fee contracts generally obligate a customer to pay fees based upon the extent to which such customer utilizes our assets for midstream energy services. Unlike firm fee contracts, under volumetric fee contracts our customers are not generally required to pay a charge to reserve an agreed upon amount of capacity and/or deliverability.
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, 2016
 
December 31, 2015
 
(in thousands)
ASSETS
 
Current Assets:
 
 
 
Cash and cash equivalents
$
2,623

 
$
2,234

Accounts receivable, net
53,033

 
57,757

Gas imbalances
878

 
1,227

Inventories
14,754

 
13,793

Derivative asset at fair value
148

 

Prepayments and other current assets
3,615

 
2,835

Total Current Assets
75,051

 
77,846

Property, plant and equipment, net
2,007,067

 
2,025,018

Goodwill
343,288

 
343,288

Intangible asset, net
95,038

 
96,546

Derivative asset at fair value
55,967

 

Unconsolidated investment
444,074

 

Deferred tax asset
442,846

 
452,430

Deferred financing costs, net
8,344

 
6,638

Deferred charges and other assets
13,232

 
14,894

Total Assets
$
3,484,907

 
$
3,016,660

LIABILITIES AND PARTNERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable (including $10,554 at December 31, 2015 related to variable interest entities)
$
17,451

 
$
22,218

Accounts payable to related parties
7,086

 
7,755

Gas imbalances
1,199

 
1,605

Derivative liabilities at fair value
351

 

Accrued taxes
15,298

 
13,844

Accrued liabilities
8,234

 
10,206

Deferred revenue
42,901

 
26,511

Other current liabilities
6,687

 
6,880

Total Current Liabilities
99,207

 
89,019

Long-term debt
1,426,000

 
901,000

Other long-term liabilities and deferred credits
6,815

 
5,143

Total Long-term Liabilities
1,432,815

 
906,143

Commitments and Contingencies

 

Equity:
 
 
 
Class A Shareholders (47,725,000 shares outstanding at June 30, 2016 and December 31, 2015)
189,356

 
422,310

Class B Shareholders (109,504,440 shares outstanding at June 30, 2016 and December 31, 2015)

 

Total Partners' Equity
189,356

 
422,310

Noncontrolling interests
1,763,529

 
1,599,188

Total Equity
1,952,885

 
2,021,498

Total Liabilities and Equity
$
3,484,907

 
$
3,016,660


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,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Crude oil transportation services
$
93,322

 
$
74,022

 
$
187,894

 
$
124,403

Natural gas transportation services
28,682

 
29,041

 
57,962

 
61,189

Sales of natural gas, NGLs, and crude oil
16,830

 
20,011

 
30,756

 
41,880

Processing and other revenues
8,097

 
9,896

 
15,724

 
20,173

Total Revenues
146,931

 
132,970

 
292,336

 
247,645

Operating Costs and Expenses:
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation and amortization shown below)
15,958

 
17,180

 
29,526

 
36,773

Cost of transportation services (exclusive of depreciation and amortization shown below)
14,240

 
13,492

 
30,396

 
24,207

Operations and maintenance
13,864

 
12,408

 
26,341

 
21,983

Depreciation and amortization
21,576

 
20,355

 
43,268

 
40,960

General and administrative
14,458

 
13,701

 
27,995

 
26,390

Taxes, other than income taxes
5,639

 
(271
)
 
13,145

 
11,026

Loss on disposal of assets
1,849

 

 
1,849

 
4,483

Total Operating Costs and Expenses
87,584

 
76,865

 
172,520

 
165,822

Operating Income
59,347

 
56,105

 
119,816

 
81,823

Other Income (Expense):
 
 
 
 
 
 
 
Interest expense, net
(10,441
)
 
(4,479
)
 
(19,118
)
 
(7,919
)
Unrealized gain on derivative instrument
18,953

 

 
10,007

 

Equity in earnings of unconsolidated investment
23,321

 

 
23,321

 

Other income, net
221

 
769

 
787

 
1,481

Total Other Income (Expense)
32,054

 
(3,710
)
 
14,997

 
(6,438
)
Net income before tax
91,401

 
52,395

 
134,813

 
75,385

Deferred income tax expense
(6,792
)
 
(1,772
)
 
(9,583
)
 
(1,772
)
Net income
84,609

 
50,623

 
125,230

 
73,613

Net income attributable to noncontrolling interests
(81,161
)
 
(45,889
)
 
(114,193
)
 
(63,757
)
Net income attributable to TEGP
$
3,448

 
$
4,734

 
$
11,037

 
$
9,856

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 net income per Class A share
$
0.07

 
$
0.05

 
$
0.23

 
$
0.05

Diluted net income per Class A share
$
0.07

 
$
0.05

 
$
0.23

 
$
0.05

Basic average number of Class A shares outstanding
47,725

 
47,725

 
47,725

 
47,725

Diluted average number of Class A shares outstanding
47,734

 
47,725

 
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,
 
2016
 
2015
 
(in thousands)
Cash Flows from Operating Activities:
 
 
 
Net income
$
125,230

 
$
73,613

Adjustments to reconcile net income to net cash flows provided by operating activities:
 
 
 
Depreciation and amortization
46,272

 
42,905

Equity in earnings of unconsolidated investment
(23,321
)
 

Distributions from unconsolidated investment
23,321

 

Noncash change in fair value of derivative financial instruments
(9,804
)
 
41

Deferred tax expense
9,583

 
1,772

Loss on disposal of assets
1,849

 
4,483

Changes in components of working capital:
 
 
 
Accounts receivable and other
6,613

 
(10,215
)
Inventories
(1,683
)
 
(6,068
)
Accounts payable and accrued liabilities
(2,398
)
 
2,389

Deferred revenue
16,174

 
4,198

Other operating, net
1,734

 
(1,495
)
Net Cash Provided by Operating Activities
193,570

 
111,623

Cash Flows from Investing Activities:
 
 
 
Acquisition of unconsolidated affiliate
(436,022
)
 

Acquisition of Pony Express membership interest
(49,118
)
 
(700,000
)
Capital expenditures
(28,491
)
 
(49,544
)
Contributions to unconsolidated investment
(14,387
)
 

Distributions from unconsolidated investment in excess of cumulative earnings
6,335

 

Other investing, net
411

 
(4,648
)
Net Cash Used in Investing Activities
(521,272
)
 
(754,192
)
Cash Flows from Financing Activities:
 
 
 
Borrowings under revolving credit facility, net
525,000

 
294,000

Acquisition of Pony Express membership interest
(425,882
)
 

Proceeds from public offering of TEP common units, net
261,770

 
551,673

Distributions to noncontrolling interests
(109,551
)
 
(46,082
)
Proceeds from private placement, net of offering costs
90,009

 

TEGP distributions to Class A shareholders
(18,278
)
 

Contributions from noncontrolling interests
7,273

 
16,294

Proceeds from initial public offering of Class A shares, net

 
1,315,383

Acquisition of Acquired TEP Units

 
(953,600
)
Distribution of Excess Proceeds to Exchange Right Holders

 
(334,068
)
Acquisition of additional Tallgrass Equity units

 
(171,948
)
Distributions to TEGP Predecessor, net

 
(13,533
)
Other financing, net
(2,250
)
 
(14,139
)
Net Cash Provided by Financing Activities
328,091

 
643,980

Net Change in Cash and Cash Equivalents
389

 
1,411

Cash and Cash Equivalents, beginning of period
2,234

 
867

Cash and Cash Equivalents, end of period
$
2,623

 
$
2,278


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



Schedule of Noncash Investing and Financing Activities:
 
 
 
Property, plant and equipment acquired via the cash management agreement with Tallgrass Development, LP
$

 
$
103,239

Contributions from noncontrolling interests settled via the cash management agreement with Tallgrass Development, LP
$

 
$
21,525

Distribution to noncontrolling interests settled via the cash management agreement with Tallgrass Development, LP
$

 
$
22,266


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



TALLGRASS ENERGY GP, LP
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
 
TEGP Predecessor
 
Partners' Equity (excluding noncontrolling interests)
 
Noncontrolling Interests
 
Total Equity
 
 
Class A Shares
 
Class B Shares
 
 
 
(in thousands)
Balance at January 1, 2016
$

 
$
422,310

 
$

 
$
1,599,188

 
$
2,021,498

Net income

 
11,037

 

 
114,193

 
125,230

Acquisition of additional 31.3% membership interest in Pony Express

 
(255,617
)
 

 
(173,422
)
 
(429,039
)
Issuance of TEP units to public, net of offering costs

 
22,159

 

 
239,611

 
261,770

Distributions to noncontrolling interest

 

 

 
(109,551
)
 
(109,551
)
Issuance of TEP units in a private placement, net of offering costs

 
7,592

 

 
82,417

 
90,009

TEGP distributions to Class A shareholders

 
(18,278
)
 

 

 
(18,278
)
Contributions from noncontrolling interest

 

 

 
7,273

 
7,273

Noncash compensation expense

 
642

 

 
3,820

 
4,462

Costs associated with equity issuance

 
(489
)
 

 

 
(489
)
Balance at June 30, 2016
$

 
$
189,356

 
$

 
$
1,763,529

 
$
1,952,885

 
 
 
 
 
 
 
 
 
 
 
TEGP Predecessor
 
Partners' Equity (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 the public, net of offering costs
63,520

 

 

 
488,153

 
$
551,673

Acquisition of additional 33.3% Pony Express membership interest
(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


The accompanying notes are an integral part of these condensed consolidated financial statements.
5



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 limited partnership 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. 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 Tallgrass Energy Partners, LP ("TEP") as described below:
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 1.09% general partner interest in TEP at June 30, 2016.
20,000,000 TEP common units, representing an approximately 26.14% limited partner interest in TEP at June 30, 2016.
The term "TEGP Predecessor" refers to TEGP, as recast to show the effects of the reorganization, 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).
TEP is a publicly traded, growth-oriented limited partnership formed to own, operate, acquire and develop midstream energy assets in North America. TEP currently provides crude oil transportation to customers in Wyoming, Colorado, and the surrounding regions through Tallgrass Pony Express Pipeline, LLC ("Pony Express"), which owns a crude oil pipeline commencing in Guernsey, Wyoming and terminating in Cushing, Oklahoma that includes a lateral in Northeast Colorado that commences in Weld County, Colorado, and interconnects with the pipeline just east of Sterling, Colorado (the "Pony Express System"). TEP provides natural gas transportation and storage services for customers in the Rocky Mountain, Midwest and Appalachian regions of the United States through: (1) TEP's 25% membership interest in Rockies Express Pipeline LLC ("Rockies Express"), a Delaware limited liability company which owns the Rockies Express Pipeline, a FERC-regulated natural gas pipeline system extending from Opal, Wyoming and Meeker, Colorado to Clarington, Ohio, (2) 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 (3) the Trailblazer Pipeline system, a FERC-regulated natural gas pipeline system extending from the Colorado and Wyoming border to Beatrice, Nebraska (the "Trailblazer Pipeline"). TEP also provides services for customers in Wyoming at the Casper and Douglas natural gas processing facilities and the West Frenchie Draw natural gas treating facility (collectively, the "Midstream Facilities"), and NGL transportation services in Northeast Colorado. TEP performs water business services in Colorado and Texas through BNN Water Solutions, LLC ("Water Solutions"). TEP's 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, Bakken, Marcellus and Utica shale formations.
Our reportable business segments are:
Crude Oil Transportation & Logistics—the ownership and operation of a FERC-regulated crude oil pipeline system;
Natural Gas Transportation & Logistics—the ownership and operation of FERC-regulated interstate natural gas pipelines and integrated natural gas storage facilities; and
Processing & Logistics—the ownership and operation of natural gas processing, treating and fractionation facilities, the provision of water business services primarily to the oil and gas exploration and production industry and the transportation of NGLs.

6



2. Summary of Significant Accounting Policies
Basis of Presentation
These condensed consolidated financial statements and related notes for the three and six months ended June 30, 2016 and 2015 were prepared in accordance with the accounting principles contained in the Financial Accounting Standards Board's Accounting Standards Codification, the single source of generally accepted accounting principles in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP for annual periods. The condensed consolidated financial statements for the three and six months ended June 30, 2016 and 2015 include all normal, recurring adjustments and disclosures that we believe are necessary for a fair statement of the results for the interim periods. In this report, the Financial Accounting Standards Board is referred to as the FASB and the FASB Accounting Standards Codification is referred to as the Codification or ASC. Certain prior period amounts have been reclassified to conform to the current presentation.
Our financial results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016. The accompanying condensed consolidated interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015 ("2015 Form 10-K") filed with the United States Securities and Exchange Commission (the "SEC") on February 17, 2016.
The condensed consolidated financial statements of TEGP for the three and six months ended June 30, 2015 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 is 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 Pony Express effective September 1, 2014, TEP, Tallgrass Development, LP ("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 ended 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 ended 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 are attributed to TEP and its noncontrolling interests in accordance with the respective ownership interests.

7



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 liabilities of our consolidated VIEs for which creditors do not have recourse to our general credit. Our consolidated VIEs do not have material assets that can only be used to settle specific obligations of the consolidated VIEs. Tallgrass Equity is considered to be a VIE under the applicable authoritative guidance. Based on a qualitative analysis in accordance with the applicable authoritative guidance, we have determined that we are the primary beneficiary as we have the right to receive benefits of Tallgrass Equity that could potentially be significant to Tallgrass Equity. Also, as discussed further under "New Accounting Pronouncements" below, under the new authoritative guidance effective January 1, 2016, TEP is considered to be a VIE. Based on a qualitative analysis, we have determined that TEP GP is the primary beneficiary of TEP and we continue to consolidate TEP accordingly. Pony Express was considered to be a VIE under the applicable authoritative guidance prior to our acquisition of an additional 31.3% membership interest effective January 1, 2016. Effective January 1, 2016, Pony Express is no longer considered to be a VIE. We continue to consolidate our membership interest in Pony Express.
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.
New Accounting Pronouncements
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update ("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.
Throughout the first half of 2016, the FASB has issued a series of subsequent updates to the revenue recognition guidance in Topic 606, including ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.
The amendments in ASU 2014-09, ASU 2016-08, ASU 2016-10, and ASU 2016-12 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 these updates.

8



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.
ASU No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes"
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
The amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-17 did not have a material impact on our financial position and results of operations.
ASU No. 2016-02, "Leases (Topic 842)"
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 provides a comprehensive update to the lease accounting topic in the Codification intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in ASU 2016-02 include a revised definition of a lease as well as certain scope exceptions. The changes primarily impact lessee accounting, while lessor accounting is largely unchanged from previous GAAP.
The amendments in ASU 2016-02 are effective for public entities for annual reporting periods beginning after December 15, 2018, and for interim periods within that reporting period. Early application is permitted. We are currently evaluating the impact of ASU 2016-02.
ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting"
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Among other changes, ASU 2016-09 allows an entity to make an entity-wide accounting policy election to either estimate the number of awards expected to vest (consistent with current GAAP) or account for forfeitures when they occur.
The amendments in ASU 2016-09 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 2016-09.
ASU No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments"
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 simplifies the accounting for measurement-period adjustments for provisional amounts recognized in a business combination by eliminating the requirement for an acquirer to retrospectively account for measurement-period adjustments. Under the updated guidance, the acquirer must recognize adjustments in the reporting period in which the adjustment amounts are determined and the effect on earnings as a result of the change to the provisional amounts must be calculated as if the accounting had been completed at the acquisition date.
The amendments in ASU 2015-16 are effective for public entities for annual periods and interim periods within those annual periods beginning after December 15, 2015. The adoption of ASU 2015-16 did not have a material impact on our financial position and results of operations.

9



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. The adoption of ASU 2015-02 did not have a material impact on our financial position and results of operations.
ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period"
In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 provides explicit guidance on accounting for share-based payments requiring a specific performance target to be achieved in order for employees to become eligible to vest in the awards when that performance target may be achieved after the requisite service period for the award. The ASU requires that such performance targets be treated as a performance condition, and should not be reflected in the estimate of the grant-date fair value of the award. Instead, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved.
ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The adoption of ASU 2014-12 did not have a material impact on our financial position and results of operations.
3. Variable Interest Entities
As discussed in Note 2Summary of Significant Accounting Policies, upon adoption of the accounting guidance in ASU 2015-02 effective January 1, 2016, we determined that TEP is a VIE of which TEP GP, our consolidated subsidiary, is the primary beneficiary. We continue to consolidate TEP accordingly. We have not provided any additional financial support and have no contractual commitments or obligations to provide additional financial support to TEP.
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 Equity accordingly. We have not provided any additional financial support to Tallgrass Equity other than our initial capital contribution to acquire a portion of the approximate 30.35% controlling interest in Tallgrass Equity and have no contractual commitments or obligations to provide additional financial support to Tallgrass Equity.
Pony Express was considered to be a VIE under the applicable authoritative guidance prior to our acquisition of an additional 31.3% membership interest effective January 1, 2016. Effective January 1, 2016, Pony Express is no longer considered to be a VIE. We continue to consolidate our membership interest in Pony Express.
Other than TEGP's deferred tax asset of approximately $442.8 million and $452.4 million at June 30, 2016 and December 31, 2015, respectively, the assets and liabilities included in our consolidated balance sheets at June 30, 2016 and December 31, 2015 represent the consolidated assets and liabilities of Tallgrass Equity, including the assets and liabilities of TEP and Pony Express.
4. Acquisitions
Acquisition of a 25% Membership Interest in Rockies Express Pipeline LLC
On March 29, 2016, TD's indirect wholly owned subsidiary Rockies Express Holdings, LLC ("REX Holdings") signed a purchase agreement (the "REX Purchase Agreement") with a unit of Sempra U.S. Gas and Power ("Sempra") to acquire Sempra's 25% membership interest in Rockies Express for cash consideration of $440 million, subject to adjustment under the REX Purchase Agreement.

10



On April 28, 2016, we announced that TD offered TEP the right to assume the rights and obligations of REX Holdings under the REX Purchase Agreement. On May 6, 2016, TEP REX Holdings, LLC ("TEP REX"), an indirect wholly-owned subsidiary of TEP, and REX Holdings entered into an Assignment and Assumption Agreement pursuant to which REX Holdings assigned to TEP REX all of its rights under the REX Purchase Agreement and, in exchange, TEP REX assumed all of the rights and obligations of REX Holdings under the REX Purchase Agreement. Subsequently on May 6, 2016, TEP REX closed the purchase of a 25% membership interest in Rockies Express from Sempra pursuant to the REX Purchase Agreement for cash consideration of approximately $436.0 million, after making the adjustments to the purchase price required by the REX Purchase Agreement.
Our investment in Rockies Express is recorded under the equity method of accounting and reported as "Unconsolidated investment" on our condensed consolidated balance sheet. As of May 6, 2016, the difference between the fair value of our investment in Rockies Express of $436.0 million and the book value of the underlying net assets of approximately $840.7 million results in a negative basis difference of approximately $404.7 million. The basis difference has been allocated to property, plant and equipment and long-term debt based on their respective fair values at the date of acquisition. The amount of the basis difference allocated to property, plant and equipment is accreted over 35 years, which equates to the 2.86% composite depreciation rate utilized by Rockies Express to depreciate the underlying property, plant and equipment. The amount allocated to long-term debt is amortized over the remaining life of the various debt facilities. The basis difference at June 30, 2016 was allocated as follows:
 
Basis Difference
 
Amortization Period
 
(in thousands)
 
 
Long-term debt
$
7,002

 
2 - 25 years
Property, plant and equipment
(411,730
)
 
35 years
Total basis difference
$
(404,728
)
 
 
During the period from May 6, 2016 to June 30, 2016, we recognized equity in earnings from Rockies Express of $23.3 million, inclusive of the amortization of the negative basis difference discussed above, and received distributions from and made contributions to Rockies Express of $29.7 million and $14.4 million, respectively.
Summarized financial information for Rockies Express is as follows:
 
June 30, 2016
 
(in thousands)
Current assets
$
170,874

Noncurrent assets
$
6,038,268

Current liabilities
$
185,793

Noncurrent liabilities
$
2,636,680

Members' equity
$
3,386,669

 
Period from May 6, 2016 to June 30, 2016
 
(in thousands)
Revenue
$
98,161

Operating income
$
43,832

Net income to Members
$
84,741

Acquisition of Additional 31.3% Membership Interest in Pony Express
Effective January 1, 2016, TEP acquired an additional 31.3% membership interest in Pony Express in exchange for cash consideration of $475 million and 6,518,000 TEP common units (valued at approximately $268.6 million based on the December 31, 2015 closing price of TEP's common units) issued to TD for total consideration of approximately $743.6 million. The transaction increased TEP's aggregate membership interest in Pony Express to 98.0%. As part of the transaction, TD granted TEP an 18 month call option to repurchase the newly issued 6,518,000 common units at a price of $42.50. On the effective date of the acquisition, the call option was valued at $46.0 million. As discussed in Note 8Risk Management, on July 21, 2016, we partially exercised the option and repurchased 3,563,146 of the common units, leaving 2,954,854 remaining common units available for repurchase under the call option.

11



The acquisition of the additional 31.3% 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 31.3% membership interest. The transaction resulted in a deemed distribution to our general partner as discussed further in Note 10Partnership Equity and Distributions.
Cash outflows to acquire an additional noncontrolling interest in Pony Express are classified as an investing activity in the accompanying condensed consolidated statements of cash flows to the extent the consideration paid was used to directly fund the construction of the underlying assets by the noncontrolling member. Cash outflows to acquire an additional noncontrolling interest in excess of the cost to construct the underlying assets are classified as financing activities. For the six months ended June 30, 2016, $49.1 million of the $475 million paid to acquire the additional 31.3% membership interest in Pony Express was classified as an investing activity and $425.9 million was classified as a financing activity.
TEP Acquisition of BNN Western, LLC
On December 16, 2015, Whiting Oil and Gas Corporation ("Whiting"), BNN Redtail, LLC ("Redtail"), and BNN Western, LLC ("Western"), a newly formed Delaware limited liability company, entered into a definitive Transfer, Purchase and Sale Agreement, pursuant to which Redtail acquired 100% of the outstanding membership interests of Western from Whiting in exchange for total cash consideration of $75 million. Western's assets consist of a fresh water delivery and storage system and produced water gathering and produced water disposal system, which together comprise 62 miles of pipeline along with associated fresh water ponds and disposal wells. As part of the transaction with Whiting, Whiting also executed a five-year fresh water service contract and a nine-year gathering and disposal contract.
At December 31, 2015, the assets acquired and liabilities assumed in the acquisition were recorded at provisional amounts based on the preliminary purchase price allocation. The $75 million purchase price of the assets was allocated entirely to property, plant and equipment. TEP is in the process of obtaining additional information to identify and measure all assets acquired and liabilities assumed in the acquisition within the measurement period. Such provisional amounts will be adjusted if necessary to reflect any new information about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of these amounts.
TEGP's unaudited pro forma revenue and net income attributable to partners for the three and six months ended June 30, 2015 is presented below as if the acquisition of Western had been completed on January 1, 2015:
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
 
(in thousands)
Revenue
$
133,447

 
$
248,594

Net income attributable to TEGP
$
4,751

 
$
9,890

The pro forma financial information is not necessarily indicative of what the actual results of operations or financial position of TEGP would have been if the transactions had in fact occurred on the date or for the period indicated, nor do they purport to project the results of operations or financial position of TEGP for any future periods or as of any date. The pro forma financial information does not give effect to any cost savings, operating synergies, or revenue enhancements expected to result from the transactions or the costs to achieve these cost savings, operating synergies, and revenue enhancements. The pro forma revenue and net income includes adjustments to give effect to TEGP's consolidated interest in the estimated results of operations of Western for the periods presented.
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 Tallgrass Energy Holdings, LLC (which acts as the general partner of TD).

12



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, which was $500,000 for the second quarter of 2016. This amount will be periodically reviewed and adjusted as necessary to continue to reflect reasonable allocation of costs to TEGP.
There was no interest income from TD recognized for the three and six months ended June 30, 2016. During the six months ended June 30, 2015 we recognized interest income from TD of $0.4 million on the receivable balance under the Pony Express cash management agreement in effect through December 31, 2015.
Totals of transactions with affiliated companies are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Cost of transportation services
$
7,295

 
$
6,233

 
$
14,551

 
$
10,591

Charges to TEGP: (1)
 
 
 
 
 
 
 
Property, plant and equipment, net
$
622

 
$
1,594

 
$
1,521

 
$
2,901

Operation and maintenance
$
6,323

 
$
5,825

 
$
12,461

 
$
11,248

General and administrative
$
10,452

 
$
9,565

 
$
19,643

 
$
18,821

(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.
Details of balances with affiliates included in "Accounts receivable, net" and "Accounts payable to related parties" in the condensed consolidated balance sheets are as follows: 
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Receivable from related parties:
 
 
 
Rockies Express Pipeline LLC
$

 
$
15

Total receivable from related parties
$

 
$
15

Accounts payable to related parties:
 
 
 
Tallgrass Operations, LLC
$
7,028

 
$
7,731

Rockies Express Pipeline LLC
58

 
7

Deeprock Development, LLC

 
17

Total accounts payable to related parties
$
7,086

 
$
7,755

Balances of gas imbalances with affiliated shippers are as follows:
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Affiliate gas balance receivables
$
23

 
$
92

Affiliate gas balance payables
$
167

 
$
227

6. Inventory
The components of inventory at June 30, 2016 and December 31, 2015 consisted of the following:
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Crude oil
$
5,752

 
$
2,661

Materials and supplies
6,429

 
8,581

Natural gas liquids
351

 
395

Gas in underground storage
2,222

 
2,156

Total inventory
$
14,754

 
$
13,793


13



7. Property, Plant and Equipment
A summary of net property, plant and equipment by classification is as follows:
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Crude oil pipelines
$
1,180,989

 
$
1,172,684

Natural gas pipelines
552,107

 
550,710

Processing and treating assets
255,767

 
254,073

Water business assets
80,736

 
81,098

General and other
81,876

 
69,181

Construction work in progress
27,182

 
30,699

Accumulated depreciation and amortization
(171,590
)
 
(133,427
)
Total property, plant and equipment, net
$
2,007,067

 
$
2,025,018

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. For example, the risks associated with changes in the market price of crude oil and natural gas include, among others (i) pre-existing or anticipated physical crude oil and 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.
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, 2016
 
December 31, 2015
 
 
 
(in thousands)
Crude oil derivative contract (1)
Current assets
 
$
148

 
$

Call option derivative (2)
Noncurrent assets
 
$
55,967

 
$

Natural gas derivative contracts (3)
Current liabilities
 
$
351

 
$

(1) 
As of June 30, 2016, the fair value of crude oil derivative contracts represents the sale of 85,000 barrels in July 2016. As of December 31, 2015 there were no crude oil derivative contracts outstanding.
(2) 
As discussed in Note 4Acquisitions, in conjunction with our acquisition of an additional 31.3% membership interest in Pony Express effective January 1, 2016, TD granted us an 18 month call option to repurchase the newly issued 6,518,000 common units at a price of $42.50.
(3) 
As of June 30, 2016, the fair value shown for commodity contracts was comprised of derivative volumes for short natural gas fixed-price swaps totaling 0.8 Bcf. As of December 31, 2015 there were no natural gas derivative contracts outstanding.

14



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, 2016 and 2015:
 
Location of gain (loss) recognized
in income on derivatives
 
Amount of gain (loss) recognized in income on derivatives
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
(in thousands)
Derivatives not designated as hedging contracts:
 
 
 
 
 
 
 
 
 
Call option derivative
Unrealized gain on derivative instrument
 
$
18,953

 
$

 
$
10,007

 
$

Natural gas derivative contracts
Sales of natural gas, NGLs, and crude oil
 
$
(307
)
 
$
(131
)
 
$
(351
)
 
$
(41
)
Crude oil derivative contract
Sales of natural gas, NGLs, and crude oil
 
$
148

 
$

 
$
148

 
$

Exercise of Call Option
On July 21, 2016, TEP partially exercised the call option granted by TD in January 2016, as discussed in Note 4Acquisitions and repurchased 3,563,146 common units for a cash payment of $151.4 million. These TEP common units were deemed canceled upon repurchase by TEP and as of July 21, 2016 are no longer issued and outstanding. As of July 29, 2016, 2,954,854 common units remained available for repurchase under the call option.
Credit Risk
We have counterparty credit risk as a result of our use of derivative contracts. Counterparties to our crude oil and natural gas derivatives 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. The counterparty to our call option derivative is TD. Settlement of the call option derivative, when exercised, requires TEP to make a cash payment to TD in exchange for return of the common units.
Our over-the-counter swaps are entered into with counterparties outside central trading organizations such as 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, 2016, the fair value of our natural gas commodity derivative contracts was a liability, resulting in no credit exposure from TEP's counterparties as of that date. The maximum potential exposure to credit losses on our crude oil derivative contract at June 30, 2016 was:
 
Asset Position
 
(in thousands)
Gross
$
148

Netting agreement impact

Cash collateral held

Net Exposure
$
148

As of June 30, 2016 and December 31, 2015, 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 any margin deposits with counterparties associated with natural gas 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.

15



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 call option granted by TD is valued using a Black-Scholes option pricing model. Key inputs to the valuation model include the term of the option, risk free rate, the exercise price and current market price, expected volatility and expected distribution yield of the underlying units. The call option valuation is classified within Level 2 of the fair value hierarchy as the value is based on significant observable inputs.
The following table summarizes the fair value measurements of our derivative contracts as of June 30, 2016 based on the fair value hierarchy established by the Codification:
 
 
 
Asset 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)
As of June 30, 2016
 
 
 
 
 
 
 
Call option derivative
$
55,967

 
$

 
$
55,967

 
$

Crude oil derivative contract
$
148

 
$

 
$
148

 
$

 
 
 
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)
As of June 30, 2016
 
 
 
 
 
 
 
Natural gas derivative contracts
$
351

 
$

 
$
351

 
$

9. Long-term Debt
Tallgrass Equity Revolving Credit Facility
The following table sets forth the available borrowing capacity under the Tallgrass Equity revolving credit facility as of June 30, 2016 and December 31, 2015:
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Total capacity under the Tallgrass Equity revolving credit facility
$
150,000

 
$
150,000

Less: Outstanding borrowings under the Tallgrass Equity revolving credit facility
(148,000
)
 
(148,000
)
Available capacity under the Tallgrass Equity revolving credit facility
$
2,000

 
$
2,000


16



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. Among various other covenants and restrictive provisions, Tallgrass Equity is required to maintain a total leverage ratio of not more than 3.00 to 1.00. As of June 30, 2016, Tallgrass Equity was in compliance with the covenants required under the revolving credit facility.
The unused portion of the revolving credit facility is subject to a commitment fee of 0.50%. As of June 30, 2016, the weighted average interest rate on outstanding borrowings under the Tallgrass Equity revolving credit facility was 2.95%. During the six months ended June 30, 2016, Tallgrass Equity's weighted average effective interest rate, including the interest on outstanding borrowings, commitment fees, and amortization of deferred financing costs, was 3.23%.
TEP Revolving Credit Facility
Effective January 4, 2016, in connection with the acquisition of an additional 31.3% membership interest in Pony Express, TEP exercised the committed accordion feature to increase the total capacity of its revolving credit facility from $1.1 billion to $1.5 billion. In connection with the acquisition of a 25% membership interest in Rockies Express, TEP amended its revolving credit facility to increase the total capacity to $1.75 billion, which increase became effective May 6, 2016.
The following table sets forth the available borrowing capacity under the TEP revolving credit facility as of June 30, 2016 and December 31, 2015:
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Total capacity under the TEP revolving credit facility
$
1,750,000

 
$
1,100,000

Less: Outstanding borrowings under the TEP revolving credit facility (1)
(1,278,000
)
 
(753,000
)
Available capacity under the TEP revolving credit facility
$
472,000

 
$
347,000

(1) 
As of July 29, 2016, TEP's outstanding borrowings under its revolving credit facility were approximately $1.423 billion.
TEP's 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 its 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 our 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, 2016, TEP is in compliance with the covenants required under its revolving credit facility.
The unused portion of TEP's 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, 2016, the weighted average interest rate on outstanding borrowings under the TEP revolving credit facility was 2.72%. During the six months ended June 30, 2016, the weighted average effective interest rate under the TEP revolving credit facility, including the interest on outstanding borrowings, commitment fees, and amortization of deferred financing costs, was 2.66%.
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, 2016 and December 31, 2015, 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, 2016
$

 
$
1,426,000

 
$

 
$
1,426,000

 
$
1,426,000

December 31, 2015
$

 
$
901,000

 
$

 
$
901,000

 
$
901,000


17



The long-term debt borrowed under the revolving credit facility is carried at amortized cost. As of June 30, 2016 and December 31, 2015, the fair value approximates the carrying amount for the borrowings under the revolving credit facilities 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, 2016.
10. Partnership Equity and Distributions
Tallgrass Development Purchase Program
On February 17, 2016, we announced that the Board of Directors of Tallgrass Energy Holdings, LLC, the sole member of TEGP's general partner and the general partner of TD, has authorized an equity purchase program under which TD may initially purchase up to an aggregate of $100 million of the outstanding Class A shares of TEGP or the outstanding common units of TEP. TD may purchase Class A shares or Common Units from time to time on the open market or in negotiated purchases. The timing and amounts of any such purchases will be subject to market conditions and other factors, and will be in accordance with applicable securities laws and other legal requirements. The purchase plan does not obligate TD to acquire any specific number of Class A shares or Common Units and may be discontinued at any time. No purchases were made under this program during the six months ended June 30, 2016.
TEGP Partnership Agreement and Distributions to Holders of Class A Shares
In connection with the Offering on May 12, 2015, TEGP entered into an amended and restated partnership agreement. 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 ended June 30, 2015. The following table details the distributions for the periods indicated:
Three Months Ended
 
Date Paid
 
Distributions to Class A Shareholders
 
Distributions per Class A Share
 
 
 
 
 
(in thousands)
 
 
 
June 30, 2016
 
August 12, 2016(1)
 
$
11,693

 
$
0.245

 
March 31, 2016
 
May 13, 2016
 
10,022

 
0.210

 
December 31, 2015
 
February 12, 2016
 
8,256

 
0.173

 
September 30, 2015
 
November 13, 2015
 
6,872

 
0.144

 
June 30, 2015
 
August 17, 2015
 
3,484

 
0.073

(2) 
(1) 
The distribution announced on July 6, 2016 for the second quarter of 2016 will be paid on August 12, 2016 to Class A shareholders of record at the close of business on July 29, 2016.
(2) 
The first quarterly distribution declared on July 15, 2015 was prorated for the number of days between the closing of TEGP's initial public offering on May 12, 2015 and the end of the second quarter.
Subsidiary Distributions    
TEP Distributions. The following table shows the TEP distributions for the periods indicated:
 
 
 
 
Distributions
 
 
  
 
 
 
Limited Partner
Common 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, 2016
 
August 12, 2016(1)
 
$
54,442

 
$
24,262

 
$
911

 
$
79,615

 
$
0.7550

March 31, 2016
 
May 13, 2016
 
48,238

 
19,816

 
830

 
68,884

 
0.7050

December 31, 2015
 
February 12, 2016
 
42,984

 
15,332

 
724

 
59,040

 
0.6400

September 30, 2015
 
November 13, 2015
 
36,347

 
11,567

 
660

 
48,574

 
0.6000

June 30, 2015
 
August 14, 2015
 
35,135

 
10,418

 
627

 
46,180

 
0.5800

March 31, 2015
 
May 14, 2015
 
31,322

 
6,934

 
530

 
38,786

 
0.5200

(1) 
The distribution announced on July 6, 2016 for the second quarter of 2016 will be paid on August 12, 2016 to unitholders of record at the close of business on July 29, 2016.

18



TEP Equity Distribution Agreements
On October 31, 2014, TEP entered into an equity distribution agreement pursuant to which it may sell from time to time through a group of managers, as its sales agents, common units representing limited partner interests having an aggregate offering price of up to $200 million. On May 13, 2015 the amount was subsequently amended to $100.2 million in order to account for follow-on equity offerings under TEP's S-3 shelf registration statement. On May 17, 2016, TEP entered into a new equity distribution agreement allowing for the sale of common units with an aggregate offering price of up to $657.5 million. Sales of common units, if any, will be made by means of ordinary brokers' transactions, to or through a market maker or directly on or through an electronic communication network, a "dark pool" or any similar market venue, or as otherwise agreed by TEP and one or more of the managers. TEP intends to use the net cash proceeds from any sale of the units for general partnership purposes, which may include, among other things, the exercise of TEP's right to repurchase all or a portion of the 6,518,000 common units issued by TEP to TD in connection with TEP's acquisition of an additional 31.3% of Pony Express in January 2016, repayment or refinancing of debt, funding for acquisitions, capital expenditures and additions to working capital.
During the six months ended June 30, 2016, TEP issued and sold 6,081,138 common units with a weighted average sales price of $43.63 per unit under its equity distribution agreements for net cash proceeds of approximately $261.8 million (net of approximately $3.6 million in commissions and professional service expenses).
Private Placement
On April 28, 2016, TEP issued an aggregate of 2,416,987 common units for net cash proceeds of $90.0 million in a private placement transaction to certain funds managed by Tortoise Capital Advisors, L.L.C. The units were subsequently registered pursuant to TEP's Form S-3/A (File No. 333-210976) filed with the SEC on May 6, 2016, which became effective May 17, 2016.
Noncontrolling Interests
As of June 30, 2016, noncontrolling interests in our subsidiaries consisted of a 69.65% interest in Tallgrass Equity held by the Exchange Right Holders, as defined in Note 11Net Income per Class A Share, the 73.57% limited partner interest in TEP held by TD and the public TEP unitholders, the 2.0% membership interest in Pony Express held by TD, and an 8% membership interest in Water Solutions. During the six months ended June 30, 2016, we recognized contributions from and distributions to noncontrolling interests of $7.3 million and $109.6 million, respectively. Contributions from noncontrolling interests consisted primarily of contributions from TD to Pony Express. Distributions to noncontrolling interests consisted of distributions to TEP unitholders of $64.3 million, Tallgrass Equity distributions to the Exchange Right Holders of $41.9 million, and distributions to Pony Express and Water Solutions noncontrolling interests of $3.3 million.
During the six months ended June 30, 2015, we received contributions from and made distributions to noncontrolling interests of $68.7 million and $22.6 million, respectively. Contributions from noncontrolling interest primarily consisted of contributions from TD to Pony Express. Distributions to noncontrolling interests consisted of distributions to TEP unitholders of $13.5 million and distributions from Pony Express to TD.
Other Contributions and Distributions
During the six months ended June 30, 2015, we distributed $334.1 million of proceeds from the Offering to the Exchange Right Holders as part of the reorganization of entities effective concurrent with the Offering. 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 owners of the sole member of TEP GP.
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, we considered the impact of possible future exercises of the Exchange Right by the Exchange Right Holders on both net income attributable to TEGP and the diluted weighted average number of Class A shares outstanding. The Exchange Right Holders refers to the group of persons who collectively own all of TEGP's outstanding Class B shares and an equivalent number of Tallgrass Equity units. The Exchange Right Holders are entitled to exercise the right to exchange their Tallgrass Equity units (together with an equivalent number of TEGP Class B shares) for TEGP Class A shares at an exchange ratio of one TEGP Class A share for each Tallgrass Equity unit exchanged, which we refer to as the Exchange Right. The Exchange Right Holders primarily consist of Kelso & Company and its affiliated investment funds, The Energy & Minerals Group and its

19



affiliated investment funds, and Tallgrass KC, LLC, which is an entity owned by certain members of TEGP's and TEP's management.
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. For the six months ended June 30, 2016 the potential issuance of any TEGP Equity Participation Shares did not have a dilutive effect on basic net income per Class A share.
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, 2016 and 2015:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per share data)
Basic Net Income per Class A Share:
 
 
 
 
 
 
 
Net income attributable to TEGP
$
3,448

 
$
4,734

 
$
11,037

 
$
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 subsequent to May 12, 2015
$
3,448

 
$
2,463

 
$
11,037

 
$
2,463

Basic weighted average Class A Shares outstanding
47,725

 
47,725

 
47,725

 
47,725

Basic net income per Class A share
$
0.07

 
$
0.05

 
$
0.23

 
$
0.05

 
 
 
 
 
 
 
 
Diluted Net Income per Class A Share:
 
 
 
 
 
 
 
Net income attributable to TEGP subsequent to May 12, 2015
$
3,448

 
$
2,463

 
$
11,037

 
$
2,463

Incremental net income attributable to TEGP including the effect of the assumed issuance of Equity Participation Shares
1

 

 

 

Net income attributable to TEGP including incremental net income from assumed issuance of Equity Participation Shares
$
3,449

 
$
2,463

 
$
11,037

 
$
2,463

Basic weighted average Class A Shares outstanding
47,725

 
47,725

 
47,725

 
47,725

Equity Participation Shares equivalent shares
9

 

 

 

Diluted weighted average Class A Shares outstanding
47,734

 
47,725

 
47,725

 
47,725

Diluted net income per Class A Share
$
0.07

 
$
0.05

 
$
0.23

 
$
0.05

12. Regulatory Matters
There are currently no proceedings challenging the currently effective rates of Pony Express, Rockies Express or Trailblazer Pipeline Company LLC ("Trailblazer"). On October 30, 2015, Tallgrass Interstate Gas Transmission, LLC ("TIGT") filed a general rate case with the FERC pursuant to Section 4 of the Natural Gas Act ("NGA"), discussed in more detail below. Regulators, as well as shippers, do have rights, under circumstances prescribed by applicable law, to challenge the rates that we charge at our regulated entities. Further, applicable law 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 like the Pony Express System 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.

20



TIGT
General Rate Case Filing – FERC Docket RP16-137
On October 30, 2015, TIGT filed a general rate case with the FERC pursuant to Section 4 of the NGA. The rate case proposed a general system-wide increase in the maximum tariff rates for all firm and interruptible services offered by TIGT. In addition, TIGT proposed certain changes to the transportation rate design of its system to replace the current rate zone structure with a single "postage stamp" rate. TIGT also proposed new incremental charges, including (i) a charge for deliveries made to points without certain electronic flow measurement equipment, and (ii) a Cost Recovery Mechanism ("CRM") charge to completely or partially reimburse TIGT for certain costs it incurred to maintain system safety, environmental compliance and reliability. TIGT also proposed to replace its fixed fuel and lost and unaccounted for ("FL&U") charge with a FL&U tracker that would compensate TIGT for its actual FL&U expenses and adjust each year to reflect the previous period's under/over collection and the forecasted FL&U expense for the upcoming period. TIGT also proposed to implement a power cost tracker to recover the actual power costs incurred by TIGT to power its compressors. Finally, TIGT proposed certain revisions to its FERC Gas Tariff addressing a number of other rate and non-rate matters. Under the NGA and the FERC's regulations, TIGT's shippers and other interested parties, including the FERC's Trial Staff, have a right to challenge any aspect of TIGT's rate case filing. Accordingly, numerous TIGT customers have protested aspects of TIGT's NGA Section 4 rate filing.
On November 30, 2015, the FERC issued an order accepting and suspending the proposed rates and certain proposed tariff records to be effective upon motion May 1, 2016, subject to refund, certain modifications to TIGT's proposed CRM charge, and the outcome of an evidentiary hearing before a FERC Administrative Law Judge (the "Suspension Order"). In the Suspension Order, the FERC also accepted two tariff records related to force majeure events and reservation charge crediting to be effective December 1, 2015, subject to certain modifications. On December 21, 2015, TIGT made a compliance filing with the FERC to modify TIGT's proposed CRM charge and update the tariff records related to force majeure events and reservation charge crediting as directed by the FERC in the Suspension Order. No comments or protests were filed in response to the compliance filing and FERC accepted the compliance filing on February 1, 2016. On March 22, 2016, a Settlement Judge was appointed in the case to assist the participants in exploring the possibility of settlement. On March 31, 2016, the FERC issued an order denying certain rehearing requests concerning the CRM, granting in part a motion to remove certain pro forma tariff records from the hearing, and also requested comments in order to assess the need for a technical conference. The FERC also retained for resolution through hearing the pro forma tariff records related to TIGT's proposed charge at delivery points lacking electronic flow measurement and removed from hearing the other issues related to the pro forma tariff records. Whether any issues will be resolved through technical conference is pending. The FERC also directed TIGT to provide additional information related to certain pro forma tariff records, which TIGT filed on April 14, 2016. On June 23, 2016, the Commission approved the implementation of TIGT’s filed postage stamp rates, subject to refund, effective on May 1, 2016.
TIGT has reached an agreement in principle with customers representing a majority of firm fee revenue on the TIGT System for the year ended December 31, 2015 to settle all rate related issues set for hearing in its existing FERC rate case, including the issues of a cost recovery mechanism and a non-Electronic Flow Measurement charge. On May 5, 2016, the Acting Chief Administrative Law Judge issued an Order suspending the procedural schedule in the case as a result of the agreement in principle. On June 8, 2016, TIGT filed with the Commission its offer of settlement which resolves all issues in the case, with the exception of certain non-rate related tariff issues which remain subject to the Commission’s review and approval. On June 9, 2016, the Presiding Administrative Law Judge issued an Order shortening the period for any comments on the settlement, such that comments were due by June 13, 2016. No adverse comments were filed. The offer of settlement was certified to the Commission by the Administrative Law Judge on July 14, 2016. The Judge found that the settlement is uncontested, presents no issues of first impression, has no Commission policy implications, and appears to be just, reasonable, and in the public interest. The settlement is now subject to the final approval of the FERC.
Trailblazer
2016 Annual Fuel Tracker Filing – FERC Docket RP16-814-000
On April 1, 2016, Trailblazer made its annual fuel tracker filing with a proposed effective date of May 1, 2016 in Docket No. RP16-814-000. The FERC accepted this filing on April 18, 2016.
Rockies Express
Annual FERC Fuel Tracking Filings – Docket No. RP16-702
On March 1, 2016, Rockies Express made its annual fuel tracker filing with a proposed effective date of April 1, 2016 in Docket No. RP16-702. The FERC issued an order accepting the filing on March 25, 2016.

21



Seneca Lateral Facilities Conversion
On March 2, 2015 in Docket No. CP15-102-000, Rockies Express filed with FERC an application for (1) authorization to convert certain existing and operating pipeline and compression facilities located in Noble and Monroe Counties, Ohio (Seneca Lateral Facilities described in Docket Nos. CP13-539-000 and CP14-194-000) from Natural Gas Policy Act of 1978 Section 311 authority to Natural Gas Act Section 7 jurisdiction, and (2) issuance of a certificate of public convenience and necessity authorizing Rockies Express to operate and maintain the Seneca Lateral Facilities. On April 7, 2016, the FERC issued a Certificate to Rockies Express granting its requested authorizations. As directed by the FERC, Rockies Express filed revised rates for Natural Gas Act service on the Seneca Lateral and the pipeline announced that Natural Gas Act service would commence on June 1, 2016.
Rockies Express Zone 3 Capacity Enhancement Project
On March 31, 2015 in Docket No. CP15-137-000, Rockies Express filed with FERC an application for authorization to construct and operate (1) three new mainline compressor stations located in Pickaway and Fayette Counties, Ohio and Decatur County, Indiana; (2) additional compressors at an existing compressor station in Muskingum County, Ohio; and (3) certain ancillary facilities. The proposed facilities will increase the Rockies Express Zone 3 east-to-west mainline capacity by 800,000 Dth/d from receipts at Clarington, Ohio to corresponding deliveries of 520,000 Dth/d and 280,000 Dth/d to Lebanon, Ohio and Moultrie County, Illinois, respectively. Pursuant to the FERC's obligations under the National Environmental Policy Act, FERC staff issued an Environmental Assessment for the project on August 31, 2015. On February 25, 2016, the FERC issued a Certificate of Public Convenience and Necessity authorizing Rockies Express to proceed with the project. On March 14, 2016, Rockies Express commenced construction of the project facilities, which are expected to be placed into service in the fourth quarter of 2016.
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 no reserve for legal claims as of June 30, 2016 or December 31, 2015.
Rockies Express
Mineral Management Service Lawsuit
On June 30, 2009, Rockies Express filed claims against Mineral Management Service, a former unit of the U.S. Department of Interior (collectively "Interior") for breach of its contractual obligation to sign transportation service agreements and to pay approximately $192 million for pipeline capacity that it had agreed to take on Rockies Express. The Civilian Board of Contract Appeals ("CBCA") conducted a trial and ruled that Interior was liable for breach of contract, but limited the damages Interior was required to pay. On September 13, 2013, the United States Court of Appeals for the Federal Circuit issued a decision affirming that Interior was liable for its breach of contract, but reversing the CBCA's decision to limit damages. The case was remanded to the CBCA for the purpose of calculating damages at a hearing. On May 20, 2016, Rockies Express and Interior agreed to resolve the claims in this matter in exchange for a $65 million cash payment to Rockies Express. Interior paid the amount due Rockies Express on June 23, 2016.
Ultra Resources
In early 2016, Ultra Resources, Inc. ("Ultra"), defaulted on its firm transportation service agreement for approximately 0.2 Bcf/d through November 11, 2019. In late March 2016, Rockies Express terminated Ultra's service agreement. On April 14, 2016, Rockies Express filed a lawsuit against Ultra for breach of contract and damages in Harris County, Texas, in which Rockies Express seeks approximately $303 million in damages and other relief. Specifically, Rockies Express has asserted that Ultra owes approximately $303 million for past transportation service charges and for reservation charge fees that Rockies Express would have received over the term of the service agreement had Ultra not defaulted, in addition to other amounts owed under law or equity.
On April 29, 2016, Ultra and certain of its debtor affiliates filed for protection under Chapter 11 of the United States Bankruptcy Code in United States Bankruptcy Court for the Southern District of Texas. On May 10, 2016, Ultra filed a notice of bankruptcy in the Harris County state court proceeding, which asserted that pursuant to section 362(a) of the Bankruptcy Code, the filing of Ultra’s Chapter 11 petition operated as a stay of the Harris County state court proceeding. Accordingly, Rockies Express intends to pursue its approximately $303 million claim in Ultra’s Chapter 11 proceeding.

22



Michels Corporation
On June 17, 2014, Michels Corporation ("Michels") filed a complaint and request for relief against Rockies Express as a result of work performed by Michels to construct the Seneca Lateral Pipeline in Ohio. Michels seeks unspecified damages from Rockies Express and asserts claims of breach of contract, negligent misrepresentation, unjust enrichment and quantum meruit. Michels has also filed notices of Mechanic's Liens in Monroe and Noble Counties, asserting $24.2 million as the amount due. The case is currently scheduled to go to trial in April 2017. Rockies Express also previously filed Petition for Declaratory Judgment, Injunctive Relief and Damages against Michels in Johnson County, Kansas. That claim was dismissed without prejudice in September 2015. Rockies Express believes Michels' claims are without merit and plans to continue 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 $4.4 million and $4.8 million at June 30, 2016 and December 31, 2015, respectively.
TMID
Casper Plant, EPA Notice of Violation
In August 2011, the 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 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 EPA concerning settlement of this matter in April 2013 and received additional settlement communications from the EPA and Department of Justice beginning in July 2014. Settlement negotiations are continuing, including the expected 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.
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.
Trailblazer
Pipeline Integrity Management Program
In 2014 and 2015, Trailblazer conducted 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. Such repair or replacement will likely occur over a period of years, depending upon final assessment of corrosion growth rates and the remediation and repair plan implemented by Trailblazer. Trailblazer is currently operating at less than its current maximum allowable operating 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 completed 32 excavation digs at an aggregate cost of approximately $1.3 million based on preliminary analysis of the smart tool surveys performed in 2014. 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 continuing to develop a remediation and repair plan, which involves, among other things, finalizing cost recovery options, establishing project scope and timing and setting

23



an overall project budget. In 2016, Trailblazer intends to replace approximately 8 miles of pipe, install additional ground beds, and continue remediating areas with external control anomalies at an estimated cost of $21.5 million. 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 incurred 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 an annual $1.5 million deductible.
14. Reporting Segments
Our operations are located in the United States. We are organized into three reporting segments: (1) Crude Oil Transportation & Logistics, (2) Natural Gas Transportation & Logistics, and (3) Processing & Logistics.
Crude Oil Transportation & Logistics
The Crude Oil Transportation & Logistics segment is engaged in the ownership, 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 the second quarter of 2015.
Natural Gas Transportation & Logistics
The Natural Gas Transportation & Logistics segment is engaged in the 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. The Natural Gas Transportation & Logistics segment includes our 25% membership interest in Rockies Express effective May 6, 2016, as discussed in Note 3Acquisitions.
Processing & Logistics
The Processing & Logistics segment is engaged in the 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 and the transportation of NGLs.
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 facility, public company costs, 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.
The following tables set forth our segment information for the periods indicated:
 
Three Months Ended June 30, 2016
 
Three Months Ended June 30, 2015
Revenue:
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
(in thousands)
Crude Oil Transportation & Logistics
$
93,470

 
$

 
$
93,470

 
$
75,219

 
$

 
$
75,219

Natural Gas Transportation & Logistics
30,150

 
(1,410
)
 
28,740

 
30,969

 
(1,344
)
 
29,625

Processing & Logistics
24,721

 

 
24,721

 
28,126

 

 
28,126

Corporate and Other

 

 

 

 

 

Total Revenue
$
148,341

 
$
(1,410
)
 
$
146,931

 
$
134,314

 
$
(1,344
)
 
$
132,970


24



 
Six Months Ended June 30, 2016
 
Six Months Ended June 30, 2015
Revenue:
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
Total
Revenue
 
Inter-
Segment
 
External
Revenue
 
(in thousands)
Crude Oil Transportation & Logistics
$
188,042

 
$

 
$
188,042

 
$
125,600

 
$

 
$
125,600

Natural Gas Transportation & Logistics
61,137

 
(2,765
)
 
58,372

 
64,579

 
(2,690
)
 
61,889

Processing & Logistics
45,922

 

 
45,922

 
60,156

 

 
60,156

Corporate and Other

 

 

 

 

 

Total Revenue
$
295,101

 
$
(2,765
)
 
$
292,336

 
$
250,335

 
$
(2,690
)
 
$
247,645

 
Three Months Ended June 30, 2016
 
Three Months Ended June 30, 2015
Operating Income:
Total
Operating Income
 
Inter-
Segment
 
External
Operating Income
 
Total
Operating Income
 
Inter-
Segment
 
External
Operating Income
 
(in thousands)
Crude Oil Transportation & Logistics
$
53,726

 
$
1,346

 
$
55,072

 
$
45,515

 
$
1,344

 
$
46,859

Natural Gas Transportation & Logistics
10,100

 
(1,410
)
 
8,690

 
9,937

 
(1,344
)
 
8,593

Processing & Logistics
(1,372
)
 
64

 
(1,308
)
 
3,666

 

 
3,666

Corporate and Other
(3,107
)
 

 
(3,107
)
 
(3,013
)
 

 
(3,013
)
Total Operating Income
$
59,347

 
$

 
$
59,347

 
$
56,105

 
$

 
$
56,105

Reconciliation to Net Income:
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
 
 
 
(10,441
)
 
 
 
 
 
(4,479
)
Unrealized gain on derivative instrument
 
 
 
 
18,953

 
 
 
 
 

Equity in earnings of unconsolidated investment
 
 
 
 
23,321

 
 
 
 
 

Other income, net
 
 
 
 
221

 
 
 
 
 
769

Net income before income tax
 
 
 
 
$
91,401

 
 
 
 
 
$
52,395

 
Six Months Ended June 30, 2016
 
Six Months Ended June 30, 2015
Operating Income:
Total
Operating Income
 
Inter-
Segment
 
External
Operating Income
 
Total
Operating Income
 
Inter-
Segment
 
External
Operating Income
 
(in thousands)
Crude Oil Transportation & Logistics
$
106,392

 
$
2,691

 
$
109,083

 
$
59,788

 
$
2,690

 
$
62,478

Natural Gas Transportation & Logistics
20,764

 
(2,765
)
 
17,999

 
22,490

 
(2,690
)
 
19,800

Processing & Logistics
(1,194
)
 
74

 
(1,120
)
 
4,720

 

 
4,720

Corporate and Other
(6,146
)
 

 
(6,146
)
 
(5,175
)
 

 
(5,175
)
Total Operating Income
$
119,816

 
$

 
$
119,816

 
$
81,823

 
$

 
$
81,823

Reconciliation to Net Income:
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
 
 
 
(19,118
)
 
 
 
 
 
(7,919
)
Unrealized gain on derivative instrument
 
 
 
 
10,007

 
 
 
 
 

Equity in earnings of unconsolidated investment
 
 
 
 
23,321

 
 
 
 
 

Other income, net
 
 
 
 
787

 
 
 
 
 
1,481

Net income before income tax
 
 
 
 
$
134,813

 
 
 
 
 
$
75,385


25



 
Six Months Ended June 30,
Capital Expenditures:
2016
 
2015
 
(in thousands)
Crude Oil Transportation & Logistics
$
19,160

 
$
32,501

Natural Gas Transportation & Logistics
4,115

 
7,061

Processing & Logistics
5,216

 
9,982

Corporate and Other

 

Total capital expenditures
$
28,491

 
$
49,544

Assets:
June 30, 2016
 
December 31, 2015
 
(in thousands)
Crude Oil Transportation & Logistics
$
1,425,917

 
$
1,439,418

Natural Gas Transportation & Logistics
1,142,222

 
706,576

Processing & Logistics
408,055

 
409,795

Corporate and Other
508,713

 
460,871

Total assets
$
3,484,907

 
$
3,016,660

15. Subsequent Events
On July 1, 2016, we acquired the remaining 8% noncontrolling equity interest in Water Solutions and additional interests in certain of Water Solutions' subsidiaries from Regency Investments I, LLC and BSEG Water Group LLC for total cash consideration of $6.0 million, which will be accounted for as an acquisition of noncontrolling interest. Subsequent to the closing of the transaction, our aggregate membership interest in Water Solutions is 100%.

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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's ("TEGP") 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 ("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"). 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 connection with the Offering. 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. 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 condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report. Additionally, the following discussion and analysis should be read in conjunction with our audited 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 Annual Report on Form 10-K for the year ended December 31, 2015 (our "2015 Form 10-K") filed with the United States Securities and Exchange Commission (the "SEC") on February 17, 2016.
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," "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:
TEP's ability to complete and integrate acquisitions from TD or from third parties, including its acquisition of a 25% membership interest in Rockies Express that was completed in May 2016, its purchase of an additional 31.3% membership interest in Pony Express that was completed in January 2016, and its acquisition of water business assets in Weld County, Colorado that was completed in December 2015;
large or multiple customer defaults, including defaults resulting from actual or potential insolvencies;
changes in general economic conditions;
competitive conditions in our industry;
actions taken by third-party operators, processors and transporters;
the demand for TEP's services, including crude oil transportation services, natural gas transportation, storage and processing services and water business services;

27



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 level of production of crude oil, natural gas and other hydrocarbons and the resultant market prices of crude oil, natural gas, NGLs, and other hydrocarbons;
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, transporting, storing and processing natural gas, and transporting, gathering and disposing of water produced in connection with hydrocarbon exploration and production activities;
natural disasters, weather-related delays, casualty losses and other matters beyond our control;
interest rates;
labor relations;
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 limited partnership that has elected to be treated as a corporation for U.S. federal income tax purposes. We were formed as part of a reorganization involving entities that were previously controlled by Tallgrass Equity in order to effect the Offering which was completed on May 12, 2015.
Our sole cash-generating asset is an approximate 30.35% controlling membership interest in Tallgrass Equity. Tallgrass Equity's sole cash-generating assets consist of the direct and indirect partnership interests in TEP, described below:
100% of the outstanding membership interests in TEP GP, which owns all of the general partner interest in TEP and all of TEP's IDRs. The general partner interest in TEP is represented by 834,391 general partner units, representing an approximate 1.14% general partner interest in TEP at August 3, 2016.
20,000,000 TEP common units, representing an approximately 27.42% limited partner interest in TEP at August 3, 2016.
TEP is a publicly traded, growth-oriented limited partnership formed in 2013 to own, operate, acquire and develop midstream energy assets in North America. TEP currently provides crude oil transportation to customers in Wyoming, Colorado, and the surrounding regions through Tallgrass Pony Express Pipeline, LLC ("Pony Express"), which owns a crude oil pipeline commencing in Guernsey, Wyoming and terminating in Cushing, Oklahoma that includes a lateral in Northeast Colorado that commences in Weld County, Colorado, and interconnects with the pipeline just east of Sterling, Colorado (the "Pony Express System"). TEP provides natural gas transportation and storage services for customers in the Rocky Mountain, Midwest and Appalachian regions of the United States through: (1) TEP's 25% membership interest in Rockies Express Pipeline LLC ("Rockies Express"), a Delaware limited liability company which owns the Rockies Express Pipeline, a FERC-regulated natural gas pipeline system extending from Opal, Wyoming and Meeker, Colorado to Clarington, Ohio, (2) 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 (3) the Trailblazer Pipeline system, a FERC-regulated natural gas pipeline system extending from the Colorado and Wyoming border to Beatrice, Nebraska (the "Trailblazer Pipeline"). TEP also provides services for customers in Wyoming at the Casper and Douglas natural gas processing facilities and the West Frenchie Draw natural gas treating facility (collectively, the "Midstream Facilities"), and NGL transportation services in Northeast Colorado. TEP performs water business services in Colorado and Texas through BNN Water Solutions, LLC ("Water Solutions"). TEP's operations are strategically located in and provide services to certain key United States

28



hydrocarbon basins, including the Denver-Julesburg, Powder River, Wind River, Permian and Hugoton-Anadarko Basins and the Niobrara, Mississippi Lime, Eagle Ford, Bakken, Marcellus and Utica shale formations.
TEP intends to continue to leverage its relationship with TD and utilize the significant experience of its management team to execute its growth strategy of acquiring midstream assets from TD and third parties, increasing utilization of its existing assets and expanding its systems through construction of additional assets. TEP's reportable business segments are:
Crude Oil Transportation & Logistics—the ownership and operation of a FERC-regulated crude oil pipeline system;
Natural Gas Transportation & Logistics—the ownership and operation of FERC-regulated interstate natural gas pipelines and integrated natural gas storage facilities; and
Processing & Logistics—the ownership and operation of natural gas processing, treating and fractionation facilities, the provision of water business services primarily to the oil and gas exploration and production industry and the transportation of NGLs.
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 GAAP, 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, historical results of operations for periods prior to May 12, 2015 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 Announced
On July 6, 2016, we announced a cash distribution for the quarter ended June 30, 2016 of $0.245 per Class A share. The distribution will be paid on August 12, 2016, to Class A shareholders of record on July 29, 2016.
TEP Distribution Announced
On July 6, 2016, TEP announced a cash distribution for the quarter ended June 30, 2016 of $0.755 per common unit. The distribution will be paid on August 12, 2016, to unitholders of record on July 29, 2016. 
Exercise of Call Option
On July 21, 2016, TEP partially exercised the call option granted by TD in January 2016 and repurchased 3,563,146 common units for a cash payment of $151.4 million. These TEP common units were deemed canceled upon repurchase by TEP and as of July 21, 2016 are no longer issued and outstanding. As of July 29, 2016, 2,954,854 common units remained available for repurchase under the call option.
Acquisition of Additional Interest in Water Solutions
On July 1, 2016, we acquired the remaining 8% noncontrolling equity interest in Water Solutions and additional interests in certain of Water Solutions' subsidiaries from Regency Investments I, LLC and BSEG Water Group LLC for total cash consideration of $6.0 million, which will be accounted for as an acquisition of noncontrolling interest. Subsequent to the closing of the transaction, our aggregate membership interest in Water Solutions is 100%.

29



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
Our 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 entirely dependent upon the ability of TEP to make cash distributions to its partners.
TEP's Contract Profile and Volumes
TEP's results are driven primarily by the volume of crude oil transportation capacity, natural gas transportation and storage capacity, NGL transportation capacity, and water transportation, gathering and disposal capacity under firm fee contracts, as well as the volume of natural gas that it processes and the fees assessed for such services.
Operating Costs and Expenses
The primary components of TEP's operating costs and expenses that we evaluate include cost of sales, cost of transportation services, operations and maintenance and general and administrative costs. TEP's operating expenses are driven primarily by expenses related to the operation, maintenance and growth of its asset base.

30



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,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except operating data)
Revenues: