| Acquisitions | Acquisition of Outrigger Powder River Operating, LLC On August 3, 2017, we acquired 100% of the membership interests of Outrigger Powder River Operating, LLC (subsequently renamed as Tallgrass Crude Gathering, LLC, "TCG"), which owns the PRB Crude System, a crude oil gathering system in the Powder River Basin with approximately 34 miles of gathering lines and approximately 150,000 acres dedicated on a long-term fee-based contract, for approximately $36 million , subject to working capital adjustments. The transaction qualifies as an acquisition of a business and is accounted for as a business combination under ASC 805. The following represents the fair value of assets acquired and liabilities assumed at August 3, 2017 (in thousands): Accounts receivable $ 117 Property, plant and equipment 29,306 Intangible asset 6,694 (1) Accounts payable and accrued liabilities (87 ) Net identifiable assets acquired $ 36,030 (1) The $6.7 million intangible asset acquired represents a major customer contract. This intangible asset is amortized on a straight-line basis over a period of 8 years , the remaining term of the contract at the time of acquisition. At September 30, 2017, the assets acquired and liabilities assumed in the acquisition were recorded at provisional amounts based on the preliminary purchase price allocation. TEP is in the process of obtaining additional information to identify and measure all assets acquired and liabilities assumed in the acquisition within the measurement period. Such provisional amounts will be adjusted if necessary to reflect any new information about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of these amounts. Actual revenue and net loss attributable to TEP from TCG of less than $1 million was recognized in the accompanying condensed consolidated statements of income for the period from August 3, 2017 to September 30, 2017. Acquisitions of Additional Interests in Deeprock Development On July 20, 2017, we acquired an additional 40% membership interest in Deeprock Development from Kinder Morgan Cushing, LLC for cash consideration of approximately $57.2 million , net of cash acquired. We subsequently acquired an additional 9% membership interest in Deeprock Development from Deeprock Energy Resources LLC ("DER") on July 21, 2017, as discussed further below. Upon closing of the acquisition of the 40% membership interest on July 20, 2017, we obtained a controlling financial interest in Deeprock Development and accordingly has accounted for the transaction as a step acquisition under ASC 805. On the acquisition date, TEP remeasured its previously held 20% equity interest in Deeprock Development to its fair value of $22.9 million , recognized a gain of $9.7 million in "Gain on remeasurement of unconsolidated investment" in the condensed consolidated statements of income, and consolidated Deeprock Development in our condensed consolidated financial statements. The 40% equity interest in Deeprock Development held by noncontrolling interests was recorded at its acquisition date fair value of $45.9 million . The fair values of the previously held equity interest and the noncontrolling interest were determined using a discounted cash flow analysis and adjusted for lack of control. These fair value measurements are based on significant inputs, such as forecasted cash flows and discount rates, that are not observable in the market and thus represent fair value measurements categorized within Level 3 of the fair value hierarchy under ASC 820. The following represents the fair value of assets acquired and liabilities assumed at July 20, 2017 (in thousands): Accounts receivable $ 968 Other current assets 598 Property, plant and equipment 70,148 Accounts payable (712 ) Deferred revenue (6,546 ) Net identifiable assets acquired 64,456 Goodwill 61,550 Net assets acquired (excluding cash) $ 126,006 At September 30, 2017, the assets acquired and liabilities assumed in the acquisition were recorded at provisional amounts based on the preliminary purchase price allocation. TEP is in the process of obtaining additional information to identify and measure all assets acquired and liabilities assumed in the acquisition within the measurement period. Such provisional amounts will be adjusted if necessary to reflect any new information about facts and circumstances that existed at the acquisition date that, if known, would have affected the measurement of these amounts. The goodwill recognized of $61.6 million is primarily attributed to synergies expected from combining the operations of TEP and Deeprock Development. All of the goodwill was assigned to our Gathering, Processing & Terminalling segment. Actual revenue and net income attributable to TEP from Deeprock Development of $2.4 million and $1.1 million , respectively, was recognized in the accompanying condensed consolidated statements of income for the period from July 20, 2017 to September 30, 2017. On July 21, 2017, subsequent to the acquisition of an additional 40% membership interest discussed above, we acquired an additional 9% membership interest in Deeprock Development from DER for total consideration valued at approximately $13.1 million , consisting of approximately $6.4 million in cash and the issuance of 128,790 common units (valued at approximately $6.7 million based on the July 20, 2017 closing price of TEP's common units), which was accounted for as an acquisition of noncontrolling interest. Subsequent to the closing of the transaction, our aggregate membership interest in Deeprock Development is 69% . Pro Forma Financial Information Unaudited pro forma revenue and net income attributable to TEP for the three and nine months ended September 30, 2017 and 2016 is presented below as if the acquisitions of TCG and Deeprock Development had been completed on January 1, 2016. Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (in thousands) Revenue $ 177,022 $ 158,642 $ 492,625 $ 465,232 Net income attributable to partners $ 174,587 $ 65,644 $ 338,407 $ 204,197 The pro forma financial information is not necessarily indicative of what the actual results of operations or financial position of TEP would have been if the transactions had in fact occurred on the date or for the period indicated, nor do they purport to project the results of operations or financial position of TEP for any future periods or as of any date. The pro forma financial information does not give effect to any cost savings, operating synergies, or revenue enhancements expected to result from the transactions or the costs to achieve these cost savings, operating synergies, and revenue enhancements. The pro forma revenue and net income includes adjustments to give effect to the estimated results of operations of TCG and Deeprock Development for the periods presented, as well as to eliminate the equity in earnings and gain on remeasurement of unconsolidated investment associated with our previously held 20% membership interest in Deeprock Development. Acquisition of DCP Douglas, LLC On June 5, 2017, we acquired 100% of the membership interests in DCP Douglas, LLC (subsequently renamed as Tallgrass Midstream Gathering, LLC), which owns the Douglas Gathering System, a natural gas gathering system in the Powder River Basin with approximately 1,500 miles of gathering pipeline connected to the Douglas processing plant, for approximately $128.5 million , subject to working capital adjustments. The acquisition has been accounted for as an asset acquisition, with substantially all of the fair value allocated to the long-lived assets acquired based on their relative fair values. Acquisition of an Additional 24.99% Membership Interest in Rockies Express On March 31, 2017, TEP, TD, and Rockies Express Holdings, LLC, entered into a definitive Purchase and Sale Agreement, pursuant to which TEP acquired an additional 24.99% membership interest in Rockies Express from TD in exchange for cash consideration of $400 million . Together with the 25% membership interest in Rockies Express that TEP acquired from a unit of Sempra U.S. Gas and Power on May 6, 2016, this transaction increases TEP’s aggregate membership interest in Rockies Express to 49.99% . The transfer of the Rockies Express membership interest between TD and the Partnership is considered a transaction between entities under common control, but does not represent a change in reporting entity. Our investment in Rockies Express is recorded under the equity method of accounting and is reported as "Unconsolidated investments" on our condensed consolidated balance sheets. As a result of the common control nature of the transaction, the 24.99% membership interest in Rockies Express was transferred to the Partnership at TD's historical carrying amount, including the remaining unamortized basis difference driven by the difference between the fair value of the investment and the book value of the underlying assets and liabilities on November 13, 2012, the date of acquisition by TD. For additional information, see Note 7 – Investments in Unconsolidated Affiliates . As of March 31, 2017, the negative basis difference carried over from TD was approximately $386.8 million . 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 associated with the recently acquired 24.99% membership interest in Rockies Express at September 30, 2017 was allocated as follows: Basis Difference Amortization Period (in thousands) Long-term debt $ 19,078 2 - 25 years Property, plant and equipment (399,667 ) 35 years Total basis difference $ (380,589 ) Acquisition of Tallgrass Terminals, LLC and Tallgrass NatGas Operator, LLC Effective January 1, 2017, we acquired 100% of the issued and outstanding membership interests in Terminals and 100% of the issued and outstanding membership interests in NatGas from TD for total cash consideration of $140 million . These acquisitions are considered transactions between entities under common control, and a change in reporting entity. Terminals owns several fully operational assets providing storage capacity and additional injection points for the Pony Express System, including the Sterling Terminal near Sterling, Colorado, the Buckingham Terminal in northeast Colorado, and a 69% interest in the Deeprock Development Terminal in Cushing, Oklahoma following the acquisition of an aggregate additional 49% membership interest in Deeprock Development in July 2017 discussed above. Terminals also owns acreage in Cushing, Oklahoma and Guernsey, Wyoming, which is under development to provide additional storage capacity and other potential opportunities. NatGas is the operator of the Rockies Express Pipeline and receives a fee from Rockies Express as compensation for its services. Historical Financial Information The results of our acquisitions of Terminals and NatGas are included in the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016 . The following table presents our previously reported December 31, 2016 condensed consolidated balance sheet, adjusted for the acquisitions of Terminals and NatGas: December 31, 2016 TEP (As previously reported) Consolidate Terminals Consolidate NatGas TEP (As currently reported) (in thousands) ASSETS Current Assets: Cash and cash equivalents $ 1,873 $ — $ — $ 1,873 Accounts receivable, net 59,469 38 29 59,536 Gas imbalances 1,597 — — 1,597 Inventories 12,805 288 — 13,093 Derivative assets 10,967 — — 10,967 Prepayments and other current assets 6,820 808 — 7,628 Total Current Assets 93,531 1,134 29 94,694 Property, plant and equipment, net 2,012,263 66,969 — 2,079,232 Goodwill 343,288 — — 343,288 Intangible assets, net 93,522 — — 93,522 Unconsolidated investments 461,915 13,710 — 475,625 Deferred financing costs, net 4,815 — — 4,815 Deferred charges and other assets 9,637 1,400 — 11,037 Total Assets $ 3,018,971 $ 83,213 $ 29 $ 3,102,213 LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 24,076 $ 46 $ — $ 24,122 Accounts payable to related parties 5,879 56 — 5,935 Gas imbalances 1,239 — — 1,239 Derivative liabilities 556 — — 556 Accrued taxes 16,328 668 — 16,996 Accrued liabilities 16,525 177 — 16,702 Deferred revenue 60,757 — — 60,757 Other current liabilities 6,446 — — 6,446 Total Current Liabilities 131,806 947 — 132,753 Long-term debt, net 1,407,981 — — 1,407,981 Other long-term liabilities and deferred credits 7,063 — — 7,063 Total Long-term Liabilities 1,415,044 — — 1,415,044 Equity: Net Equity 1,472,121 82,266 29 1,554,416 Total Equity 1,472,121 82,266 29 1,554,416 Total Liabilities and Equity $ 3,018,971 $ 83,213 $ 29 $ 3,102,213 The results of our acquisitions of Terminals and NatGas are included in the condensed consolidated statements of income for the three and nine months ended September 30, 2017 and 2016 . The following tables present the previously reported condensed consolidated statements of income for the three and nine months ended September 30, 2016 , adjusted for the acquisitions of Terminals and NatGas: Three Months Ended September 30, 2016 TEP (As previously reported) Consolidate Terminals Consolidate NatGas Elimination TEP (As currently reported) (in thousands) Revenues: Crude oil transportation services $ 91,387 $ — $ — $ — $ 91,387 Natural gas transportation services 31,444 — — — 31,444 Sales of natural gas, NGLs, and crude oil 20,758 — — (271 ) (1) 20,487 Processing and other revenues 8,536 3,116 1,182 (2,884 ) (2) 9,950 Total Revenues 152,125 3,116 1,182 (3,155 ) 153,268 Operating Costs and Expenses: Cost of sales (exclusive of depreciation and amortization shown below) 18,590 — — (271 ) (1) 18,319 Cost of transportation services (exclusive of depreciation and amortization shown below) 13,528 198 — (2,884 ) (2) 10,842 Operations and maintenance 14,714 432 — — 15,146 Depreciation and amortization 20,831 346 — — 21,177 General and administrative 13,147 266 — — 13,413 Taxes, other than income taxes 6,717 143 — — 6,860 Total Operating Costs and Expenses 87,527 1,385 — (3,155 ) 85,757 Operating Income (Loss) 64,598 1,731 1,182 — 67,511 Other Income (Expense): Interest expense, net (10,907 ) — — — (10,907 ) Unrealized loss on derivative instrument (4,419 ) — — — (4,419 ) Equity in earnings of unconsolidated investments 12,066 698 — — 12,764 Other income, net 480 — — — 480 Total Other (Expense) Income (2,780 ) 698 — — (2,082 ) Net income 61,818 2,429 1,182 — 65,429 Net income attributable to noncontrolling interests (1,084 ) — — — (1,084 ) Net income attributable to partners $ 60,734 $ 2,429 $ 1,182 $ — $ 64,345 Nine Months Ended September 30, 2016 TEP (As previously reported) Consolidate Terminals Consolidate NatGas Elimination TEP (As currently reported) (in thousands) Revenues: Crude oil transportation services $ 279,281 $ — $ — $ — $ 279,281 Natural gas transportation services 89,406 — — — 89,406 Sales of natural gas, NGLs, and crude oil 51,514 — — (271 ) (1) 51,243 Processing and other revenues 24,260 8,982 4,855 (8,576 ) (2) 29,521 Total Revenues 444,461 8,982 4,855 (8,847 ) 449,451 Operating Costs and Expenses: Cost of sales (exclusive of depreciation and amortization shown below) 48,116 — — (271 ) (1) 47,845 Cost of transportation services (exclusive of depreciation and amortization shown below) 43,924 598 — (8,576 ) (2) 35,946 Operations and maintenance 41,055 1,319 — — 42,374 Depreciation and amortization 64,099 975 — — 65,074 General and administrative 40,072 1,153 — — 41,225 Taxes, other than income taxes 19,862 431 — — 20,293 Contract termination — 8,061 (3) — — 8,061 Loss on disposal of assets 1,849 — — — 1,849 Total Operating Costs and Expenses 258,977 12,537 — (8,847 ) 262,667 Operating Income 185,484 (3,555 ) 4,855 — 186,784 Other Income (Expense): Interest expense, net (27,639 ) — — — (27,639 ) Unrealized gain on derivative instrument 5,588 — — — 5,588 Equity in earnings of unconsolidated investments 35,387 2,108 — — 37,495 Other income, net 1,267 — — — 1,267 Total Other Income 14,603 2,108 — — 16,711 Net income (loss) 200,087 (1,447 ) 4,855 — 203,495 Net income attributable to noncontrolling interests (3,235 ) — — — (3,235 ) Net income (loss) attributable to partners $ 196,852 $ (1,447 ) $ 4,855 $ — $ 200,260 (1) Represents the elimination of revenue and cost of sales associated with the purchase of crude oil from Pony Express by Terminals. (2) Represents the elimination of revenue and cost of transportation services associated with the lease of the Sterling Terminal facilities by Pony Express. (3) Represents a one-time charge related to the termination of an operating agreement at the Sterling Terminal. |
