| 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 as of the acquisition date and approximately 150,000 acres dedicated on a long-term fee-based contract, for approximately $36 million . 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. No adjustments were made to these provisional amounts and the allocation of assets acquired and liabilities assumed in the acquisition was considered final as of December 31, 2017. Actual revenue and net loss attributable to TEP from TCG of less than $1 million was recognized in the accompanying consolidated statements of income for the period from August 3, 2017 to December 31, 2017. Acquisitions of Additional Interests in Deeprock Development, LLC 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 have 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 consolidated statements of income, and consolidated Deeprock Development in our 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. No adjustments were made to these provisional amounts and the allocation of assets acquired and liabilities assumed in the acquisition was considered final as of December 31, 2017. The goodwill recognized of $61.6 million is primarily attributed to synergies expected from combining the operations of TEP and Deeprock Development. All the goodwill was assigned to our Gathering, Processing & Terminalling segment. Actual revenue and net income attributable to TEP from Deeprock Development of $10.5 million and $8.5 million , respectively, was recognized in the accompanying consolidated statements of income for the period from July 20, 2017 to December 31, 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% . 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 the fair value allocated to the long-lived assets acquired based on their relative fair values. Acquisitions of 49.99% in Rockies Express Pipeline LLC On May 6, 2016, TD assigned us its right to purchase a 25% membership interest in Rockies Express from a unit of Sempra U.S. Gas and Power ("Sempra") pursuant to the purchase agreement originally entered into between TD's wholly-owned subsidiary and Sempra in March 2016. Subsequently on May 6, 2016, we closed the purchase of a 25% membership interest in Rockies Express from Sempra pursuant to the purchase agreement for cash consideration of approximately $436.0 million , after making the adjustments to the purchase price required by the purchase agreement. On March 31, 2017, TEP, TD, and Rockies Express Holdings, LLC, entered into a definitive Purchase and Sale Agreement, pursuant to which we 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 we acquired from a unit of Sempra U.S. Gas and Power on May 6, 2016, this transaction increases our aggregate membership interest in Rockies Express to 49.99% . For additional information, see Note 8 – Investments in Unconsolidated Affiliates . 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. Acquisitions of 100% of Pony Express Effective September 1, 2014, TEP acquired a controlling 33.3% membership interest in Pony Express for total consideration of approximately $600 million . At closing, Pony Express, TD, and TEP entered into the Second Amended Pony Express LLC Agreement, which set forth the relative rights of TD and TEP as the owners of Pony Express. The terms of TEP's acquisition of a 33.3% membership interest in Pony Express provided TEP a minimum quarterly preference payment of $16.65 million through the quarter ended September 30, 2015 with distributions thereafter shared in accordance with the terms of the Second Amended Pony Express LLC Agreement. Effective March 1, 2015, TEP acquired an additional 33.3% membership interest in Pony Express for cash consideration of $700 million . At closing, Pony Express, TD, and TEP entered into the Pony Express LLC Agreement, which sets forth the relative rights of TD and TEP as the owners of Pony Express. The terms of the transaction increased the minimum quarterly preference payment provided to TEP to $36.65 million through the quarter ending December 31, 2015 (prorated to approximately $23.5 million for the quarter ended March 31, 2015) with distributions thereafter shared in accordance with the terms of the Pony Express LLC Agreement. Upon the effective date of the second acquisition, TEP reevaluated its VIE assessment and determined that Pony Express continued to be considered a VIE of which TEP is the primary beneficiary. The acquisition of the additional 33.3% membership interest in Pony Express represents a transaction between entities under common control and an acquisition of noncontrolling interests. As a result, financial information for periods prior to the transaction have not been recast to reflect the additional 33.3% membership interest. The transaction resulted in a deemed distribution to our general partner as discussed further in Note 11 – Partnership Equity and Distributions . 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 our common units) issued to TD, for total consideration of approximately $743.6 million . The transaction increased our aggregate membership interest in Pony Express to 98% . As part of the transaction, TD granted us an 18 -month call option covering 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 9 – Risk Management , in July 2016 and October 2016, we partially exercised the option covering 3,563,146 and 1,251,760 of the common units, respectively. On February 1, 2017, we exercised the remainder of the call option covering an additional 1,703,094 common units, leaving no remaining common units subject to the call option as of such date. As a result of the partial exercises in 2016 and 2017, TEP derecognized a portion of the derivative asset balance, recognizing approximately $34.0 million and $12.6 million through equity for the years ended December 31, 2016 and 2017, respectively, as discussed further in Note 11 – Partnership Equity and Distributions . 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 has 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 11 – Partnership Equity and Distributions . Cash outflows to acquire an additional noncontrolling interest in Pony Express are classified as an investing activity in the accompanying 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 year ended December 31, 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. As discussed in Note 20 – Subsequent Events , we acquired the remaining 2% of Pony Express from TD effective February 1, 2018. 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, each of which commenced in December 2015. 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. No adjustments were made to these provisional amounts and the allocation of assets acquired and liabilities assumed in the acquisition was considered final as of September 30, 2016. Pro Forma Financial Information Unaudited pro forma revenue and net income attributable to TEP for the years ended December 31, 2017 and 2016 is presented below as if the acquisitions of TCG and Deeprock Development had been completed on January 1, 2016. Unaudited pro forma revenue and net income attributable to TEP for the year ended December 31, 2015 is presented below as if the acquisition of Western had been completed on January 1, 2015. Year Ended December 31, 2017 2016 2015 (in thousands) Revenue $ 667,391 $ 632,528 $ 544,497 Net income attributable to partners $ 427,522 $ 275,506 $ 173,542 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, Deeprock Development, and Western 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. Historical Financial Information The results of our acquisitions of Terminals and NatGas are included in the consolidated balance sheets as of December 31, 2017 and December 31, 2016 . The following table presents our previously reported December 31, 2016 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 consolidated statements of income for the years ended December 31, 2017 , 2016 , and 2015 . The following tables present the previously reported consolidated statements of income for the years ended December 31, 2016 and 2015 , adjusted for the acquisitions of Terminals and NatGas: Year Ended December 31, 2016 TEP (As previously reported) Consolidate Terminals Consolidate NatGas Elimination TEP (As currently reported) (in thousands) Revenues: Crude oil transportation services $ 374,949 $ — $ — $ — $ 374,949 Natural gas transportation services 119,962 — — — 119,962 Sales of natural gas, NGLs, and crude oil 77,394 99 — (370 ) (1) 77,123 Processing and other revenues 32,817 12,043 6,228 (11,460 ) (2) 39,628 Total Revenues 605,122 12,142 6,228 (11,830 ) 611,662 Operating Costs and Expenses: Cost of sales 71,920 100 — (370 ) (1) 71,650 Cost of transportation services 58,341 788 — (11,460 ) (2) 47,669 Operations and maintenance 53,386 1,684 — — 55,070 Depreciation and amortization 84,896 1,351 — — 86,247 General and administrative 53,633 1,469 — — 55,102 Taxes, other than income taxes 24,727 673 — — 25,400 Contract termination — 8,061 (3) — — 8,061 Loss on disposal of assets 1,849 — — — 1,849 Total Operating Costs and Expenses 348,752 14,126 — (11,830 ) 351,048 Operating Income (Expense) 256,370 (1,984 ) 6,228 — 260,614 Other Income (Expense): Interest expense, net (40,688 ) — — — (40,688 ) Unrealized loss on derivative instrument (1,291 ) — — — (1,291 ) Equity in earnings of unconsolidated investments 51,780 2,751 — — 54,531 Other income, net 1,723 — — — 1,723 Total Other Income 11,524 2,751 — — 14,275 Net income 267,894 767 6,228 — 274,889 Net income attributable to noncontrolling interests (4,365 ) — — — (4,365 ) Net income attributable to partners $ 263,529 $ 767 $ 6,228 $ — $ 270,524 Year Ended December 31, 2015 TEP (As previously reported) Consolidate Terminals Consolidate NatGas Elimination TEP (As currently reported) (in thousands) Revenues: Crude oil transportation services $ 300,436 $ — $ — $ — $ 300,436 Natural gas transportation services 119,895 — — — 119,895 Sales of natural gas, NGLs, and crude oil 82,133 — — — 82,133 Processing and other revenues 33,733 7,689 6,332 (7,557 ) (2) 40,197 Total Revenues 536,197 7,689 6,332 (7,557 ) 542,661 Operating Costs and Expenses: Cost of sales 75,285 — — — 75,285 Cost of transportation services 53,597 800 — (7,557 ) (2) 46,840 Operations and maintenance 49,138 1,685 — — 50,823 Depreciation and amortization 83,476 782 — — 84,258 General and administrative 50,195 1,156 — — 51,351 Taxes, other than income taxes 21,796 — — — 21,796 Loss on disposal of assets 4,795 — — — 4,795 Total Operating Costs and Expenses 338,282 4,423 — (7,557 ) 335,148 Operating Income 197,915 3,266 6,332 — 207,513 Other Income (Expense): Interest expense, net (15,514 ) — — — (15,514 ) Equity in earnings of unconsolidated investments — 2,759 — — 2,759 Other income, net 2,413 — — — 2,413 Total Other (Expense) Income (13,101 ) 2,759 — — (10,342 ) Net income 184,814 6,025 6,332 — 197,171 Net income attributable to noncontrolling interests (24,268 ) — — — (24,268 ) Net income attributable to partners $ 160,546 $ 6,025 $ 6,332 $ — $ 172,903 (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. |
