Tallgrass Energy Partners, LP 2016 Annual Report
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ENERGY PARTNERS 2016 ANNUAL REPORT About Tallgrass Energy Partners, LP Tallgrass Energy Partners, LP (NYSE: TEP) is a publicly traded, growth-oriented limited partnership formed to own, operate, acquire and develop midstream energy assets in North America. TEP’s operations are 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. TEP currently provides crude oil transportation to customers in Wyoming, Colorado, and the surrounding regions through the Pony Express System, a crude oil pipeline commencing in Guernsey, Wyoming and terminating in Cushing, Oklahoma, which includes a lateral in Northeast Colorado commencing in Weld County, Colorado, and interconnecting with the pipeline just east of Sterling, Colorado. TEP also provides crude oil storage and terminalling services, including crude oil terminals near Sterling, Colorado and in Weld County, Colorado, and a 20 percent interest in Deeprock Development, LLC, which owns a crude oil terminal in Cushing, Oklahoma. TEP provides natural gas transportation and storage services for customers in the Rocky Mountain, Midwest and Appalachian regions of the United States through its 25 percent interest in the Rockies Express Pipeline, a FERC-regulated natural gas pipeline system extending from Opal, Wyoming and Meeker, Colorado to Clarington, Ohio, the Tallgrass Interstate Gas Transmission system, a FERC-regulated natural gas transportation and storage system located in Colorado, Kansas, Missouri, Nebraska and Wyoming, and the Trailblazer Pipeline system, a FERC-regulated natural gas pipeline system extending from the Colorado and Wyoming border to Beatrice, Nebraska. TEP provides services for customers in Wyoming at the Casper and Douglas natural gas processing facilities and the West Frenchie Draw natural gas treating facility, and NGL transportation services in Northeast Colorado and Wyoming. TEP also engages in water business services, including freshwater transportation and produced water gathering and disposal, in Colorado and Texas through BNN Water Solutions. TEP Distributions per Unit $0.8150 35% CAGR TEP Gross Margin Profile $0.2875 2% 1% Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 Q4 '16 97% Adjusted EBITDA (in millions) $423.5 $252.3 Firm Fee Volumetric Fee Commodity $74.6 $109.9 2013 2014 2015 2016 TALLGRASS SYSTEM MAP Tallgrass Energy Partners Tallgrass Development Rockies Express Pipeline Pony Express System Rockies Express Pipeline Lease of Overthrust Pipeline Capacity Oil Terminal Lease of Overthrust Pipeline Capacity Tallgrass Interstate Gas Transmission NE Colorado Water & NGL Infrastructure Pony Express System Trailblazer Pipeline Tallgrass Midstream T A L L G R A S S E N E R G Y P A R T N E R S , L P 1 Letter to TEP Unitholders CHAPTER 4/YEAR 4—A TRADITIONAL MIDSTREAM MLP 6. In 2016, as in prior years, we have done what we said we were going Once again, we turn the page on another year at Tallgrass. And to do. We intend to keep on doing the same. what a year! 2016 was a year of extremes, the kind of year in the energy space—and the MLP space in particular—that we seem to have every 2016—ANOTHER YEAR OF EXECUTION—A YEAR OF ~$2.0+ five to seven years. We saw extremes in energy commodity pricing, BILLION IN ACQUISITIONS AND EXPANSIONS particularly to the downside, that eventually rippled through the entire Pony Express—On Jan. 1, 2016, we bought our final interest energy space—upstream, midstream and downstream. in the Pony Express crude oil pipeline for $743.6 million, bringing our Even though 2016 was a rough year for much of the industry, total ownership to 98 percent. At the time, the Seller—TDEV—took back Tallgrass never missed a beat and consistently executed our business 6.518 million TEP common units valued at $41.21 a share. In addition, strategy. We continued to increase distributions and deliver the kind of TEP retained the right to repurchase (or “call”) the shares back at a value our unitholders have come to expect from us. Before I dive into price of $42.50. We are pleased to report that from that time, TEP was our 2016 performance, I’d like to remind everyone who we are. able to raise equity at an average price of $47.25 and buy back all 6.518 Tallgrass Energy Partners, LP (TEP) is a traditional midstream million units—netting TEP a retained difference of approximately $31 operator providing long-term sustainable distribution growth to inves- million, thus reducing the transaction price by that much as well as tors fueled by strong customer relationships, a significant geographic reducing the multiple paid down to an 8.7x multiple of cash flow. To footprint, solid growth potential and a flexible capital structure. our knowledge, this is the first time a call strategy has been used Again in 2016, I believe we lived up to that reputation. when issuing equity to a related party and further shows on a histori- It occurs to me as I write this fourth annual letter to my fellow uni- cal basis TEP’s creativity and TDEV’s continuing commitment to the tholders that my message may seem repetitive. There’s a reason for ongoing success of TEP. that: many of our messages at Tallgrass are worth repeating. We have a track record for doing what we say we’re going to do. I’ll leave it to Rockies Express Pipeline (REX)—In May 2016, we purchased a you to decide if you believe our actions of the past and our facts of the 25 percent equity interest in REX from a subsidiary of Sempra U.S. present will translate into our vision and performance of the future Gas and Power for $436 million. The overall enterprise value of the for Tallgrass. transaction exceeded $1.0 billion. This was TEP’s first acquisition of an interest in REX. Our private affiliate, TDEV, still owns 50 percent of MORE ON 2016—PERFORMANCE AND PRESENT VALUE REX and we expect sometime over the next two years to acquire In February 2016, TEP units hit a 52-week low closing price of TDEV’s 50 percent interest in REX, continuing our growth at TEP. $25.87—largely due to us being painted with the same brush as our At REX, we constructed our Zone 3 Capacity Enhancement proj- upstream counterparts. In January 2017, we pushed back up to about ect. This project added an additional 0.8 Bcf/day of east-to-west the $50.00 per unit mark. On Feb. 12, 2016, TEP paid an annualized dis- capacity in Zone 3 by adding additional horsepower at three new com- tribution of $2.56, which at the time meant that TEP yielded close to 10 pressor stations and enhancing two existing stations. This project percent. Even though our unit price has recovered significantly, I was placed in full service in early January 2017. We and our partners believe TEP remains undervalued. at REX spent approximately $525 million on this project, which is fully On Feb. 14, 2017, TEP paid an annualized distribution of $3.26 per contracted for 15 years. unit ($0.815 quarterly). At a current TEP price of ~$49.00, that equates We also restructured REX’s largest legacy contract (0.5 Bcf/d) to a yield of nearly 7 percent. Let me lay out my case for why I believe with Encana. The contract was extended to 2024, giving Encana short- TEP is still undervalued. term rate relief in exchange for a longer-term contract with REX. It 1. From February 2016 to February 2017, we raised our distribution by was NPV positive at a nice discount rate and was a win/win for both 27.3 percent—a top 5 annualized growth rate in the MLP space. REX and its customer. REX reached an agreement to settle its $303 million breach of 2. We have told the market we believe we will have 20 percent annual- contract claim against Ultra Resources, a legacy customer. REX will ized distribution growth in 2017. receive $150 million in cash during 2017 and a new seven-year contract 3. At ~7 percent, TEP’s current yield is above both the average and for 0.2 Bcf/d commencing in 2019 for ~$27 million per year. This settle- median yield of all MLPs. Our view is that on a comparative basis, ment essentially keeps us whole on our original contract, takes capac- TEP is significantly better than average (the mean) and deserving of a ity out of the marketplace and allows us to have a healthy, solvent much lower yield than the middle value (the median). customer for the long term at REX. 4. For 2016 we covered our distribution by greater than 1.25x, generating With two contracts that extend beyond 2019, we now have nearly almost $90 million in excess of cash distributed to our unitholders. 40 percent (0.7 Bcf/d) of the west-end volumes contracted at average Since going public in May 2013, we have generated more than $130 rates of $0.67 with a weighted average life of more than five years million of excess distribution coverage that we have used to repay (post-2019). Combined with the fully contracted zone 3 volumes of 2.6 debt and reinvest in our business. In 2017 we believe we will cover our Bcf/d, we have now re-contracted greater than 85 percent of REX’s distributions by ~1.40x, generating almost $175 million in excess of original cashflow on a long-term basis.