IPO Report: Tallgrass Energy GP, LP (TEGP)

Francis Gaskins |

tallgrass_energy.jpg

Tallgrass Energy GP, LP (TEGP) is a recently formed Delaware limited partnership that will elect to be treated as a corporation for US federal income tax purposes. The 'parent' is Tallgrass Energy Partners, LP (TEP), with a market cap $3 billion. It is based in Leawood, KS.

Eleven other companies are scheduled for the week of May 4. The full IPO calendar is available at IPO Premium.

SEC Documents

Manager, Joint-managers: Citigroup, Goldman Sachs
Co-managers: BofA Merrill Lynch, Barclays, Credit Suisse, Deutsche Bank Securities, Morgan Stanley, RBC Capital Markets, Wells Fargo Securities, Baird, Scotia Howard Weil, Stifel, Tudor, Pickering, Holt, US Capital Advisors

End of lockup (180 days): Tuesday, November 3, 2015
End of 25-day quiet period: Monday, June 1, 2015

TEGP scheduled a $900 million IPO with a market capitalization of $4 billion at a price range midpoint of $25.50 for Thursday, May 7, 2015 on NYSE.

Tallgrass Energy GP, LP Summary

TEGP is a recently formed Delaware limited partnership that will elect to be treated as a corporation for US federal income tax purposes. The 'parent' is Tallgrass Energy Partners, LP (TEP), with a market cap $3 billion.

TEGP’s only cash-generating assets at the closing of this offering will consist of 35,311,000 common units in Tallgrass Equity, which TEGP refers to as Tallgrass Equity units, representing a controlling 22.46% membership interest in Tallgrass Equity (through TEGP’s role as the sole managing member of Tallgrass Equity).

Tallgrass Energy GP, LP Valuation

Glossary

Valuation Ratios

Mrkt Cap (mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV*

% offered in IPO

Tallgrass Energy GP, LP (TEGP)

$4,004

10.8

67.9

2.2

1.8

22%

   

2014 yr

   

*class A stock

Compare

           

Valuation Ratios

Mrkt Cap (mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV*

Yield

Tallgrass Energy GP, LP (TEGP)

$4,004

10.8

67.9

2.2

1.8

2.45%

Tallgrass Energy, L.P. (TEP)

$3,000

8.1

42.3

2.9

5.1

4.31%

   

2014 yr

   

*class A stock

             

Tallgrass Energy GP, LP Conclusion

Positive

TEGP is an incentive distribution play (IDR).  Gas transmission, estimates below are for the June 16yr compared with the Dec '14 year, see financials below

TEPG is a play on further drop down assets to parent TEP, which should increase IDR (incentive distribution rights) distributions, of which TEGP gets 22.5%

Road show says potential is $3-4bb in drop down value to parent TEP, compared to current $1.5bb in assets that have been 'dropped down'

TEGP class A gets 22.5% of distributable  cash flow

Estimated class A dividend of $22mm,  June yr '16, 2.45% rate, no overage expected, parent TEG pays 4.31% distribution

Exchange rights holders distribution +193% to $76mm, Incentive distributions rts +741% to $51mm, mostly to Exchange rights holders

The IDRs (Incentive distribution rights) entitle Tallgrass Equity to receive, without duplication, the following:

• 13% of all cash distributed in a quarter after $0.3048 has been distributed in respect of each common unit of TEP for that quarter;

• 23% of all cash distributed in a quarter after $0.3536 has been distributed in respect of each common unit of TEP for that quarter; and

• 48% of all cash distributed in a quarter after $0.4313 has been distributed in respect of each common unit of TEP for that quarter.

IDR distributions can grow quickly

---------------------

Risk:  "We may limit or modify the incentive distributions that Tallgrass Equity is entitled to receive through its ownership of TEP’s incentive distribution rights without the consent of our shareholders, which may reduce cash distributions to you."

2 steps to get cash to TEGP:  "Our only cash-generating assets are our interests in Tallgrass Equity and therefore our cash flow will be entirely dependent upon the ability of TEP (the parent, see org chart below) to make cash distributions to Tallgrass Equity, and the ability of Tallgrass Equity to make cash distributions to us."

Tallgrass Energy GP, LP Business

TEGP is a recently formed Delaware limited partnership that will elect to be treated as a corporation for U.S. federal income tax purposes.   The 'parent' is Tallgrass Energy Partners, LP (TEP), with a market cap $3 billion.

TEGP’s only cash-generating assets at the closing of this offering will consist of 35,311,000 common units in Tallgrass Equity, which TEGP refers to as Tallgrass Equity units, representing a controlling 22.46% membership interest in Tallgrass Equity (through TEGP’s role as the sole managing member of Tallgrass Equity).

At the closing of this offering, Tallgrass Equity will own, through its ownership of TEP GP, all of TEP’s incentive distribution rights, or IDRs, and 834,391 TEP general partner units, representing an approximate 1.37% general partner interest in TEP.

Tallgrass Energy GP, LP Organization

Tallgrass Equity will also own directly the Acquired TEP Units, representing an approximate 32.75% limited partner interest in TEP.

TEGP believes TEP’s stable, fee-based cash flow and strong potential for future distribution growth will directly benefit TEGP as a result of TEGP’s interest in Tallgrass Equity.

Based on TEP’s most recent quarterly distribution of $0.4850 per common unit for the fourth quarter of 2014 and the 60,234,105 outstanding common units as of March 31, 2015, aggregate quarterly cash distributions received by Tallgrass Equity would have been approximately $15.1 million ($4.9 million on incentive distribution rights, $9.7 million on the Acquired TEP Units and $0.5 million on the general partner interest).

TEGP and the Exchange Right Holders will each receive TEGP’s proportionate share of the distributions received with respect to the TEP partnership interests owned by Tallgrass Equity, after Tallgrass Equity deducts certain general, administrative and other similar expenses,

TEGP’s public company expenses, payments of principal and interest on Tallgrass Equity’s outstanding indebtedness, if any, taxes owed by Tallgrass Equity, and any capital contributed (or retained for future contribution) by Tallgrass Equity to TEP GP for it to maintain its existing general partner interest or attain up to a 2.0% general partner interest in TEP.

TEGP intends to pay to its Class A shareholders quarterly distributions equal to the cash Tallgrass Equity distributes to TEGP, less income taxes and any reserves established by TEGP’s general partner.

Tallgrass Energy GP, LP Dividends

For the twelve month period ending June 30, 2016, TEGP expects to pay cash distributions of $0.6240 per Class A share, which represents an average quarterly distribution of $0.1560 per Class A share during the period.

This equates to an average aggregate cash distribution of approximately $5.5 million per quarter, or approximately $22.0 million per year.

Tallgrass Equity intends to use the proceeds it receives from TEGP (together with borrowings of $150 million under the Tallgrass Equity revolving credit facility) to purchase the Acquired TEP Units and to pay offering expenses and other transaction costs.

Tallgrass Energy GP, LP Intellectual Property

None

Tallgrass Energy GP, LP Competition

TEP’s principal competitors in its natural gas transportation and storage market include companies that own major natural gas pipelines, such as Wyoming Interstate Company, LLC, Colorado Interstate Gas Company, LLC, Cheyenne Plains Gas Pipeline Company, LLC and Southern Star Central Gas Pipeline, Inc., many of whom also have existing storage facilities connected to their transportation systems that compete with TEP’s storage facilities.

In addition to this competition, which is primarily comprised of other pipeline companies that transport gas out of the Rocky Mountain Region, the Trailblazer Pipeline also delivers gas into a very competitive marketplace that receives gas from the developing shale plays like the Bakken, Marcellus and Utica.

As these supplies increase, it reduces the need for traditional Rockies gas production that is accessible to the Trailblazer Pipeline.

Pony Express encounters competition in the crude oil transportation business.

A number of pipeline companies directly compete with Pony Express to service takeaway volumes in markets that Pony Express currently serves, including pipelines owned and operated by Spectra Energy, Plains All American, Suncor and SemGroup.

Pony Express also competes with rail facilities, which can provide more delivery optionality to crude oil producers and marketers looking to capitalize on basis differentials between two primary crude oil price benchmarks (West Texas Intermediate Crude and Brent Crude), and with refineries that source barrels in areas served by Pony Express

TEP also experiences competition in the natural gas processing business.

TEP’s principal competitors for processing business include other facilities that service its supply areas, such as the other regional processing and treating facilities in the Greater Powder River Basin which include plants owned and operated by Kinder Morgan, Inc., which TEP refers to as Kinder Morgan, ONEOK Partners, LP, Western Gas Partners, LP, Williams Partners L.P. and Meritage Midstream Services II, LLC. In addition, due to the growing nature of the liquids-rich plays in the Wind River Basin and Powder River Basin, it is possible that one of TEP’s competitors could build additional processing facilities that service its supply areas.

Tallgrass Energy GP, LP 5% Shareholders Pre-IPO

Entities affiliated with Kelso       36.66%

Entities affiliated with EMG        37.50%

Tallgrass KC     25%

David G. Dehaemers, Jr.           25%

Frank J. Loverro            36.66%

Stanley de J. Osborne   36.66%

John T. Raymond          37.50%                        

Tallgrass Energy GP, LP Use of Proceeds

TEGP expects to receive $860 million from its IPO and use it for the following:

to Tallgrass Equity in exchange for Tallgrass Equity’s issuance to TEGP of Tallgrass Equity units.

At the closing of this offering, Tallgrass Equity intends to enter into a new $150 million revolving credit facility, and to borrow approximately $150 million, the proceeds of which will be used, together with the net proceeds from this offering that Tallgrass Equity receives from TEGP, to purchase 20 million TEP common units from Tallgrass Development at $47.68 per TEP common unit (with the price per TEP common unit being determined based on a 2.25% discount to the volume weighted average price of the TEP common units for the 30 trading days prior to April 15, 2015) and to pay offering expenses and other transaction costs.

Tallgrass Equity intends to distribute the remaining proceeds, if any, to the Exchange Right Holders.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
TEGP Tallgrass Energy GP LP Class A Shares 24.38 -0.25 -1.02 115,954

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