LEAWOOD, Kan.–(BUSINESS WIRE)–Tallgrass Energy GP, LP (NYSE: TEGP) and Tallgrass Energy Partners, LP (NYSE: TEP) (“TEP”) today announced that Tallgrass Equity, LLC (“Tallgrass Equity”), a subsidiary of TEGP, has acquired a 25.01 percent membership interest in Rockies Express Pipeline LLC (“REX”) and 5,619,218 TEP common units from Tallgrass Development, LP (“TD”). The companies also announced that TEP has acquired a 2 percent membership interest in Tallgrass Pony Express Pipeline, LLC (“Pony Express”) and other administrative assets from TD. In addition, Tallgrass announced it is beginning an evaluation of potential reorganization alternatives involving TEGP and TEP.
Tallgrass Equity Acquisition and Anticipated Distribution Increase
On Feb. 7, 2018, TD merged into a wholly owned subsidiary of Tallgrass Equity. As a result, Tallgrass Equity acquired a 25.01 percent membership interest in REX and 5,619,218 TEP common units. In consideration, TEGP and Tallgrass Equity issued 27,554,785 unregistered TEGP Class B shares and Tallgrass Equity units valued at approximately $644.8 million based on the TEGP closing price on Feb. 6, 2018. The equity issued by TEGP and Tallgrass Equity was based on a discounted 30-day volume-weighted average price of TEGP Class A shares. The 25.01 percent REX membership interest was valued at approximately $400 million and the 5,619,218 TEP common units were valued at approximately $256.2 million based on a 30-day volume-weighted average price.
Management intends to recommend to the board of directors of TEGP’s general partner that TEGP increase its quarterly distributions for the first and second quarters of 2018 by an aggregate of approximately $0.12 ($0.48 annualized) per class A share, which would be an increase of approximately 33 percent as compared to the quarterly distribution declared for the fourth quarter of 2017.
“This acquisition represents an accretive transaction for Tallgrass Equity and TEGP,” said Tallgrass President and CEO David G. Dehaemers Jr. “The TEGP equity consideration utilizes our most effective cost of equity at this time, and likely addresses Tallgrass Energy’s foreseeable equity capital requirements for currently known financing needs during 2018 and 2019. In addition, the TEGP share consideration received by Tallgrass Development partners demonstrates our continued belief in the long-term value creation opportunities that lie ahead for Tallgrass Energy. As sponsors, the TD partners continue to have a significant investment in Tallgrass Energy and we now have another $645 million invested as a result of this transaction.”
Effective Feb. 1, 2018, TEP acquired a 2 percent membership interest in Pony Express and administrative assets — primarily information technology assets — from TD for cash consideration of approximately $60 million. TEP funded the transaction with borrowings under its revolving credit facility.
“The organic growth projects and third-party acquisitions TEP announced during 2017 and early 2018, including those issued earlier today, demonstrate our ability to continue to grow TEP distributions at an attractive rate without sponsor dropdowns,” Dehaemers said. “We continue to see capital deployment opportunities. Those opportunities can be made even more attractive to our partners when enhanced by the potential for a reduced cost of equity capital following a possible reorganization transaction involving TEGP and TEP.”
Evaluation of TEGP and TEP Reorganization Alternatives
Tallgrass is evaluating potential reorganization transactions that could, among other things, streamline and simplify TEP and TEGP’s organizational structure, improve its equity cost of capital, improve its debt cost of capital and facilitate financing of its current and future growth opportunities. Management expects that the evaluation process and any resulting transaction or transactions could potentially be completed by the end of 2018, although the process is ongoing and no decision to pursue a particular alternative has been reached. Tallgrass does not intend to disclose further developments with respect to the evaluation process except to the extent that a specific course of action is approved, the process is concluded, or it is required by law or otherwise deemed appropriate.
“Today’s announcements, including the merger of Tallgrass Development into a subsidiary of TEGP, reinforce our commitment to best position Tallgrass to be a fiscally prudent and growth-oriented midstream operator for decades to come and demonstrate what could be the first step in a potential reorganization transaction,” said Dehaemers.
Tallgrass plans to hold a conference call at 9:30 a.m. Central Time on Thursday, Feb. 8, 2018, to discuss these announcements as well as other announcements from Feb. 7, 2018. Tallgrass invites unitholders, shareholders and other interested parties to listen to the call through a link posted on the Investor Relations section of Tallgrass’ website at www.tallgrassenergy.com.