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IPO Preview: Tallgrass Energy GP

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In the latest chapter in the development of the Tallgrass corporate structure, Tallgrass Energy will launch their General Partner, Tallgrass Energy Partners GP, an LP which will own 20MM units of TEP and 100% of the Incentive Distributions Rights derived from the Limited Partner.  TEGP will issue 35MM public units,  representing 22% of GP ownership, for $900MM.  Launched in May 2013, Tallgrass Energy Partners LP has been one of the top performing MLPs with an impressive track record of distribution growth  as illustrated below




When compared to other high growth midstream MLP's, TEP presently has a 200bps spread to it's peer group due to their smaller EBITDA inventory and modest leverage.   TEP's initial IPO yield was 5.6%, rewarding unitholders who waited for the growth story to develop and become transparent to the market.  




Tallgrass Energy GP will pay out $0.624 over the next twelve months, implying a forward midpoint target yield of 2.45%, for which the C-corp company expects to report no federal income tax on 1099 distributions through 12/31/2017. Tallgrass Development will continue to control the GP through 77% ownership of Class B shares, which will not receive distributions, but will have majority voting control .  In 2015, the cumulative IDR payments are expected to be just $4.9MM, but the company has reached the high split IDR of 50%, which certainly was one of the key triggers for the IPO.   The 2.45% forward target yield will position TEGP as one of top three GP units when considering yield  plus growth as shown below




The Assets


Apart from the 20MM unit of ownership in TEP, the only other asset which TEGP will own is the IDR rights to receive 50% of the incremental distributions above $.04313 for each outstanding LP unit.  TEGP will benefit from both the issuance of new TEP units to fund future drop downs from their sponsor, as well as the increase in TEP distributions to unit holders  Management expects TEP to grow  distributions by 20% through 2017 and has raised $900MM from the issuance of new units to fund dropdown in order to grow distributions,.  At a 9x EBITDA multiple, TEP will need to issue  over $2B of new units to finance future drop downs assuming 50% equity financing.  Clearly TEGP is in the early stages of rapidly growing their IDR payments with a transparent plan for growth.





Future Growth


Given their 77% interest in TEGP, Sponsor Tallgrass Development is motivated to further grow TEP by way of incubating new assets for future drop down to the LP.  Presently, the sponsor has $500MM of EBITDA dropdown inventory to sell to TEP, along with new projects under development.  The existing EBITDA inventory consists of ownership interests in the Pony Express and Rocky Express Pipeline, the former of which is majority owned by TEP.





TEGP will offer total total return investors +25% under a flat interest rate scenario which will be well protected in the case of a rising rate environment.  While the backlog is considerably smaller than it's peer group of similar yield and growth units, the management team has proven capable of growing their asset base with very high quality and accretive projects.  Further, TEGP will enable public unitholders to participate in any future takeover premium, an often elusive benefit available to public LP holders.  










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