As filed with the Securities and Exchange Commission on
February 9, 2011
Registration
No. 333-171525
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 1
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Tesoro Logistics LP
(Exact name of Registrant as
Specified in Its Charter)
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Delaware
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4610
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27-4151603
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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19100 Ridgewood Parkway
San Antonio, Texas
78259-1828
(210) 626-6000
(Address, Including Zip Code,
and Telephone Number, including Area Code, of Registrants
Principal Executive Offices)
Charles S. Parrish
Vice President, General Counsel and Secretary
19100 Ridgewood Parkway
San Antonio, Texas
78259-1828
(210) 626-4280
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent for
Service)
Copies to:
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William N. Finnegan IV
Brett E. Braden
Latham & Watkins LLP
717 Texas Avenue, Suite 1600
Houston, Texas 77002
(713) 546-5400
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David P. Oelman
D. Alan Beck, Jr.
Vinson & Elkins L.L.P.
1001 Fannin Street, Suite 2500
Houston, Texas 77002
(713) 758-2222
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell nor does it seek an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
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SUBJECT TO COMPLETION, DATED
FEBRUARY 9, 2011.
PRELIMINARY PROSPECTUS
Common
Units
Representing Limited Partner
Interests
Tesoro Logistics LP
This is an initial public offering of common units representing
limited partner interests of Tesoro Logistics LP. We are
offering
common units in this offering. Prior to this offering, there has
been no public market for our common units. We currently
estimate that the initial public offering price per common unit
will be between $ and
$ . We intend to apply to list our
common units on the New York Stock Exchange under the symbol
TLLP.
Investing in our common units involves risks. See Risk
Factors beginning on page 17. These risks include the
following:
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Tesoro Corporation accounts for substantially all of our
revenues. Additionally, conflicts of interest may arise between
Tesoro and its affiliates, including our general partner, on the
one hand, and us and our unitholders, on the other hand. If
Tesoro changes its business strategy, is unable to satisfy its
obligations under our commercial agreements for any reason or
significantly reduces the volumes transported through our
pipelines or handled at our terminals, our revenues would
decline and our financial condition, results of operations, cash
flows and ability to make distributions to our unitholders would
be adversely affected.
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We may not have sufficient cash from operations following the
establishment of cash reserves and payment of fees and expenses,
including cost reimbursements to our general partner and its
affiliates, to enable us to pay the minimum quarterly
distribution to our unitholders.
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Tesoro may suspend, reduce or terminate its obligations under
our commercial agreements in some circumstances, which would
have a material adverse effect on our financial condition,
results of operations, cash flows and ability to make
distributions to unitholders.
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Tesoros level of indebtedness, the terms of its borrowings
and its credit ratings could adversely affect our ability to
grow our business, our ability to make cash distributions to our
unitholders and our credit ratings and profile. Our ability to
obtain credit in the future may also be affected by
Tesoros credit rating.
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A material decrease in the refining margins at Tesoros
refineries could materially reduce the volumes of crude oil or
refined products that we handle, which could adversely affect
our financial condition, results of operations, cash flows and
ability to make distributions to our unitholders.
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We may not be able to significantly increase our third-party
revenue due to competition and other factors, which could limit
our ability to grow and extend our dependence on Tesoro.
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Our general partner and its affiliates, including Tesoro, have
conflicts of interest with us and limited fiduciary duties, and
they may favor their own interests to the detriment of us and
our common unitholders. Additionally, we have no control over
Tesoros business decisions and operations, and Tesoro is
under no obligation to adopt a business strategy that favors us.
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Unitholders have very limited voting rights and, even if they
are dissatisfied, they cannot remove our general partner without
its consent.
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Our tax treatment depends on our status as a partnership for
federal income tax purposes. If the Internal Revenue Service
were to treat us as a corporation for federal income tax
purposes, which would subject us to entity-level taxation, then
our cash available for distribution to our unitholders would be
substantially reduced.
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Our unitholders share of our income will be taxable to
them for federal income tax purposes even if they do not receive
any cash distributions from us.
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Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
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Per Common Unit
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Total
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Public Offering Price
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$
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$
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Underwriting Discount(1)
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$
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$
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Proceeds to Tesoro Logistics LP(2)
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$
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$
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(1)
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Excludes a structuring fee of 0.25%
of the gross offering proceeds payable to Citigroup Global
Markets Inc. and an advisory fee. Please see
Underwriting.
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(2)
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We intend to use substantially all
of the net proceeds of this offering to make a distribution to
Tesoro. For a detailed explanation of our intended use of the
net proceeds from this offering, please see Use of
Proceeds on page 46.
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To the extent that the underwriters sell more
than common units in this
offering, the underwriters have the option to purchase up to an
additional common units from
Tesoro Logistics LP at the initial public offering price less
underwriting discounts and the structuring fee payable to
Citigroup Global Markets Inc.
The underwriters expect to deliver the common units to
purchasers on or
about ,
2011 through the book-entry facilities of The Depository
Trust Company.
Joint Book-Running Managers
Citi Wells Fargo Securities BofA Merrill Lynch Credit Suisse
Co-Managers
,
2011.
TABLE OF
CONTENTS
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F-1
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A-1
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EX-23.1 |
EX-23.2 |
You should rely only on the information contained in this
prospectus or in any free writing prospectus we may authorize to
be delivered to you. We have not, and the underwriters have not,
authorized any other person to provide you with different
information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the underwriters are not, making an offer to sell these
securities in any jurisdiction where an offer or sale is not
permitted. You should assume that the information appearing in
this prospectus is accurate as of the date on the front cover of
this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
Through and
including ,
2011 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealers obligation to
deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
Industry
and Market Data
The market data and certain other statistical information used
throughout this prospectus are based on independent industry
publications, government publications or other published
independent sources. Some data are also based on our good faith
estimates. Although we believe these third-party sources are
reliable, we have not independently verified the information and
cannot guarantee its accuracy and completeness.
iv
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. It does not contain all of the information that
you should consider before purchasing our common units. You
should read the entire prospectus carefully, including the
historical and pro forma combined financial statements and notes
to those financial statements. Unless expressly stated
otherwise, the information presented in this prospectus assumes
(1) an initial public offering price of
$ per common unit and
(2) that the underwriters option to purchase
additional common units is not exercised. You should read
Risk Factors beginning on page 17 for more
information about important factors that you should consider
before purchasing our common units.
Unless the context otherwise requires, references in this
prospectus to Tesoro Logistics LP, our
partnership, we, our,
us, or like terms, when used in a historical
context, refer to Tesoro Logistics LP Predecessor, our
predecessor for accounting purposes, also referenced as
our predecessor, and when used in the present tense
or prospectively, refer to Tesoro Logistics LP and its
subsidiaries. References in this prospectus to
Tesoro refer collectively to Tesoro Corporation and
its subsidiaries, other than Tesoro Logistics LP, its
subsidiaries and its general partner.
Tesoro
Logistics LP
Overview
We are a fee-based, growth-oriented Delaware limited partnership
recently formed by Tesoro to own, operate, develop and acquire
crude oil and refined products logistics assets. Our logistics
assets are integral to the success of Tesoros refining and
marketing operations and are used to gather, transport and store
crude oil and to distribute, transport and store refined
products. Our initial assets consist of a crude oil gathering
system in the Bakken Shale/Williston Basin area of North Dakota
and Montana, eight refined products terminals in the midwestern
and western United States and a crude oil and refined products
storage facility and five related short-haul pipelines in Utah.
We intend to expand our business through organic growth,
including constructing new assets and increasing the utilization
of our existing assets, and by acquiring assets from Tesoro and
third parties. Although Tesoro has historically operated its
logistics assets primarily to support its refining and marketing
business, it has recently announced its intent to grow its
logistics operations in order to maximize the integrated value
of its assets within the midstream and downstream value chain.
In support of this strategy, Tesoro has formed us to be the
primary vehicle to grow its logistics operations. In order to
provide us with initial acquisition opportunities, Tesoro has
granted us a right of first offer on certain logistics assets
that it will retain following this offering.
We generate revenue by charging fees for gathering, transporting
and storing crude oil and for terminalling, transporting and
storing refined products. Since we generally do not own any of
the crude oil or refined products that we handle and do not
engage in the trading of crude oil or refined products, we have
minimal direct exposure to risks associated with fluctuating
commodity prices, although these risks indirectly influence our
activities and results of operations over the long term.
Following the closing of this offering, substantially all of our
revenue will be derived from Tesoro, primarily under various
long-term, fee-based commercial agreements that include minimum
volume commitments. We believe these commercial agreements will
provide us with a stable base of cash flows.
Our
Assets and Operations
Our assets and operations are organized into the following two
segments:
Crude Oil Gathering. Our common carrier crude
oil gathering system in North Dakota and Montana, which we refer
to as our High Plains system, includes an approximate
23,000 barrels per day (bpd) truck-based crude oil
gathering operation and approximately 700 miles of pipeline
and related storage assets with the current capacity to deliver
up to 70,000 bpd to Tesoros Mandan, North Dakota
refinery. This system gathers and transports crude oil produced
from the Williston Basin, one of the most prolific onshore crude
oil
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producing basins in North America, including production from the
Bakken Shale formation. We refer to this area, a significant
portion of which is serviced by our High Plains system, as the
Bakken Shale/Williston Basin area. Currently, Tesoros
Mandan refinery is the only destination point on our High Plains
system.
Terminalling, Transportation and Storage. We
own and operate eight refined products terminals with aggregate
truck and barge delivery capacity of approximately
229,000 bpd. The terminals provide distribution primarily
for refined products produced at Tesoros refineries
located in Los Angeles and Martinez, California; Salt Lake City,
Utah; Kenai, Alaska; Anacortes, Washington; and Mandan, North
Dakota. We also own and operate assets that exclusively support
Tesoros Salt Lake City refinery, including a refined
products and crude oil storage facility with total shell
capacity of approximately 878,000 barrels and three
short-haul crude oil supply pipelines and two short-haul refined
product delivery pipelines connected to third-party interstate
pipelines. Our terminalling, transportation and storage assets
serve regions that are expected to experience growth in refined
product demand at a rate greater than the national average for
the United States over the next 25 years according to the
United States Energy Information Administration (EIA).
For the year ended December 31, 2009, we had pro forma
EBITDA of approximately $51.5 million and pro forma net
income of approximately $40.3 million. Tesoro accounted for
93% of our pro forma EBITDA and 91% of our pro forma net income
for that period. For the year ended December 31, 2009, we
had pro forma revenue of $48.8 million from our crude oil
gathering segment and $42.1 million from our terminalling,
transportation and storage segment. Please read Summary
Historical and Pro Forma Combined Financial and Operating
Data beginning on page 76 for the definition of the
term EBITDA and a reconciliation of EBITDA to our most directly
comparable financial measures, calculated and presented in
accordance with GAAP.
Our
Commercial Agreements with Tesoro
All of our operations are strategically located within
Tesoros refining and marketing supply chain and, following
the closing of this offering, a substantial majority of our
revenues will be generated by providing services to
Tesoros refining and marketing businesses under various
long-term, fee-based commercial agreements that we will enter
into with Tesoro at the closing of this offering. Under these
agreements, we will provide various pipeline transportation,
trucking, terminal distribution and storage services to Tesoro,
and Tesoro will commit to provide us with minimum monthly
throughput volumes of crude oil and refined products. These
commercial agreements with Tesoro will include:
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a 10-year
pipeline transportation services agreement under which Tesoro
will pay us fees for gathering and transporting crude oil on our
High Plains pipeline system;
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a two-year trucking transportation services agreement under
which Tesoro will pay us fees for crude oil trucking and related
services and scheduling and dispatching services that we provide
through our High Plains truck-based crude oil gathering
operation;
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a 10-year
master terminalling services agreement under which Tesoro will
pay us fees for providing terminalling services at our eight
refined products terminals;
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a 10-year
pipeline transportation services agreement under which Tesoro
will pay us fees for transporting crude oil and refined products
on our five Salt Lake City short-haul pipelines; and
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a 10-year
storage and transportation services agreement under which Tesoro
will pay us fees for storing crude oil and refined products at
our Salt Lake City storage facility and transporting crude oil
and refined products between the storage facility and
Tesoros Salt Lake City refinery through interconnecting
pipelines on a dedicated basis.
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For additional information about these commercial agreements, as
well as other revenue we expect to receive from Tesoro and third
parties, please read Managements Discussion and
Analysis of Financial Condition and Results of
Operations How We Generate Revenue beginning
on page 80 and Certain Relationships and Related
Party Transactions Agreements Governing the
Transactions Commercial Agreements with Tesoro
beginning on page 143.
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Business
Strategies
Our primary business objectives are to maintain stable cash
flows and to increase our quarterly cash distribution per unit
over time. We intend to accomplish these objectives by executing
the following strategies:
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Focus on Stable, Fee-Based Business. We intend
to focus on opportunities to provide committed, fee-based
logistics services to Tesoro and third parties and to minimize
our direct exposure to commodity price fluctuations.
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Pursue Attractive Organic Growth
Opportunities. We intend to evaluate investment
opportunities to expand our existing asset base that may arise
from the growth of Tesoros refining and marketing business
or from increased third-party activity in our areas of
operations. We intend to focus on organic growth opportunities
that complement our current asset base or provide attractive
returns in new areas within our geographic footprint.
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Grow Through Strategic Acquisitions. We plan
to pursue accretive acquisitions of complementary assets from
Tesoro as well as third parties. In order to provide us with
initial acquisition opportunities, Tesoro has granted us a right
of first offer to acquire certain logistics assets that it will
retain following this offering. Our third-party acquisition
strategy will be focused on logistics assets in the western half
of the United States where we believe our knowledge of the
market will provide us with a competitive advantage.
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Optimize Existing Asset Base and Pursue Third-Party
Volumes. We will seek to enhance the
profitability of our existing assets by pursuing opportunities
to add Tesoro and third-party volumes, improve operating
efficiencies and increase utilization.
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Competitive
Strengths
We believe we are well positioned to achieve our primary
business objectives and execute our business strategies based on
the following competitive strengths:
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Long-Term, Fee-Based Contracts. Initially, we
will generate a substantial majority of our revenue under
long-term, fee-based contracts with Tesoro that include minimum
volume commitments and fees that are indexed for inflation.
These contracts should promote cash flow stability and minimize
our direct exposure to commodity price fluctuations.
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Relationship with Tesoro. We have a strategic
relationship with Tesoro, which we believe will provide us with
a stable base of cash flows as well as opportunities for growth.
Our High Plains system currently delivers all of the crude oil
processed by Tesoros Mandan refinery, and our refined
products terminals provide critical storage and distribution
infrastructure for six of Tesoros seven refineries. In
addition, we have a right of first offer to acquire certain
logistics assets that will be retained by Tesoro following this
offering.
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Assets Positioned in Areas of High Demand. Our
High Plains system is located in the Williston Basin, one of the
most prolific onshore oil producing basins in North America, and
our terminalling, transportation and storage assets are
positioned in markets that the EIA projects will experience
growth in demand for refined products.
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Experienced Management Team. Our management
team has significant experience in the management and operation
of logistics assets and the execution of expansion and
acquisition strategies. Our management team includes some of the
most senior officers of Tesoro, who average over 27 years
of experience in the energy industry.
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Financial Flexibility. We believe we will have
the financial flexibility to execute our growth strategy through
the available capacity under our revolving credit facility and
our ability to access the debt and equity capital markets.
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3
Growth
Opportunities
Crude Oil Gathering. We believe there are a
number of potential growth opportunities that capitalize on the
strategic position of our High Plains system within the Bakken
Shale/Williston Basin area, ranging from projects with modest
capital requirements to larger greenfield projects that would
require a larger investment. For example, we could increase the
volume of third-party crude oil that we ship on our High Plains
system by making outlet connections to several existing
third-party pipelines. We could also increase the throughput
capacity of this system through the addition of pumping capacity
or the construction of additional gathering infrastructure.
Terminalling, Transportation and Storage. We
believe our growth in this segment will primarily be driven by
pursuing opportunities to increase Tesoro and third-party
volumes and by completing organic growth and expansion projects,
including those constructed by Tesoro and purchased by us after
construction is completed. For example, we intend to add ethanol
blending capabilities to several of our terminals where there is
existing demand. Additionally, we believe we are well positioned
to expand our business at our existing terminals to handle
additional Tesoro volumes on a more cost-effective basis than
competing third-party terminals.
Our
Relationship with Tesoro
One of our principal strengths is our relationship with Tesoro.
Tesoro is the third largest independent refiner in the United
States by crude capacity and owns and operates seven refineries
that serve markets in Alaska, Arizona, California, Hawaii,
Idaho, Minnesota, Nevada, North Dakota, Oregon, Utah, Washington
and Wyoming. Tesoro also sells transportation fuels and
convenience products in 15 states through a network of over
800 retail stations, primarily under the
Tesoro®,
Mirastar®,
Shell®,
and USA
Gasolinetm
brands. For the year ended December 31, 2009, Tesoro had
consolidated revenues of approximately $16.9 billion, an
operating loss of $57 million, a net loss of
$140 million and, as of December 31, 2009, had
consolidated total assets of approximately $8.1 billion.
Tesoro Corporations common stock trades on the
New York Stock Exchange (NYSE) under the symbol
TSO.
Following the completion of this offering, Tesoro will continue
to own and operate substantial crude oil and refined products
logistics assets and will retain a significant interest in us
through its ownership of a %
limited partner interest and a 2.0% general partner interest in
us, as well as all of our incentive distribution rights. Given
Tesoros significant ownership in us following this
offering and its intent to use us as the primary vehicle to grow
its logistics operations, we believe Tesoro will be motivated to
promote and support the successful execution of our business
strategies. In particular, we believe it will be in
Tesoros best interest for it to contribute additional
logistics assets to us over time and to facilitate organic
growth opportunities and accretive acquisitions from third
parties, although Tesoro is under no obligation to contribute
any assets to us or accept any offer for its assets that we may
choose to make.
In addition to the commercial agreements we will enter into with
Tesoro upon the closing of this offering, we will enter into an
omnibus agreement and an operational services agreement with
Tesoro. Under the omnibus agreement, subject to certain
exceptions, Tesoro will agree not to engage in the business of
owning or operating crude oil or refined products pipelines,
terminals or storage facilities in the United States that are
not integral to a Tesoro refinery. Additionally, under the
omnibus agreement, Tesoro will grant us a right of first offer
to acquire certain of its retained logistics assets, including
terminals, pipelines, docks, storage facilities and other
related logistic assets located in Alaska, California and
Washington, to the extent it decides to sell any of those
assets. As of September 30, 2010, the aggregate gross book
value of the retained logistics assets on which we have a right
of first offer was approximately $240.0 million, as
compared to an aggregate gross book value of approximately
$190.0 million for the assets being contributed to us in
connection with this offering. The consideration to be paid by
us for retained logistics assets offered to us by Tesoro, if
any, as well as the consummation and timing of any acquisition
by us of these assets, would depend upon, among other things,
the timing of Tesoros decision to sell these assets and
our ability to successfully negotiate a price and other purchase
terms for these assets. Management of our general partner will
negotiate the terms of any acquisition with management of
Tesoro, subject to approval of our general partners board
of directors and, if our general
4
partners board of directors so authorizes, the conflicts
committee of our general partners board of directors. The
omnibus agreement will also address our payment of a fee to
Tesoro for the provision of various centralized corporate
services, Tesoros reimbursement of us for certain
maintenance capital expenditures, and Tesoros
indemnification of us for certain matters, including
environmental, title and tax matters. Please read Certain
Relationships and Related Party Transactions
Agreements Governing the Transactions Omnibus
Agreement beginning on page 139.
Under the operational services agreement, we will reimburse
Tesoro for the provision of certain operational services to us
in support of our assets, and we will also pay Tesoro an annual
fee for operational services performed by certain of
Tesoros field-level employees at our Mandan, North Dakota
terminal and our Salt Lake City, Utah storage facility. Please
read Certain Relationships and Related Party
Transactions Agreements Governing the
Transactions Operational Services Agreement
beginning on page 143.
We believe the terms and conditions of all of our initial
agreements with Tesoro are generally no less favorable to either
party than those that could have been negotiated with
unaffiliated parties with respect to similar services.
While our relationship with Tesoro and its subsidiaries is a
significant strength, it is also a source of potential
conflicts. Please read Conflicts of Interest and Fiduciary
Duties beginning on page 152 and Risk
Factors Risks Inherent in an Investment in
Us Our general partner and its affiliates, including
Tesoro, have conflicts of interest with us and limited fiduciary
duties, and they may favor their own interests to the detriment
of us and our common unitholders. Additionally, we have no
control over Tesoros business decisions and operations and
Tesoro is under no obligation to adopt a business strategy that
favors us on page 32.
Risk
Factors
An investment in our common units involves risks associated with
our business, our partnership structure and the tax
characteristics of our common units. You should carefully
consider the following risk factors, the other risks described
in Risk Factors and the other information in this
prospectus before deciding whether to invest in our common
units. The following risks are discussed in more detail in
Risk Factors beginning on page 17.
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Tesoro Corporation accounts for substantially all of our
revenues. Additionally, conflicts of interest may arise between
Tesoro and its affiliates, including our general partner, on the
one hand, and us and our unitholders, on the other hand. If
Tesoro changes its business strategy, is unable to satisfy its
obligations under our commercial agreements for any reason or
significantly reduces the volumes transported through our
pipelines or handled at our terminals, our revenues would
decline and our financial condition, results of operations, cash
flows and ability to make distributions to our unitholders would
be adversely affected.
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We may not have sufficient cash from operations following the
establishment of cash reserves and payment of fees and expenses,
including cost reimbursements to our general partner and its
affiliates, to enable us to pay the minimum quarterly
distribution to our unitholders.
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Tesoro may suspend, reduce or terminate its obligations under
our commercial agreements in some circumstances, which would
have a material adverse effect on our financial condition,
results of operations, cash flows and ability to make
distributions to unitholders.
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Tesoros level of indebtedness, the terms of its borrowings
and its credit ratings could adversely affect our ability to
grow our business, our ability to make cash distributions to our
unitholders and our credit ratings and profile. Our ability to
obtain credit in the future may also be affected by
Tesoros credit rating.
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A material decrease in the refining margins at Tesoros
refineries could materially reduce the volumes of crude oil or
refined products that we handle, which could adversely affect
our financial condition, results of operations, cash flows and
ability to make distributions to our unitholders.
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5
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We may not be able to significantly increase our third-party
revenue due to competition and other factors, which could limit
our ability to grow and extend our dependence on Tesoro.
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Our general partner and its affiliates, including Tesoro, have
conflicts of interest with us and limited fiduciary duties, and
they may favor their own interests to the detriment of us and
our common unitholders. Additionally, we have no control over
Tesoros business decisions and operations, and Tesoro is
under no obligation to adopt a business strategy that
favors us.
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Unitholders have very limited voting rights and, even if they
are dissatisfied, they cannot remove our general partner without
its consent.
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Our tax treatment depends on our status as a partnership for
federal income tax purposes. If the Internal Revenue Service
were to treat us as a corporation for federal income tax
purposes, which would subject us to entity-level taxation, then
our cash available for distribution to our unitholders would be
substantially reduced.
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Our unitholders share of our income will be taxable to
them for federal income tax purposes even if they do not receive
any cash distributions from us.
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The
Transactions
We were formed in December 2010 by Tesoro Corporation and its
wholly owned subsidiary, Tesoro Logistics GP, LLC, our general
partner, to own, operate, develop and acquire crude oil and
refined products logistics assets. In connection with the
closing of this offering, Tesoro will contribute all of our
predecessors assets and operations to us (excluding
working capital and other noncurrent liabilities).
Additionally, at the closing of this offering the following
transactions will occur:
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we will
issue
common units
and
subordinated units to Tesoro, representing an
aggregate % limited partner
interest in us,
and
general partner units, representing a 2.0% general partner
interest in us, and all of our incentive distribution rights to
our general partner;
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we will
issue
common units to the public in this offering, representing
a % limited partner interest in us,
and will apply the net proceeds as described in Use of
Proceeds on page 46;
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we will enter into a new $150.0 million revolving credit
facility, under which we will borrow $50.0 million to fund
an additional cash distribution to Tesoro;
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Tesoro will enter into multiple long-term commercial agreements
with us; and
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Tesoro will enter into an omnibus agreement and an operational
services agreement with us.
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6
Organizational
Structure After the Transactions
The following simplified diagram depicts our organizational
structure after giving effect to the transactions described
above.
After giving effect to the transactions, our units will be held
as follows:
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Public common units
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%
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Tesoro common units
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%
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Tesoro subordinated units
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%
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General partner units
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2.0
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%
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Total
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100
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%
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7
Management
of Tesoro Logistics LP
We are managed and operated by the board of directors and
executive officers of Tesoro Logistics GP, LLC, our general
partner. Tesoro is the sole owner of our general partner and has
the right to appoint the entire board of directors of our
general partner. Unlike shareholders in a publicly traded
corporation, our unitholders will not be entitled to elect our
general partner or the board of directors of our general
partner. Some of the executive officers and directors of our
general partner currently serve as executive officers and
directors of Tesoro. For more information about the directors
and executive officers of our general partner, please read
Management Directors and Executive Officers of
Tesoro Logistics GP, LLC beginning on page 125.
In order to maintain operational flexibility, our operations
will be conducted through, and our operating assets will be
owned by, various operating subsidiaries. However, neither we
nor our subsidiaries have any employees. Our general partner has
the sole responsibility for providing the personnel necessary to
conduct our operations, whether through directly hiring
employees or by obtaining the services of personnel employed by
Tesoro or others. All of the personnel that will conduct our
business immediately following the closing of this offering will
be employed by our general partner and its affiliates, including
Tesoro, but we sometimes refer to these individuals in this
prospectus as our employees.
Principal
Executive Offices and Internet Address
Our principal executive offices are located at 19100 Ridgewood
Parkway, San Antonio, Texas
78259-1828,
and our telephone number is
(210) 626-6000.
Following the completion of this offering, our website will be
located at
www. .com.
We expect to make our periodic reports and other information
filed with or furnished to the Securities and Exchange
Commission (SEC) available, free of charge, through our website,
as soon as reasonably practicable after those reports and other
information are electronically filed with or furnished to the
SEC. Information on our website or any other website is not
incorporated by reference into this prospectus and does not
constitute a part of this prospectus.
Summary
of Conflicts of Interest and Fiduciary Duties
Our general partner has a legal duty to manage us in a manner
beneficial to our unitholders. This legal duty originates in
statutes and judicial decisions and is commonly referred to as a
fiduciary duty. However, because our general partner
is a wholly owned subsidiary of Tesoro, the officers and
directors of our general partner have fiduciary duties to manage
the business of our general partner in a manner beneficial to
Tesoro. As a result of this relationship, conflicts of interest
may arise in the future between us and our unitholders, on the
one hand, and our general partner and its affiliates, including
Tesoro, on the other hand. For example, our general partner will
be entitled to make determinations that affect the amount of
cash distributions we make to the holders of common units, which
in turn has an effect on whether our general partner receives
incentive cash distributions. In addition, our general partner
may determine to manage our business in a way that directly
benefits Tesoros refining or marketing businesses, whether
by causing us not to seek higher tariff rates and terminalling
fees with third-party customers or otherwise, rather than
indirectly benefitting Tesoro solely through its ownership
interests in us. For a more detailed description of the
conflicts of interest and fiduciary duties of our general
partner, please read Conflicts of Interest and Fiduciary
Duties beginning on page 152.
Our partnership agreement limits the liability and reduces the
fiduciary duties of our general partner to our unitholders. Our
partnership agreement also restricts the remedies available to
unitholders for actions that might otherwise constitute breaches
of our general partners fiduciary duties. By purchasing a
common unit, the purchaser agrees to be bound by the terms of
our partnership agreement, and pursuant to the terms of our
partnership agreement each holder of common units consents to
various actions and potential conflicts of interest contemplated
in the partnership agreement that might otherwise be considered
a breach of fiduciary or other duties under Delaware law.
8
The
Offering
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Common units offered to the public |
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common
units. |
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common
units if the underwriters exercise in full their option to
purchase additional common units from us. |
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Units outstanding after this offering |
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common
units
and subordinated
units, each representing a 49.0% limited partner interest in us. |
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Use of proceeds |
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We expect to receive net proceeds of
$ million from this offering,
after deducting underwriting discounts, a structuring fee, an
advisory fee and estimated offering expenses. We intend to
retain $3.0 million of the net proceeds for working capital
purposes, and $ million to
make a cash distribution to Tesoro, in part to reimburse Tesoro
for certain capital expenditures incurred with respect to the
assets contributed to us. |
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At the closing of this offering, we will borrow
$50.0 million under our revolving credit facility, all of
which will be used to fund an additional cash distribution to
Tesoro. |
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The net proceeds from any exercise by the underwriters of their
option to purchase additional common units from us will be used
to redeem from Tesoro a number of common units equal to the
number of common units issued upon exercise of the option at a
price per common unit equal to the proceeds per common unit
before expenses but after deducting underwriting discounts and
the structuring fee. |
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Cash distributions |
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We intend to make a minimum quarterly distribution of
$ per unit to the extent we have
sufficient cash from operations after establishment of cash
reserves and payment of fees and expenses, including payments to
our general partner. |
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For the quarter in which this offering closes, we will pay a
prorated distribution on our units covering the period from the
completion of this offering
through ,
2011, based on the actual length of that period. |
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In general, we will pay any cash distributions we make each
quarter in the following manner: |
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first, 98.0% to the holders of common units
and 2.0% to our general partner, until each common unit has
received a minimum quarterly distribution of
$ plus any arrearages from prior
quarters;
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second, 98.0% to the holders of subordinated
units and 2.0% to our general partner, until each subordinated
unit has received a minimum quarterly distribution of
$ ; and
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third, 98.0% to all unitholders, pro rata,
and 2.0% to our general partner, until each unit has received a
distribution of $ .
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If cash distributions to our unitholders exceed
$ per unit in any quarter, our
general partner will receive, in addition to distributions on
its 2.0% general partner interest, increasing |
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percentages, up to 48.0%, of the cash we distribute in excess
of that amount. We refer to these distributions as
incentive distributions. In certain circumstances,
our general partner, as the initial holder of our incentive
distribution rights, has the right to reset the target
distribution levels described above to higher levels based on
our cash distributions at the time of the exercise of this reset
election. Please read Provisions of our Partnership
Agreement Relating to Cash Distributions beginning on
page 62. |
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Pro forma cash available for distribution generated during the
year ended December 31, 2009 and the twelve months ended
September 30, 2010 was approximately $43.2 million and
$46.7 million, respectively. The amount of available cash
we need to pay the minimum quarterly distribution for four
quarters on our common units and subordinated units to be
outstanding immediately after this offering and the
corresponding distribution on our 2.0% general partner interest
is approximately $ million
(or an average of approximately
$ million per quarter). As a
result, for the year ended December 31, 2009 and the twelve
months ended September 30, 2010, on a pro forma basis, we
would have generated available cash sufficient to pay the full
minimum quarterly distribution on all of our common units, and
our subordinated units during those periods. Please read
Cash Distribution Policy and Restrictions on
Distributions Unaudited Pro Forma Available Cash for
the Year Ended December 31, 2009 and the Twelve Months
Ended September 30, 2010 beginning on page 51. |
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We believe, based on our financial forecast and related
assumptions included in Cash Distribution Policy and
Restrictions on Distributions Estimated EBITDA for
the Year Ending December 31, 2011 that we will have
sufficient available cash to pay the minimum quarterly
distribution of $ on all of our
units and the corresponding distribution on our general
partners 2.0% interest for the year ending
December 31, 2011. However, we do not have a legal
obligation to pay distributions at our minimum quarterly
distribution rate or at any other rate except as provided in our
partnership agreement, and there is no guarantee that we will
make quarterly cash distributions to our unitholders. Please
read Cash Distribution Policy and Restrictions on
Distributions beginning on page 49. |
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Subordinated units |
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Tesoro will initially own all of our subordinated units. The
principal difference between our common units and subordinated
units is that in any quarter during the subordination period,
the subordinated units will not be entitled to receive any
distribution until the common units have received the minimum
quarterly distribution plus any arrearages in the payment of the
minimum quarterly distribution from prior quarters. Subordinated
units will not accrue arrearages. |
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Conversion of subordinated units |
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The subordination period will end on the first business day
after we have earned and paid at least
(1) $ (the minimum quarterly
distribution on an annualized basis) on each outstanding unit
and the corresponding distribution on our general partners
2.0% |
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interest for each of three consecutive, non-overlapping four
quarter periods ending on or
after ,
2014 or (2) $ (150.0% of the
annualized minimum quarterly distribution) on each outstanding
unit and the corresponding distributions on our general
partners 2.0% interest and the incentive distribution
rights for the four-quarter period immediately preceding that
date, in each case provided there are no arrearages on our
common units at that time. |
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The subordination period also will end upon the removal of our
general partner other than for cause if no subordinated units or
common units held by the holders of subordinated units or their
affiliates are voted in favor of that removal. |
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When the subordination period ends, all subordinated units will
convert into common units on a
one-for-one
basis, and all common units thereafter will no longer be
entitled to arrearages. Please read Provisions of our
Partnership Agreement Relating to Cash Distributions
Subordination Period beginning on page 65. |
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Issuance of additional units |
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Our partnership agreement authorizes us to issue an unlimited
number of additional units without the approval of our
unitholders. Please read Units Eligible for Future
Sale beginning on page 174 and The Partnership
Agreement Issuance of Additional Securities
beginning on page 164. |
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Limited voting rights |
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Our general partner will manage and operate us. Unlike the
holders of common stock in a corporation, our unitholders will
have only limited voting rights on matters affecting our
business. Our unitholders will have no right to elect our
general partner or its directors on an annual or other
continuing basis. Our general partner may not be removed except
by a vote of the holders of at least
662/3%
of the outstanding units, including any units owned by our
general partner and its affiliates, voting together as a single
class. Upon consummation of this offering, Tesoro will own an
aggregate of % of our common and
subordinated units (or % of our
common and subordinated units, if the underwriters exercise
their option to purchase additional common units in full). This
will give Tesoro the ability to prevent the removal of our
general partner. Please read The Partnership
Agreement Voting Rights beginning on page 162. |
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Limited call right |
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If at any time our general partner and its affiliates own more
than 75% of the outstanding common units, our general partner
has the right, but not the obligation, to purchase all of the
remaining common units at a price equal to the greater of
(1) the average of the daily closing price of our common
units over the 20 trading days preceding the date that is three
days before notice of exercise of the call right is first mailed
and (2) the highest
per-unit
price paid by our general partner or any of its affiliates for
common units during the
90-day
period preceding the date such notice is first mailed. Please
read The Partnership Agreement Limited Call
Right beginning on page 170. |
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Estimated ratio of taxable income to distributions |
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We estimate that if you own the common units you purchase in
this offering through the record date for distributions for the
period |
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ending December 31, 2013, you will be allocated, on a
cumulative basis, an amount of federal taxable income for that
period that will be approximately %
of the cash distributed to you with respect to that period. For
example, if you receive an annual distribution of
$ per unit, we estimate that your
average allocable federal taxable income per year will be no
more than approximately $ per
unit. Thereafter, the ratio of allocable taxable income to cash
distributions to you could substantially increase. Please read
Material Federal Income Tax Consequences Tax
Consequences of Unit Ownership Ratio of Taxable
Income to Distributions on page 178 for the basis of
this estimate. |
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Material federal income tax consequences |
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For a discussion of the material federal income tax consequences
that may be relevant to prospective unitholders who are
individual citizens or residents of the United States, please
read Material Federal Income Tax Consequences
beginning on page 175. |
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Exchange listing |
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We intend to apply to list our common units on the New York
Stock Exchange under the symbol TLLP. |
12
Summary
Historical and Pro Forma Combined Financial and Operating
Data
The following table shows summary historical combined financial
and operating data of Tesoro Logistics LP Predecessor, our
predecessor for accounting purposes, and summary pro forma
combined financial and operating data of Tesoro Logistics LP for
the periods and as of the dates indicated. The summary
historical combined financial data of our predecessor for the
years ended December 31, 2007, 2008 and 2009 are derived
from the audited combined financial statements of our
predecessor appearing elsewhere in this prospectus. The summary
historical combined financial data of our predecessor for the
nine months ended September 30, 2009 and 2010 are derived
from the unaudited combined financial statements of our
predecessor appearing elsewhere in this prospectus. The
following table should be read together with, and is qualified
in its entirety by reference to, the historical and unaudited
pro forma combined financial statements and the accompanying
notes included elsewhere in this prospectus. The table should
also be read together with Managements Discussion
and Analysis of Financial Condition and Results of
Operations beginning on page 80.
The summary pro forma combined financial data presented in the
following table for the year ended December 31, 2009 and as
of and for the nine months ended September 30, 2010 are
derived from the unaudited pro forma combined financial
statements included elsewhere in this prospectus. The pro forma
balance sheet assumes that the offering and the related
transactions occurred as of September 30, 2010, and the pro
forma statements of operations for the year ended
December 31, 2009 and the nine months ended
September 30, 2010 assume that the offering and the related
transactions occurred as of January 1, 2009. These
transactions include, and the pro forma financial data give
effect to, the following:
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Tesoros contribution of all of our predecessors
assets and operations to us (excluding working capital and other
noncurrent liabilities);
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our execution of multiple long-term commercial agreements with
Tesoro and recognition of incremental revenues under those
agreements that were not recognized by our predecessor;
|
|
|
|
certain intrastate tariff increases on our High Plains pipeline
system;
|
|
|
|
our execution of an omnibus agreement and an operational
services agreement with Tesoro;
|
|
|
|
the consummation of this offering and our issuance
of
common units to the
public,
general partner units and the incentive distribution rights to
our general partner
and
common units
and
subordinated units to Tesoro; and
|
|
|
|
|
|
the application of the net proceeds of this offering, together
with the proceeds from borrowings under our revolving credit
facility, as described in Use of Proceeds on
page 46.
|
The pro forma combined financial data do not give effect to the
estimated $3.0 million in incremental annual general and
administrative expenses we expect to incur as a result of being
a separate publicly traded partnership.
Our assets have historically been a part of the integrated
operations of Tesoro, and our predecessor generally recognized
only the costs, but not the revenue, associated with the
short-haul pipeline transportation, terminalling, storage or
trucking services provided to Tesoro on an intercompany basis.
Accordingly, the revenues in our predecessors historical
combined financial statements relate only to amounts received
from third parties for these services and amounts received from
Tesoro with respect to transportation regulated by the Federal
Energy Regulatory Commission (FERC) and the North Dakota Public
Service Commission (NDPSC) on our High Plains pipeline system.
For this reason, as well as the other factors described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Overview Factors Affecting the Comparability of Our
Financial Results beginning on page 83, our future
results of operations will not be comparable to our
predecessors historical results.
13
The following table presents the non-GAAP financial measure of
EBITDA, which we use in our business as a measure of performance
and liquidity. For a definition of EBITDA and a reconciliation
to our most directly comparable financial measures calculated
and presented in accordance with GAAP, please see
Non-GAAP Financial Measure on page 16.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tesoro Logistics LP
|
|
|
|
Tesoro Logistics LP Predecessor Historical
|
|
|
Pro Forma
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per unit data and operating
information)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering
|
|
$
|
20,646
|
|
|
$
|
21,190
|
|
|
$
|
19,422
|
|
|
$
|
14,239
|
|
|
$
|
14,177
|
|
|
$
|
48,827
|
|
|
$
|
37,461
|
|
Terminalling, transportation and storage
|
|
|
3,251
|
|
|
|
3,297
|
|
|
|
3,237
|
|
|
|
2,324
|
|
|
|
2,797
|
|
|
|
42,136
|
|
|
|
33,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
23,897
|
|
|
$
|
24,487
|
|
|
$
|
22,659
|
|
|
$
|
16,563
|
|
|
$
|
16,974
|
|
|
$
|
90,963
|
|
|
$
|
70,626
|
|
Operating and maintenance expense(2)
|
|
|
26,858
|
|
|
|
29,741
|
|
|
|
32,566
|
|
|
|
24,209
|
|
|
|
25,990
|
|
|
|
35,499
|
|
|
|
28,832
|
|
Depreciation expense
|
|
|
6,342
|
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
6,975
|
|
|
|
5,983
|
|
|
|
8,820
|
|
|
|
5,983
|
|
General and administrative expense(3)
|
|
|
2,800
|
|
|
|
2,525
|
|
|
|
3,141
|
|
|
|
2,340
|
|
|
|
2,337
|
|
|
|
4,008
|
|
|
|
3,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(12,103
|
)
|
|
|
(14,404
|
)
|
|
|
(21,868
|
)
|
|
|
(16,961
|
)
|
|
|
(17,336
|
)
|
|
|
42,636
|
|
|
|
32,805
|
|
Interest expense, net(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,306
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(12,103
|
)
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(16,961
|
)
|
|
$
|
(17,336
|
)
|
|
$
|
40,330
|
|
|
$
|
31,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Common unitholders interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Subordinated unitholders interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Pro forma net income (loss) per common unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Pro forma net income (loss) per subordinated unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, net
|
|
|
127,226
|
|
|
$
|
138,785
|
|
|
$
|
138,055
|
|
|
$
|
139,049
|
|
|
$
|
133,151
|
|
|
|
|
|
|
$
|
133,151
|
|
Total Assets
|
|
|
130,752
|
|
|
|
141,697
|
|
|
|
141,215
|
|
|
|
142,295
|
|
|
|
136,811
|
|
|
|
|
|
|
|
138,151
|
|
Total Liabilities
|
|
|
5,404
|
|
|
|
8,686
|
|
|
|
5,499
|
|
|
|
5,664
|
|
|
|
6,267
|
|
|
|
|
|
|
|
50,000
|
|
Total Division Equity/Partners Capital
|
|
|
125,348
|
|
|
|
133,011
|
|
|
|
135,716
|
|
|
|
136,631
|
|
|
|
130,544
|
|
|
|
|
|
|
|
88,151
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(5,703
|
)
|
|
$
|
(6,045
|
)
|
|
$
|
(12,324
|
)
|
|
$
|
(9,286
|
)
|
|
$
|
(9,997
|
)
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
(19,050
|
)
|
|
|
(16,022
|
)
|
|
|
(12,249
|
)
|
|
|
(11,295
|
)
|
|
|
(2,167
|
)
|
|
|
|
|
|
|
|
|
Financing activities
|
|
$
|
24,753
|
|
|
|
22,067
|
|
|
$
|
24,573
|
|
|
$
|
20,581
|
|
|
$
|
12,164
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(5)
|
|
$
|
(5,761
|
)
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(9,986
|
)
|
|
|
(11,353
|
)
|
|
|
51,456
|
|
|
|
38,788
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
$
|
3,713
|
|
|
$
|
8,475
|
|
|
$
|
3,319
|
|
|
$
|
2,688
|
|
|
$
|
1,297
|
|
|
$
|
3,319
|
|
|
$
|
1,297
|
|
Expansion(6)
|
|
|
15,527
|
|
|
|
10,186
|
|
|
|
5,915
|
|
|
|
5,626
|
|
|
|
289
|
|
|
|
5,915
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,240
|
|
|
$
|
18,661
|
|
|
$
|
9,234
|
|
|
$
|
8,314
|
|
|
$
|
1,586
|
|
|
$
|
9,234
|
|
|
$
|
1,586
|
|
Operating Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline throughput (bpd)(7)
|
|
|
56,232
|
|
|
|
54,737
|
|
|
|
52,806
|
|
|
|
52,645
|
|
|
|
47,954
|
|
|
|
52,806
|
|
|
|
47,954
|
|
Average pipeline revenue per barrel(8)
|
|
$
|
1.01
|
|
|
$
|
1.06
|
|
|
$
|
1.01
|
|
|
$
|
0.99
|
|
|
$
|
1.08
|
|
|
$
|
1.28
|
|
|
$
|
1.38
|
|
Trucking volume (bpd)
|
|
|
18,560
|
|
|
|
23,752
|
|
|
|
22,963
|
|
|
|
22,571
|
|
|
|
23,386
|
|
|
|
22,963
|
|
|
|
23,386
|
|
Average trucking revenue per barrel(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.88
|
|
|
$
|
3.03
|
|
Terminalling, transportation and storage segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal throughput (bpd)(9)
|
|
|
103,305
|
|
|
|
112,868
|
|
|
|
113,135
|
|
|
|
112,031
|
|
|
|
113,964
|
|
|
|
113,135
|
|
|
|
113,964
|
|
Average terminal revenue per barrel(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.77
|
|
|
$
|
0.82
|
|
Short-haul pipeline throughput (bpd)
|
|
|
60,395
|
|
|
|
60,894
|
|
|
|
56,942
|
|
|
|
58,537
|
|
|
|
52,798
|
|
|
|
56,942
|
|
|
|
52,798
|
|
Average short-haul pipeline revenue per barrel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
Storage capacity reserved (shell capacity barrels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878,000
|
|
|
|
878,000
|
|
Storage per shell capacity barrel (per month)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
14
|
|
|
(1) |
|
Pro forma revenues reflect recognition of affiliate revenues
generated by pipeline and terminal assets to be contributed to
us at the closing of this offering that were not previously
recorded in the historical financial records of Tesoro Logistics
LP Predecessor. Product volumes used in the calculations are
historical volumes transported or terminalled through facilities
included in the Tesoro Logistics LP Predecessor financial
statements. Tariff rates and service fees were calculated using
the rates and fees in the commercial agreements to be entered
into with Tesoro at the closing of this offering and tariff
rates on our High Plains pipeline system to be in effect at the
time of closing of this offering. |
|
(2) |
|
Operating and maintenance expense includes losses on fixed asset
disposals. Operating and maintenance expense in 2009 includes a
$1.1 million loss on fixed asset disposals primarily
related to the retirement of a portion of our Los Angeles
terminal. Pro forma operating and maintenance expense for the
year ended December 31, 2009 and for the nine months ended
September 30, 2010 includes incremental operating and
maintenance expenses primarily related to purchased additives,
inspection and port charges, and insurance premiums for business
interruption and property insurance. |
|
(3) |
|
Pro forma general and administrative expenses have been adjusted
to give effect to the annual corporate services fee of
$2.5 million that we will pay to Tesoro under the omnibus
agreement for providing treasury, accounting, legal and other
general and administrative services as well as higher
employee-related expenses of $0.9 million, but do not
include the estimated $3.0 million in incremental annual
general and administrative expenses we expect to incur as a
result of being a separate publicly traded partnership. |
|
(4) |
|
Pro forma interest expense is related to expected borrowings
under our revolving credit facility, commitment fees on the
unutilized portion of our revolving credit facility and
amortization of related debt issuance costs. Interest expense is
calculated assuming an estimated annual interest rate of 2.8%.
If the actual interest rate increases or decreases by 1.0%, pro
forma interest expense would increase or decrease by
approximately $0.5 million per year. |
|
(5) |
|
EBITDA is defined in Non-GAAP Financial Measure
below. |
|
(6) |
|
Expansion capital expenditures reflect the $12.6 million
acquisition of our Los Angeles terminal in May 2007 and a
$3.5 million truck rack expansion project at this terminal
in 2008. |
|
(7) |
|
Pro forma and historical pipeline throughput for the nine months
ended September 30, 2010 include the effects of a scheduled
turnaround at Tesoros Mandan refinery in April and May of
2010. |
|
(8) |
|
Average pipeline revenue per barrel includes tariffs for
committed and uncommitted volumes of crude oil under the
pipeline transportation services agreement to be entered into
with Tesoro at the closing of this offering, as well as fees for
the injection of crude oil into the pipeline system from
trucking receipt points, which we refer to as pumpover fees.
Average trucking service revenue per barrel includes tank usage
fees and fees for providing trucking, dispatching, accounting
and data services under the trucking transportation services
agreement to be entered into with Tesoro at the closing of this
offering. Average terminal revenue per barrel includes terminal
throughput fees as well as ancillary services fees for ethanol
blending and additive injection. |
|
(9) |
|
Terminal throughput includes throughput from our Los Angeles
terminal following its acquisition by Tesoro in May 2007. |
15
Non-GAAP Financial
Measure
We define EBITDA as net income (loss) before net interest
expense, income tax expense, depreciation and amortization
expense. EBITDA is used as a supplemental financial measure by
management and by external users of our financial statements,
such as investors and commercial banks, to assess:
|
|
|
|
|
our operating performance as compared to those of other
companies in the logistics business, without regard to financing
methods, historical cost basis or capital structure;
|
|
|
|
the ability of our assets to generate sufficient cash flow to
make distributions to our partners;
|
|
|
|
our ability to incur and service debt and fund capital
expenditures; and
|
|
|
|
the viability of acquisitions and other capital expenditure
projects and the returns on investment of various investment
opportunities.
|
We believe that the presentation of EBITDA in this prospectus
provides information useful to investors in assessing our
financial condition and results of operations. The GAAP measures
most directly comparable to EBITDA are net income (loss) and net
cash from (used in) operating activities. EBITDA should not be
considered an alternative to net income (loss), operating
income, net cash from (used in) operating activities or any
other measure of financial performance or liquidity presented in
accordance with GAAP. EBITDA excludes some, but not all, items
that affect net income and operating income, and these measures
may vary among other companies. As a result, EBITDA as presented
below may not be comparable to similarly titled measures of
other companies.
The following table presents a reconciliation of EBITDA, to net
income (loss) and net cash from (used in) operating activities,
the most directly comparable GAAP financial measures, on a
historical basis and pro forma basis, as applicable, for each of
the periods indicated.
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|
|
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Tesoro Logistics LP Predecessor Historical
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|
Tesoro Logistics LP Pro Forma
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Nine Months
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|
|
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|
Nine Months
|
|
|
|
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Ended
|
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|
Year Ended
|
|
|
Ended
|
|
|
|
Years Ended December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
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|
|
|
(In thousands)
|
|
|
Reconciliation of EBITDA to net income (loss):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(12,103
|
)
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(16,961
|
)
|
|
$
|
(17,336
|
)
|
|
$
|
40,330
|
|
|
$
|
31,075
|
|
Add:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Depreciation expense
|
|
|
6,342
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|
|
|
6,625
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|
|
|
8,820
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|
|
|
6,975
|
|
|
|
5,983
|
|
|
|
8,820
|
|
|
|
5,983
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|
Interest expense, net
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,306
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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EBITDA
|
|
$
|
(5,761
|
)
|
|
$
|
(7,779
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)
|
|
$
|
(13,048
|
)
|
|
$
|
(9,986
|
)
|
|
$
|
(11,353
|
)
|
|
$
|
51,456
|
|
|
$
|
38,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of EBITDA to net cash from (used in) operating
activities:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
(5,703
|
)
|
|
$
|
(6,045
|
)
|
|
$
|
(12,324
|
)
|
|
$
|
(9,286
|
)
|
|
$
|
(9,997
|
)
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities
|
|
|
167
|
|
|
|
(1,258
|
)
|
|
|
390
|
|
|
|
343
|
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
Loss on asset disposals
|
|
|
(225
|
)
|
|
|
(476
|
)
|
|
|
(1,114
|
)
|
|
|
(1,043
|
)
|
|
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(5,761
|
)
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(9,986
|
)
|
|
$
|
(11,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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16
RISK
FACTORS
Limited partner interests are inherently different from the
capital stock of a corporation, although many of the business
risks to which we are subject are similar to those that would be
faced by a corporation engaged in a similar business. You should
carefully consider the following risk factors together with all
of the other information included in this prospectus in
evaluating an investment in our common units.
If any of the following risks were actually to occur, our
business, financial condition, results of operations and our
cash flows could be materially adversely affected. In that case,
we might not be able to pay distributions on our common units,
the trading price of our common units could decline, and you
could lose all or part of your investment.
Risks
Related to Our Business
Tesoro
accounts for substantially all of our revenues. Additionally,
conflicts of interest may arise between Tesoro and its
affiliates, including our general partner, on the one hand, and
us and our unitholders, on the other hand. If Tesoro changes its
business strategy, is unable to satisfy its obligations under
our commercial agreements for any reason or significantly
reduces the volumes transported through our pipelines or handled
at our terminals, our revenues would decline and our financial
condition, results of operations, cash flows and ability to make
distributions to our unitholders would be adversely
affected.
For each of the year ended December 31, 2009 and the nine
months ended September 30, 2010, Tesoro accounted for
approximately 96% of our pro forma revenues. Tesoro is the
primary shipper on our High Plains system and has historically
operated the system solely to supply its Mandan, North Dakota
refinery and not as a stand-alone business. Tesoro is also our
primary customer in our terminalling, transportation and
services segment. As we expect to continue to derive the
substantial majority of our revenues from Tesoro for the
foreseeable future, we are subject to the risk of nonpayment or
nonperformance by Tesoro under our commercial agreements. Any
event, whether in our areas of operation or otherwise, that
materially and adversely affects Tesoros financial
condition, results of operations or cash flows may adversely
affect our ability to sustain or increase cash distributions to
our unitholders. Accordingly, we are indirectly subject to the
operational and business risks of Tesoro, some of which are
related to the following:
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the effects of the global economic downturn on Tesoros
business and the business of its suppliers, customers, business
partners and lenders;
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the risk of contract cancellation, non-renewal or failure to
perform by Tesoros customers, and Tesoros inability
to replace such contracts
and/or
customers;
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disruptions due to equipment interruption or failure at
Tesoros facilities, such as the recent fire at
Tesoros Anacortes, Washington refinery, or at third-party
facilities on which Tesoros business is dependent;
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the timing and extent of changes in commodity prices and demand
for Tesoros refined products, and the availability and
costs of crude oil and other refinery feedstocks;
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Tesoros ability to remain in compliance with the terms of
its outstanding indebtedness;
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changes in the cost or availability of third-party pipelines,
terminals and other means of delivering and transporting crude
oil, feedstocks and refined products;
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state and federal environmental, economic, health and safety,
energy and other policies and regulations, and any changes in
those policies and regulations;
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environmental incidents and violations and related remediation
costs, fines and other liabilities; and
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changes in crude oil and refined product inventory levels and
carrying costs.
|
Additionally, Tesoro continually considers opportunities
presented by third parties with respect to its refinery assets.
These opportunities may include offers to purchase and joint
venture propositions. Tesoro may also change its
refineries operations by constructing new facilities,
suspending or reducing certain operations,
17
modifying or closing facilities or terminating operations.
Changes may be considered to meet market demands, to satisfy
regulatory requirements or environmental and safety objectives,
to improve operational efficiency or for other reasons. Tesoro
actively manages its assets and operations, and, therefore,
changes of some nature, possibly material to its business
relationship with us, are likely to occur at some point in the
future.
Furthermore, conflicts of interest may arise between Tesoro and
its affiliates, including our general partner, on the one hand,
and us and our unitholders, on the other hand. We have no
control over Tesoro, our largest source of revenue and our
primary customer, and Tesoro may elect to pursue a business
strategy that does not favor us and our business. Please read
Risks Inherent in an Investment in
Us Our general partner and its affiliates, including
Tesoro, have conflicts of interest with us and limited fiduciary
duties, and they may favor their own interests to the detriment
of us and our common unitholders. Additionally, we have no
control over Tesoros business decisions and operations,
and Tesoro is under no obligation to adopt a business strategy
that favors us on page 32.
We may
not have sufficient cash from operations following the
establishment of cash reserves and payment of fees and expenses,
including cost reimbursements to our general partner and its
affiliates, to enable us to pay the minimum quarterly
distribution to our unitholders.
In order to pay the minimum quarterly distribution of
$ per unit per quarter, or
$ per unit per year, we will
require available cash of approximately
$ million per quarter, or
approximately $ million per
year, based on the number of common units, subordinated units
and general partner units to be outstanding immediately after
completion of this offering. We may not have sufficient
available cash from operating surplus each quarter to enable us
to pay the minimum quarterly distribution. The amount of cash we
can distribute on our units principally depends upon the amount
of cash we generate from our operations, which will fluctuate
from quarter to quarter based on, among other things:
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|
|
|
|
the volume of crude oil and refined products we handle;
|
|
|
|
the tariff rates and terminalling, trucking and storage fees
with respect to volumes that we handle; and
|
|
|
|
prevailing economic conditions.
|
In addition, the actual amount of cash we will have available
for distribution will also depend on other factors, some of
which are beyond our control, including:
|
|
|
|
|
the amount of our operating expenses and general and
administrative expenses, including reimbursements to Tesoro in
respect of those expenses and payment of an annual corporate
services fee to Tesoro;
|
|
|
|
the level of capital expenditures we make;
|
|
|
|
the cost of acquisitions, if any;
|
|
|
|
our debt service requirements and other liabilities;
|
|
|
|
fluctuations in our working capital needs;
|
|
|
|
our ability to borrow funds and access capital markets;
|
|
|
|
restrictions contained in our revolving credit facility and
other debt service requirements;
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|
|
|
the amount of cash reserves established by our general
partner; and
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|
|
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other business risks affecting our cash levels.
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18
The
assumptions underlying the forecast of cash available for
distribution that we include in Cash Distribution Policy
and Restrictions on Distributions are inherently uncertain
and subject to significant business, economic, financial,
regulatory and competitive risks that could cause our actual
cash available for distribution to differ materially from our
forecast.
The forecast of cash available for distribution set forth in
Cash Distribution Policy and Restrictions on
Distributions includes our forecast of our results of
operations, EBITDA and cash available for distribution for the
year ending December 31, 2011. Our ability to pay the full
minimum quarterly distribution in the forecast period is based
on a number of assumptions that may not prove to be correct and
that are discussed in Cash Distribution Policy and
Restrictions on Distributions beginning on page 49.
Our financial forecast has been prepared by management, and we
have neither received nor requested an opinion or report on it
from our or any other independent auditor. The assumptions
underlying the forecast are inherently uncertain and are subject
to significant business, economic, regulatory and competitive
risks, including those discussed in this prospectus, which could
cause our EBITDA to be materially less than the amount
forecasted. If we do not generate the forecasted EBITDA, we may
not be able to make the minimum quarterly distribution or pay
any amount on our common units or subordinated units, and the
market price of our common units may decline materially.
Tesoro
may suspend, reduce or terminate its obligations under our
commercial agreements in some circumstances, which would have a
material adverse effect on our financial condition, results of
operations, cash flows and ability to make distributions to
unitholders.
Our commercial agreements with Tesoro include provisions that
permit Tesoro to suspend, reduce or terminate its obligations
under the applicable agreement if certain events occur. These
events include Tesoro deciding to permanently or indefinitely
suspend refining operations at one or more of its refineries as
well as our being subject to certain force majeure events that
would prevent us from performing required services under the
applicable agreement. Tesoro has the discretion to make such
decisions notwithstanding the fact that they may significantly
and adversely affect us. For instance, under the agreements, if
Tesoro decides to permanently or indefinitely suspend refining
operations at a refinery for a period that will continue for at
least 12 consecutive months, then it may terminate the agreement
on no less than 12 months prior written notice to us,
unless it publicly announces its intent to resume operations at
the refinery at least two months prior to the expiration of the
12-month
notice period.
Generally, although Tesoro is not entitled to claim a force
majeure event, Tesoros and our obligations under these
agreements will be proportionately reduced or suspended to the
extent that we are unable to perform under the agreements upon
our declaration of a force majeure event. As defined in our
commercial agreements, force majeure events include any acts or
occurrences that prevent us from providing services under the
applicable agreement, such as:
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|
|
|
acts of God, or fires, floods or storms;
|
|
|
|
compliance with orders of courts or any governmental authority;
|
|
|
|
explosions, wars, terrorist acts, riots, strikes, lockouts or
other industrial disturbances;
|
|
|
|
accidental disruption of service;
|
|
|
|
breakdown of machinery, storage tanks or pipelines and inability
to obtain or unavoidable delay in obtaining material or
equipment; and
|
|
|
|
similar events or circumstances, so long as such events or
circumstances are beyond our reasonable control and could not
have been prevented by our due diligence.
|
Accordingly, there exists a broad range of events that could
result in our no longer being required to transport or
distribute Tesoros minimum throughput commitments on our
pipelines or terminals, respectively, and Tesoro no longer being
required to pay the full amount of fees that would have been
associated with its minimum throughput commitments.
Additionally, we have no control over Tesoros business
decisions and operations, and conflicts of interest may arise
between Tesoro and its affiliates, including our general
partner,
19
on the one hand and us and our unitholders, on the other hand.
Tesoro is not required to pursue a business strategy that favors
us or utilizes our assets, and could elect to decrease refinery
production or shut down or re-configure a refinery. These
actions, as well the other activities described above, could
result in a reduction or suspension of Tesoros obligations
under one or more of our commercial agreements. Any such
reduction or suspension would have a material adverse effect on
our financial condition, results of operations, cash flows and
ability to make distributions to unitholders. Please read
Certain Relationships and Related Party
Transactions Agreements Governing the
Transactions Commercial Agreements with Tesoro
beginning on page 143.
If
Tesoro satisfies only its minimum obligations under, or if we
are unable to renew or extend, the various commercial agreements
we have with Tesoro, our ability to make distributions to our
unitholders will be reduced.
Tesoro is not obligated to use our services with respect to
volumes of crude oil or refined products in excess of the
minimum volume commitments under the various commercial
agreements with us. If Tesoro had satisfied only its minimum
volume commitments during the past twelve months under those
agreements, we would not have been able to make the minimum
quarterly distribution on all outstanding units. Our ability to
make the minimum quarterly distribution on all outstanding units
requires that we transport additional volumes for Tesoro on our
High Plains system (in excess of the minimum volume commitments
under our commercial agreements), that we handle additional
Tesoro
and/or
third-party volumes at our terminals and that Tesoros
obligations under our commercial agreements are not suspended,
reduced or terminated due to a refinery shutdown or force
majeure event. In addition, the terms of Tesoros
obligations under those agreements range from two to
10 years. If Tesoro fails to use our facilities and
services after expiration of those agreements and we are unable
to generate additional revenues from third parties, our ability
to make cash distributions to unitholders will be reduced.
Although
we believe our commercial agreements with Tesoro should provide
us with stable throughput volumes on both our High Plains system
and at our terminals, the rates charged for transporting,
terminalling and storing such volumes and for related ancillary
services vary. Accordingly, the mix of rates applied to such
throughput volumes could impact the stability of our
revenues.
Our commercial agreements require Tesoro to provide us with
minimum throughput volumes on our High Plains system and at our
terminals. Under our High Plains pipeline transportation
services agreement, we will charge Tesoro for transporting crude
oil from North Dakota origin points on our High Plains pipeline
system pursuant to both committed and uncommitted tariff rates,
and Tesoro will be obligated to transport an average of at least
49,000 bpd per month at the committed rate from North
Dakota origin points to Tesoros Mandan refinery. The rates
charged on the High Plains pipeline system for such services
will vary depending on the origin point on the system from which
barrels are transported. Accordingly, while we believe the
agreement should provide us with a stable base of throughput
volumes, our revenues generated on the High Plains pipeline
system are subject to risks relative to the mix of tariff rates
applied to the volumes shipped by Tesoro. Should the High Plains
pipeline transportation services agreement be invalidated for
any reason, all intrastate volumes would be shipped at the lower
uncommitted tariff rate, thereby potentially lowering our
revenues. Under our master terminalling services agreement,
Tesoro is obligated to throughput a volume of refined products
equal to an average of 100,000 bpd per month for all of our
terminals on an aggregate basis. However, the rates that we
charge for the terminalling services that we provide, including
for the provision of ancillary services such as ethanol blending
and additive injection, vary depending on both the service type
and the terminal at which such services are provided. Variances
in rates applied under our commercial agreements could impact
the stability of our revenues and thus the stability of our
distributions to unitholders.
If our
interstate or intrastate tariffs are successfully challenged, we
could be required to reduce our tariff rates, which would reduce
our revenues and our ability to make distributions to our
unitholders.
Tesoro has agreed not to challenge, or to cause others to
challenge or assist others in challenging, our tariffs in effect
during the term of our High Plains pipeline transportation
services agreement with Tesoro.
20
This agreement does not prevent future shippers from challenging
our tariffs and any related proration rules. At the end of the
term of the agreement, Tesoro will be free to challenge, or to
cause other parties to challenge or assist others in
challenging, our tariffs in effect at that time. If any
challenge were successful, Tesoros minimum volume
commitment under our High Plains pipeline transportation
services agreement could be invalidated, and all of the volumes
shipped on our High Plains pipeline system would be at the lower
uncommitted tariff rate. Successful challenges would reduce our
revenues and our ability to make distributions to our
unitholders.
Tesoros
level of indebtedness, the terms of its borrowings and its
credit ratings could adversely affect our ability to grow our
business, our ability to make cash distributions to our
unitholders and our credit ratings and profile. Our ability to
obtain credit in the future may also be affected by
Tesoros credit rating.
Tesoro must devote a portion of its cash flows from operating
activities to service its indebtedness, and therefore cash flows
may not be available for use in pursuing its growth strategy,
including the expansion of its logistics operations.
Furthermore, a higher level of indebtedness at Tesoro in the
future increases the risk that it may default on its obligations
to us under our commercial agreements. As of September 30,
2010, Tesoro had long-term indebtedness of approximately
$1.85 billion. The covenants contained in the agreements
governing Tesoros outstanding and future indebtedness may
limit its ability to borrow additional funds for development and
make certain investments and may directly or indirectly impact
our operations in a similar manner. For example, Tesoros
indebtedness requires that any transactions it enters into with
us must be on terms no less favorable to Tesoro than those that
could have been obtained with an unrelated person. Furthermore,
in the event that Tesoro were to default under certain of its
debt obligations, there is a risk that Tesoros creditors
would attempt to assert claims against our assets during the
litigation of their claims against Tesoro. The defense of any
such claims could be costly and could materially impact our
financial condition, even absent any adverse determination. In
the event these claims were successful, our ability to meet our
obligations to our creditors, make distributions and finance our
operations could be materially adversely affected.
Tesoros long-term credit ratings are currently below
investment grade. If these ratings are lowered in the future,
the interest rate and fees Tesoro pays on its revolving credit
facilities may increase. In addition, although we will not have
any indebtedness rated by any credit rating agency at the
closing of this offering, we may have rated debt in the future.
Credit rating agencies will likely consider Tesoros debt
ratings when assigning ours because of Tesoros ownership
interest in us, the significant commercial relationships between
Tesoro and us, and our reliance on Tesoro for substantially all
of our revenues. If one or more credit rating agencies were to
downgrade the outstanding indebtedness of Tesoro, we could
experience an increase in our borrowing costs or difficulty
accessing the capital markets. Such a development could
adversely affect our ability to grow our business and to make
cash distributions to our unitholders.
Our
logistics operations and Tesoros refining operations are
subject to many risks and operational hazards, some of which may
result in business interruptions and shutdowns of our or
Tesoros facilities and damages for which we may not be
fully covered by insurance. If a significant accident or event
occurs that results in business interruption or shutdown for
which we are not adequately insured, our operations and
financial results could be adversely affected.
Our logistics operations are subject to all of the risks and
operational hazards inherent in transporting and storing crude
oil and refined products, including:
|
|
|
|
|
damages to pipelines and facilities, related equipment and
surrounding properties caused by earthquakes, floods, fires,
severe weather, explosions and other natural disasters and acts
of terrorism;
|
|
|
|
mechanical or structural failures at our facilities or at
third-party facilities on which our operations are dependent,
including Tesoros facilities;
|
|
|
|
curtailments of operations relative to severe seasonal weather;
|
21
|
|
|
|
|
inadvertent damage to pipelines from construction, farm and
utility equipment; and
|
|
|
|
other hazards.
|
These risks could result in substantial losses due to personal
injury
and/or loss
of life, severe damage to and destruction of property and
equipment and pollution or other environmental damage, as well
as business interruptions or shutdowns of our facilities. Any
such event or unplanned shutdown could have a material adverse
effect on our business, financial condition and results of
operations. In addition, Tesoros refining operations, on
which our operations are substantially dependent, are subject to
similar operational hazards and risks inherent in refining crude
oil. A serious accident at our facilities or at Tesoros
facilities, such as the April 2010 fire at Tesoros
Anacortes refinery, could result in serious injury or death to
employees of our general partner or its affiliates or
contractors and could expose us to significant liability for
personal injury claims and reputational risk. We have no control
over the operations at Tesoros refineries and their
associated pipelines.
We do not maintain insurance coverage against all potential
losses and could suffer losses for uninsurable or uninsured
risks or in amounts in excess of existing insurance coverage. We
carry separate policies of property and business interruption
insurance and are insured under Tesoros liability policies
and we are subject to Tesoros policy limits. The
occurrence of an event that is not fully covered by insurance or
failure by one or more insurers to honor its coverage
commitments for an insured event could have a material adverse
effect on our business, financial condition and results of
operations.
A
material decrease in the refining margins at Tesoros
refineries could materially reduce the volumes of crude oil or
refined products that we handle, which could adversely affect
our financial condition, results of operations, cash flows and
ability to make distributions to our unitholders.
The volume of refined products that we distribute and store at
our refined products terminals and the volume of crude oil that
we transport on our High Plains system depend substantially on
Tesoros refining margins. Refining margins are dependent
both upon the price of crude oil or other refinery feedstocks
and the price of refined products. These prices are affected by
numerous factors beyond our or Tesoros control, including
the global supply and demand for crude oil, gasoline and other
refined products. The current global economic weakness and high
unemployment in the United States are expected to continue to
depress demand for refined products. The impact of low demand
has been further compounded by excess global refining capacity
and historically high inventory levels. Tesoro expects these
conditions to continue to put significant pressure on refined
product margins until the economy improves and unemployment
declines. Several refineries in North America and Europe have
been temporarily or permanently shut down in response to falling
demand and excess refining capacity. Tesoro has publicly
disclosed that it will continue to assess its refineries to
determine if a complete or partial shutdown of one or more of
its facilities is appropriate.
In addition to current market conditions, there are long-term
factors that may impact the supply and demand of refined
products in the United States. These factors include:
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increased fuel efficiency standards for vehicles;
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more stringent refined products specifications;
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renewable fuels standards;
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availability of alternative energy sources;
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potential and enacted climate change legislation;
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the Environmental Protection Agency (EPA) regulation of
greenhouse gas emissions under the Clean Air Act; and
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increased refining capacity or decreased refining capacity
utilization.
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If the demand for refined products, particularly in
Tesoros primary market areas, decreases significantly, or
if there were a material increase in the price of crude oil
supplied to Tesoros refineries without an increase
22
in the value of the products produced by those refineries,
either temporary or permanent, which caused Tesoro to reduce
production of refined products at its refineries, there would
likely be a reduction in the volumes of crude oil and refined
products we handle for Tesoro. Any such reduction could
adversely affect our financial condition, results of operations,
cash flows and ability to make distributions to our unitholders.
A
material decrease in the crude oil produced in the Bakken
Shale/Williston Basin area could materially reduce the volume of
crude oil gathered and transported by our High Plains system and
refined products distributed by our Mandan terminal, which could
adversely affect our financial condition, results of operations,
cash flows and ability to make distributions to
unitholders.
The volume of crude oil that we gather and transport on our High
Plains system and the volume of refined products that we
distribute at our Mandan terminal, in each case, in excess of
Tesoros committed volumes, depends on the volume of
refined products produced at Tesoros Mandan refinery. The
volume of refined products produced depends, in part, on the
availability of attractively-priced, high-quality crude oil
produced in the Bakken Shale/Williston Basin area, which is the
primary source of supply for Tesoros Mandan refinery.
In order to maintain or increase refined product production
levels at the Mandan refinery, Tesoro must continually contract
for new crude oil supplies in the Bakken Shale/Williston Basin
area or consider connecting to alternative sources of crude oil,
such as the Enbridge pipeline at the Canada/North Dakota border.
Adverse developments in the Bakken Shale/Williston Basin area
could have a significantly greater impact on our financial
condition, results of operations and cash flows because of our
lack of geographic diversity and substantial reliance on Tesoro
as a customer. Accordingly, in addition to general industry
risks related to gathering and transporting crude oil, we are
disproportionately exposed to risks in the area, including:
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the volatility and uncertainty of regional pricing differentials;
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the availability of drilling rigs for producers;
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weather-related curtailment of operations by producers and
disruptions to truck gathering operations;
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the nature and extent of governmental regulation and
taxation; and
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the anticipated future prices of crude oil and of refined
products in markets which Tesoros Mandan refinery serves.
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Furthermore, the development of third-party crude oil gathering
systems in the Williston Basin could disproportionately impact
our High Plains system, should producers ship on competing
systems, thereby impacting the price and availability of crude
oil Tesoro ships to its Mandan refinery. If as a result of any
of these or other factors, the volume of attractively-priced,
high-quality crude oil available to the Mandan refinery is
materially reduced for a prolonged period of time, the volume of
crude oil gathered and transported by our High Plains system and
the volume of refined products distributed by our Mandan
terminal, and the related fees for those services, could be
materially reduced, which could adversely affect our financial
condition, results of operations, cash flows and ability to make
distributions to our unitholders.
We may
not be able to significantly increase our third-party revenue
due to competition and other factors, which could limit our
ability to grow and extend our dependence on
Tesoro.
Part of our growth strategy includes diversifying our customer
base by identifying opportunities to offer services to third
parties with our existing assets or by constructing or acquiring
new assets independently from Tesoro. Our ability to increase
our third-party revenue is subject to numerous factors beyond
our control, including competition from third parties and the
extent to which we lack available capacity when third-party
shippers require it. For example, our High Plains system is
subject to competition from existing and future third-party
crude oil gathering systems and trucking operations in the
Williston Basin. To the extent that we have available capacity
on our High Plains system for third-party volumes, we may not be
able to compete effectively with third-party gathering systems
for additional crude oil production in the area. Our ability to
23
obtain third-party customers on our High Plains system is also
dependent on our ability to make outlet connections to
third-party pipelines, and, if we are unable to do so, the
throughput on our High Plains system will be limited by the
demand from Tesoros Mandan refinery. To the extent that we
have available capacity at our refined products terminals
available for third-party volumes, competition from other
existing or future refined products terminals owned by third
parties may limit our ability to utilize this available capacity.
We have historically provided gathering, transporting and
storage services to third parties on only a limited basis, and
we can provide no assurance that we will be able to attract any
material third-party service opportunities. Our efforts to
attract new unaffiliated customers may be adversely affected by
our relationship with Tesoro, our desire to provide services
pursuant to fee-based contracts and, with respect to the High
Plains system, Tesoros operational requirements at its
Mandan refinery, which relies upon the High Plains system to
supply all of its crude oil requirements and which we expect to
continue to utilize substantially all of the available capacity
of the current High Plains system for transportation of crude
oil to the Mandan refinery. Our potential customers may prefer
to obtain services under other forms of contractual arrangements
under which we would be required to assume direct commodity
exposure. In addition, we will need to establish a reputation
among our potential customer base for providing high quality
service in order to successfully attract unaffiliated third
parties.
Certain
of our terminals face competition from third-party terminals for
Tesoro refined product volumes.
Tesoro utilizes third-party terminals to handle volumes of
certain refined products above the minimum volumes that it is
committed to deliver through our terminals under our master
terminalling services agreement. Our Los Angeles, Stockton and
Vancouver terminals, in particular, face competition for these
incremental volumes. Part of our growth strategy for our
terminal business depends on Tesoro transferring all or a
portion of these incremental volumes from competing third-party
terminals to our terminals, thereby increasing our terminal
throughput revenue. To the extent that these third-party
terminals can offer terminalling services at more competitive
rates or on a more reliable basis or are otherwise successful in
competing with us, our ability to fully execute our growth
strategy and increase our terminalling revenues could be
adversely affected.
Our
expansion of existing assets and construction of new assets may
not result in revenue increases and will be subject to
regulatory, environmental, political, legal and economic risks,
which could adversely affect our operations and financial
condition.
A portion of our strategy to grow and increase distributions to
unitholders is dependent on our ability to expand existing
assets and to construct additional assets. While we are
presently engaged in discussions with multiple producers to
expand our pipeline gathering network in the Bakken
Shale/Williston Basin area, we have no material commitments for
expansion or construction projects as of the date of this
prospectus. The construction of a new pipeline or terminal or
the expansion of an existing pipeline or terminal, such as by
adding horsepower or pump stations, increasing storage capacity
or otherwise, involves numerous regulatory, environmental,
political and legal uncertainties, most of which are beyond our
control. If we undertake these projects, they may not be
completed on schedule or at all or at the budgeted cost.
Moreover, we may not receive sufficient long-term contractual
commitments from customers to provide the revenue needed to
support such projects and we may be unable to negotiate
acceptable interconnection agreements with third-party pipelines
to provide destinations for increased throughput. Even if we
receive such commitments or make such interconnections, we may
not realize an increase in revenue for an extended period of
time. For instance, if we build a new pipeline, the construction
will occur over an extended period of time and we will not
receive any material increases in revenues until after
completion of the project. Moreover, we may construct facilities
to capture anticipated future growth in production in a region,
such as the Bakken Shale/Williston Basin area, in which such
growth does not materialize. As a result, new facilities may not
be able to attract enough throughput to achieve our expected
investment return, which could adversely affect our results of
operations and financial condition and our ability to make
distributions to our unitholders.
24
If we
are unable to make acquisitions on economically acceptable terms
from Tesoro or third parties, our future growth would be
limited, and any acquisitions we may make may reduce, rather
than increase, our cash generated from operations on a per unit
basis.
A portion of our strategy to grow our business and increase
distributions to unitholders is dependent on our ability to make
acquisitions that result in an increase in distributable cash
flow per unit. The acquisition component of our growth strategy
is based, in large part, on our expectation of ongoing
divestitures of gathering, transportation and storage assets by
industry participants, including Tesoro. A material decrease in
such divestitures would limit our opportunities for future
acquisitions and could adversely affect our ability to grow our
operations and increase cash distributions to our unitholders.
If we are unable to make acquisitions from Tesoro or third
parties, because we are unable to identify attractive
acquisition candidates or negotiate acceptable purchase
contracts, we are unable to obtain financing for these
acquisitions on economically acceptable terms or we are outbid
by competitors, our future growth and ability to increase
distributions will be limited. Furthermore, even if we do
consummate acquisitions that we believe will be accretive, they
may in fact result in a decrease in distributable cash flow per
unit. Any acquisition involves potential risks, including, among
other things:
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mistaken assumptions about revenues and costs, including
synergies;
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the assumption of unknown liabilities;
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limitations on rights to indemnity from the seller;
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mistaken assumptions about the overall costs of equity or debt;
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the diversion of managements attention from other business
concerns;
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unforeseen difficulties operating in new product areas or new
geographic areas; and
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customer or key employee losses at the acquired businesses.
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If we consummate any future acquisitions, our capitalization and
results of operations may change significantly, and unitholders
will not have the opportunity to evaluate the economic,
financial and other relevant information that we will consider
in determining the application of these funds and other
resources.
Our
right of first offer to acquire certain of Tesoros
existing assets is subject to risks and uncertainty, and
ultimately we may not acquire any of those assets.
Our omnibus agreement provides us with a right of first offer on
certain of Tesoros existing logistics assets for a period
of ten years after the closing of this offering. The
consummation and timing of any future acquisitions of these
assets will depend upon, among other things, Tesoros
willingness to offer these assets for sale, our ability to
negotiate acceptable purchase agreements and commercial
agreements with respect to the assets and our ability to obtain
financing on acceptable terms. We can offer no assurance that we
will be able to successfully consummate any future acquisitions
pursuant to our right of first offer, and Tesoro is under no
obligation to accept any offer that we may choose to make. In
addition, certain of the assets covered by our right of first
offer may require substantial capital expenditures in order to
maintain compliance with applicable regulatory requirements or
otherwise make them suitable for our commercial needs. For
example, the dock at Tesoros Golden Eagle wharf facility
will require significant capital improvements, which may be in
excess of $100.0 million, in order to maintain compliance
with various governmental regulations after 2011. For these or a
variety of other reasons, we may decide not to exercise our
right of first offer if and when any assets are offered for
sale, and our decision will not be subject to unitholder
approval. In addition, our right of first offer may be
terminated by Tesoro at any time after it no longer controls our
general partner. Please read Certain Relationships and
Related Party Transactions Agreements Governing the
Transactions Omnibus Agreement Right of
First Offer beginning on page 140.
25
Our
ability to expand and increase our utilization rates may be
limited if Tesoros refining and marketing business does
not grow as expected.
Part of our growth strategy depends on the growth of
Tesoros refining and marketing business. For example, in
our terminals and storage business, we believe our growth will
primarily be driven by identifying and executing organic
expansion projects that will result in increased throughput
volumes from Tesoro and third parties. Our prospects for organic
growth currently include projects that we expect Tesoro to
undertake, such as constructing new tankage, and that we expect
to have an opportunity to purchase from Tesoro. If Tesoro
focuses on other growth areas or does not make capital
expenditures to fund the organic growth of its logistics
operations, we may not be able to fully execute our growth
strategy.
Any
reduction in the capacity of, or the allocations to, our
shippers in interconnecting, third-party pipelines could cause a
reduction of volumes distributed through our terminals and
through our short-haul crude oil pipelines.
Tesoro is dependent upon connections to third-party pipelines to
transport refined products to certain of our terminals and to
ship crude oil through our short-haul crude oil pipelines. Any
reduction of capacities of these interconnecting pipelines due
to testing, line repair, reduced operating pressures or other
causes could result in reduced volumes of refined products
distributed through our terminals and shipments of crude oil
through our short-haul pipelines. Similarly, if additional
shippers begin transporting volumes of refined products or crude
oil over interconnecting pipelines, the allocations to Tesoro
and other existing shippers on these pipelines could be reduced,
which could also reduce volumes distributed through our
terminals or transported through short-haul crude oil pipelines.
Any significant reduction in volumes would adversely affect our
revenues and cash flow and our ability to make distributions to
our unitholders.
Our
exposure to direct commodity price risk may increase in the
future.
We currently generate substantially all of our revenues from
Tesoro, primarily pursuant to fee-based commercial agreements
under which we are paid based on the volumes of crude oil and
refined products that we handle and the ancillary services we
provide, rather than the value of the commodities themselves.
Although some of our commercial agreements with Tesoro contain
loss allowance provisions that require us to bear the risk of
any volume loss relating to the services we provide, our
existing operations and cash flows generally have limited
exposure to direct commodity price risk. We may acquire or
develop additional assets in the future that have a greater
exposure to fluctuations in commodity price risk than our
current operations. In addition, although we intend to continue
to contractually minimize our exposure to direct commodity price
risk in the future, our efforts to negotiate such contracts may
not be successful. Increased exposure to the volatility of oil
and refined product prices in the future could have a material
adverse effect on our revenues and cash flow and our ability to
make distributions to our unitholders.
We do
not own all of the land on which our pipelines and terminals are
located, which could result in disruptions to our
operations.
We do not own all of the land on which our pipelines and
terminals are located, and we are, therefore, subject to the
possibility of more onerous terms and increased costs to retain
necessary land use if we do not have valid leases or
rights-of-way
or if such
rights-of-way
lapse or terminate. We obtain the rights to construct and
operate our pipelines on land owned by third parties and
governmental agencies for a specific period of time. Our loss of
these rights, through our inability to renew
right-of-way
contracts or otherwise, could have a material adverse effect on
our business, results of operations, financial condition and
ability to make cash distributions to our unitholders.
We operate refined products terminals on leased property in
Stockton, California, Vancouver, Washington and Anchorage,
Alaska. Our lease with the Port of Stockton expires in 2014 and
we have the option to renew this lease for up to three
additional five-year terms. Our lease with the Port of Vancouver
expires in 2016 and we have the option to renew this lease for
up to two additional
10-year
terms. Our Anchorage terminal has leases with the Alaska
Railroad Corporation and the Port of Anchorage. Our lease with
the Alaska Railroad Corporation expires in 2011 and we have the
option to renew this lease for up to three additional five-year
26
terms. Our lease with the Port of Anchorage expires in 2014 and
there can be no guarantee we will be able to renew this lease on
satisfactory terms or at all.
Restrictions
in our revolving credit facility could adversely affect our
business, financial condition, results of operations, ability to
make cash distributions to our unitholders and the value of our
units.
We will be dependent upon the earnings and cash flow generated
by our operations in order to meet our debt service obligations
and to allow us to make cash distributions to our unitholders.
The operating and financial restrictions and covenants in our
revolving credit facility and any future financing agreements
could restrict our ability to finance future operations or
capital needs or to expand or pursue our business activities,
which may, in turn, limit our ability to make cash distributions
to our unitholders. For example, we expect that our revolving
credit facility will restrict our ability to, among other things:
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make cash distributions;
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incur indebtedness;
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create liens;
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make investments; and
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merge or sell all or substantially all of our assets.
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Furthermore, our revolving credit facility will contain
covenants requiring us to maintain certain financial ratios.
Please read Managements Discussion and Analysis of
Financial Condition and Results of Operations
Capital Resources and Liquidity Revolving Credit
Facility beginning on page 89 for additional
information about our revolving credit facility.
The provisions of our revolving credit facility may affect our
ability to obtain future financing and pursue attractive
business opportunities and our flexibility in planning for, and
reacting to, changes in business conditions. In addition, a
failure to comply with the provisions of our revolving credit
facility could result in an event of default which could enable
our lenders, subject to the terms and conditions of the
revolving credit facility, to declare the outstanding principal
of that debt, together with accrued interest, to be immediately
due and payable. If we were unable to repay the accelerated
amounts, our lenders could proceed against the collateral
granted to them to secure such debt. If the payment of our debt
is accelerated, defaults under our other debt instruments, if
any, may be triggered, and our assets may be insufficient to
repay such debt in full, and the holders of our units could
experience a partial or total loss of their investment. Please
read Managements Discussion and Analysis of
Financial Condition and Results of Operations
Capital Resources and Liquidity beginning on page 89.
Debt
we incur in the future may limit our flexibility to obtain
financing and to pursue other business
opportunities.
Our future level of debt could have important consequences to
us, including the following:
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our ability to obtain additional financing, if necessary, for
working capital, capital expenditures or other purposes may be
impaired, or such financing may not be available on favorable
terms;
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our funds available for operations, future business
opportunities and distributions to unitholders will be reduced
by that portion of our cash flow required to make interest
payments on our debt;
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we may be more vulnerable to competitive pressures or a downturn
in our business or the economy generally; and
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our flexibility in responding to changing business and economic
conditions may be limited.
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Our ability to service our debt will depend upon, among other
things, our future financial and operating performance, which
will be affected by prevailing economic conditions and
financial, business, regulatory and other factors, some of which
are beyond our control. If our operating results are not
sufficient to service any future indebtedness, we will be forced
to take actions such as reducing distributions, reducing or
delaying our
27
business activities, investments or capital expenditures,
selling assets or issuing equity. We may not be able to effect
any of these actions on satisfactory terms or at all. The amount
of cash we have available for distribution to holders of our
common and subordinated units depends primarily on our cash flow
rather than on our profitability, which may prevent us from
making distributions, even during periods in which we record net
income.
The amount of cash we have available for distribution depends
primarily upon our cash flow and not solely on profitability,
which will be affected by non-cash items. As a result, we may
make cash distributions during periods when we record net losses
for financial accounting purposes, and we may not make cash
distributions during periods when we record net income for
financial accounting purposes. Increases in interest rates could
adversely impact our unit price, our ability to issue equity or
incur debt for acquisitions or other purposes, and our ability
to make cash distributions at our intended levels.
Interest rates may increase in the future. As a result, interest
rates on our debt could be higher than current levels, causing
our financing costs to increase accordingly. As with other
yield-oriented securities, our unit price will be impacted by
our cash distributions and the implied distribution yield. The
distribution yield is often used by investors to compare and
rank yield-oriented securities for investment decision-making
purposes. Therefore, changes in interest rates, either positive
or negative, may affect the yield requirements of investors who
invest in our units, and a rising interest rate environment
could have an adverse impact on our unit price and our ability
to issue equity or incur debt for acquisitions or other purposes
and to make cash distributions at our intended levels.
We do
not operate the central control room for our High Plains
pipeline system, and we may face higher costs associated with
control room services in the future.
The control room management functions for the pipelines in our
High Plains pipeline system are performed under a control center
services agreement with a third-party operator that expires in
December 2012 and continues year to year thereafter unless
terminated by either party. Under the terms of the agreement,
the third-party control room operator controls, monitors,
records and reports on the operation of the High Plains system,
including supervisory control and data acquisition (SCADA)
systems that monitor pipeline conditions and controls some of
the valves and pump switches remotely through satellite
communication. The control room operator also provides leak
detection, data reporting, customer support, general maintenance
and technical support and emergency response procedure
compliance services. Under our current control room contract, we
are liable for any losses resulting from actions of the
third-party control room operator, unless such losses resulted
from the gross negligence or willful misconduct of the operator.
If disputes arise over the operation of the control room, or if
our operator fails to provide the services contracted under the
agreement, our business, results of operation, and financial
condition could be adversely affected. Upon the expiration of
our existing agreement in 2012, we will be required to negotiate
the renewal of the terms of this agreement, negotiate a similar
arrangement with Tesoro or another third party or install our
own control room and hire and train personnel to operate this
control room. We anticipate that the costs of these services
under a negotiated renewal of our existing agreement or a new
similar agreement will increase relative to historical costs.
Increased costs associated with control room operation services
will decrease the amount of cash available for distribution to
unitholders to the extent we are not indemnified for these costs
by Tesoro under our omnibus agreement.
Our
assets and operations are subject to federal, state, and local
laws and regulations relating to environmental protection and
safety that could require us to make substantial
expenditures.
Our assets and operations involve the transportation and storage
of crude oil and refined products, which is subject to
increasingly stringent federal, state, and local laws and
regulations governing the discharge of materials into the
environment and operational safety matters. Our business of
transporting and storing crude oil and refined products involves
the risk that crude oil, refined products and other hydrocarbons
may gradually or suddenly be released into the environment. We
also own or lease a number of properties that have been used to
store or distribute crude oil and refined products for many
years; many of these properties have been operated by third
parties whose handling, disposal, or release of hydrocarbons and
other wastes were not
28
under our control. To the extent not covered by insurance or an
indemnity, responding to the release of regulated substances
into the environment may cause us to incur potentially material
expenditures related to response actions, government penalties,
natural resources damages, personal injury or property damage
claims from third parties and business interruption.
Our Anchorage and Vancouver facilities operate in
environmentally sensitive waters where maritime vessel, pipeline
and refined product transportation and storage operations are
closely monitored by federal, state and local agencies and
environmental interest groups. Transportation and storage of
crude oil and refined products over water or proximate to
navigable water bodies which occurs at several of
our facilities in addition to Anchorage and
Vancouver involves inherent risks and subjects us to
the provisions of the Oil Pollution Act of 1990 (the Oil
Pollution Act) and similar state environmental laws. Among
other things, these laws require us to demonstrate our capacity
to respond to a spill of up to 100,000 barrels of oil from
an above ground storage tank adjacent to water (a worst
case discharge) to the maximum extent possible. To meet
this requirement, we and Tesoro have contracted with various
spill response service companies in the areas in which we
transport or store crude oil and refined products; however,
these companies may not be able to adequately contain a
worst case discharge in all instances and we cannot
ensure that all of their services would be available for our or
Tesoros use at any given time. There are many factors that
could inhibit the availability of these service providers,
including, but not limited to, weather conditions, governmental
regulations or other global events. By requirement of state or
federal ruling, the availability of these service providers
could be diverted to respond to other global events. In these
and other cases, we may be subject to liability in connection
with the discharge of crude oil or refined products into
navigable waters.
Our pipelines, terminals and storage facilities are also subject
to increasingly strict federal, state, and local laws and
regulations that require us to comply with various safety
requirements regarding the design, installation, testing,
construction, and operational management of our facilities. We
could incur potentially significant additional expenses should
we identify that any of our assets are not in compliance.
Our failure to comply with these or any other environmental or
safety-related regulations could result in the assessment of
administrative, civil, or criminal penalties, the imposition of
investigatory and remedial liabilities, and the issuance of
injunctions that may subject us to additional operational
constraints. Any such penalties or liability could have a
material adverse effect on our business, financial condition, or
results of operations.
Please read Business Environmental
Regulation Environmental Liabilities beginning
on page 122 and Business Rate and Other
Regulation beginning on page 114.
Meeting
the requirements of evolving environmental, health and safety
laws and regulations, including those related to climate change,
could adversely affect our performance.
Environmental laws and regulations have raised operating costs
for the oil and refined products industry and compliance with
such laws and regulations may cause us and Tesoro to incur
potentially material capital expenditures associated with the
construction, maintenance, and upgrading of equipment and
facilities. We may be required to address conditions discovered
in the future that require environmental response actions or
remediation. Also, future environmental, health and safety
requirements or changed interpretations of existing
requirements, may impose more stringent requirements on our
assets and operations, which may require us to incur potentially
material expenditures to ensure continued compliance. Future
developments in federal laws and regulations governing
environmental, health and safety and energy matters are
especially difficult to predict.
Currently, various legislative and regulatory measures to
address greenhouse gas emissions (including carbon dioxide,
methane and other gases) are in various phases of discussion or
implementation. These include requirements effective January
2010 that require Tesoros refineries to report emissions
of greenhouse gases to the EPA beginning in 2011, and proposed
federal, state, and regional initiatives (such as AB 32 in
California) that require, or could require, us and Tesoro to
reduce greenhouse gas emissions from our facilities. Requiring
reductions in greenhouse gas emissions could cause us to incur
substantial costs to (i) operate and maintain our
facilities, (ii) install new emission controls at our
facilities and (iii) administer and manage any
29
greenhouse gas emissions programs, including the acquisition or
maintenance of emission credits or allowances. These
requirements may also adversely affect Tesoros refinery
operations and have an indirect adverse effect on our business,
financial condition and results of our operations.
Requiring a reduction in greenhouse gas emissions and the
increased use of renewable fuels could also decrease demand for
refined products, which could have an indirect, but material,
adverse effect on our business, financial condition and results
of operations. For example, in 2010, the EPA promulgated a rule
establishing greenhouse gas emission standards for new-model
passenger cars, light-duty trucks, and medium-duty passenger
vehicles. Also in 2010, the EPA promulgated a rule establishing
greenhouse gas emission thresholds for the permitting of certain
stationary sources, which could require greenhouse emission
controls for those sources. These requirements could have an
indirect adverse effect on our business due to reduced demand
for crude oil and refined products, and a direct adverse affect
on our business from increased regulation of our facilities.
Changes in other forms of health and safety regulations are also
being considered. New pipeline safety legislation requiring more
stringent spill reporting and disclosure obligations has been
introduced in the U.S. Congress and was recently passed by
the U.S. House of Representatives. The Department of
Transportation (DOT) has also recently proposed
legislation providing for more stringent oversight of pipelines
and increased penalties for violations of safety rules, which is
in addition to the Pipeline and Hazardous Materials Safety
Administrations announced intention to strengthen its
rules. Such legislative and regulatory changes could have a
material effect on our operations through more stringent and
comprehensive safety regulations and higher penalties for the
violation of those regulations.
Our
business is impacted by environmental risks inherent in our
operations.
Our operation of crude oil and refined products pipelines,
refined products terminals and crude oil and refined products
storage facilities is inherently subject to the risks of spills,
discharges or other inadvertent releases of petroleum or other
hazardous substances. If any of these events have previously
occurred or occur in the future, whether in connection with any
of Tesoros refineries, our storage facility, any of our
pipelines or refined products terminals, or any other facility
to which we send or have sent wastes or by-products for
treatment or disposal, we could be liable for all costs and
penalties associated with the remediation of such facilities
under federal, state and local environmental laws or the common
law. We may also be liable for personal injury or property
damage claims from third parties alleging contamination from
spills or releases from our facilities or operations. In
addition, our indemnification for certain environmental
liabilities under the omnibus agreement will be limited to
liabilities identified prior to the earlier of the fifth
anniversary of the closing of this offering and the date that
Tesoro no longer controls our general partner (provided that, in
any event, such date shall be no earlier than the second
anniversary of the closing of this offering). Even if we are
insured or indemnified against such risks, we may be responsible
for costs or penalties to the extent our insurers or indemnitors
do not fulfill their obligations to us. The payment of such
costs or penalties could be significant and have a material
adverse effect on our business, financial condition and results
of operations.
We are
subject to regulation by multiple governmental agencies, which
could adversely impact our business, results of operations and
financial condition.
Our business activities are subject to regulation by multiple
federal, state and local governmental agencies. Our historical
and projected operating costs reflect the recurring costs
resulting from compliance with these regulations, and we do not
anticipate material expenditures in excess of these amounts in
the absence of future acquisitions, or changes in regulation, or
discovery of existing but unknown compliance issues. Additional
proposals and proceedings that affect the crude oil and refined
products industry are regularly considered by Congress, as well
as by state legislatures and federal and state regulatory
commissions and agencies and courts. We cannot predict when or
whether any such proposals may become effective or the magnitude
of the impact changes in laws and regulations may have on our
business; however, additions or enhancements to the regulatory
burden on our industry generally increase the cost of doing
business and affect our profitability.
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Rate
regulation may not allow us to recover the full amount of
increases in our costs.
Part of our High Plains system provides interstate service that
is subject to regulation by the FERC. Rates for service on this
part of our system are set using FERCs tariff indexing
methodology. The indexing methodology currently allows a
pipeline to increase its rates by a percentage factor equal to
the change in the producer price index for finished goods
(PPI) plus 1.3 percent. When the index falls,
we may be required to reduce rates if they exceed the new
maximum allowable rate. In addition, changes in the index might
not be large enough to fully reflect actual increases in our
costs.
FERCs indexing methodology is subject to review every five
years; the current methodology will remain in place through
June 30, 2011. On December 16, 2010, FERC issued an
order continuing the use of the current method of indexing rates
for the five-year period beginning July 1, 2011; however,
FERCs order increases the adjustment to the PPI to plus
2.65% (rather than PPI plus 1.3% currently in effect).
FERCs order is subject to rehearing during a period of
thirty days or may be appealed without seeking rehearing to the
U.S. Court of Appeals during a period of sixty days after
issuance of the order. The current or any revised indexing
formula could hamper our ability to recover our costs because:
(1) the indexing methodology is tied to an inflation index;
(2) it is not based on pipeline-specific costs; and
(3) it could later be reduced in comparison to current or
proposed formulas. Any of the foregoing would adversely affect
our revenues and cash flow. FERC could limit our ability to set
rates based on our costs, order us to reduce rates, require the
payment of refunds or reparations to shippers, or any or all of
these actions, which could adversely affect our financial
position, cash flows, and results of operations.
The balance of our High Plains system provides intrastate
service that is subject to regulation by the NDPSC. Similar to
FERC, NDPSC could limit our ability to set rates based on our
costs or could order us to reduce our rates and could require
the payment of refunds to shippers. Such regulation or a
successful challenge to our intrastate pipeline rates could
adversely affect our financial position, cash flows or results
of operations. Furthermore, although NDPSC has not officially
adopted the FERC indexing methodology, our existing intrastate
tariffs have utilized the FERC indexing methodology as a basis
for annual tariff rate adjustment.
If FERCs or NDPSCs ratemaking methodology changes,
the new methodology could also result in tariffs that generate
lower revenues and cash flow and adversely affect our ability to
make cash distributions to our unit holders.
Based on the way our pipelines are operated, we believe the only
transportation on our pipelines that is or will be subject to
the jurisdiction of FERC is the transportation specified in the
tariff that we have on file with FERC. We cannot guarantee that
the jurisdictional status of transportation on our pipelines and
related facilities will remain unchanged, however. Should
circumstances change, then currently non-jurisdictional
transportation could be found to be FERC-jurisdictional. In that
case, FERCs ratemaking methodologies may limit our ability
to set rates based on our actual costs, may delay the use of
rates that reflect increased costs, and may subject us to
potentially burdensome and expensive operational, reporting and
other requirements. Any of the foregoing could adversely affect
our business, results of operations and financial condition.
We believe that neither our interconnecting pipelines between
our Salt Lake City storage facility and Tesoros Salt Lake
City refinery nor our five Salt Lake City short-haul pipelines
will be subject to FERC regulation, either because FERC will not
assert jurisdiction over single-user pipelines that deliver
crude oil and refined products within a single state, or because
FERC will exempt the pipelines from regulation because only one
affiliated shipper takes service on the pipelines. We will file
for a FERC ruling disclaiming or exempting from FERC
jurisdiction transportation service on these pipelines. If FERC,
however, were to deny our request and assert jurisdiction over
transportation service on these pipelines, we would be required
to file tariffs with FERC for each pipeline that would establish
the rates and terms and conditions for service on each pipeline.
If this were to occur, our short-haul pipeline transportation
services agreement with Tesoro requires Tesoro and us to
negotiate appropriate changes to the terms of the agreement to
restore to each party the economic benefits expected prior to
FERCs assertion of jurisdiction. While we and Tesoro are
required to negotiate in good faith, it is possible that the
negotiations will not yield the intended result and that the
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assertion of FERC jurisdiction could adversely affect our
business, results of operations and financial condition.
If we
fail to develop or maintain an effective system of internal
controls, we may not be able to report our financial results
accurately or prevent fraud, which would likely have a negative
impact on the market price of our common units.
Prior to this offering, we have not been required to file
reports with the SEC. Upon the completion of this offering, we
will become subject to the public reporting requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act. We prepare our financial statements in accordance with
GAAP, but our internal accounting controls may not currently
meet all standards applicable to companies with publicly traded
securities. Effective internal controls are necessary for us to
provide reliable financial reports, prevent fraud and to operate
successfully as a publicly traded partnership. Our efforts to
develop and maintain our internal controls may not be
successful, and we may be unable to maintain effective controls
over our financial processes and reporting in the future or to
comply with our obligations under Section 404 of the
Sarbanes-Oxley Act of 2002, which we refer to as
Section 404. For example, Section 404 will require us,
among other things, to annually review and report on, and our
independent registered public accounting firm to attest to, the
effectiveness of our internal controls over financial reporting.
We must comply with Section 404 for our fiscal year ending
December 31, 2012. Any failure to develop, implement or
maintain effective internal controls or to improve our internal
controls could harm our operating results or cause us to fail to
meet our reporting obligations. Given the difficulties inherent
in the design and operation of internal controls over financial
reporting, we can provide no assurance as to our, or our
independent registered public accounting firms,
conclusions about the effectiveness of our internal controls,
and we may incur significant costs in our efforts to comply with
Section 404. Ineffective internal controls will subject us
to regulatory scrutiny and a loss of confidence in our reported
financial information, which could have an adverse effect on our
business and would likely have a negative effect on the trading
price of our common units.
Risks
Inherent in an Investment in Us
Our
general partner and its affiliates, including Tesoro, have
conflicts of interest with us and limited fiduciary duties, and
they may favor their own interests to the detriment of us and
our common unitholders. Additionally, we have no control over
Tesoros business decisions and operations, and Tesoro is
under no obligation to adopt a business strategy that favors
us.
Following the offering, Tesoro will own a 2.0% general partner
interest and a % limited partner interest
in us and will own and control our general partner. Although our
general partner has a fiduciary duty to manage us in a manner
that is beneficial to us and our unitholders, the directors and
officers of our general partner have a fiduciary duty to manage
our general partner in the manner that is beneficial to its
owner, Tesoro. Conflicts of interest may arise between Tesoro
and its affiliates, including our general partner, on the one
hand, and us and our unitholders, on the other hand. In
resolving these conflicts, the general partner may favor its own
interests and the interests of its affiliates, including Tesoro,
over the interests of our common unitholders. These conflicts
include, among others, the following situations:
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Neither our partnership agreement nor any other agreement
requires Tesoro to pursue a business strategy that favors us or
utilizes our assets, which could involve decisions by Tesoro to
increase or decrease refinery production, connect our High
Plains pipeline system to third-party delivery points, shut down
or reconfigure a refinery, or pursue and grow particular
markets. Tesoros directors and officers have a fiduciary
duty to make these decisions in the best interests of the
stockholders of Tesoro;
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Tesoro, as our primary customer, has an economic incentive to
cause us to not seek higher tariff rates, trucking fees or
terminalling fees, even if such higher rates or fees would
reflect rates and fees that could be obtained in
arms-length, third-party transactions;
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Tesoro may be constrained by the terms of its debt instruments
from taking actions, or refraining from taking actions, that may
be in our best interests;
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Due to operational requirements at Tesoros Mandan
refinery, Tesoro has an incentive to limit third-party volumes
on our High Plains system, which may limit our ability to
generate third-party revenue with that asset;
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Our general partner has limited its liability and reduced its
fiduciary duties, while also restricting the remedies available
to our unitholders for actions that, without the limitations,
might constitute breaches of fiduciary duty;
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Except in limited circumstances, our general partner has the
power and authority to conduct our business without unitholder
approval;
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Our general partner determines the amount and timing of asset
purchases and sales, borrowings, issuance of additional
partnership securities and the creation, reduction or increase
of cash reserves, each of which can affect the amount of cash
that is distributed to our unitholders;
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Our general partner determines the amount and timing of any
capital expenditures and whether a capital expenditure is
classified as a maintenance capital expenditure, which reduces
operating surplus, or expansion or investment capital
expenditures, which do not reduce operating surplus. This
determination can affect the amount of cash that is distributed
to our unitholders and to our general partner and the ability of
the subordinated units to convert to common units;
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Our general partner determines which costs incurred by it are
reimbursable by us;
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Our general partner may cause us to borrow funds in order to
permit the payment of cash distributions, even if the purpose or
effect of the borrowing is to make a distribution on the
subordinated units, to make incentive distributions or to
accelerate the expiration of the subordination period;
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Our partnership agreement permits us to classify up to
$ million as operating
surplus, even if it is generated from asset sales, non-working
capital borrowings or other sources that would otherwise
constitute capital surplus. This cash may be used to fund
distributions on our subordinated units or to our general
partner in respect of the general partner interest or the
incentive distribution rights;
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Our partnership agreement does not restrict our general partner
from causing us to pay it or its affiliates for any services
rendered to us or entering into additional contractual
arrangements with any of these entities on our behalf;
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Our general partner intends to limit its liability regarding our
contractual and other obligations;
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Our general partner may exercise its right to call and purchase
all of the common units not owned by it and its affiliates if it
and its affiliates own more than 75% of the common units;
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Our general partner controls the enforcement of obligations owed
to us by our general partner and its affiliates, including our
commercial agreements with Tesoro;
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Our general partner decides whether to retain separate counsel,
accountants, or others to perform services for us; and
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Our general partner may elect to cause us to issue common units
to it in connection with a resetting of the target distribution
levels related to our general partners incentive
distribution rights without the approval of the conflicts
committee of the board of directors of our general partner,
which we refer to as our conflicts committee, or our
unitholders. This election may result in lower distributions to
our common unitholders in certain situations.
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Under the terms of our partnership agreement, the doctrine of
corporate opportunity, or any analogous doctrine, does not apply
to our general partner or any of its affiliates, including its
executive officers, directors and owners. Other than as provided
in our omnibus agreement, any such person or entity that becomes
aware of a potential transaction, agreement, arrangement or
other matter that may be an opportunity for us will not
33
have any duty to communicate or offer such opportunity to us.
Any such person or entity will not be liable to us or to any
limited partner for breach of any fiduciary duty or other duty
by reason of the fact that such person or entity pursues or
acquires such opportunity for itself, directs such opportunity
to another person or entity or does not communicate such
opportunity or information to us. This may create actual and
potential conflicts of interest between us and affiliates of our
general partner and result in less than favorable treatment of
us and our unitholders. Please read Certain Relationships
and Related Party Transactions Agreements Governing
the Transactions Omnibus Agreement beginning
on page 139 and Conflicts of Interest and Fiduciary
Duties beginning on page 152.
Our
partnership agreement requires that we distribute all of our
available cash, which could limit our ability to grow and make
acquisitions.
We expect that we will distribute all of our available cash to
our unitholders and will rely primarily upon external financing
sources, including commercial bank borrowings and the issuance
of debt and equity securities, to fund our acquisitions and
expansion capital expenditures. As a result, to the extent we
are unable to finance growth externally, our cash distribution
policy will significantly impair our ability to grow. In
addition, because we distribute all of our available cash, our
growth may not be as fast as that of businesses that reinvest
their available cash to expand ongoing operations. To the extent
we issue additional units in connection with any acquisitions or
expansion capital expenditures, the payment of distributions on
those additional units may increase the risk that we will be
unable to maintain or increase our per unit distribution level.
There are no limitations in our partnership agreement or our
revolving credit facility on our ability to issue additional
units, including units ranking senior to the common units. The
incurrence of additional commercial borrowings or other debt to
finance our growth strategy would result in increased interest
expense, which, in turn, may impact the available cash that we
have to distribute to our unitholders.
Our
partnership agreement limits our general partners
fiduciary duties to holders of our common and subordinated
units.
Our partnership agreement contains provisions that modify and
reduce the fiduciary standards to which our general partner
would otherwise be held by state fiduciary duty law. For
example, our partnership agreement permits our general partner
to make a number of decisions in its individual capacity, as
opposed to in its capacity as our general partner, or otherwise
free of fiduciary duties to us and our unitholders. This
entitles our general partner to consider only the interests and
factors that it desires and relieves it of any duty or
obligation to give any consideration to any interest of, or
factors affecting, us, our affiliates or our limited partners.
Examples of decisions that our general partner may make in its
individual capacity include:
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how to allocate business opportunities among us and its other
affiliates;
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whether to exercise its limited call right;
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how to exercise its voting rights with respect to the units it
owns;
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whether to exercise its registration rights;
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whether to elect to reset target distribution levels; and
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whether or not to consent to any merger or consolidation of the
partnership or amendment to the partnership agreement.
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By purchasing a common unit, a unitholder is treated as having
consented to the provisions in the partnership agreement,
including the provisions discussed above. Please read
Conflicts of Interest and Fiduciary Duties
Fiduciary Duties beginning on page 157.
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Our
partnership agreement restricts the remedies available to
holders of our common and subordinated units for actions taken
by our general partner that might otherwise constitute breaches
of fiduciary duty.
Our partnership agreement contains provisions that restrict the
remedies available to unitholders for actions taken by our
general partner that might otherwise constitute breaches of
fiduciary duty under state fiduciary duty law. For example, our
partnership agreement:
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provides that whenever our general partner makes a determination
or takes, or declines to take, any other action in its capacity
as our general partner, our general partner is required to make
such determination, or take or decline to take such other
action, in good faith, and will not be subject to any other or
different standard imposed by our partnership agreement,
Delaware law, or any other law, rule or regulation, or at equity;
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provides that our general partner will not have any liability to
us or our unitholders for decisions made in its capacity as a
general partner so long as it acted in good faith, which
requires that it believed that the decision was in, or not
opposed to, the best interest of our partnership;
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provides that our general partner and its officers and directors
will not be liable for monetary damages to us or our limited
partners resulting from any act or omission unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that our general partner or
its officers and directors, as the case may be, acted in bad
faith or engaged in fraud or willful misconduct or, in the case
of a criminal matter, acted with knowledge that the conduct was
criminal; and
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provides that our general partner will not be in breach of its
obligations under the partnership agreement or its fiduciary
duties to us or our limited partners if a transaction with an
affiliate or the resolution of a conflict of interest is:
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(1) approved by our conflicts committee, although our
general partner is not obligated to seek such approval;
(2) approved by the vote of a majority of the outstanding
common units, excluding any common units owned by our general
partner and its affiliates;
(3) on terms no less favorable to us than those generally
being provided to or available from unrelated third
parties; or
(4) fair and reasonable to us, taking into account the
totality of the relationships among the parties involved,
including other transactions that may be particularly favorable
or advantageous to us.
In connection with a situation involving a transaction with an
affiliate or a conflict of interest, any determination by our
general partner must be made in good faith. If an affiliate
transaction or the resolution of a conflict of interest is not
approved by our common unitholders or our conflicts committee
and the board of directors of our general partner determines
that the resolution or course of action taken with respect to
the affiliate transaction or conflict of interest satisfies
either of the standards set forth in subclauses (3) and
(4) above, then it will be presumed that, in making its
decision, the board of directors acted in good faith, and in any
proceeding brought by or on behalf of any limited partner or the
partnership, the person bringing or prosecuting such proceeding
will have the burden of overcoming such presumption. Please read
Conflicts of Interest and Fiduciary Duties beginning
on page 152.
Cost
reimbursements, which will be determined in our general
partners sole discretion, and fees due our general partner
and its affiliates for services provided will be substantial and
will reduce our cash available for distribution to
you.
Under our partnership agreement, we are required to reimburse
our general partner and its affiliates for all costs and
expenses that they incur on our behalf for managing and
controlling our business and operations. Except to the extent
specified under our omnibus agreement or our operational
services agreement, our general partner determines the amount of
these expenses. Under the terms of the omnibus agreement we will
be
35
required to pay Tesoro an annual corporate services fee,
initially in the amount of $2.5 million, for the provision
of various centralized corporate services. Under the terms of
our operational services agreement, we will pay Tesoro an annual
service fee, initially in the amount of $0.2 million, for
services performed by certain of Tesoros field-level
employees at our Mandan terminal and Salt Lake City storage
facility, and we will reimburse Tesoro for any direct costs
actually incurred by Tesoro in providing other operational
services with respect to our other assets and operations. Our
general partner and its affiliates also may provide us other
services for which we will be charged fees as determined by our
general partner. Payments to our general partner and its
affiliates will be substantial and will reduce the amount of
available cash for distribution to unitholders.
Unitholders
have very limited voting rights and, even if they are
dissatisfied, they cannot remove our general partner without its
consent.
Unlike the holders of common stock in a corporation, unitholders
have only limited voting rights on matters affecting our
business and, therefore, limited ability to influence
managements decisions regarding our business. Unitholders
did not elect our general partner or the board of directors of
our general partner and will have no right to elect our general
partner or the board of directors of our general partner on an
annual or other continuing basis. The board of directors of our
general partner is chosen by the members of our general partner,
which are wholly owned subsidiaries of Tesoro Corporation.
Furthermore, if the unitholders are dissatisfied with the
performance of our general partner, they will have little
ability to remove our general partner. As a result of these
limitations, the price at which our common units will trade
could be diminished because of the absence or reduction of a
takeover premium in the trading price.
The unitholders will be unable initially to remove our general
partner without its consent because our general partner and its
affiliates will own sufficient units upon completion of the
offering to be able to prevent its removal. The vote of the
holders of at least
662/3%
of all outstanding common units and subordinated units voting
together as a single class is required to remove our general
partner. At closing, our general partner and its affiliates will
own % of the common units and
subordinated units. Also, if our general partner is removed
without cause during the subordination period and common units
and subordinated units held by our general partner and its
affiliates are not voted in favor of that removal, all remaining
subordinated units will automatically be converted into common
units, and any existing arrearages on the common units will be
extinguished. A removal of our general partner under these
circumstances would adversely affect the common units by
prematurely eliminating their distribution and liquidation
preference over the subordinated units, which would otherwise
have continued until we had met certain distribution and
performance tests.
Cause is narrowly defined to mean that a court of competent
jurisdiction has entered a final, non-appealable judgment
finding the general partner liable for actual fraud or willful
or wanton misconduct in its capacity as our general partner.
Cause does not include most cases of charges of poor management
of the business, so the removal of our general partner because
of the unitholders dissatisfaction with our general
partners performance in managing our partnership will most
likely result in the termination of the subordination period.
Furthermore, unitholders voting rights are further
restricted by the partnership agreement provision providing that
any units held by a person that owns 20% or more of any class of
units then outstanding, other than our general partner, its
affiliates, their transferees, and persons who acquired such
units with the prior approval of the board of directors of our
general partner, cannot vote on any matter.
Our partnership agreement also contains provisions limiting the
ability of unitholders to call meetings or to acquire
information about our operations, as well as other provisions
limiting the unitholders ability to influence the manner
or direction of management.
Our
general partner interest or the control of our general partner
may be transferred to a third party without unitholder
consent.
Our general partner may transfer its general partner interest to
a third party in a merger or in a sale of all or substantially
all of its assets without the consent of the unitholders.
Furthermore, there is no restriction in
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the partnership agreement on the ability of Tesoro to transfer
its membership interest in our general partner to a third party.
The new partners of our general partner would then be in a
position to replace the board of directors and officers of our
general partner with their own choices and to control the
decisions taken by the board of directors and officers.
The
incentive distribution rights of our general partner may be
transferred to a third party without unitholder
consent.
Our general partner may transfer its incentive distribution
rights to a third party at any time without the consent of our
unitholders. If our general partner transfers its incentive
distribution rights to a third party but retains its general
partner interest, our general partner may not have the same
incentive to grow our partnership and increase quarterly
distributions to unitholders over time as it would if it had
retained ownership of its incentive distribution rights. For
example, a transfer of incentive distribution rights by our
general partner could reduce the likelihood of Tesoro accepting
offers made by us relating to assets subject to the right of
first offer contained in our omnibus agreement, as Tesoro would
have less of an economic incentive to grow our business, which
in turn would impact our ability to grow our asset base.
You
will experience immediate and substantial dilution in pro forma
net tangible book value of $ per
common unit.
The assumed initial public offering price of
$ per common unit exceeds our pro
forma net tangible book value of $
per unit. Based on an assumed initial public offering price of
$ per common unit, you will incur
immediate and substantial dilution of
$ per common unit. This dilution
results primarily because the assets contributed by Tesoro are
recorded in accordance with GAAP at their historical cost, and
not their fair value. Please read Dilution beginning
on page 48.
We may
issue additional units without unitholder approval, which would
dilute unitholder interests.
At any time, we may issue an unlimited number of limited partner
interests of any type without the approval of our unitholders.
Further, neither our partnership agreement nor our revolving
credit facility prohibits the issuance of equity securities that
may effectively rank senior to our common units. The issuance by
us of additional common units or other equity securities of
equal or senior rank will have the following effects:
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our unitholders proportionate ownership interest in us
will decrease;
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the amount of cash available for distribution on each unit may
decrease;
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because a lower percentage of total outstanding units will be
subordinated units, the risk that a shortfall in the payment of
the minimum quarterly distribution will be borne by our common
unitholders will increase;
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the ratio of taxable income to distributions may increase;
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the relative voting strength of each previously outstanding unit
may be diminished; and
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the market price of our common units may decline.
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Tesoro
may sell units in the public or private markets, and such sales
could have an adverse impact on the trading price of the common
units.
After the sale of the common units offered by this prospectus,
Tesoro will
hold common
units
and
subordinated units. All of the subordinated units will convert
into common units at the end of the subordination period and may
convert earlier under certain circumstances. Additionally, we
have agreed to provide Tesoro with certain registration rights.
Please read Units Eligible for Future Sale beginning
on page 174. The sale of these units in the public or
private markets could have an adverse impact on the price of the
common units or on any trading market that may develop.
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Our
general partners discretion in establishing cash reserves
may reduce the amount of cash available for distribution to
unitholders.
The partnership agreement requires our general partner to deduct
from operating surplus cash reserves that it determines are
necessary to fund our future operating expenditures. In
addition, the partnership agreement permits the general partner
to reduce available cash by establishing cash reserves for the
proper conduct of our business, to comply with applicable law or
agreements to which we are a party, or to provide funds for
future distributions to partners. These cash reserves will
affect the amount of cash available for distribution to
unitholders.
Tesoro
may compete with us.
Tesoro may compete with us. Under our omnibus agreement, for so
long as Tesoro controls our general partner, Tesoro and its
affiliates will agree not to engage in, whether by acquisition
or otherwise, the business of owning or operating crude oil or
refined products pipelines, terminals or storage facilities in
the United States that are not within, directly connected to,
substantially dedicated to, or otherwise an integral part of,
any refinery owned, acquired or constructed by Tesoro. This
restriction, however, does not apply to:
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any assets owned by Tesoro at the closing of this offering
(including replacements or expansions of those assets);
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any asset or business that Tesoro acquires or constructs that
has a fair market value of less than $5.0 million; and
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any asset or business that Tesoro acquires or constructs that
has a fair market value of $5.0 million or more if we have
been offered the opportunity to purchase the asset or business
for fair market value not later than six months after completion
of such acquisition or construction, and we decline to do so
with the concurrence of our conflicts committee.
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As a result, Tesoro has the ability to construct assets which
directly compete with our assets so long as they are integral to
a refinery owned by Tesoro. The limitations on the ability of
Tesoro to compete with us will terminate if Tesoro ceases to
control our general partner.
Our
general partner may cause us to borrow funds in order to make
cash distributions, even where the purpose or effect of the
borrowing benefits the general partner or its
affiliates.
In some instances, our general partner may cause us to borrow
funds from Tesoro or from third parties in order to permit the
payment of cash distributions. These borrowings are permitted
even if the purpose and effect of the borrowing is to enable us
to make a distribution on the subordinated units, to make
incentive distributions or to hasten the expiration of the
subordination period.
Our
general partner has a limited call right that may require you to
sell your common units at an undesirable time or
price.
If at any time our general partner and its affiliates own more
than 75% of our common units, our general partner will have the
right, but not the obligation, which it may assign to any of its
affiliates or to us, to acquire all, but not less than all, of
the common units held by unaffiliated persons at a price not
less than their then-current market price. As a result, you may
be required to sell your common units at an undesirable time or
price and may not receive any return on your investment. You may
also incur a tax liability upon a sale of your units. At the
completion of this offering and assuming no exercise of the
underwriters option to purchase additional common units,
our general partner and its affiliates will own
approximately % of our common
units. At the end of the subordination period (which could occur
as early
as ),
assuming no additional issuances of common units (other than
upon the conversion of the subordinated units), our general
partner and its affiliates will own
approximately % of our common
units. For additional information about the call right, please
read The Partnership Agreement Limited Call
Right beginning on page 170.
38
Your
liability may not be limited if a court finds that unitholder
action constitutes control of our business.
A general partner of a partnership generally has unlimited
liability for the obligations of the partnership, except for
those contractual obligations of the partnership that are
expressly made without recourse to the general partner. Our
partnership is organized under Delaware law, and we conduct
business in a number of other states. The limitations on the
liability of holders of limited partner interests for the
obligations of a limited partnership have not been clearly
established in some jurisdictions. You could be liable for our
obligations as if you were a general partner if a court or
government agency were to determine that:
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we were conducting business in a state but had not complied with
that particular states partnership statute; or
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your right to act with other unitholders to remove or replace
the general partner, to approve some amendments to our
partnership agreement or to take other actions under our
partnership agreement constitute control of our
business.
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Please read The Partnership Agreement Limited
Liability beginning on page 163 for a discussion of
the implications of the limitations of liability on a unitholder.
Unitholders
may have liability to repay distributions that were wrongfully
distributed to them.
Under certain circumstances, unitholders may have to repay
amounts wrongfully returned or distributed to them. Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act, we may
not make a distribution to you if the distribution would cause
our liabilities to exceed the fair value of our assets. Delaware
law provides that for a period of three years from the date of
the impermissible distribution, limited partners who received
the distribution and who knew at the time of the distribution
that it violated Delaware law will be liable to the limited
partnership for the distribution amount. Transferees of common
units are liable for the obligations of the transferor to make
contributions to the partnership that are known to the
transferee at the time of the transfer and for unknown
obligations if the liabilities could be determined from the
partnership agreement. Liabilities to partners on account of
their partnership interest and liabilities that are non-recourse
to the partnership are not counted for purposes of determining
whether a distribution is permitted.
There
is no existing market for our common units, and a trading market
that will provide you with adequate liquidity may not develop.
The price of our common units may fluctuate significantly, and
you could lose all or part of your investment.
Prior to this offering, there has been no public market for our
common units. After this offering, there will be
only
publicly traded common units. In addition, Tesoro will
own common
and
subordinated units, representing an
aggregate % limited partner
interest in us. We do not know the extent to which investor
interest will lead to the development of a trading market or how
liquid that market might be. You may not be able to resell your
common units at or above the initial public offering price.
Additionally, the lack of liquidity may result in wide bid-ask
spreads, contribute to significant fluctuations in the market
price of the common units and limit the number of investors who
are able to buy the common units.
The initial public offering price for the common units offered
hereby will be determined by negotiations between us and the
representatives of the underwriters and may not be indicative of
the market price of the common units that will prevail in the
trading market. The market price of our common units may decline
below the initial public offering price. The market price of our
common units may also be influenced by many factors, some of
which are beyond our control, including:
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our quarterly distributions;
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our quarterly or annual earnings or those of other companies in
our industry;
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announcements by us or our competitors of significant contracts
or acquisitions;
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changes in accounting standards, policies, guidance,
interpretations or principles;
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general economic conditions;
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the failure of securities analysts to cover our common units
after this offering or changes in financial estimates by
analysts;
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future sales of our common units; and
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other factors described in these Risk Factors.
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Our
general partner, or any transferee holding incentive
distribution rights, may elect to cause us to issue common units
and general partner units to it in connection with a resetting
of the target distribution levels related to its incentive
distribution rights, without the approval of our conflicts
committee or the holders of our common units. This could result
in lower distributions to holders of our common
units.
Our general partner has the right, at any time when there are no
subordinated units outstanding and it has received distributions
on its incentive distribution rights at the highest level to
which it is entitled (48.0%, in addition to distributions paid
on its 2.0% general partner interest) for each of the prior four
consecutive fiscal quarters, to reset the initial target
distribution levels at higher levels based on our distributions
at the time of the exercise of the reset election. Following a
reset election, the minimum quarterly distribution will be
adjusted to equal the reset minimum quarterly distribution, and
the target distribution levels will be reset to correspondingly
higher levels based on percentage increases above the reset
minimum quarterly distribution.
If our general partner elects to reset the target distribution
levels, it will be entitled to receive a number of common units
and general partner units. The number of common units to be
issued to our general partner will be equal to that number of
common units that would have entitled their holder to an average
aggregate quarterly cash distribution in the prior two quarters
equal to the average of the distributions to our general partner
on the incentive distribution rights in the prior two quarters.
Our general partner will also be issued the number of general
partner units necessary to maintain our general partners
interest in us that existed immediately prior to the reset
election. We anticipate that our general partner would exercise
this reset right in order to facilitate acquisitions or internal
growth projects that would not be sufficiently accretive to cash
distributions per common unit without such conversion. It is
possible, however, that our general partner could exercise this
reset election at a time when it is experiencing, or expects to
experience, declines in the cash distributions it receives
related to its incentive distribution rights and may, therefore,
desire to be issued common units rather than retain the right to
receive distributions based on the initial target distribution
levels. This risk could be elevated if our incentive
distribution rights have been transferred to a third party. As a
result, a reset election may cause our common unitholders to
experience a reduction in the amount of cash distributions that
they would have otherwise received had we not issued new common
units and general partner units in connection with resetting the
target distribution levels. Additionally, our general partner
has the right to transfer our incentive distribution rights at
any time, and such transferee shall have the same rights as the
general partner relative to resetting target distributions if
our general partner concurs that the tests for resetting target
distributions have been fulfilled. Please read Provisions
of our Partnership Agreement Relating to Cash
Distributions General Partners Right to Reset
Incentive Distribution Levels beginning on page 69.
Our
unitholders who fail to furnish certain information requested by
our general partner or who our general partner, upon receipt of
such information, determines are not eligible citizens may not
be entitled to receive distributions in kind upon our
liquidation and their common units will be subject to
redemption.
Our general partner may require each limited partner to furnish
information about his nationality, citizenship or related
status. If a limited partner fails to furnish information about
his nationality, citizenship or other related status within
30 days after a request for the information or our general
partner determines after receipt of the information that the
limited partner is not an eligible citizen, the limited partner
may be treated as a non-citizen assignee. A non-citizen assignee
does not have the right to direct the voting of his units and
40
may not receive distributions in kind upon our liquidation.
Furthermore, we have the right to redeem all of the common units
and subordinated units of any holder that is not an eligible
citizen or fails to furnish the requested information. The
redemption price will be paid in cash or by delivery of a
promissory note, as determined by our general partner. Please
read The Partnership Agreement Non-Citizen
Assignees; Redemption beginning on page 171.
Common
units held by persons who are non-taxpaying assignees will be
subject to the possibility of redemption.
To avoid any adverse effect on the maximum applicable rates
chargeable to customers by us under FERC regulations, or in
order to reverse an adverse determination that has occurred
regarding such maximum rate, our partnership agreement gives our
general partner the power to amend the agreement. If our general
partner determines that our not being treated as an association
taxable as a corporation or otherwise taxable as an entity for
U.S. federal income tax purposes, coupled with the tax
status (or lack of proof thereof) of one or more of our limited
partners, has, or is reasonably likely to have, a material
adverse effect on the maximum applicable rates chargeable to
customers by us, then our general partner may adopt such
amendments to our partnership agreement as it determines are
necessary or advisable to obtain proof of the U.S. federal
income tax status of our limited partners (and their owners, to
the extent relevant) and permit us to redeem the units held by
any person whose tax status has or is reasonably likely to have
a material adverse effect on the maximum applicable rates or who
fails to comply with the procedures instituted by our general
partner to obtain proof of the U.S. federal income tax
status. Please read The Partnership Agreement
Non-Taxpaying Assignees; Redemption beginning on
page 171.
The
NYSE does not require a publicly traded limited partnership like
us to comply with certain of its corporate governance
requirements.
We intend to apply to list our common units on the NYSE. Because
we will be a publicly traded limited partnership, the NYSE does
not require us to have a majority of independent directors on
our general partners board of directors or to establish a
compensation committee or a nominating and corporate governance
committee. Accordingly, unitholders will not have the same
protections afforded to certain corporations that are subject to
all of the NYSE corporate governance requirements. Please read
Management Management of Tesoro Logistics
LP beginning on page 125.
Tax
Risks
In addition to reading the following risk factors, please read
Material Federal Income Tax Consequences beginning
on page 175 for a more complete discussion of the expected
material federal income tax consequences of owning and disposing
of common units.
Our
tax treatment depends on our status as a partnership for federal
income tax purposes. If the Internal Revenue Service (IRS) were
to treat us as a corporation for federal income tax purposes,
which would subject us to entity-level taxation, then our cash
available for distribution to our unitholders would be
substantially reduced.
The anticipated after-tax economic benefit of an investment in
the common units depends largely on our being treated as a
partnership for federal income tax purposes. We have not
requested, and do not plan to request, a ruling from the IRS on
this or any other tax matter affecting us.
Despite the fact that we are a limited partnership under
Delaware law, it is possible in certain circumstances for a
partnership such as ours to be treated as a corporation for
federal income tax purposes. Although we do not believe based
upon our current operations that we are or will be so treated, a
change in our business or a change in current law could cause us
to be treated as a corporation for federal income tax purposes
or otherwise subject us to taxation as an entity.
If we were treated as a corporation for federal income tax
purposes, we would pay federal income tax on our taxable income
at the corporate tax rate, which is currently a maximum of 35%,
and would likely pay
41
state and local income tax at varying rates. Distributions would
generally be taxed again as corporate dividends (to the extent
of our current and accumulated earnings and profits), and no
income, gains, losses, deductions, or credits would flow through
to you. Because a tax would be imposed upon us as a corporation,
our cash available for distribution to you would be
substantially reduced. Therefore, if we were treated as a
corporation for federal income tax purposes, there would be
material reduction in the anticipated cash flow and after-tax
return to our unitholders, likely causing a substantial
reduction in the value of our common units.
Our partnership agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that
subjects us to taxation as a corporation or otherwise subjects
us to entity-level taxation for federal, state or local income
tax purposes, the minimum quarterly distribution amount and the
target distribution amounts may be adjusted to reflect the
impact of that law on us.
If we
were subjected to a material amount of additional entity-level
taxation by individual states, it would reduce our cash
available for distribution to our unitholders.
Changes in current state law may subject us to additional
entity-level taxation by individual states. Because of
widespread state budget deficits and other reasons, several
states are evaluating ways to subject partnerships to
entity-level taxation through the imposition of state income,
franchise and other forms of taxation. Imposition of any such
taxes may substantially reduce the cash available for
distribution to you. Our partnership agreement provides that, if
a law is enacted or existing law is modified or interpreted in a
manner that subjects us to entity-level taxation, the minimum
quarterly distribution amount and the target distribution
amounts may be adjusted to reflect the impact of that law on us.
The
tax treatment of publicly traded partnerships or an investment
in our common units could be subject to potential legislative,
judicial or administrative changes and differing
interpretations, possibly on a retroactive basis.
The present federal income tax treatment of publicly traded
partnerships, including us, or an investment in our common units
may be modified by administrative, legislative or judicial
interpretation at any time. Recently, members of the
U.S. Congress have considered substantive changes to the
existing federal income tax laws that affect certain publicly
traded partnerships, which, if enacted, may or may not be
applied retroactively. Although we are unable to predict whether
any of these changes or any other proposals will ultimately be
enacted, any such changes could negatively impact the value of
an investment in our common units.
Our
unitholders share of our income will be taxable to them
for federal income tax purposes even if they do not receive any
cash distributions from us.
Because a unitholder will be treated as a partner to whom we
will allocate taxable income which could be different in amount
than the cash we distribute, a unitholders allocable share
of our taxable income will be taxable to it, which may require
the payment of federal income taxes and, in some cases, state
and local income taxes, on its share of our taxable income even
if it receives no cash distributions from us. Our unitholders
may not receive cash distributions from us equal to their share
of our taxable income or even equal to the actual tax liability
that results from that income.
If the
IRS contests the federal income tax positions we take, the
market for our common units may be adversely impacted and the
cost of any IRS contest will reduce our cash available for
distribution to our unitholders.
We have not requested a ruling from the IRS with respect to our
treatment as a partnership for federal income tax purposes or
any other matter affecting us. The IRS may adopt positions that
differ from the conclusions of our counsel expressed in this
prospectus or from the positions we take, and the IRSs
positions may ultimately be sustained. It may be necessary to
resort to administrative or court proceedings to sustain some or
all of our counsels conclusions or the positions we take
and such positions may not ultimately be sustained. A court may
not agree with some or all of our counsels conclusions or
the positions we take. Any
42
contest with the IRS, and the outcome of any IRS contest, may
have a materially adverse impact on the market for our common
units and the price at which they trade. In addition, our costs
of any contest with the IRS will be borne indirectly by our
unitholders and our general partner because the costs will
reduce our cash available for distribution.
Tax
gain or loss on the disposition of our common units could be
more or less than expected.
If you sell your common units, you will recognize a gain or loss
for federal income tax purposes equal to the difference between
the amount realized and your tax basis in those common units.
Because distributions in excess of your allocable share of our
net taxable income decrease your tax basis in your common units,
the amount, if any, of such prior excess distributions with
respect to the common units you sell will, in effect, become
taxable income to you if you sell such common units at a price
greater than your tax basis in those common units, even if the
price you receive is less than your original cost. Furthermore,
a substantial portion of the amount realized on any sale of your
common units, whether or not representing gain, may be taxed as
ordinary income due to potential recapture items, including
depreciation recapture. In addition, because the amount realized
includes a unitholders share of our nonrecourse
liabilities, if you sell your common units, you may incur a tax
liability in excess of the amount of cash you receive from the
sale. Please read Material Federal Income Tax
Consequences Disposition of Common Units
Recognition of Gain or Loss beginning on page 184 for
a further discussion of the foregoing.
Tax-exempt
entities and
non-U.S.
persons face unique tax issues from owning our common units that
may result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as
employee benefit plans and individual retirement accounts (known
as IRAs), and
non-U.S. persons
raises issues unique to them. For example, virtually all of our
income allocated to organizations that are exempt from federal
income tax, including IRAs and other retirement plans, will be
unrelated business taxable income and will be taxable to them.
Distributions to
non-U.S. persons
will be reduced by withholding taxes at the highest applicable
effective tax rate, and
non-U.S. persons
will be required to file federal income tax returns and pay tax
on their share of our taxable income. If you are a tax-exempt
entity or a
non-U.S. person,
you should consult a tax advisor before investing in our common
units.
We
will treat each purchaser of common units as having the same tax
benefits without regard to the actual common units purchased.
The IRS may challenge this treatment, which could adversely
affect the value of the common units.
Because we cannot match transferors and transferees of common
units and because of other reasons, we will adopt depreciation
and amortization positions that may not conform to all aspects
of existing Treasury Regulations. A successful IRS challenge to
those positions could adversely affect the amount of tax
benefits available to you. Our counsel is unable to opine as to
the validity of such filing positions. It also could affect the
timing of these tax benefits or the amount of gain from your
sale of common units and could have a negative impact on the
value of our common units or result in audit adjustments to your
tax returns. Please read Material Federal Income Tax
Consequences Tax Consequences of Unit
Ownership Section 754 Election beginning
on page 182 for a further discussion of the effect of the
depreciation and amortization positions we will adopt.
We
prorate our items of income, gain, loss and deduction for
federal income tax purposes between transferors and transferees
of our units each month based upon the ownership of our units on
the first day of each month, instead of on the basis of the date
a particular unit is transferred. The IRS may challenge this
treatment, which could change the allocation of items of income,
gain, loss and deduction among our unitholders.
We will prorate our items of income, gain, loss and deduction
for federal income tax purposes between transferors and
transferees of our units each month based upon the ownership of
our units on the first day of each month, instead of on the
basis of the date a particular unit is transferred. The use of
this proration
43
method may not be permitted under existing Treasury
Regulations, and, accordingly, our counsel is unable to opine as
to the validity of this method. If the IRS were to challenge
this method or new Treasury regulations were issued, we may be
required to change the allocation of items of income, gain, loss
and deduction among our unitholders. Please read Material
Federal Income Tax Consequences Disposition of
Common Units Allocations Between Transferors and
Transferees beginning on page 185.
A
unitholder whose common units are loaned to a short
seller to effect a short sale of common units may be
considered as having disposed of those common units. If so, he
would no longer be treated for federal income tax purposes as a
partner with respect to those common units during the period of
the loan and may recognize gain or loss from the
disposition.
Because a unitholder whose common units are loaned to a
short seller to effect a short sale of common units
may be considered as having disposed of the loaned common units,
he may no longer be treated for federal income tax purposes as a
partner with respect to those common units during the period of
the loan to the short seller and the unitholder may recognize
gain or loss from such disposition. Moreover, during the period
of the loan to the short seller, any of our income, gain, loss
or deduction with respect to those common units may not be
reportable by the unitholder and any cash distributions received
by the unitholder as to those common units could be fully
taxable as ordinary income. Our counsel has not rendered an
opinion regarding the treatment of a unitholder where common
units are loaned to a short seller to effect a short sale of
common units; therefore, our unitholders desiring to assure
their status as partners and avoid the risk of gain recognition
from a loan to a short seller are urged to consult a tax advisor
to discuss whether it is advisable to modify any applicable
brokerage account agreements to prohibit their brokers from
loaning their common units.
We
will adopt certain valuation methodologies and monthly
conventions for federal income tax purposes that may result in a
shift of income, gain, loss and deduction between our general
partner and our unitholders. The IRS may challenge this
treatment, which could adversely affect the value of the common
units.
When we issue additional units or engage in certain other
transactions, we will determine the fair market value of our
assets and allocate any unrealized gain or loss attributable to
our assets to the capital accounts of our unitholders and our
general partner. Our methodology may be viewed as understating
the value of our assets. In that case, there may be a shift of
income, gain, loss and deduction between certain unitholders and
our general partner, which may be unfavorable to such
unitholders. Moreover, under our valuation methods, subsequent
purchasers of common units may have a greater portion of their
Internal Revenue Code Section 743(b) adjustment allocated
to our tangible assets and a lesser portion allocated to our
intangible assets. The IRS may challenge our valuation methods,
or our allocation of the Section 743(b) adjustment
attributable to our tangible and intangible assets, and
allocations of taxable income, gain, loss and deduction between
our general partner and certain of our unitholders.
A successful IRS challenge to these methods or allocations could
adversely affect the amount of taxable income or loss being
allocated to our unitholders. It also could affect the amount of
taxable gain from our unitholders sale of common units and
could have a negative impact on the value of the common units or
result in audit adjustments to our unitholders tax returns
without the benefit of additional deductions.
The
sale or exchange of 50% or more of our capital and profits
interests during any twelve-month period will result in the
termination of our partnership for federal income tax
purposes.
We will be considered to have technically terminated our
partnership for federal income tax purposes if there is a sale
or exchange of 50% or more of the total interests in our capital
and profits within a twelve-month period. For purposes of
determining whether the 50% threshold has been met, multiple
sales of the same interest will be counted only once. Our
technical termination would, among other things, result in the
closing of our taxable year for all unitholders, which would
result in us filing two tax returns (and our unitholders could
receive two Schedules K-1 if relief was not available, as
described below) for one fiscal year and could result in a
deferral of depreciation deductions allowable in computing our
taxable income. In the case of a unitholder reporting on a
taxable year other than a fiscal year ending December 31,
the closing of
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our taxable year may also result in more than twelve months of
our taxable income or loss being includable in his taxable
income for the year of termination. Our termination currently
would not affect our classification as a partnership for federal
income tax purposes, but instead we would be treated as a new
partnership for tax purposes. If treated as a new partnership,
we must make new tax elections and could be subject to penalties
if we are unable to determine that a termination occurred. The
IRS has recently announced a publicly traded partnership
technical termination relief program whereby, if a publicly
traded partnership that technically terminated requests publicly
traded partnership technical termination relief and such relief
is granted by the IRS, among other things, the partnership will
only have to provide one
Schedule K-1
to unitholders for the year notwithstanding two partnership tax
years. Please read Material Federal Income Tax
Consequences Disposition of Common Units
Constructive Termination on page 186 for a discussion
of the consequences of our termination for federal income tax
purposes.
As a
result of investing in our common units, you may become subject
to state and local taxes and return filing requirements in
jurisdictions where we operate or own or acquire
properties.
In addition to federal income taxes, our unitholders will likely
be subject to other taxes, including state and local taxes,
unincorporated business taxes and estate, inheritance or
intangible taxes that are imposed by the various jurisdictions
in which we conduct business or control property now or in the
future, even if they do not live in any of those jurisdictions.
Our unitholders will likely be required to file state and local
income tax returns and pay state and local income taxes in some
or all of these various jurisdictions. Further, our unitholders
may be subject to penalties for failure to comply with those
requirements. We initially expect to conduct business in Alaska,
California, Colorado, Idaho, Montana, North Dakota, Texas, Utah
and Washington. Many of these states currently impose a personal
income tax on individuals. As we make acquisitions or expand our
business, we may control assets or conduct business in
additional states that impose a personal income tax. It is your
responsibility to file all federal, state and local tax returns.
Our counsel has not rendered an opinion on the state or local
tax consequences of an investment in our common units.
Compliance
with and changes in tax laws could adversely affect our
performance.
We are subject to extensive tax laws and regulations, including
federal, state, and foreign income taxes and transactional taxes
such as excise, sales/use, payroll, franchise, and ad valorem
taxes. New tax laws and regulations and changes in existing tax
laws and regulations are continuously being enacted that could
result in increased tax expenditures in the future. Many of
these tax liabilities are subject to audits by the respective
taxing authority. These audits may result in additional taxes as
well as interest and penalties.
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USE OF
PROCEEDS
We expect to receive proceeds of approximately
$ million from the sale
of
common units offered by this prospectus, before payment of
underwriting discounts, structuring and advisory fees and
offering expenses. We intend to use these proceeds as follows:
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$ million will be distributed
to Tesoro, in part to reimburse Tesoro for certain capital
expenditures it incurred with respect to assets contributed to
us;
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$3.0 million for working capital purposes; and
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$ million to pay underwriting
discounts, a structuring fee and an advisory fee and to pay
offering expenses of approximately
$ million.
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At the closing of this offering, we will enter into a new
$150.0 million credit facility, under which we will borrow
$50.0 million to fund an additional $50.0 million cash
distribution to Tesoro.
The table below sets forth our anticipated use of the net
proceeds from this offering before payment of underwriting
discounts, structuring and advisory fees and offering expenses:
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Percentage
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Application of
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of
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Net Proceeds
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Net Proceeds
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|
(In thousands)
|
|
|
Distribution to Tesoro
|
|
$
|
|
|
|
|
|
%
|
Working capital purposes
|
|
|
3.0
|
|
|
|
|
|
Payment of underwriting discounts, fees and offering expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
The net proceeds from any exercise by the underwriters of their
option to purchase additional common units will be used to
redeem from Tesoro a number of common units equal to the number
of common units issued upon exercise of the option at a price
per common unit equal to the proceeds per common unit before
expenses but after deducting underwriting discounts and the
structuring fee. Accordingly, any exercise of the
underwriters option will not affect the total number of
units outstanding or the amount of cash needed to pay the
minimum quarterly distribution on all units. Please read
Underwriting beginning on page 194.
An increase or decrease in the initial public offering price of
$1.00 per common unit would cause the net proceeds from the
offering, after deducting underwriting discounts and the
structuring fee, to increase or decrease by
$ million. If the proceeds
increase due to a higher initial public offering price or
decrease due to a lower initial public offering price, then the
cash distribution to Tesoro from the proceeds of this offering
will increase or decrease, as applicable, by a corresponding
amount.
46
CAPITALIZATION
The following table shows:
|
|
|
|
|
historical cash and cash equivalents and capitalization of our
predecessor as of September 30, 2010; and
|
|
|
|
|
|
our pro forma capitalization as of September 30, 2010,
giving effect to the pro forma adjustments described in our
unaudited pro forma combined financial statements included
elsewhere in this prospectus, including this offering and the
application of the net proceeds of this offering in the manner
described under Use of Proceeds on page 46, and
borrowings under our revolving credit facility and the other
transactions described under Summary The
Transactions on page 6.
|
This table is derived from, should be read together with and is
qualified in its entirety by reference to our historical and pro
forma combined financial statements and the accompanying notes
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
|
Predecessor
|
|
|
Partnership
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
(In millions)
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
3.0
|
|
Revolving credit facility
|
|
|
|
|
|
|
50.0
|
|
Division equity/partners capital:
|
|
|
|
|
|
|
|
|
Tesoro division equity
|
|
$
|
130.5
|
|
|
|
|
|
Held by public:
|
|
|
|
|
|
|
|
|
Common units
|
|
|
|
|
|
|
|
|
Held by Tesoro:
|
|
|
|
|
|
|
|
|
Common units
|
|
|
|
|
|
|
|
|
Subordinated units
|
|
|
|
|
|
|
|
|
General partner units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total division equity/partners capital
|
|
|
130.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
130.5
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
47
DILUTION
Dilution is the amount by which the offering price per common
unit in this offering will exceed the net tangible book value
per unit after the offering. On a pro forma basis as of
September 30, 2010, after giving effect to the offering of
common units and the related transactions, our net tangible book
value was approximately
$ million, or
$ per unit. Purchasers of common
units in this offering will experience substantial and immediate
dilution in net tangible book value per common unit for
financial accounting purposes, as illustrated in the following
table.
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per common unit
|
|
|
|
|
|
$
|
|
|
Pro forma net tangible book value per unit before the offering(1)
|
|
$
|
|
|
|
|
|
|
Decrease in net tangible book value per unit attributable to
purchasers in the offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Pro forma net tangible book value per unit after the
offering(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immediate dilution in net tangible book value per common unit to
purchasers in the offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Determined by dividing the number of units
(
common
units, subordinated
units
and
general partner units) to be issued to the general partner and
its affiliates for their contribution of assets and liabilities
to us into the net tangible book value of the contributed assets
and liabilities. |
|
(2) |
|
Determined by dividing the number of units
(
common
units,
subordinated units
and
general partner units) to be outstanding after the offering into
our pro forma net tangible book value. |
The following table sets forth the number of units that we will
issue and the total consideration contributed to us by the
general partner and its affiliates in respect of their units and
by the purchasers of common units in this offering upon
consummation of the transactions contemplated by this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units Acquired
|
|
|
Total Consideration
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
General partner and its affiliates(1)(2)
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
Purchasers in this offering
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Upon the consummation of the transactions contemplated by this
prospectus, our general partner and its affiliates will
own
common
units, subordinated
units
and
general partner units. |
|
(2) |
|
The assets contributed by the general partner and its affiliates
were recorded at historical cost in accordance with accounting
principles generally accepted in the United States. Book value
of the consideration provided by the general partner and its
affiliates, as of September 30, 2010, after giving effect
to the application of the net proceeds of the offering, is as
follows: |
|
|
|
|
|
|
|
(In thousands)
|
|
|
Book value of net assets contributed
|
|
$
|
|
|
Less: Distribution to Tesoro from net proceeds of this offering
|
|
|
|
|
Distribution to Tesoro from borrowings under our revolving
credit facility
|
|
|
|
|
|
|
|
|
|
Total consideration
|
|
$
|
|
|
|
|
|
|
|
48
CASH
DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
You should read the following discussion of our cash
distribution policy in conjunction with the specific assumptions
included in this section. In addition, you should read
Forward-Looking Statements beginning on
page 200 and Risk Factors beginning on
page 17 for information regarding statements that do not
relate strictly to historical or current facts and regarding
certain risks inherent in our business.
For additional information regarding our historical and pro
forma results of operations, you should refer to our historical
and pro forma combined financial statements and the notes to
those financial statements included elsewhere in this
prospectus.
General
Rationale
for Our Cash Distribution Policy
Our partnership agreement requires that we distribute all of our
available cash quarterly. Our cash distribution policy reflects
a basic judgment that our unitholders will be better served by
distributing our available cash rather than retaining it,
because, among other reasons, we believe we will generally
finance any expansion capital expenditures from external
financing sources. Generally, our available cash is our
(i) cash on hand at the end of a quarter after the payment
of our expenses and the establishment of cash reserves and
(ii) cash on hand resulting from working capital borrowings
made after the end of the quarter. Because we are not subject to
an entity-level federal income tax, we expect to have more cash
to distribute than would be the case if we were subject to
federal income tax.
Limitations
on Cash Distributions and Our Ability to Change Our Cash
Distribution Policy
There is no guarantee that we will make quarterly cash
distributions to our unitholders. We do not have a legal
obligation to pay distributions at our minimum quarterly
distribution rate or at any other rate except as provided in our
partnership agreement. Our partnership agreement requires that
we distribute all of our available cash quarterly. Our cash
distribution policy is subject to certain restrictions and may
be changed at any time. The reasons for such uncertainties in
our stated cash distribution policy include the following
factors:
|
|
|
|
|
Our cash distribution policy will be subject to restrictions on
cash distributions under our revolving credit facility. Should
we be unable to satisfy these restrictions included in our
revolving credit facility, we would be prohibited from making
cash distributions notwithstanding our cash distribution policy.
Please read Managements Discussion and Analysis of
Financial Condition and Results of Operations
Capital Resources and Liquidity Revolving Credit
Facility beginning on page 89.
|
|
|
|
|
|
Our general partner will have the authority to establish cash
reserves for the prudent conduct of our business and for future
cash distributions to our unitholders, and the establishment of
or increase in those reserves could result in a reduction in
cash distributions from levels we currently anticipate pursuant
to our stated cash distribution policy. Any decision to
establish cash reserves made by our general partner in good
faith will be binding on our unitholders.
|
|
|
|
|
|
While our partnership agreement requires us to distribute all of
our available cash, our partnership agreement, including the
provisions requiring us to make cash distributions contained
therein, may be amended. Our partnership agreement may not be
amended during the subordination period without the approval of
our public common unitholders, except in those limited
circumstances when our general partner can amend our partnership
agreement without any unitholder approval. However, after the
subordination period has ended our partnership agreement may be
amended with the consent of our general partner and the approval
of a majority of the outstanding common units, including common
units owned by Tesoro. At the closing of this offering, Tesoro
will own our general partner and will own an aggregate of
approximately % of the outstanding
common units and subordinated units. Please read The
Partnership Agreement Amendment of the Partnership
Agreement beginning on page 165.
|
49
|
|
|
|
|
Even if our cash distribution policy is not modified or revoked,
the amount of distributions we make under our cash distribution
policy and the decision to make any distribution is determined
by our general partner, taking into consideration the terms of
our partnership agreement.
|
|
|
|
Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act, or the
Delaware Act, we may not make a distribution if the distribution
would cause our liabilities to exceed the fair value of our
assets.
|
|
|
|
We may lack sufficient cash to make distributions to our
unitholders due to a number of operational, commercial and other
factors or increases in our operating costs, general and
administrative expenses, principal and interest payments on our
outstanding debt and working capital requirements.
|
|
|
|
|
|
If we make distributions out of capital surplus, as opposed to
operating surplus, any such distributions would constitute a
return of capital and would result in a reduction in the minimum
quarterly distribution and the target distribution levels.
Please read Provisions of our Partnership Agreement
Relating to Cash Distributions Operating Surplus and
Capital Surplus beginning on page 63. We do not
anticipate that we will make any distributions from capital
surplus.
|
|
|
|
|
|
Our ability to make distributions to our unitholders depends on
the performance of our subsidiaries and their ability to
distribute cash to us. The ability of our subsidiaries to make
distributions to us may be restricted by, among other things,
the provisions of future indebtedness, applicable state
partnership and limited liability company laws and other laws
and regulations.
|
Our
Ability to Grow is Dependent on Our Ability to Access External
Expansion Capital
We will distribute all of our available cash to our unitholders
on a quarterly basis. As a result, we expect that we will rely
primarily upon external financing sources, including borrowings
under our revolving credit facility and the issuance of debt and
equity securities, to fund any future acquisitions and other
expansion capital expenditures. To the extent we are unable to
finance growth externally, our cash distribution policy will
significantly impair our ability to grow. In addition, because
we will distribute all of our available cash, our growth may not
be as fast as businesses that reinvest all of their available
cash to expand ongoing operations. Our revolving credit facility
will restrict our ability to incur additional debt, including
through the issuance of debt securities. Please read Risk
Factors Risks Related to Our Business
Restrictions in our revolving credit facility could adversely
affect our business, financial condition, results of operations,
ability to make cash distributions to our unitholders and the
value of our units on page 27. To the extent we issue
additional units, the payment of distributions on those
additional units may increase the risk that we will be unable to
maintain or increase our per unit distribution level. There are
no limitations in our partnership agreement on our ability to
issue additional units, including units ranking senior to our
common units. If we incur additional debt (under our revolving
credit facility or otherwise) to finance our growth strategy, we
will have increased interest expense, which in turn may impact
the available cash that we have to distribute to our
unitholders. Please read Risk Factors Risks
Related to Our Business Debt we incur in the future
may limit our flexibility to obtain financing and to pursue
other business opportunities beginning on page 27.
Our
Minimum Quarterly Distribution
Upon the consummation of this offering, our partnership
agreement will provide for a minimum quarterly distribution of
$ per unit for each complete
quarter, or $ per unit on an
annualized basis. Our ability to make cash distributions at the
minimum quarterly distribution rate will be subject to the
factors described above under
General Limitations on Cash
Distributions and Our Ability to Change Our Cash Distribution
Policy beginning on page 49. Quarterly distributions,
if any, will be made within 45 days after the end of each
quarter, on or about the 15th day of each February, May, August
and November to holders of record on or about the first day of
each such month. If the distribution date does not fall on a
business day, we will make the distribution on the first
business day immediately preceding the indicated distribution
date. We do not expect to make distributions for the period that
begins
on ,
2011 and ends on the day prior to the closing of this offering
other than the distributions to be made to Tesoro in connection
with the closing of this offering that are described in
Summary The Transactions on page 6
and Use of Proceeds on page 46. We will adjust
our first distribution for the period from the closing of this
offering
through
50
, 2011 based on the actual length of the period. The amount of
available cash needed to pay the minimum quarterly distribution
on all of our common units, subordinated units and general
partner units to be outstanding immediately after this offering
for one quarter and on an annualized basis is summarized in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Quarterly Distributions
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Number of Units
|
|
|
One Quarter
|
|
|
(Four Quarters)
|
|
|
Publicly held common units
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Common units held by Tesoro
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated units held by Tesoro
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner units held by Tesoro
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the date of this offering, our general partner will be
entitled to 2.0% of all distributions that we make prior to our
liquidation. Our general partners initial 2.0% interest in
these distributions may be reduced if we issue additional units
in the future and our general partner does not contribute a
proportionate amount of capital to us in order to maintain its
initial 2.0% general partner interest. Our general partner will
also hold the incentive distribution rights, which entitle the
holder to increasing percentages, up to a maximum of 48.0%, of
the cash we distribute in excess of
$ per unit per quarter.
During the subordination period, before we make any quarterly
distributions to our subordinated unitholders, our common
unitholders are entitled to receive payment of the full minimum
quarterly distribution plus any arrearages in distributions of
the minimum quarterly distribution from prior quarters. Please
read Provisions of our Partnership Agreement Relating to
Cash Distributions Subordination Period
beginning on page 65. We cannot guarantee, however, that we
will pay the minimum quarterly distribution on our common units
in any quarter.
Although holders of our common units may pursue judicial action
to enforce provisions of our partnership agreement, including
those related to requirements to make cash distributions as
described above, our partnership agreement provides that any
determination made by our general partner in its capacity as our
general partner must be made in good faith and that any such
determination will not be subject to any other standard imposed
by the Delaware Act or any other law, rule or regulation or at
equity. Our partnership agreement provides that, in order for a
determination by our general partner to be made in good
faith, our general partner must believe that the
determination is in, or not opposed to, our best interest.
Please read Conflicts of Interest and Fiduciary
Duties beginning on page 152.
Our cash distribution policy, as expressed in our partnership
agreement, may not be modified or repealed without amending our
partnership agreement; however, the actual amount of our cash
distributions for any quarter is subject to fluctuations based
on the amount of cash we generate from our business and the
amount of reserves our general partner establishes in accordance
with our partnership agreement as described above.
Unaudited
Pro Forma Available Cash for the Year Ended December 31,
2009 and the Twelve Months Ended September 30,
2010
If we had completed the transactions contemplated in this
prospectus on January 1, 2009, pro forma available cash
generated for the year ended December 31, 2009 would have
been approximately $43.2 million. If we had completed the
transactions contemplated in this prospectus on October 1,
2009, our pro forma available cash generated for the twelve
months ended September 30, 2010 would have been
approximately $46.7 million. These amounts would have been
sufficient to pay the minimum quarterly distribution of
$ per unit per quarter
($ per unit on an annualized
basis) on all of our common units and subordinated units for
such periods.
We based the pro forma adjustments upon currently available
information and specific estimates and assumptions. The pro
forma amounts below do not purport to present our results of
operations had the
51
transactions contemplated in this prospectus actually been
completed as of the dates indicated. In addition, cash available
to pay distributions is primarily a cash accounting concept,
while our pro forma combined financial data have been prepared
on an accrual basis. As a result, you should view the amount of
pro forma available cash only as a general indication of the
amount of cash available to pay distributions that we might have
generated had we been formed in earlier periods.
The following table illustrates, on a pro forma basis, for the
year ended December 31, 2009 and the twelve months ended
September 30, 2010, the amount of cash that would have been
available for distribution to our unitholders, assuming in each
case that this offering and the other transactions contemplated
in this prospectus had been consummated at the beginning of each
period.
Tesoro
Logistics LP
Unaudited Pro Forma Available Cash
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Year Ended
|
|
|
Twelve Months Ended
|
|
|
|
December 31, 2009
|
|
|
September 30, 2010
|
|
|
|
(In thousands)
|
|
|
Pro Forma Net Income(1)
|
|
$
|
40,330
|
|
|
$
|
43,402
|
|
|
|
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
Interest expense, net(2)
|
|
|
2,306
|
|
|
|
2,306
|
|
Depreciation expense
|
|
|
8,820
|
|
|
|
7,828
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)
|
|
$
|
51,456
|
|
|
$
|
53,536
|
|
Less:
|
|
|
|
|
|
|
|
|
Cash interest paid(2)
|
|
|
1,905
|
|
|
|
1,905
|
|
Maintenance capital expenditures
|
|
|
3,319
|
|
|
|
1,928
|
|
Incremental general and administrative expense of being a
separate publicly traded partnership(4)
|
|
|
3,030
|
|
|
|
3,030
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Available Cash
|
|
$
|
43,202
|
|
|
$
|
46,673
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Cash Distributions:
|
|
|
|
|
|
|
|
|
Annualized minimum quarterly distribution per unit(5)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to public common unitholders
|
|
|
|
|
|
|
|
|
Distributions to Tesoro common units
|
|
|
|
|
|
|
|
|
Distributions to Tesoro subordinated units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to our general partner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to unitholders and general partner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of distributions payable to common unitholders
|
|
|
|
%
|
|
|
|
%
|
Percent of distributions payable to subordinated unitholders
|
|
|
|
%
|
|
|
|
%
|
|
|
|
(1) |
|
Reflects our pro forma net income for the period indicated and
gives pro forma effect to our High Plains pipeline system
tariffs and the various commercial agreements, omnibus agreement
and operational services agreements that will be entered into
with Tesoro at the closing of this offering. Pro forma net
income for the twelve months ended September 30, 2010
includes shortfall payments from Tesoro of $1.8 million,
$0.1 million and $0.1 million, respectively, under the
High Plains pipeline transportation services agreement, the
master terminalling services agreement and the short haul
pipeline transportation services agreement that we will enter
into with Tesoro at the closing of this offering. |
|
(2) |
|
Interest expense and cash interest paid both include commitment
fees and interest expense that would have been paid by our
predecessor had our revolving credit facility been in place
during the periods presented and we had borrowed
$50.0 million under the facility at the beginning of the
period. Interest expense also includes the amortization of debt
issuance costs incurred in connection with our revolving credit
facility. |
52
|
|
|
(3) |
|
EBITDA is defined in Summary Summary
Historical and Pro Forma Combined Financial and Operating
Data Non-GAAP Financial Measure on
page 16. |
|
|
|
(4) |
|
Reflects approximately $3.0 million of estimated annual
incremental general and administrative expenses that we expect
to incur as a result of being a separate publicly traded
partnership. |
|
(5) |
|
Assumes the issuance
of
general partner units and the incentive distribution rights to
our general
partner, common
units
and
subordinated units to Tesoro
and common
units to the public. |
Estimated
EBITDA for the Year Ending December 31, 2011
In order to fund the aggregate minimum quarterly distribution on
all units for the year ending December 31, 2011, totaling
$ million, we will need to
generate EBITDA of at least
$ million. For a definition
of EBITDA and a reconciliation of EBITDA to its most directly
comparable financial measures calculated and presented in
accordance with GAAP, please read Summary
Summary Historical and Pro Forma Combined Financial and
Operating Data Non-GAAP Financial Measure
on page 16. Based on the assumptions described below under
Significant Forecast Assumptions, we
believe we will generate the minimum estimated EBITDA of
$ million for the year ending
December 31, 2011. The forecast of estimated EBITDA set
forth below should not be viewed as managements projection
of the actual amount of EBITDA that we will generate during the
year ending December 31, 2011. Furthermore, there is a risk
that we will not generate the minimum estimated EBITDA for such
period. If we fail to generate the minimum estimated EBITDA, we
would not expect to have sufficient cash available for
distribution to pay the minimum quarterly distribution on all of
our units without incurring borrowings under our revolving
credit facility.
We have not historically made public projections as to future
operations, earnings or other results. However, management has
prepared the forecast of estimated EBITDA and related
assumptions set forth below to substantiate our belief that we
will have sufficient available cash to pay the minimum quarterly
distribution to all our unitholders for the year ending
December 31, 2011. Please read below under
Significant Forecast Assumptions for
further information as to the assumptions we have made for the
financial forecast. This forecast is a forward-looking statement
and should be read together with our historical and pro forma
combined financial statements and the accompanying notes
included elsewhere in this prospectus and
Managements Discussion and Analysis of Financial
Condition and Results of Operations beginning on
page 80. This forecast was not prepared with a view toward
complying with the published guidelines of the SEC or guidelines
established by the American Institute of Certified Public
Accountants with respect to prospective financial information,
but, in the view of our management, was prepared on a reasonable
basis, reflects the best currently available estimates and
judgments, and presents, to the best of managements
knowledge and belief, the assumptions on which we base our
belief that we can generate the minimum estimated EBITDA
necessary for us to have sufficient cash available for
distribution to pay the minimum quarterly distribution to all
unitholders for the forecasted period. However, this information
is not fact and should not be relied upon as being necessarily
indicative of our future results, and readers of this prospectus
are cautioned not to place undue reliance on the prospective
financial information.
The prospective financial information included in this
registration statement has been prepared by, and is the
responsibility of our management. Ernst & Young LLP
has neither compiled nor performed any procedures with respect
to the accompanying prospective financial information and,
accordingly, Ernst & Young LLP does not express an
opinion or any other form of assurance with respect thereto. The
Ernst & Young LLP report included in this registration
statement relates to our historical financial information. It
does not extend to the prospective financial information and
should not be read to do so.
When considering our financial forecast, you should keep in mind
the risk factors and other cautionary statements under
Risk Factors beginning on page 17. Any of the
risks discussed in this prospectus, to the extent they are
realized, could cause our actual results of operations to vary
significantly from those that would enable us to generate the
minimum estimated EBITDA.
53
We do not undertake any obligation to release publicly the
results of any future revisions we may make to the forecast or
to update this forecast to reflect events or circumstances after
the date of this prospectus. Therefore, you are cautioned not to
place undue reliance on this information.
Tesoro
Logistics LP
Statement
of Estimated EBITDA
|
|
|
|
|
|
|
Year Ending
|
|
|
|
December 31, 2011
|
|
|
|
(In thousands)
|
|
|
REVENUES:
|
|
|
|
|
Crude oil gathering:
|
|
|
|
|
Affiliate
|
|
$
|
49,560
|
|
Third-party
|
|
|
|
|
Terminalling, transportation and storage:
|
|
|
|
|
Affiliate
|
|
$
|
41,127
|
|
Third-party
|
|
|
3,457
|
|
|
|
|
|
|
Total Revenues
|
|
|
94,144
|
|
COSTS AND EXPENSES:
|
|
|
|
|
Operating and maintenance expense
|
|
|
38,099
|
|
Depreciation expense
|
|
|
8,592
|
|
General and administrative expense(1)
|
|
|
7,038
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
|
53,729
|
|
|
|
|
|
|
OPERATING INCOME
|
|
$
|
40,415
|
|
Interest expense, net
|
|
|
2,306
|
|
|
|
|
|
|
NET INCOME
|
|
|
38,109
|
|
Plus:
|
|
|
|
|
Interest expense, net
|
|
|
2,306
|
|
Depreciation expense
|
|
|
8,592
|
|
|
|
|
|
|
Estimated EBITDA(2)(3)
|
|
|
49,007
|
|
Less:
|
|
|
|
|
Cash interest paid
|
|
|
1,905
|
|
Maintenance capital expenditures
|
|
|
3,225
|
|
Expansion capital expenditures
|
|
|
1,100
|
|
Plus:
|
|
|
|
|
Cash on hand to fund expansion capital expenditures
|
|
|
1,100
|
|
|
|
|
|
|
Estimated cash available for distribution(3)
|
|
$
|
43,877
|
|
|
|
|
|
|
Distributions to public common unitholders
|
|
|
|
|
Distributions to Tesoro common units
|
|
|
|
|
Distributions to Tesoro subordinated units
|
|
|
|
|
Distributions to our general partner
|
|
$
|
|
|
|
|
|
|
|
Total distributions to unitholders and general partner
|
|
|
|
|
|
|
|
|
|
Excess of cash available for distribution over aggregate
annualized minimum quarterly distributions
|
|
|
|
|
Calculation of minimum estimated EBITDA necessary to pay
aggregate annualized minimum quarterly distributions:
|
|
|
|
|
Estimated EBITDA
|
|
|
|
|
Excess of cash available for distribution over aggregate
annualized minimum quarterly distributions
|
|
|
|
|
|
|
|
|
|
Minimum estimated EBITDA necessary to pay aggregate annualized
minimum quarterly distributions
|
|
$
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately $3.0 million of estimated annual
incremental general and administrative expenses that we expect
to incur as a result of being a separate publicly traded
partnership. |
|
|
|
(2) |
|
EBITDA is defined in Summary Summary
Historical and Pro Forma Combined Financial and Operating
Data Non-GAAP Financial Measure on
page 16. |
54
|
|
|
(3) |
|
Estimated EBITDA and estimated cash available for distribution
include approximately $10.2 million of forecasted revenues
from services provided to Tesoro in excess of contracted
minimums under our commercial agreements with Tesoro. |
Significant
Forecast Assumptions
The forecast has been prepared by and is the responsibility of
management. The forecast reflects our judgment as of the date of
this prospectus of conditions we expect to exist and the course
of action we expect to take during the year ending
December 31, 2011. While the assumptions disclosed in this
prospectus are not all-inclusive, the assumptions listed below
are those that we believe are material to our forecasted results
of operations and any assumptions not discussed below were not
deemed to be material. We believe we have a reasonable objective
basis for these assumptions. We believe our actual results of
operations will approximate those reflected in our forecast, but
we can give no assurance that our forecasted results will be
achieved. There will likely be differences between our forecast
and the actual results and those differences could be material.
If the forecast is not achieved, we may not be able to make cash
distributions on our common units at the minimum quarterly
distribution rate or at all.
General
Considerations
As discussed in this prospectus, a substantial majority of our
revenues and certain of our expenses will be determined by
contractual arrangements that we will enter into with Tesoro at
the closing of this offering. Accordingly, our forecasted
results are not directly comparable with historical periods.
Please read Managements Discussion and Analysis of
Financial Condition and Results of Operations
Factors Affecting the Comparability of Our Financial
Results beginning on page 83. Substantially all of
our revenues will be derived from fee-based business, primarily
pursuant to long-term commercial agreements with Tesoro that
include minimum volume commitments. As we do not generally own
the refined products or crude oil that we handle, and because
all of our commercial agreements with Tesoro, other than our
master terminalling agreement, generally require Tesoro to bear
the risk of any volume loss relating to the services we provide,
we are not directly exposed to material commodity risk. We have
not forecasted any gains or losses from commodity imbalances and
accordingly have not made any assumptions regarding future
commodity price levels in developing our forecast of estimated
EBITDA for the year ending December 31, 2011.
Revenues
We estimate that we will generate revenue of $94.1 million
for the year ending December 31, 2011, as compared to pro
forma revenues of $91.0 million and $93.1 million for
the year ended December 31, 2009 and the twelve months
ended September 30, 2010, respectively. Based on our
assumptions for the year ending December 31, 2011, we
expect approximately 96% of our forecasted revenues to be
generated by our commercial agreements with, and tariffs paid
by, Tesoro and 85% to be supported by Tesoros minimum
volume commitments under our commercial agreements.
Additionally, our commercial agreements include provisions that
generally permit Tesoro to suspend, reduce or terminate its
obligations under the applicable agreement if certain events
occur. These events include Tesoro deciding to permanently or
indefinitely suspend refining operations at one or more of its
refineries, as well as our being subject to certain force
majeure events that would prevent us from performing required
services under the applicable agreement.
Volumes. Our forecasted revenues have
been determined for our crude oil gathering segment and our
terminalling, transportation and storage segment by reference to
historical volumes handled by us for the twelve months ended
September 30, 2010 for Tesoro and third parties. The
forecasted revenues also take into consideration existing
contracts with third parties and our commercial agreements with
Tesoro that we will enter into at the closing of this offering,
as well as forecasted usage by Tesoro of services above the
minimum throughput requirements under these commercial
agreements. We expect that any variances between actual revenues
and forecasted revenues will be driven by differences between
actual volumes and forecasted volumes (subject to the minimum
volume commitments of Tesoro), by changes in uncommitted
volumes, by changes in the weighted average amount per barrel
charged for volumes of crude oil and refined products that
55
we handle and by variations between such weighted average
amounts per barrel and actual rates applied to such volumes.
The following table compares forecasted volumes to historical
volumes, contrasted against our minimum volume commitments and
reserved storage capacity (which represents 100% of our
currently-available storage capacity).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Forecasted
|
|
|
|
|
|
Contracted
|
|
|
|
|
|
|
Twelve Months
|
|
|
Year
|
|
|
|
|
|
Minimum
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Ending
|
|
|
|
|
|
as a
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Contracted
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Minimum
|
|
|
of Forecast
|
|
|
Crude oil pipeline throughput (bpd)
|
|
|
52,806
|
|
|
|
49,297
|
(1)
|
|
|
55,500
|
(2)
|
|
|
49,000
|
|
|
|
88
|
%
|
Trucking volume (bpd)
|
|
|
22,963
|
|
|
|
23,573
|
|
|
|
22,700
|
|
|
|
22,000
|
|
|
|
97
|
%
|
Terminal throughput (bpd)
|
|
|
113,135
|
|
|
|
114,587
|
|
|
|
116,800
|
|
|
|
100,000
|
|
|
|
86
|
%
|
Short-haul pipeline throughput (bpd)
|
|
|
56,942
|
|
|
|
52,650
|
|
|
|
60,300
|
|
|
|
54,000
|
|
|
|
90
|
%
|
Storage capacity reserved (barrels)
|
|
|
878,000
|
|
|
|
878,000
|
|
|
|
878,000
|
|
|
|
878,000
|
|
|
|
100
|
%
|
|
|
|
(1) |
|
Of the 49,297 bpd crude oil pipeline throughput for the
twelve months ended September 30, 2010, approximately
44,900 bpd were crude oil barrels from North Dakota origin
points that would be transported as part of Tesoros
minimum throughput commitment under the terms of the High Plains
pipeline transportation services agreement that we will enter
into with Tesoro at the closing of this offering, resulting in a
shortfall of approximately 4,100 bpd under this agreement.
This shortfall was the result of the scheduled turnaround at
Tesoros Mandan refinery during April and May of 2010. |
|
(2) |
|
Of the 55,500 bpd forecasted for the year ending
December 31, 2011, 49,000 bpd represent Tesoros
minimum throughput commitment under the High Plains pipeline
transportation services agreement, which is subject to our
committed NDPSC tariff rates, 3,700 bpd represent barrels
from North Dakota origin points in excess of Tesoros
minimum throughput commitment, which are subject to our
uncommitted NDPSC tariff rates, and 2,800 bpd represent
interstate barrels from Montana origin points, which are subject
to our FERC tariff rates. |
Crude Oil Gathering Revenues. We
estimate that our total crude oil gathering revenues for the
year ending December 31, 2011 will be $49.6 million,
as compared to $48.8 million and $49.1 million for the
year ended December 31, 2009 and the twelve months ended
September 30, 2010, respectively, on a pro forma basis. Of
the total revenues forecasted for this segment,
$41.6 million, or 84%, relate to minimum volumes under the
High Plains pipeline transportation services agreement and the
trucking transportation services agreement that we will enter
into with Tesoro at the closing of this offering. The balance of
these estimated revenues represents forecasted usage by Tesoro
of services above the minimum requirements under these
agreements, the gathering and transportation of interstate
volumes subject to our FERC tariff rates, pumpover fees and tank
usage fees paid by Tesoro. For a more detailed discussion of our
committed and uncommitted volumes, please see
Managements Discussion and Analysis of Financial
Condition and Results of Operations How We Generate
Revenue on page 80.
56
The following table shows our total crude oil gathering revenues
and our revenue per barrel handled in this segment for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Forecasted
|
|
|
|
|
|
|
Twelve Months
|
|
|
Year
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Ending
|
|
|
|
December 31, 2009
|
|
|
September 30, 2010
|
|
|
December 31, 2011
|
|
|
Revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline gathering(1)
|
|
$
|
24.7
|
|
|
$
|
24.4
|
|
|
$
|
25.6
|
|
Trucking
|
|
|
24.1
|
|
|
|
24.7
|
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
48.8
|
|
|
|
49.1
|
|
|
|
49.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (per barrel):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline gathering(1)
|
|
$
|
1.28
|
|
|
$
|
1.35
|
|
|
$
|
1.26
|
|
Trucking
|
|
|
2.88
|
|
|
|
2.87
|
|
|
|
2.89
|
|
|
|
|
(1) |
|
Pro forma revenues for the twelve months ended
September 30, 2010 include a shortfall payment from Tesoro
of $1.8 million, or $0.11 per barrel, based on a
shortfall of 4,100 bpd barrels under the terms of the High
Plains pipeline transportation services agreement that we will
enter into with Tesoro at the closing of this offering. This
shortfall was the result of the scheduled turnaround at
Tesoros Mandan refinery during April and May of 2010. |
Pipeline Gathering Services. We estimate that
total revenues attributable to the pipeline portion of our crude
oil gathering segment will be $25.6 million, or $1.26 per
barrel, for the year ending December 31, 2011, as compared
to $24.7 million, or $1.28 per barrel, and
$24.4 million, or $1.35 per barrel, for the year ended
December 31, 2009 and the twelve months ended
September 30, 2010, respectively, on a pro forma basis. The
pipeline gathering portion of this segment includes revenues
from trunkline transportation, pipeline gathering and pumpover
services. Of the $25.6 million for the pipeline gathering
portion, $19.7 million relates to Tesoros minimum
throughput commitment under our High Plains pipeline
transportation services agreement, under which we will charge
tariffs that we estimate will average (on a volume weighted
basis) approximately $1.10 per barrel (which excludes gathering
and pumpover fees). Under this agreement, Tesoro is obligated to
ship an average of at least 49,000 bpd per month on our
High Plains pipeline system from North Dakota origin points. The
remaining $5.9 million of forecasted revenue for the year
ending December 31, 2011 relates to volumes shipped from
North Dakota origin points in excess of the minimum throughput
commitment, volumes shipped from Montana origin points, as well
as uncommitted pipeline gathering and pumpover fees. The
increase in our forecasted revenues for the forecast period
compared to our pro forma revenues for the year ended
December 31, 2009 and the twelve months ended
September 30, 2010 primarily relates to higher anticipated
throughput volumes. The anticipated higher throughput volumes
are due to expected higher demand by Tesoros Mandan
refinery as a result of higher operating capabilities at the
refinery following the completion of a turnaround at the
refinery during April and May of 2010, as well as an expectation
that the Mandan refinery will operate for 12 months during
the forecast period compared to only 10.5 months of
operations during 2010 as a result of the turnaround.
Trucking Services. We estimate that total
revenues attributable to the trucking portion of our High Plains
crude oil gathering system will be $24.0 million, or $2.89
per truck-hauled barrel, for the year ending December 31,
2011. Of this amount, $21.8 million relates to the minimum
throughput commitments under the trucking transportation
services agreement that we will enter into with Tesoro at the
closing of this offering, and does not include tank usage fees.
Under this agreement, we will charge $2.72 per barrel to provide
crude oil trucking, scheduling and dispatching services to
Tesoro, and Tesoro will agree to gather and transport an average
of at least 22,000 bpd per month utilizing our trucking
services. The remaining $2.2 million of forecasted revenue
primarily relates to fees for tank usage and also forecasted
hauling volumes in excess of the minimum throughput commitments.
Revenues of $24.0 million for the forecast period are
relatively flat compared to pro forma revenues of
$24.1 million for the year ended December 31, 2009.
The decrease in our forecasted revenue for the forecast period
as compared to our pro forma revenues for the twelve months
ended September 30, 2010 primarily relates to lower demand
for trucking services following the turnaround at
57
Tesoros Mandan refinery during April and May of 2010.
Because of the turnaround, crude oil had to be trucked to
alternative destinations during those months, resulting in
higher trucking revenues.
Terminalling, Transportation and Storage
Revenues. We estimate that our total
terminalling, transportation and storage services revenues for
the year ending December 31, 2011 will be
$44.6 million, as compared to $42.1 million and
$44.1 million for the year ended December 31, 2009 and
the twelve months ended September 30, 2010, respectively,
on a pro forma basis. Of the total forecasted revenues,
$38.9 million, or 87%, relate to minimum volume commitments
under the terminalling, transportation and storage agreements
that we will enter into with Tesoro at the closing of this
offering. The balance of these estimated revenues represents
volumes above Tesoros minimum commitments as well as
third-party volumes. We expect revenues to increase in our
forecast period due to increased Tesoro and third-party
throughput volumes at our terminals, as well as increased
volumes on our short-haul pipelines. The following table shows
our total terminalling, transportation and storage revenues and
our revenue per barrel in this segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Forecasted
|
|
|
|
|
|
|
Twelve Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ending
|
|
|
|
December 31, 2009
|
|
|
September 30, 2010
|
|
|
December 31, 2011
|
|
|
|
(In millions, except per barrel amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminalling(1)
|
|
$
|
31.6
|
|
|
$
|
33.9
|
|
|
$
|
33.8
|
|
Short-Haul Pipeline
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation(1)
|
|
|
5.2
|
|
|
|
4.9
|
|
|
|
5.5
|
|
Storage
|
|
|
5.3
|
|
|
|
5.3
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42.1
|
|
|
$
|
44.1
|
|
|
$
|
44.6
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminalling (per barrel)
|
|
$
|
0.77
|
|
|
$
|
0.81
|
|
|
$
|
0.79
|
|
Short-Haul Pipeline
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation (per barrel)
|
|
|
0.25
|
|
|
|
0.25
|
|
|
|
0.25
|
|
Storage (per shell capacity barrel, per month)
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
|
|
(1) |
|
Pro forma revenues for the twelve months ended
September 30, 2010 include shortfall payments of
$0.1 million and $0.1 million, respectively, due to
shortfalls resulting from actual services and shipments below
Tesoros minimum throughput commitments under the master
terminalling services agreement and the short-haul pipeline
transportation services agreement that we will enter into with
Tesoro at the closing of this offering. |
Terminalling. We estimate that total revenues
attributable to our terminalling services will be
$33.8 million, or $0.79 per barrel, for the year ending
December 31, 2011. Of this amount, $28.7 million
relates to Tesoros minimum throughput commitments and
related ancillary services under the master terminalling
services agreement that we will enter into with Tesoro at the
closing of this offering. Under this agreement, Tesoro is
obligated to throughput an aggregate average of at least
100,000 bpd per month through our terminals. The remaining
$5.1 million of forecasted revenue is the result of
terminalling volumes of approximately 11,200 bpd for third
parties and 5,600 bpd for Tesoro in excess of Tesoros
minimum throughput commitments, and for related ancillary
services. Of the approximately 11,200 bpd terminalled for
third parties, approximately 3,800 bpd is subject to
month-to-month
contracts, and approximately 7,400 bpd is subject to
contracts with terms ranging from 90 days to one year.
Revenues of $33.8 million for the forecast period are
relatively flat compared to pro forma revenues of
$33.9 million for the year ended September 30, 2010.
The increase in our forecasted revenues for the forecast period
compared to the year ended December 31, 2009 primarily
relates to higher terminalling volume demand during the forecast
period as compared to prior periods and higher anticipated
throughput volumes at our terminals related to higher
anticipated production at Tesoros Mandan refinery in 2011
following the turnaround in April and May 2010.
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Short-Haul Pipeline Transportation. We
estimate that total revenues attributable to our short-haul
pipeline transportation business will be $5.5 million for
the year ending December 31, 2011. Of this amount,
$4.9 million relates to Tesoros minimum throughput
commitments under the short-haul pipeline transportation
agreement the we will enter into with Tesoro at the closing of
this offering. Under this agreement, we will charge $0.25 per
barrel to transport crude oil to, and refined products from,
Tesoros Salt Lake City refinery, and Tesoro will agree to
ship an average of at least 54,000 bpd utilizing our
short-haul crude oil and refined products pipelines. The
remaining $0.6 million of forecasted revenue relates to
throughput volumes in excess of Tesoros minimum throughput
commitment. The increase in our forecasted revenues compared to
pro forma revenues for the year ended December 31, 2009
primarily relates to higher anticipated throughput volumes
during the forecast period. The increase in our forecasted
revenues compared to pro forma revenues for the twelve months
ended September 30, 2010 primarily relates to higher
anticipated throughput volumes during the forecast period, as
the twelve months ended September 30, 2010 included a
scheduled turnaround at Tesoros Salt Lake City refinery,
which resulted in a shortfall payment of $0.1 million due
to actual shipments being below Tesoros minimum throughput
commitment.
Storage Services. We estimate that our storage
revenues will be $5.3 million for the year ending
December 31, 2011. Our forecasted storage revenues relate
to our storage and transportation services agreement that we
will enter into with Tesoro at the closing of this offering
under which we will provide 878,000 barrels of tank shell
capacity (100% of the currently available storage capacity) at
our storage facility, and all of the currently available
capacity on our interconnecting pipelines, to Tesoro, and Tesoro
will pay us $0.50 per barrel of tank shell capacity per month
for these storage and transportation services.
Operating
and Maintenance Expense
Our operating and maintenance expenses include labor expenses,
lease costs, utility costs, insurance premiums, repairs and
maintenance expenses and related property taxes. We estimate
that we will incur operating and maintenance expense of
$38.1 million for the year ending December 31, 2011 as
compared to $35.5 million and $35.6 million for the
year ended December 31, 2009 and the twelve months ended
September 30, 2010, respectively, on a pro forma basis. The
increase in our forecasted operating and maintenance expenses is
primarily related to a credit to operating and maintenance
expenses of $1.6 million and $2.3 million for the year
ended December 31, 2009 and the twelve months ended
September 30, 2010, respectively, for imbalance gains. We
have not included any imbalance gains or losses in our
forecasted operating and maintenance expenses. Certain of our
commercial agreements with Tesoro will have loss allowance
provisions relating to imbalances under which we may recognize
measurement gains or losses. While we may continue to recognize
imbalance gains following the closing of this offering similar
to those we recognized in prior periods, we have not made any
assumptions in that regard for purposes of our forecast of
estimated operating and maintenance expenses. Our commercial
agreements with Tesoro and many of our contracts with third
parties also contain inflation adjustment provisions that should
substantially mitigate inflation-related increases in operating
costs in rising operating cost environments.
General
and Administrative Expenses
We estimate that our total general and administrative expenses
will be $7.0 million for the year ending December 31,
2011, compared to $4.0 million for the year ended
December 31, 2009 and for the twelve months ended
September 30, 2010, on a pro forma basis. These expenses
consist of:
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a corporate services fee of $2.5 million per year that we
will pay to Tesoro under the omnibus agreement that we will
enter into at the closing of this offering for the provision of
treasury, accounting, legal and other centralized corporate
services to us. For a more complete description of this
agreement and the services covered by it, see Certain
Relationships and Related Party Transactions
Agreements Governing the Transactions Omnibus
Agreement beginning on page 139;
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approximately $1.5 million of direct costs for estimated
employee-related expenses relating to the management of our
assets; and
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approximately $3.0 million of incremental annual expenses
as a result of being a separate publicly traded partnership,
such as costs associated with annual and quarterly reports to
unitholders, financial statement audit, tax return and
Schedule K-1 preparation and distribution, investor
relations, activities, registrar and transfer agent fees,
incremental director and officer liability insurance premiums,
independent director compensation and incremental employee
benefit costs.
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By comparison, for the year ended December 31, 2009, our
predecessor recorded total general and administrative expenses
of approximately $3.1 million, which included both direct
costs for employee-related expenses related to the management of
our assets, as well as allocated costs for the provision of
treasury, accounting legal and other centralized corporate
services.
Depreciation
Expense
We estimate that depreciation expense will be approximately
$8.6 million for the year ending December 31, 2011,
compared to approximately $8.8 million and
$7.8 million for the year ended December 31, 2009 and
the twelve months ended September 30, 2010, respectively,
on a pro forma basis. Depreciation expense is expected to
increase for the year ending December 31, 2011 compared to
the twelve months ended September 30, 2010, due to an
expected increase in maintenance and expansion capital
expenditures during the forecast period.
Financing
We estimate that interest expense will be approximately
$2.3 million for the year ending December 31, 2011.
Our interest expense for the twelve months ended
September 30, 2010 and December 31, 2009, on a pro
forma basis, was also approximately $2.3 million. Our
interest expense for the year ending December 31, 2011 is
based on the following assumptions:
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through December 31, 2011, we will have average borrowings
of approximately $50.0 million under our revolving credit
facility, with an estimated average interest rate of 2.8%
through December 31, 2011. An increase or decrease of 1.0%
in the interest rate will result in increased or decreased,
respectively, annual interest expenses of $0.5 million.
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interest expense includes commitment fees for the unused portion
of our revolving credit facility at an assumed rate of 0.50%;
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interest expense also includes the amortization of debt issuance
costs incurred in connection with our revolving credit
facility; and
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we will remain in compliance with the financial and other
covenants in our revolving credit facility.
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Capital
Expenditures
We estimate that total capital expenditures for the year ending
December 31, 2011 will be $4.3 million as compared to
pro forma capital expenditures of $9.2 million and
$2.5 million for the year ended December 31, 2009 and
the twelve months ended September 30, 2010, respectively.
This forecast estimate is based on the following assumptions:
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Maintenance Capital Expenditures. We
estimate that our maintenance capital expenditures will be
$3.2 million for the year ending December 31, 2011, of
which $1.4 million relates primarily to our High Plains
pipeline system and $1.8 million relates to pipeline and
terminal integrity projects for our other assets. Maintenance
capital expenditures were $3.3 million for the year ended
December 31, 2009 and $1.9 million for the twelve
months ended September 30, 2010.
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Expansion Capital Expenditures. We have
assumed expansion capital expenditures of our existing assets of
$1.1 million for the year ending December 31, 2011.
The $1.1 million of assumed expansion capital expenditures
is related to the installation of an ethanol tank and rack
blending system at our Burley terminal. Expansion capital
expenditures were $5.9 million for the year ended
December 31, 2009 and $0.6 million for the twelve
months ended September 30, 2010. Our significantly higher
capital expenditures during 2009 were attributable to upgrades
at our Los Angeles and Boise terminals.
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Regulatory,
Industry and Economic Factors
Our forecast of estimated EBITDA for the year ending
December 31, 2011 is based on the following significant
assumptions related to regulatory, industry and economic factors:
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Tesoro will not default under any of our commercial agreements
or reduce, suspend or terminate its obligations, nor will any
events occur that would be deemed a force majeure event, under
such agreements;
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there will not be any new federal, state or local regulation, or
any interpretation of existing regulation, of the portions of
the refining or logistics industries in which we operate that
will be materially adverse to our business;
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there will not be any material accidents, weather-related
incidents, unscheduled downtime or similar unanticipated events
with respect to our assets or Tesoros refineries;
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there will not be a shortage of skilled labor; and
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there will not be any material adverse changes in the refining
industry, the midstream energy sector or market, or overall
economic conditions.
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PROVISIONS
OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH
DISTRIBUTIONS
Distributions
of Available Cash
General
Our partnership agreement requires that, within 45 days
after the end of each quarter, beginning with the quarter
ending ,
2011, we distribute our available cash to unitholders of record
on the applicable record date. We will adjust the minimum
quarterly distribution for the period from the closing of the
offering
through ,
2011 based on the actual length of the period.
Definition
of Available Cash
Available cash generally means, for any quarter, all cash on
hand at the end of the quarter:
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less, the amount of cash reserves established by our
general partner at the date of determination of available cash
for the quarter to:
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provide for the proper conduct of our business (including
reserves for our future capital expenditures and anticipated
future credit needs subsequent to that quarter);
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comply with applicable law, any of our debt instruments or other
agreements; and
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provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters
(provided that our general partner may not establish cash
reserves for distributions on our subordinated units unless it
determines that the establishment of those reserves will not
prevent us from distributing the minimum quarterly distribution
on all common units and any cumulative arrearages for the next
four quarters);
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plus, if our general partner so determines, all or any
portion of the cash on hand on the date of determination of
available cash for the quarter resulting from working capital
borrowings made subsequent to the end of such quarter.
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The purpose and effect of the last bullet point above is to
allow our general partner, if it so decides, to use cash from
working capital borrowings made after the end of the quarter but
on or before the date of determination of available cash for
that quarter to pay distributions to unitholders. Under our
partnership agreement, working capital borrowings are generally
borrowings that are made under a credit facility, commercial
paper facility or similar financing arrangement, and in all
cases are used solely for working capital purposes or to pay
distributions to partners and with the intent of the borrower to
repay such borrowings within 12 months from sources other
than additional working capital borrowings.
Intent
to Distribute the Minimum Quarterly Distribution
We intend to make a minimum quarterly distribution to the
holders of our common units and subordinated units of
$ per unit, or
$ on an annualized basis, to the
extent we have sufficient cash from our operations after the
establishment of cash reserves and the payment of costs and
expenses, including reimbursements of expenses to our general
partner. However, there is no guarantee that we will pay the
minimum quarterly distribution or any amount on our units in any
quarter. Even if our cash distribution policy is not modified or
revoked, the amount of distributions paid under our policy and
the decision to make any distribution is determined by our
general partner, taking into consideration the terms of our
partnership agreement. Please read Managements
Discussion and Analysis of Financial Condition and Results of
Operations Capital Resources and
Liquidity Revolving Credit Facility beginning
on page 89 for a discussion of certain covenants to be
included in our revolving credit facility that may restrict our
ability to make distributions.
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General
Partner Interest and Incentive Distribution Rights
As of the date of this offering, our general partner is entitled
to 2.0% of all quarterly distributions that we make prior to our
liquidation. This 2.0% general partner interest will be
represented
by
general partner units upon the completion of this offering and
may be reduced if we issue additional limited partner interests
in the future and our general partner does not contribute a
proportionate amount of capital to us in order to maintain its
2.0% general partner interest. Our general partner has the
right, but not the obligation, to contribute capital to us in
order to maintain its current general partner interest.
Our general partner also currently holds incentive distribution
rights that entitle it to receive increasing percentages, up to
a maximum of 50.0%, of the cash we distribute from operating
surplus (as defined below) in excess of
$ per unit per quarter. The
maximum distribution of 50.0% includes distributions paid to our
general partner on its 2.0% general partner interest and assumes
that our general partner maintains its general partner interest
at 2.0%. The maximum distribution of 50.0% does not include any
distributions that our general partner may receive on common
units or subordinated units that it owns. Please read
General Partner Interest and Incentive
Distribution Rights beginning on page 67 for
additional information.
Operating
Surplus and Capital Surplus
Overview
All cash distributed to unitholders will be characterized as
either being paid from operating surplus or
capital surplus. We treat distributions of available
cash from operating surplus differently than distributions of
available cash from capital surplus.
Definition
of Operating Surplus, Capital Surplus and Interim Capital
Transactions
Operating Surplus. We define operating
surplus as:
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$ million (as described
below); plus
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all of our cash receipts after the closing of this offering,
excluding cash from interim capital transactions (as defined
below); plus
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working capital borrowings made after the end of a quarter but
on or before the date of determination of operating surplus for
that quarter; plus
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cash distributions paid on equity issued (including incremental
distributions on incentive distribution rights), other than
equity issued on the closing date of this offering, to finance
all or a portion of expansion capital expenditures in respect of
the period from such financing until the earlier to occur of the
date the capital improvement commences commercial service or the
date that it is abandoned or disposed of; plus
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cash distributions paid on equity issued (including incremental
distributions on incentive distribution rights) to pay interest
on debt incurred, or to pay distributions on equity issued, to
finance all or a portion of expansion capital expenditures, in
each case in respect of the period from such financing until the
earlier to occur of the date the capital improvement commences
commercial service or the date that it is abandoned or disposed
of; less
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all of our operating expenditures (as defined below) after the
closing of this offering and the completion of the transactions
described in Summary The Transactions on
page 6; less
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the amount of cash reserves established by our general partner
to provide funds for future operating expenditures; less
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all working capital borrowings not repaid within 12 months
after having been incurred, or repaid within such
12-month
period with the proceeds from additional working capital
borrowings.
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As described above, operating surplus does not reflect actual
cash on hand that is available for distribution to our
unitholders and is not limited to cash generated by our
operations. For example, it includes
63
a basket of $ million that
will enable us, if we choose, to distribute as operating surplus
cash we receive in the future from interim capital transactions
that might otherwise be distributed as capital surplus. In
addition, the effect of including, as described above, certain
cash distributions on equity interests in operating surplus
would be to increase operating surplus by the amount of any such
cash distributions and to permit the distribution as operating
surplus of additional amounts of cash that we receive from
non-operating sources.
The proceeds of working capital borrowings increase operating
surplus and repayments of working capital borrowings are
generally operating expenditures, as described below, and thus
reduce operating surplus when made. However, if a working
capital borrowing is not repaid during the twelve-month period
following the borrowing, it will be deemed repaid at the end of
such period, thus decreasing operating surplus at such time.
When such working capital borrowing is in fact repaid, it will
be excluded from operating expenditures because operating
surplus will have been previously reduced by the deemed
repayment.
We define operating expenditures as all of our cash
expenditures, including, but not limited to, taxes, employee and
director compensation, reimbursements of expenses to our general
partner, repayments of working capital borrowings, debt service
payments, payments made in the ordinary course of business under
interest rate hedge contracts and commodity hedge contracts and
maintenance capital expenditures, provided that operating
expenditures will not include:
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repayments of working capital borrowings where such borrowings
have previously been deemed to have been repaid (as described
above);
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payments (including prepayments and prepayment penalties) of
principal of and premium on indebtedness other than working
capital borrowings;
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expansion capital expenditures;
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investment capital expenditures;
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payment of transaction expenses (including taxes) relating to
interim capital transactions;
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distributions to partners (including distributions in respect of
our incentive distribution rights);
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repurchases of partnership interests (excluding repurchases we
make to satisfy obligations under employee benefit
plans); or
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any other payments made in connection with this offering that
are described under Use of Proceeds on page 46.
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Capital Surplus and Interim Capital
Transactions. We define cash from interim
capital transactions to include proceeds from:
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borrowings other than working capital borrowings;
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issuances of our equity and debt securities; and
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sales or other dispositions of assets for cash, other than
inventory, accounts receivable and other assets sold in the
ordinary course of business or as part of normal retirement or
replacement of assets.
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We define capital surplus as available cash distributed in
excess of our cumulative operating surplus. Although the cash
proceeds from interim capital transactions do not increase
operating surplus, all distributions of available cash from
whatever source are deemed to be from operating surplus until
cumulative distributions of available cash exceed cumulative
operating surplus. Thereafter, all distributions of available
cash are deemed to be from capital surplus to the extent they
continue to exceed cumulative operating surplus.
Capital
Expenditures
Maintenance capital expenditures are cash expenditures
(including expenditures for the addition or improvement to, or
the replacement of, our capital assets or for the acquisition of
existing, or the construction or development of new, capital
assets) made to maintain, including over the long term, our
operating capacity, asset base or operating income. Examples of
maintenance capital expenditures include capital expenditures
associated with the repair, refurbishment and replacement of
pipelines and terminals.
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Expansion capital expenditures are cash expenditures incurred
for acquisitions or capital improvements that we expect will
increase our operating capacity, asset base or operating income
over the long term. Examples of expansion capital expenditures
include capital expenditures associated with the expansion of
the operating capacity of our pipelines and terminals. Expansion
capital expenditures include interest payments (and related
fees) on debt incurred to finance the construction, acquisition
or development of an improvement of a capital asset and paid in
respect of the period beginning on the date of such financing
and ending on the earlier to occur of the date that such capital
improvement commences commercial service or the date that such
capital improvement is abandoned or disposed of.
Investment capital expenditures are those capital expenditures
that are neither maintenance capital expenditures nor expansion
capital expenditures. Investment capital expenditures largely
will consist of capital expenditures made for investment
purposes. Examples of investment capital expenditures include
traditional capital expenditures for investment purposes, such
as purchases of securities, as well as other capital
expenditures that might be made in lieu of such traditional
investment capital expenditures, such as the acquisition of a
capital asset for investment purposes or development of
facilities that are in excess of the maintenance of our existing
operating capacity or operating income, but which are not
expected to expand, for more than the short term, our operating
capacity or operating income.
Neither investment capital expenditures nor expansion capital
expenditures are included in operating expenditures and thus
will not reduce operating surplus. Because expansion capital
expenditures include interest payments (and related fees) on
debt incurred to finance all or a portion of the construction,
acquisition or development of an improvement of a capital asset
(such as pipelines, terminals or storage facilities) in respect
of the period that begins on the date of such financing and
ending on the earlier to occur of the date that such capital
improvement commences commercial service or the date that it is
abandoned or disposed of, such interest payments are also not
subtracted from operating surplus.
Capital expenditures that are made in part for two or more
purposes consisting of maintenance capital purposes, expansion
capital purposes or investment capital purposes will be
allocated as maintenance capital expenditures, expansion capital
expenditures or investment capital expenditures by our general
partner.
Subordination
Period
General
Our partnership agreement provides that, during the
subordination period (which we define below), our common units
will have the right to receive distributions of available cash
from operating surplus each quarter in an amount equal to
$ per common unit, which amount is
defined in our partnership agreement as the minimum quarterly
distribution, plus any arrearages in the payment of the minimum
quarterly distribution on our common units from prior quarters,
before any distributions of available cash from operating
surplus may be made on our subordinated units. These units are
deemed subordinated because for a period of time,
referred to as the subordination period, our subordinated units
will not be entitled to receive any distributions until our
common units have received the minimum quarterly distribution
plus any arrearages from prior quarters. Furthermore, no
arrearages will be paid on our subordinated units. The practical
effect of our subordinated units is to increase the likelihood
that during the subordination period there will be available
cash to be distributed on our common units.
Definition
of Subordination Period
Except as described below, the subordination period will begin
upon the date of this offering and expire on the first business
day after the distribution to unitholders in respect of any
quarter, beginning with the quarter
ending ,
2014, that each of the following tests are met:
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distributions of available cash from operating surplus on each
of the outstanding common units, subordinated units and general
partner units equaled or exceeded the minimum quarterly
distribution for each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date;
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the adjusted operating surplus (as defined below)
generated during each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date equaled or
exceeded the sum of the minimum quarterly distributions on all
of the outstanding common units, subordinated units and general
partner units on a fully diluted weighted average basis during
those periods; and
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there are no arrearages in payment of the minimum quarterly
distribution on our common units.
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In addition to the tests outlined above, the subordination
period will end only in the event that our conflicts committee,
or the board of directors of our general partner based on the
recommendation of our conflicts committee, reasonably expects to
satisfy the tests set forth under the first and second bullet
points above for the succeeding four-quarter period without
treating as earned any curtailment fees (or similar fees under
future contracts) expected to be received during such period.
Early
Termination of Subordination Period
Notwithstanding the foregoing, the subordination period will
automatically terminate on the first business day after the
distribution to unitholders in respect of any quarter, if each
of the following has occurred:
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distributions of available cash from operating surplus on each
of the outstanding common units, subordinated units and general
partner units equaled or exceeded
$ (150.0% of the annualized
minimum quarterly distribution) for the immediately preceding
four-quarter period; and
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the adjusted operating surplus (as defined below)
generated during the immediately preceding four-quarter period
equaled or exceeded the sum of $
(150.0% of the annualized minimum quarterly distribution) on
each of the outstanding common, subordinated and general partner
units during that period on a fully diluted weighted average
basis; and
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there are no arrearages in payment of the minimum quarterly
distribution on our common units.
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In addition to the tests outlined above, the subordination
period will end only in the event that our conflicts committee,
or the board of directors of our general partner based on the
recommendation of our conflicts committee, reasonably expects to
satisfy the tests set forth under the first and second bullet
points above for the succeeding four-quarter period without
treating as earned any curtailment fees (or similar fees under
future contracts) expected to be received during such period.
Expiration
of the Subordination Period
When the subordination period ends, each outstanding
subordinated unit will convert into one common unit and will
thereafter participate pro rata with the other common units in
distributions of available cash. In addition, if the unitholders
remove our general partner other than for cause and no units
held by our general partner and its affiliates are voted in
favor of such removal:
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the subordination period will end and each subordinated unit
will immediately convert into one common unit;
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any existing arrearages in payment of the minimum quarterly
distribution on our common units will be extinguished; and
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our general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests.
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Definition
of Adjusted Operating Surplus
Adjusted operating surplus is intended to reflect the cash
generated from operations during a particular period and
therefore excludes net drawdowns of reserves of cash generated
in prior periods. Adjusted operating surplus for a period
consists of:
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operating surplus (excluding the first bullet of the definition
of operating surplus) generated with respect to that period;
less
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any net increase in working capital borrowings with respect to
such period; less
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any net decrease in cash reserves for operating expenditures
with respect to that period not relating to an operating
expenditure made with respect to that period; plus
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any net decrease in working capital borrowings with respect to
such period; plus
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any net decrease made in subsequent periods to cash reserves for
operating expenditures initially established with respect to
such period to the extent such decrease results in a reduction
in adjusted operating surplus in subsequent periods pursuant to
the third bullet point above; plus
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any net increase in cash reserves for operating expenditures
with respect to that period required by any debt instrument for
the repayment of principal, interest or premium.
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Distributions
from Operating Surplus
The following discussion regarding distributions of available
cash from operating surplus is based on the assumptions that our
general partner maintains its 2.0% general partner interest and
that we do not issue additional classes of equity securities.
Distributions
from Operating Surplus during the Subordination
Period
We will make distributions of available cash from operating
surplus for any quarter during the subordination period in the
following manner:
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first, 98.0% to the common unitholders, pro rata, and 2.0% to
our general partner, until we distribute for each outstanding
common unit an amount equal to the minimum quarterly
distribution for that quarter;
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second, 98.0% to the common unitholders, pro rata, and 2.0% to
our general partner, until we distribute for each outstanding
common unit an amount equal to any arrearages in payment of the
minimum quarterly distribution on our common units for any prior
quarters during the subordination period;
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third, 98.0% to the subordinated unitholders, pro rata, and 2.0%
to our general partner, until we distribute for each outstanding
subordinated unit an amount equal to the minimum quarterly
distribution for that quarter; and
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thereafter, in the manner described in General
Partner Interest and Incentive Distribution Rights below.
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Distributions
from Operating Surplus after the Subordination
Period
We will make distributions of available cash from operating
surplus for any quarter after the subordination period in the
following manner:
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first, 98.0% to all unitholders, pro rata, and 2.0% to our
general partner, until we distribute for each outstanding unit
an amount equal to the minimum quarterly distribution for that
quarter; and
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|
|
thereafter, in the manner described in General
Partner Interest and Incentive Distribution Rights below.
|
General
Partner Interest and Incentive Distribution Rights
Our partnership agreement provides that our general partner
initially will be entitled to 2.0% of all distributions that we
make prior to our liquidation. Our general partner has the
right, but not the obligation, to contribute a proportionate
amount of capital to us in order to maintain its 2.0% general
partner interest if we issue additional units. Our general
partners 2.0% interest, and the percentage of our cash
distributions to which it is entitled from such 2.0% interest,
will be proportionately reduced if we issue additional units in
the future (other than the issuance of common units upon
exercise by the underwriters of their option to purchase
additional common units in this offering, the issuance of common
units upon conversion of outstanding
67
subordinated units or the issuance of common units upon a reset
of the incentive distribution rights) and our general partner
does not contribute a proportionate amount of capital to us in
order to maintain its 2.0% general partner interest. Our
partnership agreement does not require that the general partner
fund its capital contribution with cash and our general partner
may fund its capital contribution by the contribution to us of
common units or other property.
Incentive distribution rights represent the right to receive an
increasing percentage (13.0%, 23.0% and 48.0%) of quarterly
distributions of available cash from operating surplus after the
minimum quarterly distribution and the target distribution
levels have been achieved. Our general partner currently holds
the incentive distribution rights, but may transfer these rights
separately from its general partner interest.
The following discussion assumes that our general partner
maintains its 2.0% general partner interest, that there are no
arrearages on common units and that our general partner owns all
of the incentive distribution rights.
If for any quarter:
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|
|
|
we have distributed available cash from operating surplus to the
unitholders in an amount equal to the minimum quarterly
distribution; and
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|
|
we have distributed available cash from operating surplus on
outstanding common units and the general partner interest in an
amount necessary to eliminate any cumulative arrearages in
payment of the minimum quarterly distribution to the common
unitholders;
|
then, we will distribute any additional available cash from
operating surplus for that quarter among the unitholders and our
general partner in the following manner:
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|
|
first, 98.0% to all unitholders, pro rata, and 2.0% to our
general partner, until each unitholder receives a total of
$ per unit for that quarter (the
first target distribution);
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|
second, 85.0% to all unitholders, pro rata, and 15.0% to our
general partner, until each unitholder receives a total of
$ per unit for that quarter (the
second target distribution);
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third, 75.0% to all unitholders, pro rata, and 25.0% to our
general partner, until each unitholder receives a total of
$ per unit for that quarter (the
third target distribution); and
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thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our
general partner.
|
Percentage
Allocations of Available Cash from Operating Surplus
The following table illustrates the percentage allocations of
available cash from operating surplus between the unitholders
and our general partner based on the specified target
distribution levels. The amounts set forth under Marginal
Percentage Interest in Distributions are the percentage
interests of our general partner and the unitholders in any
available cash from operating surplus we distribute up to and
including the corresponding amount in the column Total
Quarterly Distribution Per Unit Target Amount. The
percentage interests shown for our unitholders and our general
partner for the minimum quarterly distribution are also
applicable to quarterly distribution amounts that are less than
the minimum quarterly distribution. The percentage interests set
forth below for our general partner include its 2.0% general
partner interest and assume that there are no arrearages on
common units, our general partner has contributed any additional
68
capital necessary to maintain its 2.0% general partner interest
and that our general partner owns all of the incentive
distribution rights.
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Marginal Percentage Interest
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Total Quarterly Distribution
|
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in Distributions
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per Unit Target Amount
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Unitholders
|
|
General Partner
|
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Minimum Quarterly Distribution
|
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$
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98.0
|
%
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2.0
|
%
|
First Target Distribution
|
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above $
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up to $
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98.0
|
%
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2.0
|
%
|
Second Target Distribution
|
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above $
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up to $
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85.0
|
%
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15.0
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%
|
Third Target Distribution
|
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above $
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up to $
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75.0
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%
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25.0
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%
|
Thereafter
|
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above $
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50.0
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%
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50.0
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%
|
General
Partners Right to Reset Incentive Distribution
Levels
Our general partner, as the initial holder of our incentive
distribution rights, has the right under our partnership
agreement to elect to relinquish the right to receive incentive
distribution payments based on the initial target distribution
levels and to reset, at higher levels, the minimum quarterly
distribution amount and target distribution levels upon which
the incentive distribution payments to our general partner would
be set. If our general partner transfers all or a portion of the
incentive distribution rights in the future, then the holder or
holders of a majority of the incentive distribution rights will
be entitled to exercise this right. The following discussion
assumes that our general partner owns all of the incentive
distribution rights at the time that a reset election is made.
The right to reset the minimum quarterly distribution amount and
the target distribution levels upon which the incentive
distributions are based may be exercised, without approval of
our unitholders or our conflicts committee, at any time when
there are no subordinated units outstanding and we have made
cash distributions to the holders of the incentive distribution
rights at the highest level of incentive distribution for each
of the prior four consecutive fiscal quarters. If our general
partner and its affiliates are not the holders of a majority of
the incentive distribution rights at the time an election is
made to reset the minimum quarterly distribution amount and the
target distribution levels, then the proposed reset shall be
subject to the prior written concurrence of the general partner
that the conditions described above have been satisfied. The
reset minimum quarterly distribution amount and target
distribution levels will be higher than the minimum quarterly
distribution amount and the target distribution levels prior to
the reset such that there will be no incentive distributions
paid under the reset target distribution levels until cash
distributions per unit following this event increase as
described below. We anticipate that our general partner would
exercise this reset right in order to facilitate acquisitions or
internal growth projects that would otherwise not be
sufficiently accretive to cash distributions per common unit,
taking into account the existing levels of incentive
distribution payments being made to our general partner.
In connection with the resetting of the minimum quarterly
distribution amount and the target distribution levels and the
corresponding relinquishment by our general partner of incentive
distribution payments based on the target distribution levels
prior to the reset, our general partner will be entitled to
receive a number of newly issued common units and general
partner units based on a predetermined formula described below
that takes into account the cash parity value of the
average cash distributions related to the incentive distribution
rights received by our general partner for the two quarters
prior to the reset event as compared to the average cash
distributions per common unit during that two-quarter period.
Our general partner will be issued the number of general partner
units necessary to maintain our general partners interest
in us immediately prior to the reset election.
The number of common units that our general partner would be
entitled to receive from us in connection with a resetting of
the minimum quarterly distribution amount and the target
distribution levels then in effect would be equal to the
quotient determined by dividing (x) the average aggregate
amount of cash distributions received by our general partner in
respect of its incentive distribution rights during the two
consecutive fiscal quarters ended immediately prior to the date
of such reset election by (y) the average of the amount of
cash distributed per common unit during each quarter in that
two-quarter period.
69
Following a reset election, the minimum quarterly distribution
amount will be reset to an amount equal to the average cash
distribution amount per unit for the two fiscal quarters
immediately preceding the reset election (which amount we refer
to as the reset minimum quarterly distribution) and
the target distribution levels will be reset to be
correspondingly higher such that we would distribute all of our
available cash from operating surplus for each quarter
thereafter as follows:
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|
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first, 98.0% to all unitholders, pro rata, and 2.0% to our
general partner, until each unitholder receives an amount equal
to 115.0% of the reset minimum quarterly distribution for that
quarter;
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|
|
second, 85.0% to all unitholders, pro rata, and 15.0% to our
general partner, until each unitholder receives an amount per
unit equal to 125.0% of the reset minimum quarterly distribution
for the quarter;
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|
|
third, 75.0% to all unitholders, pro rata, and 25.0% to our
general partner, until each unitholder receives an amount per
unit equal to 150.0% of the reset minimum quarterly distribution
for the quarter; and
|
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|
|
thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our
general partner.
|
The following table illustrates the percentage allocation of
available cash from operating surplus between the unitholders
and our general partner at various cash distribution levels
(i) pursuant to the cash distribution provisions of our
partnership agreement in effect at the closing of this offering,
as well as (ii) following a hypothetical reset of the
minimum quarterly distribution and target distribution levels
based on the assumption that the average quarterly cash
distribution amount per common unit during the two fiscal
quarters immediately preceding the reset election was
$ .
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|
Marginal Percentage
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Interest in Distributions
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|
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|
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|
General
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Incentive
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|
|
|
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|
Quarterly Distribution
|
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|
Common
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|
Partner
|
|
|
Distribution
|
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|
Quarterly Distribution per Unit
|
|
|
|
per Unit Prior to Reset
|
|
|
Unitholders
|
|
|
Interest
|
|
|
Rights
|
|
|
Following Hypothetical Reset
|
|
|
Minimum Quarterly Distribution
|
|
|
|
|
|
$
|
|
|
|
|
98.0
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
$
|
|
|
First Target Distribution
|
|
above $
|
|
|
|
up to $
|
|
|
|
|
98.0
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
up to $
|
(1
|
)
|
Second Target Distribution
|
|
above $
|
|
|
|
up to $
|
|
|
|
|
85.0
|
%
|
|
|
2.0
|
%
|
|
|
13.0
|
%
|
|
above $
|
|
(1)
|
|
up to $
|
(2
|
)
|
Third Target Distribution
|
|
above $
|
|
|
|
up to $
|
|
|
|
|
75.0
|
%
|
|
|
2.0
|
%
|
|
|
23.0
|
%
|
|
above $
|
|
(2)
|
|
up to $
|
(3
|
)
|
Thereafter
|
|
|
|
|
|
above $
|
|
|
|
|
50.0
|
%
|
|
|
2.0
|
%
|
|
|
48.0
|
%
|
|
|
|
|
|
above $
|
(3
|
)
|
|
|
|
(1) |
|
This amount is 115.0% of the hypothetical reset minimum
quarterly distribution. |
|
(2) |
|
This amount is 125.0% of the hypothetical reset minimum
quarterly distribution. |
|
(3) |
|
This amount is 150.0% of the hypothetical reset minimum
quarterly distribution. |
70
The following table illustrates the total amount of available
cash from operating surplus that would be distributed to the
unitholders and our general partner, including in respect of
incentive distribution rights, or IDRs, based on an average of
the amounts distributed each quarter for the two quarters
immediately prior to the reset. The table assumes that
immediately prior to the reset there would
be
common units outstanding, our general partner has maintained its
2.0% general partner interest, and the average distribution to
each common unit was $ for the two
quarters prior to the reset.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Cash Distributions to General
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
Partner Prior to Reset
|
|
|
|
|
|
|
|
|
|
Distributions to
|
|
|
|
|
|
2.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
|
|
|
Common
|
|
|
|
|
|
General
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
Distribution per
|
|
|
Unitholders
|
|
|
Common
|
|
|
Partner
|
|
|
Distribution
|
|
|
|
|
|
Total
|
|
|
|
Unit Prior to Reset
|
|
|
Prior to Reset
|
|
|
Units
|
|
|
Interest
|
|
|
Rights
|
|
|
Total
|
|
|
Distributions
|
|
|
Minimum Quarterly Distribution
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
First Target Distribution
|
|
above $
|
|
|
|
up to $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Target Distribution
|
|
above $
|
|
|
|
up to $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Target Distribution
|
|
above $
|
|
|
|
up to $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
above $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates the total amount of available
cash from operating surplus that would be distributed to the
unitholders and our general partner, including in respect of
incentive distribution rights, with respect to the quarter in
which the reset occurs. The table reflects that as a result of
the reset there would be common
units outstanding, our general partners 2.0% interest has
been maintained, and the average distribution to each common
unit would be $ . The number of
common units to be issued to our general partner upon the reset
was calculated by dividing (i) the average of the amounts
received by our general partner in respect of its incentive
distribution rights for the two quarters prior to the reset as
shown in the table above, or $ ,
by (ii) the average available cash distributed on each
common unit for the two quarters prior to the reset as shown in
the table above, or $ .
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Distributions to General
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
Partner After Reset
|
|
|
|
|
|
|
|
|
|
Distributions to
|
|
|
|
|
|
2.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
|
|
|
Common
|
|
|
|
|
|
General
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
Distribution per
|
|
|
Unitholders
|
|
|
Common
|
|
|
Partner
|
|
|
Distribution
|
|
|
|
|
|
Total
|
|
|
|
Unit After Reset
|
|
|
After Reset
|
|
|
Units
|
|
|
Interest
|
|
|
Rights
|
|
|
Total
|
|
|
Distributions
|
|
|
Minimum Quarterly Distribution
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
First Target Distribution
|
|
above $
|
|
|
|
up to $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Target Distribution
|
|
above $
|
|
|
|
up to $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Target Distribution
|
|
above $
|
|
|
|
up to $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
above $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our general partner will be entitled to cause the minimum
quarterly distribution amount and the target distribution levels
to be reset on more than one occasion, provided that it may not
make a reset election except at a time when it has received
incentive distributions for the prior four consecutive fiscal
quarters based on the highest level of incentive distributions
that it is entitled to receive under our partnership agreement.
71
Distributions
from Capital Surplus
How
Distributions from Capital Surplus Will Be Made
We will make distributions of available cash from capital
surplus, if any, in the following manner:
|
|
|
|
|
first, 98.0% to all unitholders, pro rata, and 2.0% to our
general partner, until we distribute for each common unit that
was issued in this offering, an amount of available cash from
capital surplus equal to the initial public offering price in
this offering;
|
|
|
|
second, 98.0% to all unitholders, pro rata, and 2.0% to our
general partner, until we distribute for each common unit, an
amount of available cash from capital surplus equal to any
unpaid arrearages in payment of the minimum quarterly
distribution on the outstanding common units; and
|
|
|
|
thereafter, as if they were from operating surplus.
|
The preceding discussion is based on the assumptions that our
general partner maintains its 2.0% general partner interest and
that we do not issue additional classes of equity securities.
Effect
of a Distribution from Capital Surplus
Our partnership agreement treats a distribution of capital
surplus as the repayment of the initial unit price from this
initial public offering, which is a return of capital. The
initial public offering price less any distributions of capital
surplus per unit is referred to as the unrecovered initial
unit price. Each time a distribution of capital surplus is
made, the minimum quarterly distribution and the target
distribution levels will be reduced in the same proportion as
the corresponding reduction in the unrecovered initial unit
price. Because distributions of capital surplus will reduce the
minimum quarterly distribution, after any of these distributions
are made, it may be easier for our general partner to receive
incentive distributions and for the subordinated units to
convert into common units. However, any distribution of capital
surplus before the unrecovered initial unit price is reduced to
zero cannot be applied to the payment of the minimum quarterly
distribution or any arrearages.
Once we distribute capital surplus on the common units issued in
this offering in an amount equal to the initial unit price, we
will reduce the minimum quarterly distribution and the target
distribution levels to zero. We will then make all future
distributions from operating surplus, with 50% being paid to the
unitholders, pro rata, and 50% to our general partner (assuming
that our general partner has maintained its 2.0% general partner
interest and owns all of the incentive distribution rights).
Adjustment
to the Minimum Quarterly Distribution and Target Distribution
Levels
In addition to adjusting the minimum quarterly distribution and
target distribution levels to reflect a distribution of capital
surplus, if we combine our units into fewer units or subdivide
our units into a greater number of units, we will
proportionately adjust:
|
|
|
|
|
the minimum quarterly distribution;
|
|
|
|
the target distribution levels; and
|
|
|
|
the unrecovered initial unit price.
|
For example, if a
two-for-one
split of our common units should occur, the minimum quarterly
distribution, the target distribution levels and the unrecovered
initial unit price would each be reduced to 50% of its initial
level. We will not make any adjustment by reason of the issuance
of additional units for cash or property.
In addition, if legislation is enacted or if existing law is
modified or interpreted by a governmental authority, so that we
become taxable as a corporation or otherwise subject to taxation
as an entity for federal, state or local income tax purposes,
our partnership agreement specifies that the minimum quarterly
distribution and the target distribution levels for each quarter
may be reduced by multiplying the minimum quarterly distribution
and each target distribution level by a fraction, the numerator
of which is available cash for that
72
quarter and the denominator of which is the sum of available
cash for that quarter plus our general partners estimate
of our aggregate liability for the quarter for such income taxes
payable by reason of such legislation or interpretation. To the
extent that the actual tax liability differs from the estimated
tax liability for any quarter, the difference will be accounted
for in subsequent quarters.
Distributions
of Cash Upon Liquidation
General
If we dissolve in accordance with our partnership agreement, we
will sell or otherwise dispose of our assets in a process called
liquidation. We will first apply the proceeds of liquidation to
the payment of our creditors. We will distribute any remaining
proceeds to the unitholders and our general partner, in
accordance with their capital account balances, as adjusted to
reflect any gain or loss upon the sale or other disposition of
our assets in liquidation.
The allocations of gain and loss upon liquidation are intended,
to the extent possible, to entitle the holders of outstanding
common units to a preference over the holders of outstanding
subordinated units upon our liquidation, to the extent required
to permit common unitholders to receive their unrecovered
initial unit price plus the minimum quarterly distribution for
the quarter during which liquidation occurs plus any unpaid
arrearages in payment of the minimum quarterly distribution on
our common units. However, there may not be sufficient gain upon
our liquidation to enable the holders of common units to fully
recover all of these amounts, even though there may be cash
available for distribution to the holders of subordinated units.
Any further net gain recognized upon liquidation will be
allocated in a manner that takes into account the incentive
distribution rights of our general partner.
Manner
of Adjustments for Gain
The manner of the adjustment for gain is set forth in our
partnership agreement. If our liquidation occurs before the end
of the subordination period, we will allocate any gain to our
partners in the following manner:
|
|
|
|
|
first, to our general partner and the holders of units who have
negative balances in their capital accounts to the extent of and
in proportion to those negative balances;
|
|
|
|
second, 98.0% to the common unitholders, pro rata, and 2.0% to
our general partner, until the capital account for each common
unit is equal to the sum of:
|
(1) the unrecovered initial unit price;
(2) the amount of the minimum quarterly distribution for
the quarter during which our liquidation occurs; and
(3) any unpaid arrearages in payment of the minimum
quarterly distribution;
|
|
|
|
|
third, 98.0% to the subordinated unitholders, pro rata, and 2.0%
to our general partner, until the capital account for each
subordinated unit is equal to the sum of:
|
(1) the unrecovered initial unit price; and
(2) the amount of the minimum quarterly distribution for
the quarter during which our liquidation occurs;
|
|
|
|
|
fourth, 98.0% to all unitholders, pro rata, and 2.0% to our
general partner, until we allocate under this paragraph an
amount per unit equal to:
|
(1) the sum of the excess of the first target distribution
per unit over the minimum quarterly distribution per unit for
each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the minimum
quarterly distribution per unit that we distributed 98.0% to the
unitholders, pro rata, and 2.0% to our general partner, for each
quarter of our existence;
73
|
|
|
|
|
fifth, 85.0% to all unitholders, pro rata, and 15.0% to our
general partner, until we allocate under this paragraph an
amount per unit equal to:
|
(1) the sum of the excess of the second target distribution
per unit over the first target distribution per unit for each
quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the first
target distribution per unit that we distributed 85.0% to the
unitholders, pro rata, and 15.0% to our general partner for each
quarter of our existence;
|
|
|
|
|
sixth, 75.0% to all unitholders, pro rata, and 25.0% to our
general partner, until we allocate under this paragraph an
amount per unit equal to:
|
(1) the sum of the excess of the third target distribution
per unit over the second target distribution per unit for each
quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the second
target distribution per unit that we distributed 75.0% to the
unitholders, pro rata, and 25.0% to our general partner for each
quarter of our existence;
|
|
|
|
|
thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our
general partner.
|
The percentages set forth above are based on the assumption that
our general partner maintained its 2.0% general partner interest
and has not transferred its incentive distribution rights and
that we have not issued additional classes of equity securities.
If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that clause (3) of the second
bullet point above and all of the third bullet point above will
no longer be applicable.
Manner
of Adjustments for Losses
If our liquidation occurs before the end of the subordination
period, after making allocations of loss to the general partner
and the unitholders in a manner intended to offset in reverse
order the allocations of gains that have previously been
allocated, we will generally allocate any loss to our general
partner and unitholders in the following manner:
|
|
|
|
|
first, 98.0% to holders of subordinated units in proportion to
the positive balances in their capital accounts and 2.0% to our
general partner, until the capital accounts of the subordinated
unitholders have been reduced to zero;
|
|
|
|
second, 98.0% to the holders of common units in proportion to
the positive balances in their capital accounts and 2.0% to our
general partner, until the capital accounts of the common
unitholders have been reduced to zero; and
|
|
|
|
thereafter, 100.0% to our general partner.
|
If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that all of the first bullet point
above will no longer be applicable.
Adjustments
to Capital Accounts
Our partnership agreement requires that we make adjustments to
capital accounts upon the issuance of additional units. In this
regard, our partnership agreement specifies that we allocate any
unrealized and, for tax purposes, unrecognized gain resulting
from the adjustments to the unitholders and the general partner
in the same manner as we allocate gain upon liquidation. If we
make positive adjustments to the capital accounts upon the
issuance of additional units as a result of such gain, our
partnership agreement requires that we generally allocate any
later negative adjustments to the capital accounts resulting
from the issuance of additional units or upon our liquidation in
a manner that results, to the extent possible, in the
partners capital account balances equaling the amount that
they would have been if no earlier positive adjustments to the
74
capital accounts had been made. By contrast to the allocations
of gain, and except as provided above, we generally will
allocate any unrealized and unrecognized loss resulting from the
adjustments to capital accounts upon the issuance of additional
units to the unitholders and our general partner based on their
respective percentage ownership of us. In this manner, prior to
the end of the subordination period, we generally will allocate
any such loss equally with respect to our common and
subordinated units. In the event we make negative adjustments to
the capital accounts as a result of such loss, future positive
adjustments resulting from the issuance of additional units will
be allocated in a manner designed to reverse the prior negative
adjustments, and special allocations will be made upon
liquidation in a manner designed to result, to the extent
possible, in our unitholders capital account balances
equaling the amounts they would have been if no earlier
adjustments for loss had been made.
75
SELECTED
HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING
DATA
The following table shows selected historical combined financial
and operating data of Tesoro Logistics LP Predecessor, our
predecessor for accounting purposes, and selected pro forma
combined financial data of Tesoro Logistics LP for the periods
and as of the dates indicated. The selected historical combined
financial data of our predecessor for the years ended
December 31, 2007, 2008 and 2009 are derived from the
audited combined financial statements of our predecessor
appearing elsewhere in this prospectus. The selected historical
combined financial data of our predecessor for the nine months
ended September 30, 2009 and 2010 are derived from the
unaudited combined financial statements of our predecessor
appearing elsewhere in this prospectus. The selected historical
combined financial data of our predecessor as of
December 31, 2005 and 2006 are derived from unaudited
historical combined financial statements of our predecessor that
are not included in this prospectus. The following table should
be read together with, and is qualified in its entirety by
reference to, the historical and unaudited pro forma combined
financial statements and the accompanying notes included
elsewhere in this prospectus. The table should also be read
together with Managements Discussion and Analysis of
Financial Condition and Results of Operations beginning on
page 80.
The selected pro forma combined financial data presented in the
following table for the year ended December 31, 2009 and as
of and for the nine months ended September 30, 2010 are
derived from the unaudited pro forma combined financial
statements included elsewhere in this prospectus. The pro forma
balance sheet assumes that the offering and the related
transactions occurred as of September 30, 2010 and the pro
forma statements of operations for the year ended
December 31, 2009 and the nine months ended
September 30, 2010 assume that the offering and the related
transactions occurred as of January 1, 2009. These
transactions include, and the pro forma financial data give
effect to, the following:
|
|
|
|
|
Tesoros contribution of all of our predecessors
assets and operations to us (excluding working capital and other
noncurrent liabilities);
|
|
|
|
our execution of multiple long-term commercial agreements with
Tesoro and recognition of incremental revenues under those
agreements that were not recognized by our predecessor;
|
|
|
|
certain intrastate tariff increases on our High Plains System;
|
|
|
|
our execution of an omnibus agreement and an operational
services agreement with Tesoro;
|
|
|
|
the consummation of this offering and our issuance
of
common units to the
public, general
partner units and the incentive distribution rights to our
general partner
and
common units and subordinated units to Tesoro; and
|
|
|
|
|
|
the application of the net proceeds of this offering, together
with the proceeds from borrowings under our revolving credit
facility, as described in Use of Proceeds on
page 46.
|
The pro forma combined financial data do not give effect to the
estimated $3.0 million in incremental annual general and
administrative expense we expect to incur as a result of being a
separate publicly traded partnership.
Our assets have historically been a part of the integrated
operations of Tesoro and our predecessor generally recognized
only the costs, but not the revenue, associated with the
short-haul pipeline transportation, terminalling, storage or
trucking services provided to Tesoro on an intercompany basis.
Accordingly, the revenues in our predecessors historical
combined financial statements relate only to services provided
to third parties and amounts received from Tesoro with respect
to transportation regulated by FERC and NDPSC on our High Plains
pipeline system and do not include any revenues for any other
services provided by our predecessor to Tesoro. For this reason,
as well as the other factors described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Overview Factors Affecting the Comparability of Our
Financial Results beginning on page 83, our future
results of operations will not be comparable to our
predecessors historical results.
76
The following table presents the non-GAAP financial measure of
EBITDA, which we use in our business. For a definition of EBITDA
and a reconciliation to our most directly comparable financial
measures calculated and presented in accordance with GAAP,
please see Non-GAAP Financial Measure on
page 79.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tesoro Logistics LP Pro Forma
|
|
|
|
Tesoro Logistics LP Predecessor Historical
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per unit data and operating
information)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering
|
|
$
|
17,395
|
|
|
$
|
17,948
|
|
|
$
|
20,646
|
|
|
$
|
21,190
|
|
|
$
|
19,422
|
|
|
$
|
14,239
|
|
|
$
|
14,177
|
|
|
$
|
48,827
|
|
|
$
|
37,461
|
|
Terminalling, transportation and storage
|
|
|
2,713
|
|
|
|
2,983
|
|
|
|
3,251
|
|
|
|
3,297
|
|
|
|
3,237
|
|
|
|
2,324
|
|
|
|
2,797
|
|
|
|
42,136
|
|
|
|
33,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
20,108
|
|
|
$
|
20,931
|
|
|
$
|
23,897
|
|
|
$
|
24,487
|
|
|
$
|
22,659
|
|
|
$
|
16,563
|
|
|
$
|
16,974
|
|
|
$
|
90,963
|
|
|
$
|
70,626
|
|
Operating and maintenance expense(2)
|
|
|
24,271
|
|
|
|
25,560
|
|
|
|
26,858
|
|
|
|
29,741
|
|
|
|
32,566
|
|
|
|
24,209
|
|
|
|
25,990
|
|
|
|
35,499
|
|
|
|
28,832
|
|
Depreciation expense
|
|
|
5,941
|
|
|
|
6,011
|
|
|
|
6,342
|
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
6,975
|
|
|
|
5,983
|
|
|
|
8,820
|
|
|
|
5,983
|
|
General and administrative expense(3)
|
|
|
1,942
|
|
|
|
2,218
|
|
|
|
2,800
|
|
|
|
2,525
|
|
|
|
3,141
|
|
|
|
2,340
|
|
|
|
2,337
|
|
|
|
4,008
|
|
|
|
3,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(12,046
|
)
|
|
|
(12,858
|
)
|
|
|
(12,103
|
)
|
|
|
(14,404
|
)
|
|
|
(21,868
|
)
|
|
|
(16,961
|
)
|
|
|
(17,336
|
)
|
|
|
42,636
|
|
|
|
32,805
|
|
Interest expense, net(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,306
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
(12,046
|
)
|
|
|
(12,858
|
)
|
|
|
(12,103
|
)
|
|
|
(14,404
|
)
|
|
|
(21,868
|
)
|
|
|
(16,961
|
)
|
|
|
(17,336
|
)
|
|
$
|
40,330
|
|
|
$
|
31,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Common unitholders interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Subordinated unitholders interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Pro forma Net Income (Loss) per common unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Pro forma Net Income (Loss) per subordinated unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, net
|
|
$
|
115,555
|
|
|
$
|
114,524
|
|
|
$
|
127,226
|
|
|
$
|
138,785
|
|
|
$
|
138,055
|
|
|
$
|
139,049
|
|
|
$
|
133,151
|
|
|
|
|
|
|
$
|
133,151
|
|
Total Assets
|
|
|
118,514
|
|
|
|
117,787
|
|
|
|
130,752
|
|
|
|
141,697
|
|
|
|
141,215
|
|
|
|
142,295
|
|
|
|
136,811
|
|
|
|
|
|
|
|
138,151
|
|
Total Liabilities
|
|
|
4,124
|
|
|
|
5,089
|
|
|
|
5,404
|
|
|
|
8,686
|
|
|
|
5,499
|
|
|
|
5,664
|
|
|
|
6,267
|
|
|
|
|
|
|
|
50,000
|
|
Total Division Equity/Partners Capital
|
|
|
114,390
|
|
|
|
112,698
|
|
|
|
125,348
|
|
|
|
133,011
|
|
|
|
135,716
|
|
|
|
136,631
|
|
|
|
130,544
|
|
|
|
|
|
|
|
88,151
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(5,850
|
)
|
|
$
|
(6,524
|
)
|
|
$
|
(5,703
|
)
|
|
$
|
(6,045
|
)
|
|
$
|
(12,324
|
)
|
|
$
|
(9,286
|
)
|
|
$
|
(9,997
|
)
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
(1,646
|
)
|
|
|
(4,641
|
)
|
|
|
(19,050
|
)
|
|
|
(16,022
|
)
|
|
|
(12,249
|
)
|
|
|
(11,295
|
)
|
|
|
(2,167
|
)
|
|
|
|
|
|
|
|
|
Financing activities
|
|
$
|
7,496
|
|
|
$
|
11,165
|
|
|
$
|
24,753
|
|
|
|
22,067
|
|
|
$
|
24,573
|
|
|
$
|
20,581
|
|
|
$
|
12,164
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(5)
|
|
$
|
(6,105
|
)
|
|
$
|
(6,847
|
)
|
|
$
|
(5,761
|
)
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(9,986
|
)
|
|
$
|
(11,353
|
)
|
|
|
51,456
|
|
|
|
38,788
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
$
|
1,866
|
|
|
$
|
4,312
|
|
|
$
|
3,713
|
|
|
$
|
8,475
|
|
|
$
|
3,319
|
|
|
$
|
2,688
|
|
|
$
|
1,297
|
|
|
$
|
3,319
|
|
|
$
|
1,297
|
|
Expansion(6)
|
|
|
8
|
|
|
|
915
|
|
|
|
15,527
|
|
|
|
10,186
|
|
|
|
5,915
|
|
|
|
5,626
|
|
|
|
289
|
|
|
|
5,915
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,874
|
|
|
$
|
5,227
|
|
|
$
|
19,240
|
|
|
$
|
18,661
|
|
|
$
|
9,234
|
|
|
$
|
8,314
|
|
|
$
|
1,586
|
|
|
$
|
9,234
|
|
|
$
|
1,586
|
|
Operating Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline throughput (bpd)(7)
|
|
|
52,893
|
|
|
|
54,639
|
|
|
|
56,232
|
|
|
|
54,737
|
|
|
|
52,806
|
|
|
|
52,645
|
|
|
|
47,954
|
|
|
|
52,806
|
|
|
|
47,954
|
|
Average pipeline revenue per barrel(8)
|
|
$
|
0.90
|
|
|
$
|
0.90
|
|
|
$
|
1.01
|
|
|
$
|
1.06
|
|
|
$
|
1.01
|
|
|
$
|
0.99
|
|
|
$
|
1.08
|
|
|
$
|
1.28
|
|
|
$
|
1.38
|
|
Trucking volume (bpd)
|
|
|
18,300
|
|
|
|
17,759
|
|
|
|
18,560
|
|
|
|
23,752
|
|
|
|
22,963
|
|
|
|
22,571
|
|
|
|
23,386
|
|
|
|
22,963
|
|
|
|
23,386
|
|
Average trucking revenue per barrel(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.88
|
|
|
$
|
3.03
|
|
Terminalling, transportation and storage segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal throughput (bpd)(9)
|
|
|
76,203
|
|
|
|
79,752
|
|
|
|
103,305
|
|
|
|
112,868
|
|
|
|
113,135
|
|
|
|
112,031
|
|
|
|
113,964
|
|
|
|
113,135
|
|
|
|
113,964
|
|
Average terminal revenue per barrel(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.77
|
|
|
$
|
0.82
|
|
Short-haul pipeline throughput (bpd)
|
|
|
62,316
|
|
|
|
68,415
|
|
|
|
60,395
|
|
|
|
60,894
|
|
|
|
56,942
|
|
|
|
58,537
|
|
|
|
52,798
|
|
|
|
56,942
|
|
|
|
52,798
|
|
Average short-haul pipeline revenue per barrel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
Storage capacity reserved (shell capacity barrels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878,000
|
|
|
|
878,000
|
|
Storage per shell capacity barrel (per month)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.50
|
|
|
$
|
0.50
|
|
|
|
|
(1) |
|
Pro forma revenues reflect recognition of affiliate revenues
generated by pipeline and terminal assets to be contributed to
us at the closing of this offering that were not previously
recorded in the historical financial records of Tesoro Logistics
LP Predecessor. Product volumes used in the calculations are
historical |
77
|
|
|
|
|
volumes transported or terminalled through facilities included
in the Tesoro Logistics LP Predecessor financial statements.
Tariff rates and service fees were calculated using the rates
and fees in the commercial agreements to be entered into with
Tesoro at the closing of this offering and tariff rates on our
High Plains pipeline system to be in effect at the time of
closing of this offering. |
|
(2) |
|
Operating and maintenance expenses includes losses on fixed
asset disposals. Operating and maintenance expense in 2009
includes a $1.1 million loss on fixed asset disposals
primarily related to the retirement of a portion of our Los
Angeles terminal. Pro forma operating and maintenance expense
for the year ended December 31, 2009 and the nine months
ended September 30, 2010 includes incremental operating and
maintenance expenses primarily related to purchased additives,
inspection and port charges, and insurance premiums for business
interruption and property insurance. |
|
(3) |
|
Pro forma general and administrative expenses have been adjusted
to give effect to the annual corporate services fee of
$2.5 million that we will pay to Tesoro under the omnibus
agreement for providing treasury, accounting, legal and other
centralized corporate services as well as higher
employee-related expenses of $0.9 million, but do not
include the estimated $3.0 million in incremental annual
general and administrative expenses we expect to incur as a
result of being a separate publicly traded partnership. |
|
(4) |
|
Pro forma interest expense is related to expected borrowings
under our revolving credit facility, commitment fees on the
unutilized portion of our revolving credit facility,
amortization of related debt issuance costs. Interest expense is
calculated assuming an estimated annual interest rate of 2.8%.
If the actual interest rate increases or decreases by 1.0%, pro
forma interest expense would increase or decrease by
approximately $0.5 million per year. |
|
|
|
(5) |
|
For a discussion of the non-GAAP financial measure of EBITDA,
please read Summary Summary Historical and Pro
Forma Combined Financial and Operating Data
Non-GAAP Financial Measure beginning on page 16
of this prospectus and please read
Non-GAAP Financial Measure below. |
|
|
|
(6) |
|
Expansion capital expenditures reflect the $12.6 million
acquisition of our Los Angeles terminal in May 2007 and a
$3.5 million truck rack expansion project at this terminal
in 2008. |
|
(7) |
|
Pro forma and historical pipeline throughput for the nine months
ended September 30, 2010 include the effects of a scheduled
turnaround at Tesoros Mandan refinery in April and May of
2010. |
|
(8) |
|
Average pipeline revenue per barrel includes tariffs for
committed and uncommitted volumes of crude oil under the
pipeline transportation services agreement to be entered into
with Tesoro at the closing of this offering, as well as fees for
the injection of crude oil into the pipeline system from
trucking receipt points, which we refer to as pumpover fees.
Average trucking service revenue per barrel includes tank usage
fees and fees for providing trucking, dispatching, accounting
and data services under the trucking transportation services
agreement to be entered into with Tesoro at the closing of this
offering. Average terminal revenue per barrel includes terminal
throughput fees as well as ancillary services fees for ethanol
blending and additive injection. |
|
(9) |
|
Terminal throughput includes throughput from our Los Angeles
terminal following its acquisition by Tesoro in May 2007. |
78
Non-GAAP Financial
Measure
For a discussion of the non-GAAP financial measure of EBITDA,
please read Summary Summary Historical and Pro
Forma Combined Financial and Operating Data
Non-GAAP Financial Measure beginning on page 16
of this prospectus. The following table presents a
reconciliation of EBITDA to net income and net cash from (used
in) operating activities, the most directly comparable GAAP
financial measures, on a historical basis and pro forma basis,
as applicable, for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tesoro Logistics LP Pro Forma
|
|
|
|
Tesoro Logistics LP Predecessor Historical
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Reconciliation of EBITDA to net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income(Loss)
|
|
$
|
(12,046
|
)
|
|
$
|
(12,858
|
)
|
|
$
|
(12,103
|
)
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(16,961
|
)
|
|
$
|
(17,336
|
)
|
|
$
|
40,330
|
|
|
$
|
31,075
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
5,941
|
|
|
|
6,011
|
|
|
|
6,342
|
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
6,975
|
|
|
|
5,983
|
|
|
|
8,820
|
|
|
|
5,983
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,306
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(6,105
|
)
|
|
$
|
(6,847
|
)
|
|
$
|
(5,761
|
)
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(9,986
|
)
|
|
$
|
(11,353
|
)
|
|
$
|
51,456
|
|
|
$
|
38,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of EBITDA to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from used in operating activities
|
|
$
|
(5,850
|
)
|
|
$
|
(6,524
|
)
|
|
$
|
(5,703
|
)
|
|
$
|
(6,045
|
)
|
|
$
|
(12,324
|
)
|
|
$
|
(9,286
|
)
|
|
$
|
(9,997
|
)
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities
|
|
|
261
|
|
|
|
(82
|
)
|
|
|
167
|
|
|
|
(1,258
|
)
|
|
|
390
|
|
|
|
343
|
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
Loss on asset disposals
|
|
|
(516
|
)
|
|
|
(241
|
)
|
|
|
(225
|
)
|
|
|
(476
|
)
|
|
|
(1,114
|
)
|
|
|
(1,043
|
)
|
|
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(6,105
|
)
|
|
$
|
(6,847
|
)
|
|
$
|
(5,761
|
)
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(9,986
|
)
|
|
$
|
(11,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of the financial
condition and results of operations for Tesoro Logistics LP in
conjunction with the historical combined financial statements
and notes of Tesoro Logistics LP Predecessor and the pro forma
combined financial statements for Tesoro Logistics LP included
elsewhere in this prospectus. Among other things, those
historical and pro forma combined financial statements include
more detailed information regarding the basis of presentation
for the following information.
Overview
We are a fee-based, growth-oriented Delaware limited partnership
recently formed by Tesoro to own, operate, develop and acquire
crude oil and refined products logistics assets. Our logistics
assets are integral to the success of Tesoros refining and
marketing operations and are used to gather, transport and store
crude oil and to distribute, transport and store refined
products. Our initial assets consist of a crude oil gathering
system in the Bakken Shale/Williston Basin area of North Dakota
and Montana, eight refined products terminals in the midwestern
and western United States and a crude oil and refined products
storage facility and five related short-haul pipelines in Utah.
Our assets and operations are organized into the following two
segments:
Crude Oil Gathering. Our common carrier
crude oil gathering system in North Dakota and Montana, which we
refer to as our High Plains system, includes an approximate
23,000 bpd truck-based crude oil gathering operation and
approximately 700 miles of pipeline and related storage
assets with the current capacity to deliver up to
70,000 bpd to Tesoros Mandan, North Dakota refinery.
This system gathers and transports to Tesoros Mandan
refinery crude oil produced from the Bakken Shale/Williston
Basin area.
Terminalling, Transportation and
Storage. We own and operate eight refined
products terminals located in Alaska, California, Idaho, North
Dakota, Utah and Washington, with aggregate truck and barge
delivery capacity of approximately 229,000 bpd. The
terminals provide distribution primarily for refined products
produced at Tesoros refineries located in Los Angeles and
Martinez, California; Salt Lake City, Utah; Kenai, Alaska;
Anacortes, Washington; and Mandan, North Dakota. We also own and
operate assets that exclusively support Tesoros Salt Lake
City refinery, including a refined products and crude oil
storage facility with total shell capacity of approximately
878,000 barrels and three short-haul crude oil supply
pipelines and two short-haul refined product delivery pipelines
connected to third-party interstate pipelines.
How We
Generate Revenue
We generate revenue by charging fees for gathering, transporting
and storing crude oil and for terminalling, transporting and
storing refined products. Since we generally do not own any of
the crude oil or refined products that we handle and do not
engage in the trading of crude oil or refined products, we have
minimal direct exposure to risks associated with fluctuating
commodity prices, although these risks indirectly influence our
activities and results of operations over the long term.
Following the closing of this offering, substantially all of our
revenue will be derived from Tesoro, primarily under various
long-term, fee-based commercial agreements with minimum
throughput commitments. However, these commercial agreements
include provisions that permit Tesoro to suspend, reduce or
terminate its obligations under the applicable agreement if
certain events occur. These events include Tesoro deciding to
permanently or indefinitely suspend refining operations at one
or more of its refineries as well as our being subject to
certain force majeure events that would prevent us from
performing required services under the applicable agreement.
Crude
Oil Gathering
High Plains Pipeline Gathering and
Transportation. We and Tesoro will enter into
a 10-year
pipeline transportation services agreement, which we refer to as
our High Plains pipeline transportation services agreement.
Under this agreement, we will charge Tesoro for transporting
crude oil from North Dakota origin points on our High Plains
pipeline system pursuant to both committed and uncommitted
tariff rates, and Tesoro will be obligated to transport an
average of at least 49,000 bpd of crude oil per month at
the committed rate from North Dakota origin points to
Tesoros Mandan refinery. Based on this minimum
80
throughput commitment and the pro forma weighted average
committed tariff rate on the trunk line segments of our High
Plains pipeline system for the twelve months ended
September 30, 2010, Tesoro would have paid us approximately
$1.6 million per month under this agreement. We also expect
to receive additional revenues from Tesoro for North Dakota
intrastate shipments in excess of 49,000 bpd per month,
which will be paid at the uncommitted NDPSC tariff rate, which
is approximately $0.10 per barrel lower than the committed NDPSC
tariff rate for each North Dakota origin point. We also expect
to receive revenues from Tesoro for interstate shipment of crude
oil volumes from Montana and other interstate pipeline origin
points, to which FERC interstate tariff rates will apply. During
periods of normal operations, Tesoro has historically shipped
volumes of crude oil in excess of the minimum throughput
commitment, and we expect those excess shipments to continue. We
also expect to generate additional uncommitted fees of
approximately $0.14 per barrel for pumpover services on each
barrel that is injected into our High Plains pipeline system
from adjacent tanks, as well as gathering fees of approximately
$0.55 per barrel (based on the pro forma weighted average
per-barrel
gathering fee for the twelve months ended September 30,
2010) for each barrel of crude oil collected by our
gathering pipelines that feed our main pipeline system.
High Plains Truck Gathering. We and
Tesoro will enter into a two-year trucking transportation
services agreement under which we will provide truck-based crude
oil gathering services to Tesoro. Under this agreement, Tesoro
will be obligated to pay us a $2.72
per-barrel
transportation fee for trucking and related scheduling and
dispatching services related to the gathering and delivery of a
minimum volume of crude oil equal to an average of
22,000 bpd per month that we provide through our
truck-based crude oil gathering operation. We also expect to
generate additional uncommitted transportation fees at the same
per-barrel rate for volumes in excess of Tesoros minimum
commitments under this agreement. Based on the minimum
throughput commitment and the initial
per-barrel
transportation fee, for the twelve months ended
September 30, 2010, Tesoro would have paid us approximately
$1.8 million per month under this agreement. Under this
agreement, Tesoro will also pay us uncommitted tank usage fees
of approximately $0.14 per barrel on each barrel that is
delivered by truck to our proprietary tanks located adjacent to
injection points along our High Plains pipeline system.
Terminalling,
Transportation and Storage
Terminalling Services. We and Tesoro
will enter into a
10-year
master terminalling services agreement under which Tesoro will
be obligated to throughput minimum volumes of refined products
equal to an aggregate average of 100,000 bpd per month at
our eight refined products terminals and pay us throughput fees
and fees for providing related ancillary services (such as
ethanol blending and additive injection) at our terminals. Based
on Tesoros minimum throughput commitment and the pro forma
weighted average per barrel terminalling fee (which includes
both throughput fees and ancillary services fees), for the
twelve months ended September 30, 2010, Tesoro would have
paid us approximately $2.4 million per month under this
agreement. We also expect to generate additional, uncommitted
fee-based revenues from terminalling third-party volumes and
volumes from Tesoro in excess of its minimum commitments and
from related ancillary services under the master terminalling
services agreement.
Salt Lake City Pipeline Transportation
Services. We and Tesoro will enter into a
10-year
pipeline transportation services agreement under which Tesoro
will pay us a $0.25
per-barrel
transportation fee for transporting minimum volumes of crude oil
and refined products equal to an average of 54,000 bpd per
month on our five Salt Lake City short-haul pipelines. Based on
Tesoros minimum throughput commitment and the
per-barrel
transportation fee, for the twelve months ended
September 30, 2010, Tesoro would have paid us approximately
$0.4 million per month under this agreement. We also expect
to generate additional, uncommitted fee-based revenues from
Tesoro for transporting volumes in excess of its minimum
throughput commitment under this agreement.
Salt Lake City Storage and Transportation
Services. We and Tesoro will enter into a
10-year
storage and transportation services agreement under which Tesoro
will pay us a $0.50
per-barrel
fee per month for storing crude oil and refined products at our
Salt Lake City storage facility and transporting crude oil and
refined products between the storage facility and Tesoros
Salt Lake City refinery through our interconnecting pipelines.
Tesoros fees under the storage and transportation services
agreement will be for the use of the
81
existing shell capacity of our storage facility (currently
878,000 barrels) and the existing capacity on our
interconnecting pipelines, regardless of whether Tesoro fully
utilizes all of its contracted capacity. Accordingly, for the
twelve months ended September 30, 2010, Tesoro would have
paid us an aggregate minimum fee of approximately
$0.4 million per month under this agreement.
The fees under each of the commercial agreements described above
are indexed for inflation and apply only to services we provide
for Tesoro. Each of these commercial agreements, other than the
trucking transportation services agreement, will give Tesoro the
option to renew for two five-year terms. The trucking
transportation services agreement will renew automatically for
up to four successive two-year terms unless earlier terminated
by us or Tesoro no later than three months prior to the
expiration of any term. Please read Certain Relationships
and Related Party Transactions Agreements Governing
the Transactions Commercial Agreements with
Tesoro beginning on page 143 for a more detailed
discussion of these commercial agreements.
How We
Evaluate Our Operations
Our management intends to use a variety of financial and
operating metrics to analyze our segment performance. These
metrics are significant factors in assessing our operating
results and profitability and include: (i) volumes
(including pipeline throughput, crude oil trucking volumes and
refined products terminal volumes); (ii) operating and
maintenance expenses; (iii) EBITDA; and
(iv) Distributable Cash Flow.
Volumes. The amount of revenue we
generate primarily depends on the volumes of crude oil and
refined products that we handle with our pipeline and trucking
operations and our terminal assets. These volumes are primarily
affected by the supply of and demand for crude oil and refined
products in the markets served directly or indirectly by our
assets. Although Tesoro has committed to minimum volumes under
the commercial agreements described above, our results of
operations will be impacted by our ability to:
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utilize the remaining uncommitted capacity on, or add additional
capacity to, our High Plains system, and to optimize the entire
system;
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increase throughput volumes on our High Plains system by making
outlet connections to existing or new third party pipelines or
rail loading facilities, which increase will be driven by the
anticipated supply of and demand for additional crude oil
produced from the Bakken Shale/Williston Basin area;
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increase throughput volumes at our refined products terminals
and provide additional ancillary services at those terminals,
such as ethanol blending and additive injection; and
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identify and execute organic expansion projects, and capture
incremental Tesoro or third-party volumes.
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Additionally, increased throughput will also depend to a
significant extent on Tesoro transferring to our Vancouver,
Stockton and Los Angeles terminals volumes that it currently
distributes through competing terminals.
Operating and Maintenance Expenses. Our
management seeks to maximize the profitability of our operations
by effectively managing operating and maintenance expenses.
These expenses are comprised primarily of labor expenses, lease
costs, utility costs, insurance premiums, repairs and
maintenance expenses and related property taxes. These expenses
generally remain relatively stable across broad ranges of
throughput volumes but can fluctuate from period to period
depending on the mix of activities performed during that period
and the timing of these expenses. We will seek to manage our
maintenance expenditures on our pipelines and terminals by
scheduling maintenance over time to avoid significant
variability in our maintenance expenditures and minimize their
impact on our cash flow.
Our operating and maintenance expenses will also be affected by
the imbalance gain and loss provisions in our commercial
agreements with Tesoro. Under our High Plains pipeline
transportation services agreement, we will be permitted to
retain 0.2% of the crude oil shipped on our High Plains pipeline
system, and Tesoro will bear any crude oil volume losses in
excess of that amount. Under our master terminalling services
agreement, we will be permitted to retain 0.25% of the refined
products we handle at our Anchorage, Boise, Burley, Stockton and
Vancouver terminals for Tesoro, and we will bear any refined
product volume losses in
82
excess of that amount. The value of any crude oil or refined
product imbalance gains or losses resulting from these
contractual provisions will be determined by reference to the
monthly average reference price for the applicable commodity,
less a specified discount. Any gains and losses under these
provisions will reduce or increase, respectively, our operating
and maintenance expenses in the period in which they are
realized.
EBITDA and Distributable Cash Flow. We
define EBITDA as net income (loss) before net interest expense,
income tax expense, depreciation and amortization expense.
Although we have not quantified distributable cash flow on a
historical basis, after the closing of this offering we intend
to use distributable cash flow, which we define as EBITDA plus
cash paid net of interest income, maintenance capital
expenditures and income taxes, to analyze our performance.
Distributable cash flow will not reflect changes in working
capital balances. Distributable cash flow and EBITDA are not
presentations made in accordance with GAAP.
EBITDA and distributable cash flow are non-GAAP supplemental
financial measures that management and external users of our
combined financial statements, such as industry analysts,
investors, lenders and rating agencies, may use to assess:
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our operating performance as compared to other publicly traded
partnerships in the midstream energy industry, without regard to
historical cost basis or, in the case of EBITDA, financing
methods;
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the ability of our assets to generate sufficient cash flow to
make distributions to our unitholders;
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our ability to incur and service debt and fund capital
expenditures; and
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the viability of acquisitions and other capital expenditure
projects and the returns on investment of various investment
opportunities.
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We believe that the presentation of EBITDA in this prospectus
provides useful information to investors in assessing our
financial condition and results of operations. The GAAP measures
most directly comparable to EBITDA are net income and net cash
provided by operating activities. EBITDA should not be
considered as an alternative to GAAP net income or net cash
provided by operating activities. EBITDA has important
limitations as an analytical tool because it excludes some but
not all items that affect net income and net cash provided by
operating activities. You should not consider EBITDA in
isolation or as a substitute for analysis of our results as
reported under GAAP. Additionally, because EBITDA may be defined
differently by other companies in our industry, our definition
of EBITDA may not be comparable to similarly titled measures of
other companies, thereby diminishing its utility.
Factors
Affecting the Comparability of Our Financial Results
Our future results of operations may not be comparable to our
predecessors historical results of operations for the
reasons described below:
Revenues. There are differences in the
way our predecessor recorded revenues and the way we will record
revenues. Our assets have historically been a part of the
integrated operations of Tesoro, and our predecessor generally
recognized only the costs and did not record revenue associated
with the short-haul pipeline, transportation, terminalling,
storage or trucking services provided to Tesoro on an
intercompany basis. Accordingly, the revenues in our
predecessors historical combined financial statements
relate only to amounts received from third parties for these
services and amounts received from Tesoro with respect to
transportation regulated by FERC and NDPSC on our High Plains
system. Following the closing of this offering, our revenues
will be generated by existing third-party contracts and from the
commercial agreements that we will enter into with Tesoro at the
closing of this offering under which Tesoro will pay us fees for
gathering, transporting and storing crude oil and transporting,
storing and terminalling refined products. These contracts
contain minimum volume commitments and fees that are indexed for
inflation. In addition, we expect to generate revenue from
ancillary services such as ethanol blending and additive
injection and from tariffs on our High Plains pipeline system
for interstate and intrastate volumes in excess of committed
amounts under our High Plains pipeline transportation services
agreement with Tesoro. Furthermore, the tariff rates for
intrastate transportation on our High Plains pipeline system
were recently adjusted to reflect more uniform
83
mileage based rates that are comparable to rates for similar
pipeline gathering and transportation services in the area. This
adjustment has created an overall increase in revenues that we
will receive for committed and uncommitted intrastate
transportation services on our High Plains pipeline system.
General and Administrative
Expenses. Our predecessors general and
administrative expenses included direct monthly charges for the
management and operation of our logistics assets and certain
expenses allocated by Tesoro for general corporate services,
such as treasury, accounting and legal services. These expenses
were charged or allocated to our predecessor based on the nature
of the expenses and our predecessors proportionate share
of employee time and headcount. Following the closing of this
offering, Tesoro will continue to charge us a combination of
direct monthly charges for the management and operation of our
logistics assets, which are projected to be $0.9 million
higher than historical charges due to Tesoros provision of
additional services, and a fixed annual fee for general
corporate services, such as treasury, accounting and legal
services. For more information about the fixed annual fee and
the services covered by it, please see Certain
Relationships and Related Party Transactions
Agreements Governing the Transactions Omnibus
Agreement beginning on page 139. We also expect to
incur an additional $3.0 million of incremental annual
general and administrative expenses as a result of being a
separate publicly traded partnership.
Financing. There are differences in the
way we will finance our operations as compared to the way our
predecessor financed its operations. Historically, our
predecessors operations were financed as part of
Tesoros integrated operations and our predecessor did not
record any separate costs associated with financing its
operations. Additionally, our predecessor largely relied on
internally generated cash flows and capital contributions from
Tesoro to satisfy its capital expenditure requirements.
Following the closing of this offering, we intend to make cash
distributions to our unitholders at an initial distribution rate
of $ per unit per quarter
($ per unit on an annualized
basis). Based on the terms of our cash distribution policy, we
expect that we will distribute to our unitholders and our
general partner most of the cash generated by our operations. As
a result, we expect to fund future capital expenditures
primarily from external sources, including borrowings under our
revolving credit facility and future issuances of equity and
debt securities.
Other
Factors That Will Significantly Affect Our Results
Supply and Demand for Crude Oil and Refined
Products. We generate the substantial
majority of our revenues under fee-based agreements with Tesoro.
These contracts should promote cash flow stability and minimize
our direct exposure to commodity price fluctuations.
Additionally, since we generally do not own any of the crude oil
or refined products that we handle and do not engage in the
trading of crude oil or refined products, we have minimal direct
exposure to risks associated with fluctuating commodity prices,
although these risks indirectly influence our activities and
results of operations over the long term. Our terminal
throughput volumes depend primarily on the volume of refined
products produced at Tesoros refineries, which, in turn,
is ultimately dependent on Tesoros refining margins.
Refining margins depend on both the price of crude oil or other
feedstocks and the price of refined products. These prices are
affected by numerous factors beyond our or Tesoros
control, including the domestic and global supply of and demand
for crude oil, gasoline and other refined products. Furthermore,
our ability to execute our growth strategy in the Bakken
Shale/Williston Basin area will depend on crude oil production
in that area, which is also affected by the supply of and demand
for crude oil. Certain measures of commercial activity that are
correlated with crude oil and refined products demand showed
improvement in 2010. However, we expect the current global
economic weakness and high unemployment in the United States to
continue to depress demand for refined products. The impact of
low demand has been further compounded by excess global refining
capacity and historically high inventory levels. We expect these
conditions to continue to put significant pressure on
Tesoros refined product margins until the economy improves
and unemployment declines. If the demand for refined products
remains depressed or decreases further, or if Tesoros
crude oil costs exceed the value of the refined products it
produces, Tesoro may reduce the volumes of crude oil and refined
products that we handle.
Acquisition Opportunities. We may
acquire additional logistics assets from Tesoro or third
parties. Under our omnibus agreement, Tesoro has agreed not to
own or operate any crude oil or refined products pipelines,
terminals or storage facilities in the United States that are
not directly connected to, substantially dedicated to, or
otherwise an integral part of, a Tesoro refinery, with a fair
market value in excess of
84
$5.0 million. We also have a right of first offer on
certain logistics assets retained by Tesoro to the extent Tesoro
decides to sell any of those assets. In addition, we plan to
pursue strategic asset acquisitions from third parties to the
extent such acquisitions complement our or Tesoros
existing asset base or provide attractive potential returns in
new areas within our geographic footprint. We believe that we
will be well-positioned to acquire logistics assets from Tesoro
and third parties should such opportunities arise, and
identifying and executing acquisitions will be a key part of our
strategy. However, if we do not make acquisitions on
economically acceptable terms, our future growth will be
limited, and the acquisitions we do make may reduce, rather than
increase, our cash available for distribution.
Third-Party Business. In the future, we
plan to increase third-party volumes to our crude oil gathering
assets and our terminalling assets. We believe that the
strategic location of these assets will create significant
opportunities to capture incremental third-party business and
facilitate our growth. Immediately following the closing of this
offering, substantially all of our current revenue will be
generated under our commercial agreements with, and tariffs paid
by, Tesoro. Unless we are successful in attracting third-party
customers, our ability to increase volumes will be dependent on
Tesoro, who has no obligation to supply our High Plains system
or our terminals with additional volumes. If we are unable to
increase throughput volumes, future growth may be limited.
Results
of Operations
Combined
Overview
The following table and discussion is a summary of our combined
results of operations for the years ended December 31,
2007, 2008 and 2009 and the nine months ended September 30,
2009 and 2010. The results of operations by segment are
discussed in further detail following this combined overview
discussion.
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Year Ended
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Nine Months Ended
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December 31,
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September 30,
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2007
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2008
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2009
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2009
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2010
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(Unaudited)
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(In thousands)
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Revenues
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$
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23,897
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$
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24,487
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$
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22,659
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$
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16,563
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$
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16,974
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Costs and Expenses:
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Operating and maintenance expense
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26,858
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29,741
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32,566
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24,209
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25,990
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Depreciation expense
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6,342
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6,625
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8,820
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6,975
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5,983
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General and administrative expense
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2,800
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2,525
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3,141
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2,340
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2,337
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Total Costs and Expenses
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36,000
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38,891
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44,527
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33,524
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34,310
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Net Loss
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$
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(12,103
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$
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(14,404
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$
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(21,868
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)
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$
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(16,961
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)
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$
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(17,336
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)
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EBITDA(1)
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$
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(5,761
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$
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(7,779
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$
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(13,048
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)
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$
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(9,986
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)
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$
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(11,353
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)
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(1) |
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For a definition of EBITDA and a reconciliation to its most
directly comparable financial measures calculated and presented
in accordance with GAAP, please see Summary
Summary Historical and Pro Forma Combined Financial and
Operating Data Non-GAAP Financial Measure
on page 16. |
Nine
Months Ended September 30, 2010 compared to Nine Months
Ended September 30, 2009
Net loss increased by $0.3 million, or 2%, to
$17.3 million in the nine months ended
September 30, 2010 (2010 Period) as
compared to $17.0 million in the nine months ended
September 30, 2009 (2009 Period). The
terminalling, transportation and storage segment had a
$1.1 million decrease in operating losses primarily due to
lower depreciation expenses in the 2010 Period with no
significant change in revenues and operating and maintenance
expenses. This decrease in net loss was offset by an increase in
crude oil gathering operating losses of $1.5 million
primarily attributable to higher 2010 Period contract labor
costs and truck lease expenses. Total general and administrative
expenses were also unchanged at $2.3 million in the 2010
Period as the increases from stock based compensation costs were
offset by decreases in employee expenses.
85
Year
Ended December 31, 2009 compared to Year Ended
December 31, 2008
Net loss increased by $7.5 million, or 52%, to
$21.9 million in 2009 as compared to $14.4 million in
2008. The increase in net loss was due to a $1.8 million
decrease in revenues in the crude oil gathering segment
primarily due to reduced throughput as Tesoros Mandan
refinery approached the end of its maintenance cycle. In
addition, total operating and maintenance expenses increased
$2.8 million, primarily attributable to higher trucking
costs caused by increased third-party trucking demand, higher
repair and maintenance expenses and losses related to certain
asset retirements at our Los Angeles terminal in relation to a
large capital project. As a result of these asset retirements,
we accelerated depreciation on the related assets, which was the
primary cause of increased depreciation expense of
$2.2 million. In addition, total general and administrative
expenses increased by $0.6 million primarily due to higher
stock-based compensation costs.
Year
Ended December 31, 2008 compared to Year Ended
December 31, 2007
Net loss increased by $2.3 million, or 19%, to
$14.4 million in 2008 compared to $12.1 million in
2007, primarily due to higher operating and maintenance expenses
of $2.9 million. The increase in operating and maintenance
expenses was due mainly to contract labor costs and truck lease
expenses related to a new truck unloading facility on our High
Plains system. These increases were partially offset by total
revenue growth of $0.6 million, primarily in our crude oil
gathering segment as a result of the new facility. In addition,
consolidated general and administrative expenses decreased
$0.3 million reflecting lower stock-based compensation
costs.
Results
of Operations Crude Oil Gathering
This segment includes our High Plains pipeline system and our
related trucking operations that gather and transport crude oil
to Tesoros Mandan, North Dakota refinery.
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Years Ended
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Nine Months Ended
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December 31,
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September 30,
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2007
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2008
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2009
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2009
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2010
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(Unaudited)
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(In thousands, except volumes)
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Revenues
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$
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20,646
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$
|
21,190
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$
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19,422
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$
|
14,239
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|
|
$
|
14,177
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Costs and Expenses:
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Operating and maintenance expenses
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|
|
14,520
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|
|
|
17,029
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|
|
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18,962
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|
|
|
14,336
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|
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15,735
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Depreciation expense
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|
|
3,187
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|
|
|
3,066
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|
|
3,073
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|
|
2,307
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|
|
|
2,317
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Allocated general and administrative expense
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|
|
453
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|
|
471
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|
|
536
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|
|
382
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|
|
424
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Total Costs and Expenses
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$
|
18,160
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|
$
|
20,566
|
|
|
$
|
22,571
|
|
|
$
|
17,025
|
|
|
$
|
18,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
$
|
2,486
|
|
|
$
|
624
|
|
|
$
|
(3,149
|
)
|
|
$
|
(2,786
|
)
|
|
$
|
(4,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes (bpd):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline
|
|
|
56,232
|
|
|
|
54,737
|
|
|
|
52,806
|
|
|
|
52,645
|
|
|
|
47,954
|
(1)
|
Trucking
|
|
|
18,560
|
|
|
|
23,752
|
|
|
|
22,963
|
|
|
|
22,571
|
|
|
|
23,386
|
|
|
|
|
(1) |
|
Average daily throughput volumes decreased in the 2010 period
due to a scheduled turnaround at Tesoros Mandan refinery
in April and May of 2010. |
Nine
Months Ended September 30, 2010 compared to Nine Months
Ended September 30, 2009
Revenues were relatively unchanged for the 2010 Period compared
to the 2009 Period. Although average pipeline throughput
decreased by 4,691 bpd due to the turnaround at
Tesoros Mandan refinery during April and May of 2010,
tariff revenue was supported by higher average tariff rates per
barrel and an increase in the percentage of total volume
consisting of pipeline-gathered barrels, which are charged a
higher tariff rate.
86
Operating and maintenance expense increased $1.4 million,
or 10%, to $15.7 million in the 2010 Period compared to
$14.3 million in the 2009 Period as a result of increased
trucking costs for contract labor and truck lease expenses of
$1.9 million and approximately $0.6 million,
respectively, due to increased demand for trucking services for
use of alternative delivery locations during Tesoros 2010
Mandan refinery turnaround. The increase was partially offset by
higher imbalance settlement gains of $0.7 million during
the 2010 Period and a decrease of $0.3 million in
nonrecurring environmental expenses.
Depreciation expense was unchanged at $2.3 million for the
2010 Period compared to the 2009 Period as minor amounts of
assets were placed in service or retired during both periods.
Year
Ended December 31, 2009 compared to Year Ended
December 31, 2008
Revenues decreased by approximately $1.8 million, or 8%, to
$19.4 million in 2009 as compared to $21.2 million in
2008. Crude oil gathering pipeline throughput decreased by
1,931 bpd as Tesoros Mandan refinery approached the
end of its maintenance cycle.
Operating and maintenance expense increased approximately
$2.0 million, or 11%, to $19.0 million in 2009
compared to $17.0 million in 2008. The use of new
production gathering locations caused increases of
$1.9 million for contract labor costs, truck rental expense
and fuel expenses in our High Plains trucking operations. Other
increases included $0.5 million in environmental costs
related to our High Plains pipeline system and a decrease of
$1.6 million in imbalance credits. These amounts were
partially offset by decreases in repairs and maintenance expense
and utilities costs of $1.7 million and $0.2 million,
respectively.
Depreciation expense was unchanged at $3.1 million during
2009 and 2008 as minor amounts of assets were placed in service
or retired during both periods.
Year
Ended December 31, 2008 compared to Year Ended
December 31, 2007
Revenues increased $0.5 million, or 3%, to
$21.2 million in 2008 as compared to $20.6 million in
2007. This increase relates to an increase in pipeline gathered
volumes on our High Plains pipeline system and higher pumpover
revenues attributable to the completion of a new truck unloading
facility on our High Plains pipeline system.
Operating and maintenance expense increased $2.5 million,
or 17%, to $17.0 million in 2008 compared to
$14.5 million in 2007. As a result of increased truck
gathered volumes, contract labor costs and truck lease expense
related to the new truck unloading facility on our High Plains
pipeline system increased by $3.8 million. The increase was
offset by an increase in imbalance credits in 2009 of
$1.0 million.
Depreciation expense decreased $0.1 million, or 4%, to
$3.1 million in 2008 compared to $3.2 million in 2007
due to assets becoming fully depreciated in 2007.
87
Results
of Operations Terminalling, Transportation and
Storage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands except volumes)
|
|
|
Revenues(1)
|
|
$
|
3,251
|
|
|
$
|
3,297
|
|
|
$
|
3,237
|
|
|
$
|
2,324
|
|
|
$
|
2,797
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses
|
|
|
12,338
|
|
|
|
12,712
|
|
|
|
13,604
|
|
|
|
9,873
|
|
|
|
10,255
|
|
Depreciation expense
|
|
|
3,155
|
|
|
|
3,559
|
|
|
|
5,747
|
|
|
|
4,668
|
|
|
|
3,666
|
|
Allocated general and administrative expense
|
|
|
323
|
|
|
|
287
|
|
|
|
379
|
|
|
|
292
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
$
|
15,816
|
|
|
$
|
16,558
|
|
|
$
|
19,730
|
|
|
$
|
14,833
|
|
|
$
|
14,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
$
|
(12,565
|
)
|
|
$
|
(13,261
|
)
|
|
$
|
(16,493
|
)
|
|
$
|
(12,509
|
)
|
|
$
|
(11,394
|
)
|
Volumes (bpd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal throughput
|
|
|
103,305
|
|
|
|
112,868
|
(2)
|
|
|
113,135
|
|
|
|
112,031
|
|
|
|
113,964
|
|
Short-haul pipeline throughput
|
|
|
60,395
|
|
|
|
60,894
|
|
|
|
56,942
|
|
|
|
58,537
|
|
|
|
52,798
|
(3)
|
|
|
|
(1) |
|
Historically, no affiliate revenue was recognized in the
terminalling, transportation and storage segment. Volumes
include both affiliate and third-party throughput. |
|
(2) |
|
Average daily throughput volumes increased in 2008 partly as a
result of Tesoros acquisition of our Los Angeles terminal
in May 2007. |
|
(3) |
|
Average daily throughput volumes decreased due to a scheduled
turnaround at Tesoros Salt Lake City refinery in March and
April of 2010. |
Nine
Months Ended September 30, 2010 compared to Nine Months
Ended September 30, 2009
Revenues increased $0.5 million, or 20%, to
$2.8 million in the 2010 Period as compared to
$2.3 million in the 2009 Period, primarily due to increases
in third-party throughput volumes at our Vancouver and Anchorage
terminals.
Operating and maintenance expense increased $0.4 million,
or 4%, to $10.3 million in the 2010 Period compared to
$9.9 million in the 2009 Period primarily due to an
increase of $1.0 million in environmental costs at our
Stockton and Anchorage terminals. This was partially offset by a
decrease in losses on fixed asset disposals as an additional
$0.6 million of losses were recognized in the 2009 Period
related to the retirement of certain assets at our Los Angeles
terminal.
Depreciation expense decreased $1.0 million, or 21%, to
$3.7 million in the 2010 Period compared to
$4.7 million in the 2009 Period due to the acceleration of
depreciation on a portion of our Los Angeles terminal that was
retired in 2009.
Year
Ended December 31, 2009 compared to Year Ended
December 31, 2008
Revenues decreased $0.1 million, or 2%, to
$3.2 million in 2009 as compared to $3.3 million in
2008, primarily due to a decrease in third-party terminalling
throughput of 517 bpd and a corresponding decrease in
third-party terminalling revenues.
Operating and maintenance expense increased $0.9 million,
or 7%, to $13.6 million in 2009 compared to
$12.7 million in 2008. The increase was primarily due to
higher repair and maintenance expenses of approximately
$0.6 million and losses related to fixed asset disposals at
our Los Angeles terminal of $0.7 million. These increases
were partially offset by a reduction in environmental costs of
$0.5 million.
88
Depreciation expense increased $2.2 million, or 61%, to
$5.7 million in 2009 as compared to $3.6 million in
2008 due to the acceleration of depreciation related to the
retirement of certain assets at our Los Angeles terminal in 2009.
Year
Ended December 31, 2008 compared to Year Ended
December 31, 2007
Revenues were unchanged in 2008 as compared to 2007. The
decrease in third-party terminalling throughput of
1,767 bpd was offset by an increase in third-party
terminalling fees.
Operating and maintenance expense increased $0.4 million,
or 3%, to $12.7 million in 2008 compared to
$12.3 million in 2007. The increase resulted from losses on
fixed asset disposals related to our Burley terminal assets of
approximately $0.2 million and approximately
$0.4 million related to a business license for our
Los Angeles terminal operations. We also had increased
property rental expense of approximately $0.1 million
related to our Anchorage and Vancouver terminals. The increase
was partially offset by a decrease of approximately
$0.5 million in repair and maintenance expenses incurred at
our Salt Lake City and Vancouver terminals and our Salt Lake
City storage facility.
Depreciation expense increased $0.4 million, or 13%, to
$3.6 million in 2008 compared to $3.2 million in 2007
due to a net increase in the amount of depreciable assets placed
into service during 2008.
Capital
Resources and Liquidity
Historically, our sources of liquidity included cash generated
from operations and funding from Tesoro. Our cash receipts were
deposited in Tesoros bank accounts and all cash
disbursements were made from these accounts. Thus, historically
our financial statements have reflected no cash balances.
Following this offering, we will have separate bank accounts,
but Tesoro will provide treasury services on our general
partners behalf under our omnibus agreement. Tesoro will
retain the working capital of our predecessor, as these balances
represent assets and liabilities related to our
predecessors assets prior to the closing of the offering.
In addition to the retention of a portion of the net proceeds
from this offering for working capital needs, we expect our
ongoing sources of liquidity following this offering to include
cash generated from operations, borrowings under our revolving
credit facility, and issuances of additional debt and equity
securities. We believe that cash generated from these sources
will be sufficient to meet our short-term working capital
requirements and long-term capital expenditure requirements and
to make quarterly cash distributions.
We intend to pay a minimum quarterly distribution of
$ per unit per quarter, which
equates to $ million per
quarter, or $ million per
year, based on the number of common, subordinated and general
partner units to be outstanding immediately after completion of
this offering. We do not have a legal obligation to pay this
distribution. Please read Cash Distribution Policy and
Restrictions on Distributions beginning on page 49.
Revolving
Credit Facility
Upon the closing of this offering, we intend to enter into a
$150.0 million senior secured revolving credit facility.
The credit facility will be available to fund working capital
and to finance acquisitions and other capital expenditures. Our
obligations under the credit agreement will be secured by a
first priority lien on substantially all of our assets.
Borrowings under our revolving credit facility are expected to
bear interest at LIBOR plus an applicable margin. LIBOR and the
applicable margin will be defined in the credit agreement that
evidences our new credit facility. We expect the unused portion
of the revolving credit facility will be subject to an estimated
commitment fee of 0.50% per annum. Upon the closing of this
offering, we will borrow $50.0 million under the credit
facility in order to fund a cash distribution to Tesoro, leaving
$100.0 million available for future borrowings.
We expect the credit agreement to contain covenants and
conditions that, among other things, limit our ability to make
cash distributions, incur indebtedness, create liens, make
investments and enter into a merger or sale of substantially all
of our assets. We also expect to be subject to certain financial
covenants, including
89
a consolidated leverage ratio and an interest coverage ratio,
and customary events of default under the credit agreement.
Cash
Flows
Net cash from (used in) operating activities, investing
activities and financing activities for the years ended
December 31, 2007, 2008 and 2009, and for the nine months
ended September 30, 2009 and 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended December 31,
|
|
September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(In thousands)
|
|
Net cash used in operating activities
|
|
$
|
(5,703
|
)
|
|
$
|
(6,045
|
)
|
|
$
|
(12,324
|
)
|
|
$
|
(9,286
|
)
|
|
$
|
(9,997
|
)
|
Net cash used in investing activities
|
|
|
(19,050
|
)
|
|
|
(16,022
|
)
|
|
|
(12,249
|
)
|
|
|
(11,295
|
)
|
|
|
(2,167
|
)
|
Net cash from financing activities
|
|
|
24,753
|
|
|
|
22,067
|
|
|
|
24,573
|
|
|
|
20,581
|
|
|
|
12,164
|
|
Cash Flows Used in Operating
Activities. Cash flows used in operating
activities for the 2010 Period increased $0.7 million, or
8%, to $10.0 million from $9.3 million for the 2009
Period. The increase is due to the change in net loss discussed
above under Results of Operations, after
excluding the effect of losses on asset disposals and
depreciation expense, neither of which had an effect on cash
flows used in operating activities. The increase was partially
offset by decreased working capital requirements for the 2010
Period compared to the 2009 Period.
Cash flows used in operating activities for the year ended
December 31, 2009 increased $6.3 million, or 104%, to
$12.3 million from $6.0 million for the year ended
December 31, 2008 due to the increased net loss discussed
above under Results of Operations, after
excluding the effect of depreciation expense that had no effect
on cash, and increased working capital requirements.
Cash flows used in operating activities for the year ended
December 31, 2008 increased $0.3 million, or 6%, to
$6.0 million from $5.7 million for the year ended
December 31, 2007 as a result of increased net loss
discussed above under Results of
Operations offset by lower working capital requirements.
Cash Flows Used in Investing
Activities. Cash flows used in investing
activities for the 2010 Period decreased $9.1 million, or
81%, to $2.2 million from $11.3 million for the 2009
Period due to lower capital expenditures in 2010 as various
projects with significant spending in 2009 at our Los Angeles,
Boise, Anchorage and Vancouver terminals and Salt Lake City
storage facility were substantially complete by
December 31, 2009.
Cash flows used in investing activities for the year ended
December 31, 2009 decreased $3.8 million, or 24%, to
$12.2 million from $16.0 million for the year ended
December 31, 2008 due to lower capital expenditures.
Cash flows used in investing activities for the year ended
December 31, 2008 decreased $3.0 million, or 16%, to
$16.0 million from $19.1 million for the year ended
December 31, 2007 primarily due to our having acquired our
Los Angeles terminal in 2007 for $12.6 million. This
resulting overall decrease was partially offset by an increase
in other capital expenditures of $9.6 million for the year
ended December 31, 2008 compared to the year ended
December, 31, 2007.
Cash Flows from Financing
Activities. Cash flows from financing
activities in historical periods were primarily driven by
capital contributions from Tesoro. We used these capital
contributions to fund our working capital needs and to finance
maintenance and expansion capital expenditure projects that are
reflected in cash flows used in investing activities.
Cash flows provided by financing activities for the 2010 Period
decreased $8.4 million, or 41%, to $12.2 million from
$20.6 million for the 2009 Period due to lower capital
contributions from Tesoro, due to lower capital expenditures in
the 2010 period.
90
Cash flows provided by financing activities for the year ended
December 31, 2009 increased by $2.5 million, or 11%,
to $24.6 million from $22.1 million for the year ended
December 31, 2008 due to higher capital contributions from
Tesoro needed to fund the increase in net loss.
Cash flows provided by financing activities for the year ended
December 31, 2008 decreased $2.7 million, or 11%, to
$22.1 million from $24.8 million for the year ended
December 31, 2007 due to lower capital contributions from
Tesoro, which resulted from the decrease in capital expenditures
and the increase in net loss.
Capital
Expenditures
Our operations are capital intensive, requiring investments to
expand, upgrade or enhance existing operations and to meet
environmental and operational regulations. Our capital
requirements have consisted of and are expected to continue to
consist of maintenance capital expenditures and expansion
capital expenditures. Maintenance capital expenditures include
expenditures required to maintain equipment reliability,
tankage, and pipeline integrity and safety and to address
environmental regulations. Expansion capital expenditures
include expenditures to acquire assets and expand existing
facilities that increase throughput capacity on our pipelines
and in our terminals or increase storage capacity at our storage
facilities. For the years ended December 31, 2007, 2008 and
2009, our predecessor incurred a total of $3.7 million,
$8.5 million and $3.3 million, respectively, in
maintenance capital expenditures and expended
$15.5 million, $10.2 million and $5.9 million,
respectively, for expansion capital expenditures, including the
acquisition of our Los Angeles terminal in 2007. Our
predecessors capital funding requirements were funded by
capital contributions from Tesoro.
We have budgeted maintenance capital expenditures of
approximately $3.2 million and expansion capital
expenditures of approximately $1.1 million for the year
ended December 31, 2011. We anticipate that these capital
expenditures will be funded primarily with cash from operations.
Following this offering, we expect that we will rely primarily
upon external financing sources, including borrowings under our
revolving credit facility and the issuance of debt and equity
securities, to fund any significant future expansion capital
expenditures.
Contractual
Obligations
A summary of our contractual obligations as of December 31,
2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011-2012
|
|
|
2013-2014
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations(1)
|
|
$
|
1,948
|
|
|
$
|
2,934
|
|
|
$
|
1,409
|
|
|
$
|
361
|
|
|
$
|
6,652
|
|
Other purchase obligations(2)
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
Capital expenditure obligations(3)
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,622
|
|
|
$
|
2,934
|
|
|
$
|
1,409
|
|
|
$
|
361
|
|
|
$
|
7,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Minimum operating lease payments for operating leases having
initial or remaining non-cancellable lease terms in excess of
one year primarily related to our truck vehicle leases and, to a
lesser extent, leases for terminals and pump stations and
property leases. |
|
(2) |
|
Represents software commitments that have non-cancellable terms
less than one year. |
|
(3) |
|
Minimum contractual spending requirements for certain capital
projects. |
Effects
of Inflation
Inflation in the United States has been relatively low in recent
years and did not have a material impact on our
predecessors results of operations for the years ended
December 31, 2007, 2008 and 2009.
91
Off
Balance Sheet Arrangements
We have not entered into any transactions, agreements or other
contractual arrangements that would result in off-balance sheet
liabilities.
Regulatory
Matters
Our interstate common carrier crude oil pipeline operations are
subject to rate regulation by the FERC under the Interstate
Commerce Act (ICA) and the Energy Policy Act of 1992 (EPAct
1992). Our pipelines, gathering systems and terminal operations
are also subject to safety regulations adopted by the
U.S. Department of Transportation. Some of our intrastate
pipeline operations are subject to regulation by the NDPSC. For
more information on federal and state regulations affecting our
business, please read Business Rate and Other
Regulation beginning on page 114.
Environmental
and Other Matters
Environmental Regulation. We are
subject to extensive federal, state and local environmental laws
and regulations. These laws, which change frequently, regulate
the discharge of materials into the environment or otherwise
relate to protection of the environment. Compliance with these
laws and regulations may require us to remediate environmental
damage from any discharge of petroleum or chemical substances
from our facilities or require us to install additional
pollution control equipment on our equipment and facilities. Our
failure to comply with these or any other environmental or
safety-related regulations could result in the assessment of
administrative, civil, or criminal penalties, the imposition of
investigatory and remedial liabilities, and the issuance of
injunctions that may subject us to additional operational
constraints.
Future expenditures may be required to comply with the Clean Air
Act and other federal, state and local requirements for our
various sites, including our storage facility, pipelines and
refined products terminals. The impact of these legislative and
regulatory developments, if enacted or adopted, could result in
increased compliance costs and additional operating restrictions
on our business, each of which could have an adverse impact on
our financial position, results of operations and liquidity.
Tesoro will indemnify us for certain of these costs as described
in the omnibus agreement. For a further description of this
indemnification, see Certain Relationships and Related
Party Transactions Agreements Governing the
Transactions Omnibus Agreement beginning on
page 139.
Environmental Liabilities. Tesoro has
been party to various litigation and contingent loss matters,
including environmental matters, arising in the ordinary course
of business. The outcome of these matters cannot always be
accurately predicted, but we have recognized historical
liabilities for these matters based on our best estimates and
applicable accounting guidelines and principles.
These liabilities were based on estimates including engineering
assessments and it is reasonably possible that the estimates
will change and that additional remediation costs could be
incurred as more information becomes available.
Accrued liabilities for estimated site remediation costs to be
incurred in the future at our facilities and properties have
been included in our historical combined financial statements.
Liabilities were recorded when site restoration and
environmental remediation and cleanup obligations were known or
considered probable and could be reasonably estimated. As of
December 31, 2009 and September 30, 2010,
environmental liabilities of $1.3 million and
$1.9 million, respectively, were accrued for groundwater
and soil remediation projects at our Stockton, Burley and
Anchorage terminals.
We are currently, and expect to continue, incurring expenses for
environmental cleanup at a number of our pipelines, terminals
and storage facilities. As part of the omnibus agreement, Tesoro
will indemnify us for certain of these expenses. For a further
description of the indemnification, please read Certain
Relationships and Related Party Transactions
Agreements Governing the Transactions Omnibus
Agreement beginning on page 139.
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Critical
Accounting Policies and Estimates
Our significant accounting policies are described in Note 3
to our audited financial statements included elsewhere in this
prospectus. We prepare our financial statements in conformity
with accounting principles generally accepted in the United
States of America, which requires us to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying footnotes. Actual results could
differ from those estimates. We consider the following policies
to be the most critical in understanding the judgments that are
involved in preparing our financial statements and the
uncertainties that could impact our financial condition and
results of operations.
Depreciation. We calculate depreciation
expense using the straight-line method over the estimated useful
lives of our property, plant and equipment. Because of the
expected long useful lives of the property and equipment, we
depreciate our property, plant and equipment over periods
ranging from 5 years to 30 years. Changes in the
estimated useful lives of the property and equipment could have
a material adverse effect on our results of operations.
Impairment of Long-Lived Assets. We
review property, plant and equipment and other long-lived assets
for impairment whenever events or changes in business
circumstances indicate the net book values of the assets may not
be recoverable. Impairment is indicated when the undiscounted
cash flows estimated to be generated by those assets are less
than the assets net book value. If this occurs, an
impairment loss is recognized for the difference between the
fair value and net book value. Factors that indicate potential
impairment include: a significant decrease in the market value
of the asset, operating or cash flow losses associated with the
use of the asset, and a significant change in the assets
physical condition or use. No impairments of long-lived assets
were recorded during the periods included in these financial
statements.
Accounting for Asset Retirement
Obligations. An asset retirement obligation
(ARO) is an estimated liability for the cost to retire a
tangible asset. We have recorded AROs at fair value in the
period in which we have a legal obligation to incur these costs
and can make a reasonable estimate of the fair value of the
liability. When the liability was initially recorded, the cost
was capitalized by increasing the book value of the related
long-lived tangible asset. The liability was accreted to its
estimated settlement value and the related capitalized cost was
depreciated over the assets useful life. Settlement dates
were estimated by considering past practice, industry practice,
managements intent and estimated economic lives.
Estimates of the fair value for certain AROs could not be made
as settlement dates (or range of dates) associated with these
assets were not estimable. These AROs include hazardous
materials disposal, site restoration, and removal or
dismantlement requirements associated with the closure of our
terminal facilities or pipelines, including the demolition or
removal of tanks, pipelines or other equipment.
Environmental Liabilities. Tesoro has
historically capitalized environmental expenditures that extend
the life or increase the capacity of facilities as well as
expenditures that prevent environmental contamination. Costs
that relate to an existing condition caused by past operations
and that do not contribute to current or future revenue
generation were expensed. Liabilities were recorded when
environmental assessments or remedial efforts were probable and
could be reasonably estimated. Estimates were based on the
expected timing and the extent of remedial actions required by
governing agencies and experience gained from similar sites for
which environmental assessments or remediation have been
completed. Environmental expenses were recorded primarily in
operating and maintenance expense. Please read
Certain Relationships and Related Party
Transactions Agreements Governing the
Transactions Omnibus Agreement beginning on
page 139 for further information on Tesoros agreement
to indemnify us for certain environmental matters.
Contingencies. In the ordinary course
of business, we become party to lawsuits, administrative
proceedings and governmental investigations, including
environmental, regulatory and other matters. Large, and
sometimes unspecified, damages or penalties may be sought from
us in some matters for which the likelihood of loss may be
possible but the amount of loss is not currently estimable. As
of December 31, 2009 and September 30, 2010, we did
not have any outstanding lawsuits, administrative proceedings or
governmental investigations.
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Imbalances. We experience volume gains
and losses, which we sometimes refer to as imbalances, within
our pipelines, terminals and storage facilities due to pressure
and temperature changes, evaporation and variances in meter
readings and in other measurement methods. Historically, we used
quoted market prices of the applicable commodity as of the
relevant reporting date to value amounts related to imbalances.
At December 31, 2007, 2008 and 2009, we did not have any
imbalance liabilities or assets on our combined balance sheets,
as any imbalances were settled prior to the end of the
respective reporting period. Under the tariffs on our High
Plains pipeline system, we will be permitted to retain 0.2% of
the crude oil shipped on our High Plains pipeline system, and
Tesoro will bear any crude oil volume losses in excess of that
amount. Under our master terminalling services agreement, we
will be permitted to retain 0.25% of the refined products we
handle at our Anchorage, Boise, Burley, Stockton and Vancouver
terminals for Tesoro, and we will bear any refined product
volume losses in excess of that amount. The value of any crude
oil or refined product imbalance gains or losses resulting from
these contractual provisions will be determined by reference to
the monthly average reference price for the applicable
commodity, less a specified discount. For all of our other
terminals, and under our other commercial agreements with
Tesoro, we will have no obligation to measure volume gains and
losses, and will have no liability for physical losses.
Qualitative
and Quantitative Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in
market rates and prices. As we do not generally own the refined
product or crude oil that is shipped through our pipelines,
distributed through our terminals, or held in our storage
facilities, and because all of our commercial agreements with
Tesoro, other than our master terminalling services agreement,
require Tesoro to bear the risk of any volume loss relating to
the services we provide, we have minimal direct exposure to
risks associated with fluctuating commodity prices. In addition,
our commercial agreements with Tesoro are indexed to inflation
and contain fuel surcharge provisions that are designed to
substantially mitigate our exposure to increases in diesel fuel
prices and the cost of other supplies used in our business. We
do not intend to hedge our exposure to commodity risk related to
imbalance gains and losses or to diesel fuel or other supply
costs.
Debt that we incur under our revolving credit facility will bear
interest at a variable rate and will expose us to interest rate
risk. Unless interest rates increase significantly in the
future, our exposure to interest rate risk should be minimal. We
may use certain derivative instruments to hedge our exposure to
variable interest rates. We do not currently have in place any
hedges or forward contracts.
Seasonality
The crude oil and refined product throughput in our pipelines
and terminals is directly affected by the level of supply and
demand for crude oil and refined products in the markets served
directly or indirectly by our assets. However, many effects of
seasonality on our revenues will be substantially mitigated
through the use of our fee-based commercial agreements with
Tesoro that include minimum volume commitments.
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BUSINESS
Overview
We are a fee-based, growth-oriented Delaware limited partnership
recently formed by Tesoro to own, operate, develop and acquire
crude oil and refined products logistics assets. Our logistics
assets are integral to the success of Tesoros refining and
marketing operations and are used to gather, transport and store
crude oil and to distribute, transport and store refined
products. Our initial assets consist of a crude oil gathering
system in the Bakken Shale/Williston Basin area of North Dakota
and Montana, eight refined products terminals in the midwestern
and western United States and a crude oil and refined products
storage facility and five related short-haul pipelines in Utah.
We intend to expand our business through organic growth,
including constructing new assets and increasing the utilization
of our existing assets, and by acquiring assets from Tesoro and
third parties. Although Tesoro historically operated its
logistics assets primarily to support its refining and marketing
business, it has recently announced its intent to grow its
logistics operations in order to maximize the integrated value
of its assets within the midstream and downstream value chain.
In support of this strategy, Tesoro has formed us to be the
primary vehicle to grow its logistics operations. In order to
provide us with initial acquisition opportunities, Tesoro has
granted us a right of first offer on certain logistics assets
that it will retain following this offering.
We generate revenue by charging fees for gathering, transporting
and storing crude oil and for distributing, transporting and
storing refined products. Since we generally do not own any of
the crude oil or refined products that we handle and do not
engage in the trading of crude oil or refined products, we have
minimal direct exposure to risks associated with fluctuating
commodity prices, although these risks indirectly influence our
activities and results of operations over the long term.
Following the closing of this offering, substantially all of our
revenue will be derived from Tesoro, primarily under various
long-term, fee-based commercial agreements that include minimum
volume commitments. We believe these commercial agreements will
provide us with a stable base of cash flows.
Our
Assets and Operations
Our assets and operations are organized into the following two
segments:
Crude Oil Gathering. Our common carrier
crude oil gathering system in North Dakota and Montana, which we
refer to as our High Plains system, includes an approximate
23,000 bpd truck-based crude oil gathering operation and
approximately 700 miles of pipeline and related storage
assets with the current capacity to deliver up to
70,000 bpd to Tesoros Mandan, North Dakota refinery.
This system gathers and transports to Tesoros Mandan
refinery crude oil produced from the Bakken Shale/Williston
Basin area.
Terminalling, Transportation and
Storage. We own and operate eight refined
products terminals with aggregate truck and barge delivery
capacity of approximately 229,000 bpd. The terminals
provide product distribution primarily for refined products
produced at Tesoros refineries located in Los Angeles and
Martinez, California; Salt Lake City, Utah; Kenai, Alaska;
Anacortes, Washington; and Mandan, North Dakota. We also own and
operate assets that exclusively support Tesoros Salt Lake
City refinery, including a refined products and crude oil
storage facility with total shell capacity of approximately
878,000 barrels and three short-haul crude oil supply
pipelines and two short-haul refined product delivery pipelines
connected to third-party interstate pipelines. Our terminalling,
transportation and storage assets serve regions that are
expected to experience growth in refined product demand at a
rate greater than the national average for the United States
over the next 25 years, according to the EIA.
For the year ended December 31, 2009, we had pro forma
EBITDA of approximately $51.5 million and pro forma net
income of approximately $40.3 million. Tesoro accounted for
93% of our pro forma EBITDA and 91% of our pro forma net income
for that period. For the year ended December 31, 2009, we
had pro forma revenue of $48.8 million from our crude oil
gathering segment and $42.1 million from our terminalling,
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transportation and storage segment. Please read Summary
Historical and Pro Forma Combined Financial and Operating
Data beginning on page 13 for the definition of the term
EBITDA and a reconciliation of EBITDA to our most directly
comparable financial measures, calculated and presented in
accordance with U.S. GAAP.
Our
Commercial Agreements with Tesoro
In connection with the closing of this offering, we will enter
into various long term, fee-based commercial agreements with
Tesoro under which we will provide various pipeline
transportation, trucking, terminal distribution and storage
services to Tesoro, and Tesoro will commit to provide us with
minimum monthly throughput volumes of crude oil and refined
products. We believe the terms and conditions of these
agreements, as well as our other initial agreements with Tesoro
described below under Other Agreements with
Tesoro, are generally no less favorable to either party
than those that could have been negotiated with unaffiliated
parties with respect to similar services. These commercial
agreements with Tesoro will include:
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a 10-year
pipeline transportation services agreement under which Tesoro
will pay us fees for gathering and transporting crude oil on our
High Plains pipeline system;
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a two-year trucking transportation services agreement under
which Tesoro will pay us fees for crude oil trucking and related
services and scheduling and dispatching services that we provide
through our High Plains truck-based crude oil gathering
operation;
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a 10-year
master terminalling services agreement under which Tesoro will
pay us fees for providing terminalling services at our eight
refined products terminals;
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a 10-year
pipeline transportation services agreement under which Tesoro
will pay us fees for transporting crude oil and refined products
on our five Salt Lake City short-haul pipelines; and
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a 10-year
storage and transportation services agreement under which Tesoro
will pay us fees for storing crude oil and refined products at
our Salt Lake City storage facility and transporting crude oil
and refined products between the storage facility and
Tesoros Salt Lake City refinery through interconnecting
pipelines on a dedicated basis.
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Each of these agreements, other than the storage and
transportation services agreement, will contain minimum
throughput commitments. Tesoros fees under the storage and
transportation services agreement will be for the use of the
existing capacity at our Salt Lake City storage facility and on
our pipelines connecting the storage facility to Tesoros
Salt Lake City refinery. The fees under each agreement are
indexed for inflation and, except for the trucking
transportation services agreement, these agreements give Tesoro
the option to renew for two five-year terms. The trucking
transportation services agreement will renew automatically for
up to four successive two-year terms unless earlier terminated
by us or Tesoro no later than three months prior to the
expiration of any term. For additional information about the
commercial agreements, including Tesoros ability to reduce
or terminate its obligations in the event of a force majeure
that affects us, please read Certain Relationships and
Related Party Transactions Agreements Governing the
Transactions Commercial Agreements with Tesoro
beginning on page 143. For additional information regarding
certain risks associated with these commercial agreements,
please also see each of the following risk factors under
Risk Factors Risk Related to our
Business beginning on page 17:
Tesoro accounts for substantially all of our
revenues. If Tesoro changes its business strategy, is unable to
satisfy its obligations under our commercial agreements for any
reason or significantly reduces the volumes transported through
our pipelines or handled at our terminals, our revenues would
decline and our financial condition, results of operations, cash
flows and ability to make distributions to our unitholders would
be adversely affected; Tesoro may
suspend, reduce or terminate its obligations under our
commercial agreements in some circumstances, which would have a
material adverse effect on our financial condition, results of
operations, cash flows and ability to make distributions to
unitholders; and If Tesoro satisfies
only its minimum obligations under, or if we are unable to renew
or extend, the various commercial agreements we have with
Tesoro, our ability to make distributions to our unitholders
will be reduced.
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For the year ended December 31, 2009, on a pro forma basis,
assuming Tesoro paid fees for only the minimum volumes under
each of these commercial agreements, our total revenue would
have been $80.5 million as compared to pro forma revenue
for that period of $91.0 million.
Other
Agreements with Tesoro
In addition to the commercial agreements described above, we
will also enter into the following agreements with Tesoro:
Omnibus Agreement. Upon the closing of
this offering, we will enter into an omnibus agreement with
Tesoro under which Tesoro will agree not to compete with us
under certain circumstances and will grant us a right of first
offer to acquire certain of its retained logistics assets,
including certain terminals, pipelines, docks, storage
facilities and other related assets located in California,
Alaska and Washington. The omnibus agreement will also address
our payment of a fee to Tesoro for the provision of various
general and administrative services, Tesoros reimbursement
of us for certain maintenance capital expenditures and
Tesoros indemnification of us for certain matters,
including environmental, title and tax matters. Please read
Certain Relationships and Related Party
Transactions Agreements Governing the
Transactions Omnibus Agreement beginning on
page 139 and Risk Factors Risks Inherent
in an Investment in Us Our general partner and its
affiliates, including Tesoro, have conflicts of interest with us
and limited fiduciary duties, and they may favor their own
interests to the detriment of us and our common unitholders.
Additionally, we have no control over Tesoros business
decisions and operations, and Tesoro is under no obligation to
adopt a business strategy that favors us on page 32.
Operational Services Agreement. Upon
the closing of this offering, we will enter into an operational
services agreement with Tesoro under which we will reimburse
Tesoro for the provision of certain operational services to us
in support of our pipelines, terminals and storage facility, and
under which we will also pay Tesoro an annual fee for
operational services performed by certain of Tesoros
field-level employees at our Mandan, North Dakota terminal and
our Salt Lake City, Utah storage facility. Please read
Certain Relationships and Related Party
Transactions Agreements Governing the
Transactions Operational Services Agreement
beginning on page 143.
Business
Strategies
Our primary business objectives are to maintain stable cash
flows and to increase our quarterly cash distribution per unit
over time. We intend to accomplish these objectives by executing
the following strategies:
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Focus on Stable, Fee-Based Business. We
intend to focus on opportunities to provide committed, fee-based
logistics services to Tesoro and third parties. We believe that
our long-term fee-based contracts with Tesoro will enhance the
stability of our cash flows and minimize our direct exposure to
commodity price fluctuations.
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Pursue Attractive Organic Expansion
Opportunities. We intend to evaluate
investment opportunities to make capital investments to expand
our existing asset base that may arise from the growth of
Tesoros refining and marketing business or from increased
third-party activity in our areas of operations. We intend to
focus on organic growth opportunities that complement our
existing asset base or provide attractive returns in new areas
within our geographic footprint. For example, with expected
production growth in the Bakken Shale/Williston Basin area, we
are evaluating opportunities to expand our High Plains system to
provide critical takeaway capacity for crude oil producers. We
will also evaluate opportunities to expand our terminal
operations to meet rising demand in Tesoros core areas of
operation. As a result of our strategic relationship with
Tesoro, if Tesoro requires expanded logistics infrastructure and
capabilities to support its refining and marketing operations,
we expect to be favorably positioned to construct and operate
the necessary logistics assets.
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Grow Through Strategic Acquisitions. We
plan to pursue accretive acquisitions of complementary assets
from Tesoro as well as from third parties. In order to provide
us with initial acquisition opportunities, Tesoro has granted us
a right of first offer to acquire certain logistics assets that
it will retain following this
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offering. As Tesoro executes its growth strategy, which may
include the acquisition of additional refinery assets, we
believe we are well-positioned to acquire any associated
logistics assets as those opportunities arise. Our third-party
acquisition strategy will be focused on logistics assets in the
western half of the United States where we believe our knowledge
of the market will provide us with a competitive advantage. We
intend to pursue these third-party acquisition opportunities
independently as well as jointly with Tesoro.
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Optimize Existing Asset Base and Pursue Third-Party
Volumes. We will seek to enhance the
profitability of our existing assets by pursuing opportunities
to add Tesoro and third-party volumes, improve operating
efficiencies and increase utilization. Historically, Tesoro has
operated its logistics assets primarily in support of its
refining and marketing business. As a result, we have available
capacity on our High Plains pipeline system and in many of our
refined product terminals where we believe we have the ability
to increase utilization with minimal capital investment. On the
High Plains pipeline system, we are evaluating several
opportunities to increase utilization, including receipt and
delivery interconnections with third-party pipeline systems. As
a result of the strategic locations of many of our refined
product terminals, we are also evaluating the potential demand
for increased access to our terminals where we have available
capacity. We are also exploring various strategic initiatives to
improve operating efficiencies at some of our terminals that
would increase capacity for additional volumes from Tesoro and
potential third parties.
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Competitive
Strengths
We believe we are well positioned to achieve our primary
business objectives and execute our business strategies based on
the following competitive strengths:
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Long-Term, Fee-Based
Contracts. Initially, we will generate a
substantial majority of our revenue under long-term, fee-based
contracts with Tesoro. We believe that these contracts will
promote cash flow stability and minimize our direct exposure to
commodity price fluctuations, although these risks indirectly
influence our activities and results of operations over the long
term. Under these contracts, Tesoro has committed to ship a
minimum volume of crude oil on our High Plains system, to
deliver a minimum volume of refined products through our
terminals, to transport a minimum volume of crude oil and
refined products on our five short-haul pipelines in Salt Lake
City and to store crude oil and refined products at our Salt
Lake City storage facility and transport crude oil and refined
products between the storage facility and Tesoros Salt
Lake City refinery on a dedicated basis. These contracts contain
fees that are indexed for inflation.
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Relationship with Tesoro. We have a
strategic relationship with Tesoro, which we believe will
provide us with a stable base of cash flows as well as
opportunities for growth. All of our logistics assets are
directly linked to Tesoros refining and marketing
operations. Our High Plains system currently delivers all of the
crude oil processed by Tesoros Mandan, North Dakota
refinery and our refined product terminals provide critical
storage and distribution infrastructure for six of Tesoros
seven refineries. We will have a right of first offer to acquire
certain logistics assets, with a gross book value of
approximately $240.0 million, that will be retained by
Tesoro and, following this offering, we are well-positioned to
partner with Tesoro in the construction or acquisition of new
logistics infrastructure associated with Tesoros refining
and marketing growth initiatives. We also expect to benefit from
Tesoros extensive operational, commercial and technical
expertise, as well as its industry relationships throughout the
midstream and downstream value chain, as we look to optimize and
expand our existing asset base.
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Assets Positioned in Areas of High
Demand. Our High Plains system is located in
the Williston Basin, one of the most prolific onshore oil
producing basins in North America, and gathers and transports
production from the Bakken Shale formation. Our terminalling,
transportation and storage assets are located in markets that
the EIA projects will experience growth in demand for refined
products. The Bakken Shale, which is within the Williston Basin,
has emerged as one of the most attractive resource plays in
North America, with estimated technically recoverable reserves
of approximately 3.65 billion
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barrels (according to United States Geological Survey estimates
published in April 2008). We expect producers to invest
substantial capital to develop the Bakken Shale and other
emerging plays in the Williston Basin. A development of this
scale will require substantial investment in pipeline and
storage infrastructure, and we believe that our existing
footprint will give us a strategic advantage to capitalize on
this opportunity. In addition, most of our terminalling assets
are located in the Mountain and Pacific regions of the United
States, which the EIA expects to see greater growth rate in
refined products demand than the U.S. national average over the
next 25 years, with the Mountain region expected to have
the highest refined products demand growth rate of any
U.S. region over the same period. We believe there is an
opportunity to capitalize on this increased demand for refined
products in our markets by optimizing our existing available
capacity and pursuing acquisitions and other growth
opportunities.
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Experienced Management Team. Our
management team has significant experience in the management and
operation of logistics assets and the execution of expansion and
acquisition strategies. Our management team includes some of the
most senior officers of Tesoro, who average over 27 years
of experience in the energy industry.
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Financial Flexibility. We believe we
will have the financial flexibility to execute our growth
strategy through the available capacity under our revolving
credit facility and our ability to access the debt and equity
capital markets. At the close of this offering, we expect to
have approximately $100.0 million of borrowing capacity
under our revolving credit facility.
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Our
Relationship with Tesoro
One of our principal strengths is our relationship with Tesoro.
Tesoro is currently the third largest independent refiner in the
United States by crude capacity and owns and operates seven
refineries that serve markets in Alaska, Arizona, California,
Hawaii, Idaho, Minnesota, Nevada, North Dakota, Oregon, Utah,
Washington and Wyoming. Tesoro also sells transportation fuels
and convenience products in 15 states through a network of
over 800 retail stations, primarily under the
Tesoro®,
Mirastar®,
Shell®,
and USA
Gasolinetm
brands. For the year ended December 31, 2009, Tesoro had
consolidated revenues of approximately $16.9 billion, an
operating loss of $57 million, a net loss of
$140 million and, as of December 31, 2009, had
consolidated gross assets of approximately $8.1 billion.
Tesoro Corporations common stock trades on the NYSE under
the symbol TSO.
Following the completion of this offering, Tesoro will continue
to own and operate substantial crude oil and refined products
logistics assets. As of September 30, 2010, the aggregate
gross book value of the logistics assets to be contributed to us
by Tesoro in connection of the closing of this offering was
approximately $190.0 million, and the aggregate gross book
value of Tesoros retained logistics assets on which we
have a right of first offer was approximately
$240.0 million. Please read Certain Relationships and
Related Party Transactions Agreements Governing the
Transactions Omnibus Agreement beginning on
page 139. Tesoro will also retain a significant interest in
us through its ownership of a %
limited partner interest, a 2.0% general partner interest and
all of our incentive distribution rights. Given Tesoros
significant ownership in us following this offering and its
intent to use us as the primary vehicle to grow its logistics
operations, we believe Tesoro will be motivated to promote and
support the successful execution of our business strategies. In
particular, we believe it will be in Tesoros best interest
for it to contribute additional assets to us over time and to
facilitate our organic growth opportunities and accretive
acquisitions from third parties.
All of our operations are strategically located within
Tesoros refining and marketing supply chain and, following
the closing of this offering, a substantial majority of our
revenues will be generated by providing services to
Tesoros refining and marketing businesses under various
commercial agreements that we will enter into with Tesoro at the
closing of this offering and that are described below. For
additional information about these commercial agreements, please
read Certain Relationships and Related Party
Transactions Agreements Governing the
Transactions Commercial Agreements with Tesoro
beginning on page 143.
While our relationship with Tesoro and its subsidiaries is a
significant strength, it is also a source of potential
conflicts. For example, Tesoro has an economic incentive not to
cause us to, and in fact may
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determine not to cause us to, seek higher tariff rates or
terminalling fees, even if such higher rates or terminalling
fees would reflect rates that could be obtained in arms
length third-party transactions. Additionally, because of
Tesoros quality preferences for crude oil refined at the
Mandan refinery, Tesoro has an economic incentive to limit the
amount of lower-quality crude oil gathered by our High Plains
system, which may limit our ability to generate third-party
revenue with this asset. Please read Conflicts of Interest
and Fiduciary Duties beginning on page 152.
Our Asset
Portfolio
Crude Oil
Gathering
Industry Overview. Crude oil gathering
assets provide the link between crude oil production gathered at
the well site or nearby collection points and crude oil
terminals and storage facilities, long-haul crude oil pipelines
and refineries. Crude oil gathering assets generally consist of
a network of smaller diameter pipelines that are connected
directly to the well site or central receipt points delivering
into larger diameter trunk lines. Pipeline transportation is
generally the lowest cost option for transporting crude oil.
Trucking operations are often used to supplement pipeline
systems by gathering and transporting crude oil production from
remote well sites that are not directly connected to pipeline
gathering infrastructure. Competition in the crude oil gathering
industry is typically regional and based on proximity to crude
oil producers, as well as access to viable delivery points.
Overall demand for gathering services in a particular area is
generally driven by crude oil producer activity in the area.
Overview of the Williston Basin and the Bakken Shale
Formation. The Williston Basin is spread
across North Dakota, South Dakota, Montana and parts of southern
Canada. The basin contains oil and natural gas in numerous
producing zones including the Bakken Shale, which the United
States Geological Survey classified in April 2008 as the largest
continuous oil accumulation ever assessed by it in
the continental United States, with approximately
3.65 billion barrels of technically recoverable reserves
according to United States Geological Survey estimates
published in April 2008. Commercial oil production activities
began in the Williston Basin in the 1950s with the first well
drilled in 1953. Since then, a significant amount of crude oil
has been produced from the basin, primarily from conventional
oil accumulations. The Williston Basin is now one of the most
actively drilled resource plays in North America. The Bakken
Shale in particular has recently experienced increased activity,
which we believe is driven by relatively attractive economics
resulting from modern drilling and completion technologies, its
high-quality crude oil and a favorable crude oil price
environment. For example, according to the North Dakota Pipeline
Authority, the rig count in North Dakota has increased from 91
as of December 2008 to 163 as of December 2010, a 79%
increase. We believe that this increase was primarily a result
of activity in the Bakken Shale, and we also expect more
activity in the more speculative
Three Forks/Sanish
formation within the Williston Basin. Producers continue to
invest significant capital in the development of the
Williston Basin, with one major oil producer having
announced that it plans to spend as much as $1.0 billion
per year over the next five years in the Bakken Shale and Three
Forks/Sanish formations. As the region continues to develop, we
believe there will be an increasing need for additional crude
oil gathering and storage infrastructure.
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The following map shows the general location of the Williston
Basin and the Bakken Shale.
The following graph shows the historical and forecasted crude
oil production from the Bakken Shale:
Source: PIRA Energy Group, November 2010
101
Our High
Plains System
Overview. Our High Plains system
consists of our crude oil pipelines and trucking operations in
the Bakken Shale/Williston Basin area of Montana and North
Dakota. Our High Plains system gathers and transports crude oil
from various production locations in this area for
transportation to Tesoros Mandan refinery. The following
table details the average aggregate daily number of barrels of
crude oil transported on our High Plains system in each of the
periods indicated. Tesoro was the shipper of substantially all
of these barrels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended
|
|
|
Year Ended December 31,
|
|
September 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Crude oil transported through (bpd):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipelines(1)
|
|
|
52,893
|
|
|
|
54,639
|
|
|
|
56,232
|
|
|
|
54,737
|
|
|
|
52,806
|
|
|
|
47,954
|
|
Trucking
|
|
|
18,300
|
|
|
|
17,759
|
|
|
|
18,560
|
|
|
|
23,752
|
|
|
|
22,963
|
|
|
|
23,386
|
|
|
|
|
(1) |
|
Also includes barrels that were delivered onto our High Plains
pipeline system by truck. |
Pipeline Operations. We own and operate
a common carrier crude oil gathering and transportation system
consisting of approximately 700 miles of gathering and
trunk lines in Montana and North Dakota, which gather and
transport crude oil from the Bakken Shale/Williston Basin area
and deliver it to Tesoros refinery in Mandan, North
Dakota. We also have the ability to transport crude oil to
Tesoros Mandan refinery from Canada on this system through
third-party pipeline connections. Tesoro is currently the
primary shipper on our High Plains pipeline system, supplying
all of the crude oil transported and processed at Tesoros
Mandan refinery. Tesoro acquired the High Plains system in 2001
in connection with Tesoros purchase of its Mandan refinery
from affiliates of BP. The High Plains pipeline system, which
has current capacity to transport up to approximately
70,000 bpd of crude oil to Tesoros Mandan refinery,
consists of the following assets:
|
|
|
|
|
approximately 143 miles of up to six-inch gathering and
injection lines in western North Dakota and eastern Montana;
|
|
|
|
approximately 474 miles of up to
12-inch
trunk lines in Montana and North Dakota that run to our Dunn
Center storage facility in North Dakota, the final aggregation
point on our system for shipments to Tesoros Mandan
refinery; and
|
|
|
|
approximately 88 miles of
16-inch
trunk lines from our Dunn Center storage facility to
Tesoros Mandan refinery.
|
The High Plains system utilizes 24 crude oil storage and
breakout tanks with a total combined capacity of
482,000 barrels, 13 proprietary and six third-party truck
receipt locations, 44 proprietary and eight third-party pipeline
gathering receipt stations (also known as collection points) and
11 relay stations to deliver crude oil to Tesoros Mandan
refinery. The system also has intake connection points with the
Bridger pipeline at Richey, Montana, the Enbridge Producers
Pipeline at Ramburg, North Dakota and Enbridges currently
idle pipeline at Portal, North Dakota, at the Canadian border.
For more information about Tesoros Mandan refinery, please
read Tesoros Refining
Operations Mandan, North Dakota Refinery
beginning on page 112.
Trucking Operations. As part of our
High Plains system, we manage a truck-based crude oil gathering
operation. This operation uses a combination of proprietary and
third-party trucks, all of which we dispatch and schedule. These
trucks gather an average of approximately 23,000 bpd of
crude oil from well sites or nearby collection points in the
Bakken Shale/Williston Basin area and deliver it onto our High
Plains pipeline system through 13 proprietary truck unloading
facilities. Tesoro and local producers contact us when they have
crude oil to transport from the well site or nearby collection
points to a pipeline receiving point. We provide
pick-up and
delivery services, and also provide accounting and data services
that enable producers to receive payment for their crude oil
sales to Tesoro. We charge
per-barrel
tariffs and service fees for picking up and
102
transporting crude oil and for dispatching and scheduling
proprietary and third-party trucks, and for use of our field
unloading tanks. The demand for our trucking services is driven
by the quantity of crude oil that Tesoro purchases directly at
production locations that are not connected to existing
gathering lines.
Growth Opportunities. We believe there
are a number of potential growth opportunities that capitalize
on the strategic position of our High Plains system within the
Bakken Shale/Williston Basin area, ranging from projects with
modest capital requirements to larger greenfield projects that
would require a more significant investment to develop. For
example, we could increase the volume of third-party crude oil
that we ship on our system by making outlet connections to
several existing third-party pipelines, including the Enbridge
pipeline at the Canada/North Dakota border, the Enbridge
Producers Pipeline at Ramburg, North Dakota, the Bridger
pipeline at Richey, Montana, the Belle Fourche pipeline at
Fritz, North Dakota, and the Little Missouri pipeline at Treetop
and Fryburg, North Dakota. These connections would require the
negotiation of tariffs with shippers and interconnection
agreements with the owners of these other pipelines, but could
be accomplished with a relatively small capital investment. We
could also increase the throughput capacity of our High Plains
system through the addition of pumping capacity, which would
also require a relatively small capital investment. We are
monitoring producer activity in the Bakken Shale/Williston Basin
area to identify opportunities to construct additional gathering
infrastructure. Together with Tesoro, we are also presently
engaged in discussions to expand our pipeline gathering network
to new and proposed drilling locations where these producers
plan to conduct extensive Bakken Shale development operations.
While these pipeline expansions may displace volumes we
presently gather by truck, pipeline transportation is generally
a lower cost, higher margin service and we expect overall
volumes on our High Plains pipeline system to increase as a
result of these pipeline expansions. We are also evaluating the
potential to construct a rail facility at Tesoros Mandan
refinery that would load crude oil volumes shipped on our High
Plains system in excess of the Mandan refinerys capacity
onto rail cars for shipment to other locations in the United
States.
The following map shows the locations of the pipelines in our
High Plains system and related connection points to third-party
pipelines.
Terminalling,
Transportation and Storage
Industry
Overview
U.S. Refined Products
Market. Refined products, such as jet fuel,
gasoline and diesel fuel are all sources of energy derived from
crude oil. According to data compiled by the EIA, refined
products accounted for approximately 37% of the nations
total annual energy consumption in 2008. Growth in petroleum
consumption is expected to generally keep pace with growth in
overall energy consumption over the next
103
25 years. Growth in petroleum consumption will be driven by
increased demand for diesel fuel, but is projected to lag
slightly behind overall energy consumption due to increased
renewable fuel consumption and new efficiency standards.
Additionally, while the EIA expects overall petroleum
consumption in the United States to grow annually by 0.5%
between 2010 and 2035, the EIA estimates expected growth in our
core areas of operation (the midwestern and western United
States) will be between 0.7% and 1.0% over the same period.
Terminalling, Transportation and
Storage. Terminalling and storage facilities
and related short-haul pipelines complement crude oil
transportation systems, refinery operations and refined products
transportation, and play a key role in moving refined products
to the end-user market. Terminals are generally used for
distribution, storage, inventory management, and blending to
achieve specified grades of gasoline, filtering of jet fuel,
injection of additives, including ethanol, and other ancillary
services. Typically, refined product terminals are equipped with
automated truck loading facilities commonly referred to as
truck racks that operate 24 hours a day and
often include storage tanks. These automated truck loading
facilities provide for control of security, allocations, credit
and carrier certification by remote input of data by customers.
Trucks pick up refined products at the truck racks and transport
them to commercial, industrial and retail end-users.
Additionally, some terminals use rail cars or barges to deliver
refined products from and receive refined products into the
terminal. During the loading process, additives may be
introduced into refined products by computer-controlled
injection systems that enable the refined products being loaded
to conform to governmental regulations and individual customer
requirements.
Our
Terminals, Storage Facilities and Related
Pipelines
Overview. Our eight refined product
terminals receive refined products from pipelines connected to
Tesoros Los Angeles, Golden Eagle, Salt Lake City, Kenai,
Mandan and Anacortes refineries and provide storage and truck
loading services to Tesoro and third parties, who in turn
deliver refined products to retail outlets and other end-users.
We also own a storage facility that receives and stores refined
products and crude oil for Tesoros Salt Lake City refinery
and five related crude oil and refined products short-haul
pipelines.
We generate most of our refined product terminal revenues from
fees on committed throughput volumes by customers for
transferring refined products from the terminal to trucks and
barges. We generate pipeline transportation revenue by
transporting crude oil for Tesoro from the terminus points of
the Chevron and Plains All American crude oil pipelines to our
Salt Lake City storage facility on our three short-haul crude
oil pipelines, and by transporting refined products for Tesoro
from its Salt Lake City refinery to the origin of Chevrons
Northwest Pipeline on our two short-haul refined products
pipelines. In addition to terminalling and transportation fees,
we generate revenues by charging our customers fees for
ancillary services, including ethanol blending and additive
injection, and, at our Vancouver and Anchorage terminals, for
barge loading fees. We also generate storage revenue for storing
crude oil and refined products for Tesoro in support of
Tesoros Salt Lake City refinery. Under the commercial
agreements that we will enter into with Tesoro at the closing of
this offering, Tesoro will initially account for substantially
all of our refined product terminal revenues.
Our refined product terminals are supplied by both Tesoro-owned
and third-party common carrier pipelines, as well as by
pressurized feed directly from Tesoro refineries, and, in some
cases, by truck or barge. For the year ended December 31,
2009, gasoline represented approximately 71% of the total volume
of refined products distributed through our refined product
terminals and distillates represented approximately 29%.
104
The tables below sets forth the total average throughput for our
refined products terminals and our Salt Lake City pipelines in
each of the periods presented.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Refined products terminalled for: (bpd)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
64,771
|
|
|
|
70,039
|
|
|
|
91,340
|
|
|
|
102,670
|
|
|
|
103,454
|
|
|
|
104,148
|
|
Third parties
|
|
|
11,432
|
|
|
|
9,713
|
|
|
|
11,965
|
|
|
|
10,198
|
|
|
|
9,681
|
|
|
|
9,816
|
|
Refined products terminalled at (bpd):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles, California
|
|
|
|
|
|
|
|
|
|
|
19,702
|
|
|
|
32,696
|
|
|
|
33,603
|
|
|
|
35,393
|
|
Stockton, California
|
|
|
6,885
|
|
|
|
6,851
|
|
|
|
7,663
|
|
|
|
7,053
|
|
|
|
7,160
|
|
|
|
8,595
|
|
Salt Lake City, Utah(1)
|
|
|
20,836
|
|
|
|
24,006
|
|
|
|
25,236
|
|
|
|
26,074
|
|
|
|
26,802
|
|
|
|
25,763
|
|
Anchorage, Alaska
|
|
|
15,780
|
|
|
|
16,433
|
|
|
|
15,358
|
|
|
|
14,704
|
|
|
|
14,914
|
|
|
|
15,726
|
|
Mandan, North Dakota
|
|
|
7,102
|
|
|
|
7,800
|
|
|
|
9,244
|
|
|
|
9,213
|
|
|
|
9,300
|
|
|
|
9,126
|
|
Vancouver, Washington(2)
|
|
|
11,027
|
|
|
|
10,204
|
|
|
|
12,968
|
|
|
|
10,824
|
|
|
|
10,089
|
|
|
|
8,557
|
|
Boise, Idaho
|
|
|
9,776
|
|
|
|
9,934
|
|
|
|
9,039
|
|
|
|
8,295
|
|
|
|
7,598
|
|
|
|
7,341
|
|
Burley, Idaho
|
|
|
4,797
|
|
|
|
4,524
|
|
|
|
4,095
|
|
|
|
4,009
|
|
|
|
3,669
|
|
|
|
3,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
76,203
|
|
|
|
79,752
|
|
|
|
103,305
|
|
|
|
112,868
|
|
|
|
113,135
|
|
|
|
113,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (barrels, in thousands)
|
|
|
27,814
|
|
|
|
29,109
|
|
|
|
37,706
|
|
|
|
41,310
|
|
|
|
41,294
|
|
|
|
31,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes transported through (bpd):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-haul crude oil pipelines
|
|
|
44,661
|
|
|
|
52,252
|
|
|
|
46,776
|
|
|
|
46,457
|
|
|
|
42,561
|
|
|
|
39,103
|
|
Short-haul refined products pipelines
|
|
|
17,655
|
|
|
|
16,163
|
|
|
|
13,619
|
|
|
|
14,437
|
|
|
|
14,381
|
|
|
|
13,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
62,316
|
|
|
|
68,415
|
|
|
|
60,395
|
|
|
|
60,894
|
|
|
|
56,942
|
|
|
|
52,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include our Salt Lake City storage facility or our
interconnecting pipelines between the storage facility and
Tesoros Salt Lake City refinery. |
|
(2) |
|
Average results for the nine months ended September 30,
2010 are lower due to the suspension of operations at
Tesoros Anacortes refinery following a fire at that
refinery in April 2010. |
The following table outlines the locations of our refined
products terminals and their storage capacities, supply source,
mode of delivery and maximum daily available capacity for the
year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
Storage
|
|
|
|
|
|
Daily Available
|
|
|
|
|
Capacity
|
|
|
|
Mode of
|
|
Terminalling
|
Terminal Location
|
|
Products Handled
|
|
(Barrels)(1)
|
|
Supply Source
|
|
Delivery
|
|
Capacity (bpd)
|
|
Los Angeles, California(2)
|
|
Gasoline; Diesel
|
|
|
6,000
|
|
|
Refinery
|
|
Truck
|
|
|
48,000
|
|
Stockton, California
|
|
Gasoline; Diesel
|
|
|
67,000
|
|
|
Refinery
|
|
Truck
|
|
|
9,400
|
|
Salt Lake City, Utah(2)(4)
|
|
Gas, Diesel, Jet Fuel
|
|
|
18,000
|
|
|
Refinery
|
|
Truck
|
|
|
42,000
|
|
Anchorage, Alaska
|
|
Gasoline, Diesel, Jet Fuel
|
|
|
883,000
|
|
|
Pipeline; Barge
|
|
Truck; Barge;
|
|
|
63,000
|
(3)
|
|
|
|
|
|
|
|
|
|
|
Pipeline
|
|
|
|
|
Mandan, North Dakota(2)
|
|
Gasoline, Diesel, Jet Fuel
|
|
|
|
|
|
Refinery
|
|
Truck
|
|
|
22,500
|
|
Vancouver, Washington
|
|
Gasoline; Diesel
|
|
|
298,000
|
|
|
Pipeline; Barge
|
|
Truck; Barge
|
|
|
19,600
|
(5)
|
Boise, Idaho
|
|
Gasoline, Diesel, Jet Fuel
|
|
|
254,000
|
|
|
Pipeline
|
|
Truck
|
|
|
22,500
|
|
Burley, Idaho
|
|
Gasoline; Diesel
|
|
|
147,000
|
|
|
Pipeline
|
|
Truck
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
1,673,000
|
|
|
|
|
|
|
|
239,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
(1) |
|
Includes storage capacity for refined products and ethanol only;
excludes storage for gasoline and diesel additives. |
|
(2) |
|
Supplied by pressurized pipeline feed from the associated Tesoro
refinery. |
|
|
|
(3) |
|
Maximum daily available terminalling capacity represents the
maximum amount we are permitted to sell and includes
approximately 30,000 bpd by truck, 23,000 bpd by barge
and 10,000 bpd by pipeline. |
|
|
|
(4) |
|
Does not include our Salt Lake City storage facility or our
short-haul pipelines. |
|
|
|
(5) |
|
Maximum daily available terminalling capacity represents the
maximum amount we are permitted to sell and includes
approximately 15,000 bpd by truck and 4,600 bpd by
barge. |
The following map shows the locations of our refined product
terminals:
Terminals
Los
Angeles, California Terminal
Our Los Angeles, California terminal is adjacent to
Tesoros Los Angeles refinery. Tesoro purchased this
terminal and its Los Angeles refinery from Shell in May 2007.
The terminal receives gasoline and diesel from Tesoros Los
Angeles refinery through two
12-inch
gasoline pipelines, one
12-inch
diesel pipeline, and one eight-inch gasoline pipeline.
Additives, including ethanol, are received by truck and
delivered into tanks at the terminal. Refined products received
at this terminal are sold locally by Tesoro through our four bay
truck loading rack. This terminal includes approximately
6,000 barrels of ethanol storage capacity. We do not have
refined product storage capacity at this terminal.
106
Stockton,
California Terminal
We lease our Stockton, California terminal from the Port of
Stockton under a five-year lease expiring in 2014. We may renew
the lease for up to three additional five-year terms. Tesoro
initially leased this terminal from the Port of Stockton in
1985. We receive gasoline and diesel at this terminal from
Tesoros Golden Eagle refinery, located in Martinez,
California, through Kinder Morgans SFPP Northern
California common carrier pipeline. Additionally, ethanol is
supplied directly to our truck loading rack from an adjacent
third-party terminal. This terminal has a two-bay truck loading
rack. Refined products received at this terminal are sold
locally by Tesoro through our truck loading rack. This terminal
also has seven storage tanks with 20,000 barrels of diesel
capacity, 46,000 barrels of gasoline capacity and
approximately 500 barrels of transmix capacity.
Salt
Lake City, Utah Terminal
Our Salt Lake City, Utah terminal is adjacent to Tesoros
Salt Lake City refinery. Tesoro purchased the terminal from BP
in 2001 in connection with the purchase of its Salt Lake City
refinery. The terminal has the ability to receive refined
products, including gasoline, diesel and jet fuel, from
Tesoros Salt Lake City refinery through our proprietary
interconnecting pipelines that run between the two facilities.
Refined products received at this terminal are sold locally and
regionally by Tesoro and third parties through our five-bay
truck loading rack. The terminal also has two gasoline storage
day tanks, with 17,900 barrels of capacity.
Anchorage,
Alaska Terminal
Our Anchorage, Alaska terminal sits on leased property at two
adjacent locations within the Port of Anchorage. A portion of
the terminal was built by Tesoro in 1969 on land that is leased
from Alaska Railroad Corporation through December 31, 2011.
We may renew the lease for up to three additional five-year
terms. Tesoro purchased the remainder of the terminal from
Equilon Enterprises LLC in 1999, and it sits on land leased from
the Port of Anchorage through June 30, 2014. This terminal
has the ability to receive refined products, including gasoline,
diesel and jet fuel, from Tesoros Kenai refinery through
the Tesoro Alaska Pipeline (TAPL), a state-regulated common
carrier pipeline owned by Tesoro, and from marine vessels
through the Port of Anchorage petroleum docks. The terminal also
has a rail rack that can hold and unload ten rail cars, is
equipped with two offloading pumps and is connected to an
eight-inch
pipeline that runs to the neighboring Anchorage Fueling and
Service Corporation (AFSC) jet fuel storage facility. Refined
products received at the terminal are sold locally by Tesoro and
others through two separate two-bay truck loading racks, through
third-party barges loaded at a Port of Anchorage dock or through
pipelines to the AFSC storage facilities. The terminal also has
25 storage tanks, with 251,500 barrels of gasoline
capacity, 99,000 barrels of diesel capacity,
400,200 barrels of jet fuel capacity and
118,300 barrels of AvGas (a high-octane aviation fuel)
capacity and 13,800 barrels of transmix tankage.
Mandan,
North Dakota Terminal
We own and operate a terminal located at Tesoros Mandan
refinery, which is just outside the city limits of Mandan, North
Dakota. The terminal consists of a truck loading rack located
within the refinery gates. Tesoro purchased this terminal and
its Mandan refinery from BP in 2001. The truck loading rack
consists of three light product bays and one residual fuel bay,
each connected to pipelines that transport product from the
refinery tank farm to the terminal. We do not have refined
product storage capacity at this terminal.
Vancouver,
Washington Terminal
We lease our Vancouver, Washington terminal from the Port of
Vancouver under a
10-year
lease expiring in 2016, with two
10-year
renewal options. Tesoro first leased this terminal from the Port
of Vancouver in 1985. We receive gasoline and distillates at
this terminal from Tesoros Anacortes refinery through the
Olympic common carrier pipeline. We also have access to a marine
dock owned by the Port of Vancouver under a non-preferential
berthing agreement. This berthing agreement allows us to receive
gasoline and distillates from Tesoros Anacortes refinery
and third-party sources through barge deliveries and to
transport
107
those refined products to the terminal on proprietary
interconnecting pipelines. In addition, we receive ethanol at
the terminal through railcars and trucks. Refined products
received at this terminal are sold locally by Tesoro and others
through our two-bay truck loading rack or through barges loaded
at the Port of Vancouver dock. We currently share dock
maintenance expenses with the Port of Vancouver and other users
of the dock. The terminal has a three-car ethanol rail unloading
rack. The terminal also includes six storage tanks with
160,000 barrels of diesel capacity, 130,000 barrels of
gasoline capacity and 7,400 barrels of ethanol capacity.
Boise
and Burley, Idaho Terminals
Our Idaho terminals are located in Boise and Burley. Tesoro
acquired both of these terminals in 2001 from affiliates of BP
in connection with Tesoros acquisition of its Salt Lake
City refinery. Our Boise terminal is a truck loading facility
that receives a variety of refined products from Tesoros
Salt Lake City refinery, including gasoline, diesel, and jet
fuel through Chevrons common carrier pipeline, as well as
ethanol received by truck from a transloading facility outside
Boise. Refined products received at this terminal are sold
locally by Tesoro through our truck loading rack. The truck
loading rack includes three loading bays for light products and
a fourth bay solely for off-loading ethanol. The terminal also
includes eight storage tanks, with 144,000 barrels of
gasoline capacity, 34,300 barrels of jet fuel capacity,
54,000 barrels of diesel capacity, 21,000 barrels of
ethanol capacity and 1,000 barrels of transmix capacity.
Our Burley terminal is a truck loading facility that receives
gasoline and diesel from Tesoros Salt Lake City refinery
through Chevrons common carrier pipeline. The truck
loading system includes a two bay truck loading rack. Refined
products received at this terminal are sold locally by Tesoro
through our truck loading rack. The Burley terminal also
includes five storage tanks, with 65,900 barrels of diesel
capacity and 81,000 barrels of gasoline capacity.
Storage
Facilities and Pipelines
Salt
Lake City, Utah Storage Facility and Pipelines
Our Salt Lake City, Utah crude oil and refined products storage
facility consists of 13 tanks with 878,000 barrels of shell
tank storage capacity. Tesoro purchased the storage facility and
related pipelines from BP in 2001 in connection with the
purchase of its Salt Lake City refinery. The storage tanks are
connected to Tesoros Salt Lake City refinery through our
four interconnecting pipelines that run between the two
facilities, but are not directly connected to our Salt Lake City
terminal. The storage facility supplies crude oil to
Tesoros Salt Lake City refinery and receives refined and
intermediate products, including gasoline, diesel and jet fuel,
from the refinery. The storage facility does not have any
refined products terminalling capabilities.
We also own three proprietary eight, 10 and
16-inch
short-haul crude oil pipelines, each approximately two miles
long, that allow the storage facility to receive crude oil from
the terminus points of a Chevron interstate crude oil pipeline
and a Plains All American interstate crude oil pipeline.
Additionally, we own two proprietary six and eight-inch refined
products pipelines, each approximately three miles long, that
transport gasoline and diesel from Tesoros Salt Lake City
refinery to the origin point for Chevrons Northwest
Pipeline. Refined products delivered through these pipelines are
delivered to our terminals in Vancouver, Boise and Burley.
Growth
Opportunities
In our terminals and storage business, we believe our growth
will primarily be driven by pursuing opportunities to increase
third-party volumes and by identifying and executing organic
expansion projects. Because our terminals have historically been
operated by Tesoro primarily to support its refining and
marketing operations, our terminalling services have not been
actively marketed to third parties. Going forward, we believe
there will be opportunities to capture incremental third-party
volumes. In addition, as part of its strategy to optimize the
value of its midstream and downstream assets, we believe Tesoro
will likely consider transferring to our terminals volumes that
it currently distributes through competing terminals, and will
be more aggressive in pursuing exchange agreements with other
refiners to drive more volumes through our terminals. We have
also identified several organic growth projects that we believe
are appropriate for us to
108
undertake or to purchase from Tesoro after construction is
completed. For instance, we believe there is significant demand
to support the construction of new tankage at our Stockton
terminal and new ethanol receiving and blending facilities at
our terminals in Salt Lake City, Boise and Burley. Additionally,
we believe we are well positioned to expand our business at our
existing terminals to handle additional Tesoro volumes on a more
cost-effective basis than competing third-party terminals. For
example, we are considering opportunities to provide transmix
unloading and jet fuel loading services at our Los Angeles
terminal, services that are currently being provided to Tesoro
by third parties.
Additionally, under the terms of our omnibus agreement, Tesoro
has granted us a right of first offer to acquire the following
assets to the extent that Tesoro decides to sell any of them in
the 10-year
period following the closing of this offering:
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a refined products terminal located at Tesoros Golden
Eagle refinery consisting of a truck loading rack with three
loading bays that receives refined products through
interconnecting pipelines from the refinery;
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a marine terminal located in Martinez, California consisting of
a dock, five crude oil storage tanks and related pipelines that
receives crude oil through third-party marine vessel deliveries
for delivery to Tesoros Golden Eagle refinery and a
third-party terminal;
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a wharf facility located in Martinez, California consisting of a
dock and related pipelines that receives refined products from
Tesoros Golden Eagle refinery through interconnecting
pipelines for delivery to third-party marine vessels;
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a common carrier pipeline consisting of approximately
69 miles of
10-inch
pipeline used to transport refined products from Tesoros
Kenai refinery to the Anchorage airport and a receiving station
at the Port of Anchorage;
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a dock and storage facility, located at Tesoros Kenai
refinery, that includes five crude oil storage tanks, and which
receives crude oil from marine vessels and from local production
fields via pipeline and truck for delivery to the refinery and
delivers refined products from the refinery to third-party
marine vessels;
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a refined products terminal located at Tesoros Kenai
refinery, consisting of a truck loading rack with two loading
bays and six above-ground refined products storage tanks, that
is supplied by interconnecting pipelines from the refinery;
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a crude oil and refined products pipeline system consisting of
approximately 17 miles of pipelines used to transport crude
oil and refined products to and from Tesoros Los Angeles
refinery and Tesoros Long Beach terminal and to various
third-party facilities;
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a refined products terminal located at Tesoros Anacortes
refinery, consisting of a truck loading rack with two loading
bays, that receives diesel fuel from storage tanks located at
the refinery;
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a marine terminal and storage facility located at Tesoros
Anacortes refinery, consisting of a crude oil and refined
products wharf facility as well as four storage tanks for crude
oil and heavy products, that receives crude oil and other
feedstocks from marine vessels and third-party pipelines for
delivery to the refinery and delivers refined products from the
refinery to third-party marine vessels; and
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a marine terminal leased from the Port of Long Beach,
California, consisting of a dock with two vessel berths, that
receives crude oil and other feedstocks from marine vessels for
delivery to Tesoros Los Angeles refinery and delivers
light oil products from the Los Angeles refinery to marine
vessels and third-party customers.
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As of September 30, 2010, the aggregate gross book value of
these assets was approximately $240.0 million, as compared
to approximately $190.0 million for the assets being
contributed to us at the closing of this offering. Please read
Certain Relationships and Related Party
Transactions Agreements Governing the
Transactions Omnibus Agreement Right of
First Offer on page 140.
109
Competition
Crude
Oil Gathering
As a result of our contractual relationship with Tesoro under
our High Plains pipeline transportation services agreement and
our connection to the Mandan refinery, we believe that our High
Plains system will not face significant competition from other
pipelines for Tesoros own crude oil supply requirements in
the Bakken Shale/Williston Basin area. Please read
Our Relationship with Tesoro
Corporation Commercial Agreements with Tesoro
beginning on page 143.
However, as we execute our growth strategy, our High Plains
system will face competition from a number of major oil
companies and smaller entities for the gathering and
transportation of crude oil production in the Bakken
Shale/Williston Basin. We may also face competition for
opportunities to build gathering lines from producers or other
pipeline companies. Existing pipelines owned and operated by
Enbridge, Plains All American Pipeline, and the True Oil
Companies (owner of the Bridger, Belle Fourche, and Little
Missouri pipelines) are available for producers who want to ship
crude oil produced in the Bakken Shale/Williston Basin area.
Additionally, EOG Resources owns a rail unit train loading
facility in the area with multiple crude oil loading points.
Encana, Transcanada, Plains All American Pipeline, Enbridge and
the True Oil Companies also continue to (or have announced their
intent to) expand their pipeline systems in the area. For
example, Enbridge completed the latest phase of its most recent
North Dakota system expansion in early 2010 and is soliciting
shipper commitments for its Bakken expansion program, the True
Oil Companies are building new pipelines to connect to existing
trunk lines, and Plains All American Pipeline has announced
plans to construct a new pipeline from Trenton, North Dakota
connecting into its existing Canadian Wascana pipeline system.
All of these projects will provide transportation options for
crude oil producers in the Bakken Shale/Williston Basin area.
Terminalling,
Transportation and Storage
We believe that we will face competition from third-party
refined products terminals for barrels of refined products in
excess of Tesoros minimum volume commitments under our
commercial agreements with Tesoro. We expect this competition to
be primarily with respect to our Los Angeles, Stockton and
Vancouver terminals. We will also likely face competition from
other terminals and pipelines that may be able to supply
Tesoros end-user markets with refined products on a more
competitive basis, due to terminal location, price, versatility
and services provided. Also, to the extent we execute our growth
strategy, we may face competition for refined product supply
sources. Our competition primarily comes from integrated
petroleum companies, refining and marketing companies,
independent terminal companies and distribution companies with
marketing and trading arms. Additionally, if Tesoros
wholesale customers reduced their purchases of refined products
from Tesoro due to the increased availability of less expensive
product from other suppliers or for other reasons, Tesoro may
only deliver the minimum volumes through our terminals (or pay
the shortfall payment if it does not deliver the minimum
volumes), which would cause a decrease in our revenues. Tesoro
competes with some of the worlds largest integrated
petroleum companies, which have their own crude oil supplies and
distribution and marketing systems, as well as with independent
refiners. Competition in particular geographic areas is affected
primarily by the volumes of refined products produced by
refineries located in those areas and by the availability of
refined products and the cost of transportation to those areas
from refineries located in other areas.
We also face competition from trucks that deliver crude oil and
refined products in a number of areas we serve. While their
costs may not be competitive for longer hauls or large volume
shipments, trucks compete effectively for incremental and
marginal volumes in many of the areas we serve.
Tesoros
Refining Operations
Although we do not own or operate any refining assets, our crude
oil gathering assets and our refined products and crude oil
terminalling, transportation and storage assets are located
within Tesoros refining and marketing supply chain. Tesoro
Corporation, through its subsidiaries, is principally a
petroleum refiner and marketer. Tesoros refining and
marketing operations include the manufacturing and marketing of
a full range
110
of petroleum products, including transportation fuels such as
gasoline, gasoline blendstocks, jet fuel and diesel fuel, and
other products such as heavy fuel oils, liquefied petroleum gas,
petroleum coke and asphalt. Tesoros refining operations
are conducted principally in the western and midwestern regions
of the United States. As of September 30, 2010, Tesoro
employed approximately 5,300 full-time employees.
Tesoro owns and operates seven petroleum refineries located in
Los Angeles and Martinez, California; Salt Lake City, Utah;
Kenai, Alaska; Anacortes, Washington; Mandan, North Dakota; and
Kapolei, Hawaii. Our pipelines transport crude oil to two of
Tesoros seven refineries (Mandan and Salt Lake City), and
our terminals and truck loading racks store and distribute
refined products received from six of Tesoros seven
refineries. We do not currently service Tesoros Kapolei,
Hawaii refinery.
The following table sets forth the crude oil refining capacity
in barrels per day of each of Tesoros refineries and, for
the year ended December 31, 2009, the percentages of crude
oil and other feedstocks and refined products that we
transported or terminalled for Tesoro:
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Percent of Crude
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Percent of
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Refining
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Commodities
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Oil/Feedstocks
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Refined Products
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Capacity
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Serviced by
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Volumes Handled
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Handled by
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Tesoro Refinery
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(bpd)
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Our Assets
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by Our Assets
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Our Assets
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Los Angeles, California
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97,000
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Refined Products
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None
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32%
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Martinez, California
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166,000
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Refined Products
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None
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5%
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Salt Lake City, Utah
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58,000
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Crude Oil/
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83%
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91%
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Feedstocks and
Refined Products
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Kenai, Alaska
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72,000
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Refined Products
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None
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29%
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Mandan, North Dakota
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58,000
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Crude Oil/
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98%
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16%
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Feedstocks and
Refined Products
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Anacortes, Washington
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120,000
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Refined Products
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None
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12%
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Total (Refineries We Service)
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571,000
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Kapolei, Hawaii
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93,500
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None
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None
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None
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Total (All Refineries)
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664,500
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Los
Angeles, California Refinery
Tesoros Los Angeles refinery is located on approximately
300 acres in the southern Los Angeles area. This refinery
sources crude oil from producing fields in California as well as
from foreign locations, and has a current processing capacity of
97,000 bpd. For the year ended December 31, 2009, the
refinery processed an average of approximately 100,500 bpd
of crude oil and other feedstock. The Los Angeles refinery also
processes intermediate feedstocks. The refinerys major
upgrading units include fluid catalytic cracking, delayed
coking, hydrocracking, vacuum distillation, hydrotreating,
reforming, butane isomerization and alkylation units. The
refinery produces a high proportion of transportation fuels,
including California Air Resources Board (CARB) gasoline and
CARB diesel fuel, as well as conventional gasoline, diesel fuel
and jet fuel. The refinery also produces heavy fuel oils,
liquefied petroleum gas and petroleum coke.
The Los Angeles refinery leases a marine terminal at the Port of
Long Beach that enables Tesoro to receive crude oil and ship
refined products. The refinery also receives crude oil from the
San Joaquin Valley and the Los Angeles Basin through
third-party pipelines and distributes approximately 32% of its
refined products through our Los Angeles terminal. The remainder
of the refined products produced at the Los Angeles refinery are
distributed and sold to customers in Southern California,
Arizona, and Nevada utilizing third-party pipelines and
terminals, and a small portion of the production is shipped to
international markets by vessels loaded at Tesoros Long
Beach marine dock.
111
Martinez,
California (Golden Eagle) Refinery
Tesoros Golden Eagle refinery is located in Martinez,
California on approximately 2,200 acres approximately
30 miles east of San Francisco. The Golden Eagle
refinery processes crude oil from California, Alaska and foreign
locations and has a current processing capacity of
166,000 bpd. The Golden Eagle refinery also processes
intermediate feedstocks. For the year ended December 31,
2009, the refinery processed an average of approximately
140,900 bpd of crude oil and other feedstock. The
refinerys major upgrading units include fluid catalytic
cracking, delayed coking, hydrocracking, naphtha reforming,
vacuum distillation, hydrotreating and alkylation units. The
refinery produces a high proportion of transportation fuels,
including CARB gasoline and CARB diesel fuel, as well as
conventional gasoline and diesel fuel. The refinery also
produces heavy fuel oils, liquefied petroleum gas and petroleum
coke.
The Golden Eagle refinery has marine terminals with access to
the San Francisco Bay that provide Tesoro with water-borne
access for shipping and receiving crude oil and refined
products. The refinery can also receive crude oil through
third-party pipelines and distribute a small percentage of its
refined products to our Stockton terminal using third-party
pipelines.
Salt
Lake City, Utah Refinery
Tesoros Salt Lake City refinery is located on
approximately 150 acres in Salt Lake City, Utah. This
refinery sources its crude oil from producing fields in Utah,
Colorado, Wyoming and Canada and has a current processing
capacity of 58,000 bpd. For the year ended
December 31, 2009, the refinery processed an average of
approximately 50,600 bpd of crude oil and other feedstock.
The refinerys major upgrading units include fluid
catalytic cracking, naphtha reforming, alkylation and
hydrotreating units that produce transportation fuels, including
gasoline, diesel fuel and jet fuel, as well as other products,
including heavy fuel oils and liquefied petroleum gas. Tesoro
distributes approximately 75% of this refinerys production
through our terminal in Salt Lake City and approximately 25% is
distributed through our short-haul pipelines and a third-party
pipeline system to our terminals in Boise and Burley and
third-party terminals in Utah, Idaho and eastern Washington.
Approximately 83% of the crude oil used by Tesoros Salt
Lake City refinery moves through our Salt Lake City short-haul
crude oil pipelines and storage facility.
Kenai,
Alaska Refinery
Tesoros Kenai refinery is located on the Cook Inlet near
Kenai, Alaska on approximately 450 acres approximately
70 miles southwest of Anchorage. The Kenai refinery
processes crude oil from producing fields in Alaska and, to a
lesser extent, foreign locations, and has a current processing
capacity of 72,000 bpd. For the year ended
December 31, 2009, the refinery processed an average of
approximately 50,600 bpd of crude oil and other feedstock.
The refinerys major upgrading units include vacuum
distillation, distillate hydrocracking, hydrotreating, naphtha
reforming, diesel desulfurizing and light naphtha isomerization
units that produce transportation fuels, including gasoline and
gasoline blendstocks, jet fuel and diesel fuel, as well as other
products, including heating oil, heavy fuel oils, liquefied
petroleum gas and asphalt.
This refinery receives crude oil that is delivered by tanker
into a marine terminal owned by Tesoro, by a third-party crude
oil pipeline, by truck and through Tesoro-owned and operated
crude oil pipelines. Tesoro also owns and operates the TAPL
common carrier refined products pipeline that runs from the
Kenai refinery to our terminal in Anchorage and to the Anchorage
International Airport. This
69-mile
pipeline has the capacity to transport approximately
48,000 bpd of refined products and allows Tesoro to
transport gasoline, diesel fuel and jet fuel. Tesoro delivers
approximately 29% of its refined products to our Anchorage
terminal.
Mandan,
North Dakota Refinery
Tesoros Mandan refinery is located on approximately
950 acres on the Missouri River near Mandan, North Dakota.
The refinery is supplied primarily with crude oil gathered and
transported on our High Plains system from the Bakken
Shale/Williston Basin area and adjacent production areas in
North Dakota and Montana. The refinery has a current processing
capacity of 58,000 bpd. For the year ended
December 31, 2009, the refinery processed an average of
approximately 54,000 bpd of crude oil and other feedstock.
The
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refinerys major upgrading units include fluid catalytic
cracking, naphtha reforming, hydrotreating and alkylation units
that produce transportation fuels, including gasoline, diesel
fuel and jet fuel, as well as other products, including heavy
fuel oils and liquefied petroleum gas. Generally, turnarounds at
the Mandan refinery occur every six years and last for
approximately one month. The last turnaround was completed in
May 2010.
Tesoro distributes a significant portion of the Mandan
refinerys production through a third-party refined
products pipeline system that serves various areas from
Jamestown, North Dakota to Minneapolis, Minnesota. Most of the
gasoline and distillate products from the Mandan refinery can be
shipped through that pipeline system to third-party terminals.
Tesoro distributes approximately 16% of the refined products
that it produces at Mandan through our terminal located inside
the refinery gates.
Anacortes,
Washington Refinery
Tesoros Anacortes refinery is located on the Puget Sound
in Anacortes, Washington on approximately 900 acres
approximately 60 miles north of Seattle. This refinery
sources crude oil from producing fields in Alaska as well as
from Canada and other foreign locations, and has a current
processing capacity of 120,000 bpd. The Anacortes refinery
also processes intermediate feedstocks, primarily heavy vacuum
gas oil, produced by some of Tesoros other refineries and
purchased in the spot-market from third parties. For the year
ended December 31, 2009, the refinery processed an average
of approximately 84,200 bpd of crude oil and other
feedstock. However, average results for the nine months ended
September 30, 2010 were lower due to the suspension of
operations at the refinery following a fire in April 2010. The
refinerys major upgrading units include fluid catalytic
cracking, butane isomerization, alkylation, hydrotreating,
vacuum distillation, deasphalting and naphtha reforming units,
which enable Tesoro to produce a high proportion of
transportation fuels, such as gasoline including CARB gasoline
and components for CARB gasoline, diesel fuel and jet fuel. The
refinery also produces heavy fuel oils, liquefied petroleum gas
and asphalt.
The Anacortes refinery receives Canadian crude oil through a
third-party pipeline originating in Edmonton, Alberta, Canada.
The refinery also receives other crude oils through a marine
terminal located at the refinery. The refinery ships
transportation fuels, including gasoline, jet fuel and diesel
fuel, through a third-party pipeline system that serves western
Washington and Portland, Oregon. The refinery also delivers
refined products through its marine terminal to ships and barges
and distributes approximately 12% of its refined products
through our Vancouver terminal.
Safety
and Maintenance
We perform preventive and normal maintenance on all of our
pipeline systems, storage tanks and terminals and make repairs
and replacements when necessary or appropriate. We also conduct
routine and required inspections of those assets as required by
regulation.
On our pipelines, we use external coatings and impressed current
cathodic protection systems to protect against external
corrosion. We conduct all cathodic protection work in accordance
with National Association of Corrosion Engineers standards. We
continually monitor, test, and record the effectiveness of these
corrosion inhibiting systems. We also monitor the structural
integrity of selected segments of our pipelines through a
program of periodic internal assessments using high resolution
internal inspection tools, as well as hydrostatic testing, that
conforms to federal standards. We accompany these assessments
with a review of the data and mitigate or repair anomalies, as
required, to ensure the integrity of the pipeline. We have
initiated a risk-based approach to prioritizing the pipeline
segments for future integrity assessments to ensure that the
highest risk segments receive the highest priority for
scheduling internal inspections or pressure tests for integrity.
At our terminals, the tanks designed for product storage are
equipped with internal or external floating roofs that minimize
regulated emissions and prevent potentially flammable vapor
accumulation. Our terminal facilities have response plans, spill
prevention and control plans, and other programs to respond to
emergencies. Our truck loading racks are protected with fire
systems, actuated either by sensors or an emergency switch. We
continually strive to maintain compliance with applicable air,
solid waste, and wastewater regulations.
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Insurance
Pipelines, terminals, storage tanks, and similar facilities may
experience damage as a result of an accident or natural
disaster. These hazards can cause personal injury and loss of
life, severe damage to and destruction of property and
equipment, pollution or environmental damage and suspension of
operations. We will maintain our own property and business
interruption insurance policies separately from Tesoro and at
varying levels of coverage that we believe are reasonable and
prudent under the circumstances to cover our operations and
assets. However, such insurance does not cover every potential
risk associated with our operating pipelines, terminals and
other facilities, and we cannot ensure that such insurance will
be adequate to protect us from all material expenses related to
potential future claims for personal and property damage, or
that these levels of insurance will be available in the future
at commercially reasonable prices. We will also be insured under
Tesoros liability policies and subject to Tesoros
deductibles and limits under those policies. As we continue to
grow, we will continue to monitor our policy limits and
retentions as they relate to the overall cost and scope of our
insurance program.
Pipeline
and Terminal Control Operations
Our High Plains system control and monitoring functions are
provided under a ten-year pipeline control center services
agreement with a third-party operator that expires in December
2012 and continues year to year thereafter unless terminated
upon six months prior written notice. Under the terms of the
agreement, the operator controls, monitors, records and reports
on the operation of the High Plains system, including the oil
flow, valves, pumping units and switches along the pipeline
system. The operator also provides flow monitoring, leak
detection, data reporting, customer support, SCADA systems
support, satellite communication, as well as general technical
support of operations, maintenance and emergency response
procedure manuals in compliance with Tesoros stated
regulatory standards.
We control the storage tanks at our Salt Lake City storage
facility through Tesoros Salt Lake City refinery control
center. We also control our Salt Lake City crude oil and refined
product short-haul pipelines through this control center.
Our refined products terminals are automated and generally
unmanned. Our customers truck drivers are provided with
security badges to access and use the truck loading racks.
Rate and
Other Regulation
General
Interstate Regulation
Our High Plains pipeline system in Montana and North Dakota is a
common carrier subject to regulation by various federal, state
and local agencies. FERC regulates interstate transportation on
our High Plains system under the ICA, EPAct 1992 and the rules
and regulations promulgated under those laws. The ICA and its
implementing regulations require that tariff rates for
interstate service on oil pipelines, including interstate
pipelines that transport crude oil and refined products
(collectively referred to as petroleum pipelines),
be just and reasonable and non-discriminatory and that such
rates and terms and conditions of service be filed with FERC.
Under the ICA, shippers may challenge new or existing rates or
services. FERC is authorized to suspend the effectiveness of a
challenged rate for up to seven months, though rates are
typically not suspended for the maximum allowable period. A
successful rate challenge could result in a petroleum pipeline
paying refunds for the period that the rate was in effect
and/or
reparations for up to two years prior to the filing of a
complaint. As discussed below, FERC allows for an annual rate
change under its indexing methodology, which is the methodology
applicable to FERC-regulated interstate transportation on our
High Plains system.
Index-Based
Rates and other Subsequent Developments
EPAct 1992 deemed certain interstate petroleum pipeline rates
then in effect to be just and reasonable under the ICA. These
rates are commonly referred to as grandfathered
rates. Our rates for interstate transportation service on
the High Plains pipeline system were deemed just and reasonable
under EPAct 1992
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and therefore are grandfathered. FERC may change grandfathered
rates upon complaint only after it is shown that:
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a substantial change has occurred since enactment in either the
economic circumstances or the nature of the services that were a
basis for the rate;
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the complainant was contractually barred from challenging the
rate prior to enactment of EPAct 1992 and filed the complaint
within 30 days of the expiration of the contractual
bar; or
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a provision of the tariff is unduly discriminatory or
preferential.
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EPAct 1992 further required FERC to establish a simplified and
generally applicable ratemaking methodology for interstate
petroleum pipelines. As a result, FERC adopted an indexing rate
methodology which, as currently in effect, allows petroleum
pipelines to change their rates within prescribed ceiling levels
that are tied to changes in the Producer Price Index for
Finished Goods, plus 1.3 percent. Rate increases made under
the index are subject to protest, but the scope of the protest
proceeding is limited to an inquiry into whether the portion of
the rate increase resulting from application of the index is
substantially in excess of the pipelines increase in
costs. The indexing methodology is applicable to any existing
rate, including a grandfathered rate.
Indexing includes the requirement that, in any year in which the
index is negative, pipelines must file to lower their rates if
those rates would otherwise be above the rate ceiling. However,
the pipeline is not required to reduce its rates below the level
deemed just and reasonable under EPAct 1992. While a petroleum
pipeline, as a general rule, must use the indexing methodology
to change its rates, FERC also retained or established
cost-of-service
ratemaking, market-based rates, and settlement rates as
alternatives to the indexing approach. A pipeline can follow a
cost-of-service
approach when seeking to increase its rates above the rate
ceiling (or when seeking to avoid lowering rates to the reduced
rate ceiling), provided that the pipeline can establish that
there is a substantial divergence between the actual costs
experienced by the pipeline and the rate resulting from
application of the index. A pipeline can charge market-based
rates if it establishes that it lacks significant market power
in the affected markets. In addition, a pipeline can establish
rates under settlement if agreed upon by all current
non-affiliated shippers.
FERCs indexing methodology is subject to review every five
years; the current methodology will remain in place through
June 30, 2011. On December 16, 2010, FERC issued an
order continuing the use of the current method of indexing rates
for the five-year period beginning July 1, 2011; however,
FERCs order increases the adjustment to the PPI to plus
2.65% (rather than PPI plus 1.3% currently in effect).
FERCs order is subject to rehearing during a period of
thirty days or may be appealed without seeking rehearing to the
U.S. Court of Appeals for a period of sixty days after
issuance of the order.
FERC issued a policy statement in May 2005 stating that it would
permit interstate oil pipelines, among others, to include an
income tax allowance in
cost-of-service
rates to reflect actual or potential tax liability attributable
to a regulated entitys operating income, regardless of the
form of ownership. Under FERCs policy, a tax pass-through
entity seeking such an income tax allowance must establish that
its partners or members have an actual or potential income tax
liability on the regulated entitys income. Whether a
pipelines owners have such actual or potential income tax
liability is subject to review by FERC on a
case-by-case
basis. Although this policy is generally favorable for pipelines
that are organized as pass-through entities, it still entails
rate risk due to the
case-by-case
review requirement. We do not currently establish our rates
based on the cost of service.
Crude
Oil and Refined Product Short-Haul Pipelines in Salt Lake City,
Utah
We own five short-haul pipelines in Salt Lake City, Utah that
provide transportation to Tesoro. Three of these pipelines
transport crude oil with interstate origins from pipelines
operated by Chevron and Plains
All-American
to our storage facility. Each of these crude oil pipelines is
approximately two miles long. Two of the pipelines transport
refined products from Tesoros Salt Lake City refinery to a
Chevron products terminal from which the refined products are
delivered into interstate pipelines. Each of these refined
product pipelines is approximately three miles long.
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We believe that transportation service for Tesoro on these
pipelines will not be subject to FERC regulation, either because
FERC will not assert jurisdiction over pipelines that deliver
crude oil or refined products for a single user between a
terminal and a refinery or storage facility within a single
state, or because FERC will exempt the pipelines from regulation
because only one affiliated shipper takes service on them. We
will file for a FERC ruling disclaiming or exempting from FERC
jurisdiction transportation service on these pipelines. If FERC,
however, were to deny our request and assert jurisdiction over
transportation service on these pipelines, we would be required
to file tariffs with FERC for each pipeline that would establish
the rates, terms and conditions for service on each pipeline. If
this were to occur, our short-haul pipeline transportation
services agreement with Tesoro requires that we and Tesoro
negotiate appropriate changes to the terms of the agreement to
restore to each party the economic benefits expected prior to
FERCs assertion of jurisdiction. While we and Tesoro are
required to negotiate in good faith, it is possible that the
negotiations will not yield the intended result and that the
assertion of FERC jurisdiction could adversely affect our
business, results of operations and financial condition.
Intrastate
Regulation
The intrastate operations of our High Plains pipeline system in
North Dakota are subject to regulation by NDPSC. Applicable
state law requires that pipelines operate as common carriers,
that access to transportation services and pipeline rates be
non-discriminatory, that if more crude oil is offered for
transportation than can be transported immediately, the crude
oil must be apportioned equitably, and that pipeline rates be
just and reasonable.
Our
Pipelines
Although we operate the High Plains pipeline system as a common
carrier pursuant to tariffs filed with both the FERC and the
NDPSC, the High Plains pipeline system is currently used to ship
crude oil only to Tesoros Mandan refinery, and Tesoro has
been the shipper of substantially all of the volumes transported
on the High Plains pipeline system. We expect to continue to
receive revenues from Tesoro for shipments under these tariffs.
For shipments to Mandan from North Dakota intrastate origin
points that are within the 49,000 bpd average minimum
throughput commitment under our pipeline transportation services
agreement with Tesoro, we will receive the NDPSC committed
tariff rate, which is $0.10 per barrel higher than the NDPSC
uncommitted tariff rate for each North Dakota origin point. We
also expect to receive additional revenues from Tesoro for North
Dakota intrastate shipments above the minimum throughput
commitment, which will be paid at the lower NDPSC uncommitted
tariff rate. We will also expect to receive revenue for
interstate shipments of crude oil from Montana and other
interstate pipeline origin points, to which FERC tariff rates
will apply. Although Tesoro is not obligated to ship these
excess intrastate and interstate volumes, Tesoro has
historically shipped volumes of crude oil above the minimum
throughput commitment under such tariffs, and we expect those
excess shipments to continue.
FERC and state regulatory agencies generally have not
investigated rates on their own initiative when those rates,
like ours, have not been the subject of a protest or a complaint
by a shipper. Tesoro has agreed not to contest our tariff rates
for the term of our commercial agreements with Tesoro. However,
FERC or NDPSC could investigate our rates on its own initiative
or at the urging of a third-party if the third-party is either a
current shipper or is able to show that it has a substantial
economic interest in our tariff rate level. If an interstate
rate for service on the High Plains pipeline system were
investigated, we would defend that rate as grandfathered under
EPAct 1992. As EPAct 1992 applies to our rates, a person
challenging a grandfathered rate must, as a threshold matter,
establish a substantial change since the date of enactment of
EPAct 1992, in either the economic circumstances or the nature
of the service that formed the basis for the rate.
If our rate levels were investigated, the inquiry could result
in a comparison of our rates to those charged by others or to an
investigation of our costs, including:
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the overall cost of service, including operating costs and
overhead;
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the allocation of overhead and other administrative and general
expenses to the regulated entity;
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the appropriate capital structure to be utilized in calculating
rates;
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the appropriate rate of return on equity and interest rates on
debt;
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the rate base, including the proper starting rate base;
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the throughput underlying the rate; and
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the proper allowance for federal and state income taxes.
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Because our pipelines are common carrier pipelines, we may be
required to accept new shippers who wish to transport on our
pipelines. It is possible that any new shippers, current
shippers, or other interested parties, may decide to challenge
our tariffs and any related proration rules. If any challenge
were successful, Tesoros minimum volume commitment under
our High Plains pipeline transportation services agreement could
be invalidated, and all of the volumes shipped on our High
Plains pipeline system would be at the lower uncommitted tariff
rate. Successful challenges would reduce our revenues and our
ability to make distributions to our unitholders.
Pipeline
Safety
Our pipelines, gathering systems and terminal operations are
subject to increasingly strict safety laws and regulations. The
transportation and storage of refined products and crude oil
involve a risk that hazardous liquids may be released into the
environment, potentially causing harm to the public or the
environment. In turn, such incidents may result in substantial
expenditures for response actions, significant government
penalties, liability to government agencies for natural
resources damages, and significant business interruption. The
U.S. Department of Transportation (DOT) has adopted safety
regulations with respect to the design, construction, operation,
maintenance, inspection and management of our pipeline and
storage facilities. These regulations contain requirements for
the development and implementation of pipeline integrity
management programs, which include the inspection and testing of
pipelines and the correction of anomalies. These regulations
also require that pipeline operation and maintenance personnel
meet certain qualifications and that pipeline operators develop
comprehensive spill response plans.
We inspect our pipelines internally using currently-available
technology to determine their condition and to determine whether
they are in need of additional maintenance or replacement. Our
inspections utilize internal and external inspection tools
supplied by third-party vendors that provide information on the
physical condition of our pipelines; these tools are operated,
and the resulting data is evaluated, by trained third-party and
Tesoro personnel. We also inspect our DOT-regulated pipelines in
accordance with DOT requirements (including inspection
frequency), and inspect our non-DOT-regulated pipelines in
accordance with a risk-based approach to ensure that the highest
risk pipeline segments receive the highest priority for
inspection.
Legislation recently passed by the U.S. House of
Representatives increases penalties for pipeline safety
violations, reduces reporting periods and provides for review
and possibly revocation of exemptions for gathering systems from
regulation by the DOTs Pipeline and Hazardous Materials
Safety Administration, among other matters. In addition, members
of Congress have introduced other legislation on pipeline
safety, and the DOT has announced a review of its safety rules
and its intention to strengthen those rules. While we believe
that all of our facilities have been constructed and are
operated and maintained in compliance with applicable federal,
state, and local laws and regulations, we cannot predict the
outcome of these or other legislative and regulatory
initiatives; however, legislative and regulatory changes could
have a material effect on our operations and subject us to more
comprehensive and more stringent safety regulation and the
imposition of greater penalties for violations of safety rules.
Refined
Product Quality Standards
Refined products that we store and transport are sold by our
customers for consumption by the public. Various federal, state
and local agencies have the authority to prescribe product
quality specifications for refined products. Changes in product
quality specifications or blending requirements could reduce our
throughput volumes, require us to incur additional handling
costs or require capital expenditures. For example,
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different product specifications for different markets affect
the fungibility of the products in our system and could require
the construction of additional storage. If we are unable to
recover these costs through increased revenues, our cash flows
and ability to pay cash distributions could be adversely
affected. In addition, changes in the product quality of the
products we receive on our refined products pipeline systems or
at our terminals could reduce or eliminate our ability to blend
products.
Environmental
Regulation
General
Our operation of pipelines, terminals, and associated facilities
in connection with the storage and transportation of crude oil
and refined products is subject to extensive and
frequently-changing federal, state and local laws, regulations
and ordinances relating to the protection of the environment.
Among other things, these laws and regulations govern the
emission or discharge of pollutants into or onto the land, air
and water, the handling and disposal of solid and hazardous
wastes and the remediation of contamination. As with the
industry generally, compliance with existing and anticipated
environmental laws and regulations increases our overall cost of
business, including our capital costs to construct, maintain,
operate and upgrade equipment and facilities. While these laws
and regulations affect our maintenance capital expenditures and
net income, we believe they do not affect our competitive
position, as the operations of our competitors are similarly
affected. We believe our facilities are in compliance with
applicable environmental laws and regulations. However, these
laws and regulations are subject to frequent change by
regulatory authorities and continued and future compliance with
such laws and regulations, or changes in the interpretation of
such laws and regulations, may require us to incur significant
expenditures. Additionally, the violation of environmental laws,
regulations, and permits can result in the imposition of
significant administrative, civil and criminal penalties,
injunctions limiting our operations, investigatory or remedial
liabilities or construction bans or delays in the construction
of additional facilities or equipment. Additionally, a discharge
of hydrocarbons or hazardous substances into the environment
could, to the extent the event is not insured, subject us to
substantial expenses, including costs to comply with applicable
laws and regulations and to resolve claims made by third parties
for personal injury or property damage. These impacts could
directly and indirectly affect our business and have an adverse
impact on our financial position, results of operations, and
liquidity. We cannot currently determine the amounts of such
future impacts.
Under the omnibus agreement, Tesoro, through certain of its
subsidiaries, will indemnify us for all known and unknown
environmental and toxic tort liabilities associated with the
ownership or operation of our assets and arising at or before
the closing of this offering. Indemnification for any unknown
environmental and toxic tort liabilities will be limited to
liabilities arising on or before the closing of this offering
and identified prior to the earlier of the fifth anniversary of
the closing of this offering and the date that Tesoro no longer
controls our general partner (provided that, in any event, such
date shall not be earlier than the second anniversary of the
closing of this offering), and will be subject to a $250,000
aggregate annual deductible before we are entitled to
indemnification in any calendar year. Neither we nor our general
partner will have any contractual obligation to investigate or
identify any such unknown environmental liabilities after the
closing of this offering. We have agreed to indemnify Tesoro for
events and conditions associated with the ownership or operation
of our assets that occur after the closing of this offering and
for environmental and toxic tort liabilities related to our
assets to the extent Tesoro is not required to indemnify us for
such liabilities.
Air
Emissions and Climate Change
Our operations are subject to the Clean Air Act and comparable
state and local statutes. Under these laws, permits may be
required before construction can commence on a new source of
potentially significant air emissions, and operating permits may
be required for sources that are already constructed. Although
our facilities are currently minor sources of volatile organic
compound and nitrogen oxide emissions, we may become subject to
more stringent regulations requiring the installation of
additional emission control technologies. Any such future
obligations may require us to incur significant additional
capital or operating costs.
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In addition, Title V of the Clean Air Act
(Title V) requires an operating permit for major
sources of air pollution. Of our facilities, only the Los
Angeles terminal and the Mandan terminal are subject to
Title V, and in the case of the Mandan terminal, the permit
provisions are incorporated in the Title V permit for
Tesoros Mandan refinery. None of our facilities are
presently subject to the federal greenhouse gas reporting rule
or the greenhouse gas tailoring rule, which subjects
certain facilities to the additional permitting obligations
under the New Source Review/Prevention of Significant
Deterioration (NSR/PSD) and Title V programs of the Clean
Air Act based on a facilities greenhouse gas emissions. As
such, we do not expect any substantial impacts from the
tailoring rule on our facilities. Future expenditures may be
required to comply with the Clean Air Act and other federal,
state and local requirements for our various sites, including
our tank farm, pipelines, and terminals. The impact of these
legislative and regulatory developments, if enacted or adopted,
could result in increased compliance costs, additional operating
restrictions on our business and an increase in the cost of or
reduced demand for products we manufacture, all of which could
have an adverse impact on our financial position, results of
operations, and liquidity.
These air emissions requirements also affect the Tesoro
refineries from which we will receive substantially all of our
revenues. Tesoro has been required in the past, and will be
required in the future, to incur significant capital
expenditures to comply with new legislative and regulatory
requirements relating to its operations. For example,
regulations issued by Californias South Coast Air Quality
Management District require the emission of nitrogen oxides to
be reduced through 2011 at Tesoros Los Angeles refinery,
and Tesoro currently plans to meet this requirement by
implementing operational changes and a portfolio of small
capital projects. To the extent these capital expenditures have
a material effect on Tesoro, they could have a material effect
on our business and results of operations.
Since the late 1990s, the EPA has undertaken significant
regulatory initiatives under authority of the Clean Air
Acts NSR/PSD program in an effort to further reduce annual
emissions of volatile organic compounds, nitrogen oxides, sulfur
dioxide, and particulate matter. These regulatory initiatives
have been targeted at industries with large manufacturing
facilities that are significant sources of emissions, such as
refining, paper and pulp, and electric power generating
industries. The basic premise of these initiatives is the
EPAs assertion that many of these industrial
establishments have modified or expanded their operations over
time without complying with NSR/PSD regulations adopted by the
EPA that require permits and new emission controls in connection
with any significant facility modifications or expansions that
can result in emissions increases above certain thresholds.
As part of this ongoing NSR/PSD regulatory initiative, the EPA
has entered into consent agreements with several refiners,
including Tesoro, that require the refiners to make significant
capital expenditures to install emissions control equipment at
selected facilities. To the extent such regulatory matters or
related permitting requirements have a material effect on
Tesoro, they could have a material effect on our business and
results of operations.
In December 2007, the U.S. Congress passed the Energy
Independence and Security Act that created a second Renewable
Fuels Standard (RFS2). This standard requires the total volume
of renewable transportation fuels (including ethanol and
advanced biofuels) sold or introduced annually in the
U.S. to reach 12.95 billion gallons in 2010 and rise
to 36 billion gallons by 2022. The requirements could
reduce future demand for petroleum products and thereby have an
indirect effect on certain aspects of our business, although it
could increase demand for our ethanol blending services at our
truck loading racks.
Currently, various legislative and regulatory measures to
address greenhouse gas emissions (including carbon dioxide,
methane and other gases) are in various phases of discussion or
implementation. These include requirements effective in January
2010 to report emissions of greenhouse gases to the EPA
beginning in 2011 and proposed federal legislation and
regulation as well as state actions to develop statewide or
regional programs (including AB 32 in California (described
below)), each of which require or could require reductions in
our greenhouse gas emissions or those of Tesoro. Requiring
reductions in greenhouse gas emissions could result in increased
costs to (i) operate and maintain our facilities,
(ii) install new emission controls at our facilities and
(iii) administer and manage any greenhouse gas emissions
programs, including acquiring
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emission credits or allotments. These requirements may also
significantly affect Tesoros refinery operations and may
have an indirect effect on our business, financial condition and
results of operations.
In California, Assembly Bill 32 (AB 32), places a statewide cap
on greenhouse gas emissions and requires that the state return
to 1990 emission levels by 2020. AB 32 focuses on using market
mechanisms, such as a
cap-and-trade
program and a Low Carbon Fuel Standard (LCFS) to achieve
emission reduction targets. The LCFS became effective in January
2010 and requires a 10% reduction in the carbon intensity of
gasoline and diesel fuel by 2020. Final regulations for all
other aspects of AB 32, including cap and trade requirements,
are being developed by CARB, will take effect in 2012, and will
be fully implemented by 2020. The implementation and
implications of AB 32 will take many years to realize, but we do
not expect a material direct impact from AB 32 on our business
or results of operations. To the extent such California
requirements have a material effect on Tesoro, however, they
could have an indirect effect on our business and results of
operations.
In addition, the EPA has proposed and may adopt further
regulations under the Clean Air Act addressing greenhouse gases,
to which some of our facilities may become subject, particularly
if the United States Congress does not adopt related
legislation. At present, Congress is considering legislation
seeking to establish a national
cap-and-trade
program beginning in 2012 to address greenhouse gas emissions
and climate change, although the ultimate adoption and form of
any federal legislation cannot presently be predicted. The
impact of future regulatory and legislative developments, if
adopted or enacted, including any
cap-and-trade
program, is likely to result in increased compliance costs,
additional operating restrictions on our business, and an
increase in the cost of refined products generally. Such costs
may impact our business directly or indirectly by impacting
Tesoros facilities or operations.
Hazardous
Substances and Waste
To a large extent, the environmental laws and regulations
affecting our operations relate to the release of hazardous
substances or solid wastes into soils, groundwater, and surface
water, and include measures to control pollution of the
environment. These laws generally regulate the generation,
storage, treatment, transportation, and disposal of solid and
hazardous waste. They also require corrective action, including
investigation and remediation, at a facility where such waste
may have been released or disposed. For instance, the
Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA), which is also known as Superfund, and
comparable state laws, impose liability, without regard to fault
or to the legality of the original conduct, on certain classes
of persons that contributed to the release of a hazardous
substance into the environment. These persons include the
owner or operator of the site where the release occurred and
companies that disposed of, or arranged for the disposal of, the
hazardous substances found at the site. Under CERCLA, these
persons may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been
released into the environment, for damages to natural resources,
and for the costs of certain health studies. CERCLA also
authorizes the EPA and, in some instances, third parties to act
in response to threats to the public health or the environment
and to seek to recover from the responsible classes of persons
the costs they incur. It is not uncommon for neighboring
landowners and other third parties to file claims for personal
injury and property damage allegedly caused by hazardous
substances or other pollutants released into the environment. In
the course of our ordinary operations, we generate waste that
falls within CERCLAs definition of a hazardous
substance and, as a result, may be jointly and severally
liable under CERCLA for all or part of the costs required to
clean up sites. Costs for these remedial actions, if any, as
well as any related claims are all covered by an indemnity from
Tesoro to the extent occurring or existing before the closing of
this offering.
We also generate solid wastes, including hazardous wastes, that
are subject to the requirements of the federal Resource
Conservation and Recovery Act (RCRA), and comparable state
statutes. From time to time, the EPA considers the adoption of
stricter disposal standards for non-hazardous wastes, including
crude oil and refined products wastes. We are not currently
required to comply with a substantial portion of the RCRA
requirements because our operations generate minimal quantities
of hazardous wastes. However, it is possible that additional
wastes, which could include wastes currently generated during
operations, will in the future be designated as hazardous
wastes. Hazardous wastes are subject to more rigorous and
costly disposal
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requirements than are non-hazardous wastes. Any changes in the
regulations could increase our maintenance capital expenditures
and operating expenses.
We currently own and lease, and Tesoro has in the past owned and
leased, properties where hydrocarbons are being or have been
handled for many years. Although we have utilized operating and
disposal practices that were standard in the industry at the
time, hydrocarbons or other waste may have been disposed of or
released on or under the properties owned or leased by us or on
or under other locations where these wastes have been taken for
disposal. In addition, many of these properties have been
operated by third parties whose treatment and disposal or
release of hydrocarbons or other wastes was not under our
control. These properties and wastes disposed thereon may be
subject to CERCLA, RCRA, and analogous state laws. Under these
laws, we could be required to remove or remediate previously
disposed wastes (including wastes disposed of or released by
prior owners or operators), to clean up contaminated property
(including contaminated groundwater), or to perform remedial
operations to prevent future contamination to the extent we are
not indemnified for such matters.
Water
Our operations can result in the discharge of pollutants,
including crude oil and refined products. Our Anchorage and
Vancouver facilities and certain tanks included in our High
Plains pipeline system operate near environmentally sensitive
waters, where tanker, pipeline and other petroleum product
transportation operations are regulated by federal, state and
local agencies and monitored by environmental interest groups.
The transportation and storage of crude oil and refined products
over and adjacent to water involves risk and subjects us to the
provisions of the Oil Pollution Act and related state
requirements. These requirements subject owners of covered
facilities to strict, joint, and potentially unlimited liability
for removal costs and other consequences of an oil spill where
the spill is into navigable waters, along shorelines or in the
exclusive economic zone of the United States. In the event of an
oil spill into navigable waters, substantial liabilities could
be imposed upon us. States in which we operate have also enacted
similar and more stringent laws. Regulations under the Water
Pollution Control Act of 1972 (Clean Water Act), the Oil
Pollution Act and state laws also impose additional regulatory
burdens on our operations. Spill prevention control and
countermeasure requirements of federal laws and some state laws
require containment to mitigate or prevent contamination of
navigable waters in the event of an oil overflow, rupture, or
leak. For example, the Clean Water Act requires us to maintain
spill prevention control and countermeasure plans at many of our
facilities. In addition, the Oil Pollution Act requires that
most oil transport and storage companies maintain and update
various oil spill prevention and oil spill contingency plans. We
maintain such plans, and where required have submitted plans and
received federal and state approvals necessary to comply with
the Oil Pollution Act, the Clean Water Act and related
regulations. Our crude oil and refined product spill prevention
plans and procedures are frequently reviewed and modified to
prevent crude oil and refined product releases and to minimize
potential impacts should a release occur. At our facilities
adjacent to water, Federally Certified Oil Spill Response
Organizations (OSROs) are available to respond to a
spill on water from above ground storage tanks or pipelines, and
we have filed and maintain dock operations manuals as required
by the United States Coast Guard at our Anchorage and Vancouver
facilities. We have contracted with respective OSROs for spills
to inland waters from our Vancouver facility and our facilities
in the midwestern region. We contract with Clean Rivers
Cooperative, Inc. for our Vancouver terminal and with Bay West,
Inc. in the midwestern region. At our Anchorage and Vancouver
terminals, Tesoro will provide open water spill response
capability for spills from our facilities via Tesoros
contracts with Cook Inlet Spill Prevention and Response,
Incorporated and Marine Spill Response Corporation,
respectively. The OSROs are capable of responding to a spill on
water equal to the greatest volume of the largest above ground
storage tank at our facilities. Those volumes range from
5,000 barrels to 100,000 barrels. At each of our
facilities, we maintain spill-response capability to mitigate
the impact of a spill from our facilities until either an OSRO
or other contracted service providers can deploy, and Tesoro has
entered into contracts with various parties to provide spill
response services augmenting that capability, if required. In
addition, we contract with various spill-response specialists to
ensure appropriate expertise is available for any contingency.
We believe these contracts provide the additional services
necessary to meet or exceed all regulatory spill-response
requirements and support our commitment to environmental
stewardship.
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The Clean Water Act also imposes restrictions and strict
controls regarding the discharge of pollutants into navigable
waters. Our Anchorage, Boise and Burley facilities contract with
third parties for wastewater disposal. Our remaining facilities
may have portions of their wastewater reclaimed by Tesoros
nearby refineries. Only our Los Angeles terminal has a separate
Clean Water Act permit for the discharge of stormwater runoff.
In the event regulatory requirements change, or interpretations
of current requirements change, and our facilities are required
to undertake different wastewater management arrangements, we
could incur substantial additional costs. The Water Pollution
Control Act imposes substantial potential liability for the
violation of permits or permitting requirements and for the
costs of removal, remediation, and damages resulting from such
discharges. In addition, some states, including California,
maintain groundwater protection programs that require permits
for discharges or operations that may impact groundwater
conditions. We believe that compliance with existing permits and
compliance with foreseeable new permit requirements will not
have a material adverse effect on our financial condition or
results of operations.
Employee
Safety
We are subject to the requirements of the Occupational Safety
and Health Act (OSHA) and comparable state statutes that
regulate the protection of the health and safety of workers. In
addition, the OSHA hazard communication standard requires that
information be maintained about hazardous materials used or
produced in operations and that this information be provided to
employees, state, and local government authorities and citizens.
We believe that our operations are in compliance with OSHA
requirements, including general industry standards, record
keeping requirements, and monitoring of occupational exposure to
regulated substances.
Endangered
Species Act
The Endangered Species Act restricts activities that may affect
endangered species or their habitats. While some of our
facilities are in areas that may be designated as habitat for
endangered species, we believe that we are in compliance with
the Endangered Species Act. However, the discovery of previously
unidentified endangered species could cause us to incur
additional costs or become subject to operating restrictions or
bans in the affected area.
Hazardous
Materials Transportation Requirements
The DOT regulations affecting pipeline safety require pipeline
operators to implement measures designed to reduce the
environmental impact of crude oil and refined product discharge
from onshore crude oil and refined products pipelines. These
regulations require operators to maintain comprehensive spill
response plans, including extensive spill response training for
pipeline personnel. In addition, the DOT regulations contain
detailed specifications for pipeline operation and maintenance.
We believe our operations are in compliance with these
regulations. The DOT also has a pipeline integrity management
rule, with which we are in substantial compliance.
Environmental
Liabilities
Contamination resulting from spills of crude oil and refined
products is not unusual within the petroleum refining,
terminalling or pipeline industries. Historic spills along our
pipelines, gathering systems and terminals as a result of past
operations have resulted in contamination of the environment,
including soils and groundwater. Site conditions, including
soils and groundwater, are being evaluated at a few of our
properties where operations may have resulted in releases of
hydrocarbons and other wastes. A number of our properties have
known hydrocarbon or other hazardous material contamination,
particularly our Anchorage, Stockton and Los Angeles terminals.
Under the omnibus agreement, Tesoro Corporation, through certain
of its subsidiaries, will indemnify us for all known and unknown
environmental and toxic tort liabilities associated with the
ownership or operation of our assets and arising at or before
the closing of this offering. Indemnification for any unknown
environmental and toxic tort liabilities will be limited to
liabilities occurring on or before the closing of this
122
offering and identified prior to the earlier of the fifth
anniversary of the closing of this offering and the date that
Tesoro no longer controls our general partner (provided that, in
any event, such date shall not be earlier than the second
anniversary of the closing of this offering) and will be subject
to a $250,000 aggregate annual deductible before we are entitled
to indemnification in any calendar year. Tesoro has been
indemnified by a third party for pre-existing contamination at
our Los Angeles terminal. We will not be indemnified for any
future spills or releases of hydrocarbons or hazardous materials
at our facilities, or, in addition to any other environmental
and toxic tort liabilities, otherwise resulting from our
operations. In addition, we have agreed to indemnify Tesoro for
events and conditions associated with the ownership or operation
of our assets that occur after the closing of this offering and
for environmental and toxic tort liabilities related to our
assets to the extent Tesoro is not required to indemnify us for
such liabilities. As a result, we may incur such expenses in the
future, which may be substantial. Tesoro is currently, and
expects to continue, incurring expenses for environmental
cleanup at a number of our terminal properties. As of
December 31, 2009 and September 30, 2010, we have
accrued $1.3 million and $1.9 million, respectively,
for these expenses and we believe these accruals are adequate.
Title to
Properties and Permits
Substantially all of our pipelines are constructed on
rights-of-way
granted by the apparent record owners of the property and in
some instances these
rights-of-way
are revocable at the election of the grantor. In many instances,
lands over which
rights-of-way
have been obtained are subject to prior liens that have not been
subordinated to the
right-of-way
grants. We have obtained permits from public authorities to
cross over or under, or to lay facilities in or along,
watercourses, county roads, municipal streets, and state
highways and, in some instances, these permits are revocable at
the election of the grantor. We have also obtained permits from
railroad companies to cross over or under lands or
rights-of-way,
many of which are also revocable at the grantors election.
In some states and under some circumstances, we have the right
of eminent domain to acquire
rights-of-way
and lands necessary for our common carrier pipelines.
Some of the leases, easements,
rights-of-way,
permits, and licenses that will be transferred to us will
require the consent of the grantor to transfer these rights,
which in some instances is a governmental entity. Our general
partner believes that it has obtained or will obtain sufficient
third-party consents, permits, and authorizations for the
transfer of the assets necessary for us to operate our business
in all material respects as described in this prospectus. With
respect to any consents, permits, or authorizations that have
not been obtained, our general partner believes that these
consents, permits, or authorizations will be obtained after the
closing of this offering, or that the failure to obtain these
consents, permits, or authorizations will not have a material
adverse effect on the operation of our business.
Our general partner believes that we will have satisfactory
title to all of the assets that will be contributed to us at the
closing of this offering. We are entitled to indemnification
from Tesoro under the omnibus agreement for certain title
defects and for failures to obtain certain consents and permits
necessary to conduct our business, in each case, that are
identified prior to the earlier of the fifth anniversary of the
closing of this offering and the date that Tesoro no longer
controls our general partner (provided that, in any event, such
date shall not be earlier than the second anniversary of the
closing of this offering). This indemnification is subject to a
$250,000 aggregate annual deductible before we are entitled to
indemnification in any calendar year. Record title to some of
our assets may continue to be held by affiliates of Tesoro until
we have made the appropriate filings in the jurisdictions in
which such assets are located and obtained any consents and
approvals that are not obtained prior to transfer. We will make
these filings and obtain these consents upon completion of this
offering. Although title to these properties is subject to
encumbrances in some cases, such as customary interests
generally retained in connection with acquisition of real
property, liens that can be imposed in some jurisdictions for
government-initiated action to clean up environmental
contamination, liens for current taxes and other burdens, and
easements, restrictions, and other encumbrances to which the
underlying properties were subject at the time of acquisition by
our predecessor or us, our general partner believes that none of
these burdens should materially detract from the value of these
properties or from our interest in these properties or should
materially interfere with their use in the operation of our
business.
123
Employees
We are managed and operated by the board of directors and
executive officers of Tesoro Logistics GP, LLC, our general
partner. Neither we nor our subsidiaries have any employees. Our
general partner has the sole responsibility for providing the
employees and other personnel necessary to conduct our
operations. All of the employees that conduct our business are
employed by our general partner and its affiliates. Immediately
after the closing of this offering, we expect that our general
partner and its affiliates will have approximately
95 employees performing services for our operations. We
believe that our general partner and its affiliates have a
satisfactory relationship with those employees.
Legal
Proceedings
Although we may, from time to time, be involved in litigation
and claims arising out of our operations in the normal course of
business, we do not believe that we are a party to any
litigation that will have a material adverse impact on our
financial condition or results of operations. We are not aware
of any significant legal or governmental proceedings against us,
or contemplated to be brought against us.
124
MANAGEMENT
Management
of Tesoro Logistics LP
Tesoro Logistics GP, LLC, as our general partner, will manage
our operations and activities on our behalf through its officers
and directors. Our general partner is not elected by our
unitholders and will not be subject to re-election on a regular
basis in the future. Unitholders will not be entitled to elect
the directors of our general partner or directly or indirectly
participate in our management or operation. However, our general
partner owes a fiduciary duty to our unitholders as provided in
our partnership agreement. In addition, our general partner will
be liable, as general partner, for all of our debts (to the
extent not paid from our assets), except for indebtedness or
other obligations that are made specifically nonrecourse to it.
Whenever possible, our general partner intends to cause us to
incur only nonrecourse indebtedness or other obligations.
At least two members of the board of directors of our general
partner will serve on our conflicts committee to review specific
matters that may involve conflicts of interest. The conflicts
committee will determine if the resolution of the conflict of
interest is fair and reasonable to us. The members of the
conflicts committee may not be officers or employees of our
general partner or directors, officers, or employees of its
affiliates, and must meet the independence and experience
standards established by the NYSE to serve on an audit committee
of a board of directors. Any matters approved by the conflicts
committee will be conclusively deemed to be approved by all of
our partners and not a breach by our general partner of any
duties it may owe us or our unitholders. In addition, our
general partner will have an audit committee of at least three
independent directors that will review our external financial
reporting, recommend engagement of our independent auditors, and
review procedures for internal auditing and the adequacy of our
internal accounting controls. We will not have a compensation
committee.
In compliance with the rules of the NYSE, the members of the
board of directors named below will appoint one independent
member prior to the listing of our common units on the NYSE, one
additional member within three months of that listing, and one
additional independent member within 12 months of that
listing. The three independent members will serve as the initial
members of the audit committee.
Neither we nor our subsidiaries have any employees. Our general
partner has the sole responsibility for providing the employees
and other personnel necessary to conduct our operations. All of
the employees that conduct our business are employed by our
general partner and its affiliates, but we sometimes refer to
these individuals in this prospectus as our employees.
Directors
and Executive Officers of Tesoro Logistics GP, LLC
Directors are elected by the sole member of our general partner
and hold office until their successors have been elected or
qualified or until their earlier death, resignation, removal or
disqualification. Executive officers are appointed by, and serve
at the discretion of, the board of directors. The following
table shows information for the directors and executive officers
of Tesoro Logistics GP, LLC.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position with Tesoro Logistics GP, LLC
|
|
Gregory J. Goff
|
|
|
54
|
|
|
Chairman of the Board of Directors and Chief Executive Officer
|
Phillip M. Anderson
|
|
|
45
|
|
|
President and Director
|
G. Scott Spendlove
|
|
|
47
|
|
|
Vice President, Chief Financial Officer and Director
|
Charles S. Parrish
|
|
|
53
|
|
|
Vice President, General Counsel, Secretary and Director
|
Everett D. Lewis
|
|
|
63
|
|
|
Director
|
Ralph J. Grimmer
|
|
|
59
|
|
|
Vice President, Operations
|
Gregory J. Goff. Gregory J. Goff was
appointed Chief Executive Officer and Chairman of the board of
directors of our general partner in December 2010. Mr. Goff
joined Tesoro Corporation in May 2010 as Chief Executive Officer
and President. Mr. Goff will devote the majority of his
time to his roles at Tesoro and he will also spend time, as
needed, directly managing our business and affairs. Initially,
we expect approximately 15% of his total business time will be
devoted to our business and affairs, although this amount may
increase
125
or decrease in future periods as our business develops.
Previously he was Senior Vice President, Commercial with
ConocoPhillips, an international, integrated energy company,
since 2008. Mr. Goff held various other positions at
ConocoPhillips since 1981, including director and Chief
Executive Officer of Conoco JET Nordic from 1998 to 2000;
chairman and managing director of Conoco Limited, a UK-based
refining and marketing affiliate, from 2000 to 2002; president
of ConocoPhillips European and Asia Pacific downstream
operations from 2002 to 2004; president of ConocoPhillips
U.S. Lower 48 and Latin America exploration and production
business from 2004 to 2006; and president of ConocoPhillips
specialty businesses and business development from 2006 to 2008.
Previously, Mr. Goff served on the board of directors of
Chevron Phillips Chemical Company, a private company, and was a
member of the downstream committee of the American Petroleum
Institute. As a former executive of an international energy
company, Mr. Goff brings to the board of directors
leadership, industry and strategic planning experience.
Mr. Goffs extensive service in various positions with
ConocoPhillips also provides him with operations experience.
Mr. Goff received a bachelors degree in science from
the University of Utah and a masters degree in business
administration from the University of Utah. We believe that
Mr. Goffs extensive energy industry background,
particularly the leadership skills he developed while serving in
several executive positions, brings important experience and
skill to the board.
Phillip M. Anderson. Phillip M.
Anderson was appointed President and a member of the board of
directors of our general partner in December 2010 and will spend
substantially all of his time managing our business and affairs.
Mr. Anderson has served as Vice President, Strategy for
Tesoro since April 2010. Prior to his current role with Tesoro,
he served as Vice President, Financial Optimization &
Analytics beginning in June 2008 and Vice President, Treasurer
beginning in June 2007. Mr. Anderson joined the company in
December 1998 as Senior Financial Analyst and worked in a
variety of strategic and financial roles. Mr. Anderson has
worked extensively on all of Tesoros acquisitions and
divestitures since 1999, including valuation, negotiating,
analysis, diligence, and financing activities. Mr. Anderson
began his career in 1991 at Ford Motor Company and worked in a
variety of financial roles at that company. Mr. Anderson
received a bachelors degree in economics from the
University of Texas at Austin and received a masters
degree in business administration with a concentration in
finance from Southern Methodist University. We believe that
Mr. Andersons extensive energy industry background,
particularly his expertise in corporate strategy and business
development, brings important experience and skill to the board.
G. Scott Spendlove. Scott Spendlove was
appointed Vice President, Chief Financial Officer and a member
of the board of directors of our general partner in December
2010. Mr. Spendlove will devote the majority of his time to
his roles at Tesoro and he will also spend time, as needed,
devoted to our business and affairs. Initially, we expect
approximately 20% of his total business time will be devoted to
our business and affairs, although this amount may increase or
decrease in future periods as our business develops.
Mr. Spendlove has served as Senior Vice President, Chief
Financial Officer for Tesoro Corporation since May 2010. Prior
to his current role with Tesoro, he served as Tesoros
Senior Vice President, Risk Management beginning in June 2008,
Vice President, Asset Enhancement and Planning beginning in
December 2006, Vice President and Controller beginning in March
2006, Vice President, Finance and Treasurer beginning in May
2003 and has held positions in strategic planning and
operations. Prior to joining Tesoro in 2002, he served as Vice
President, Corporate Planning and Investor Relations for
Ultramar Diamond Shamrock Corporation (UDS). He also served as
Director, Investor Relations, of UDS and held various positions
in accounting, finance, forecasting and planning at both UDS and
Unocal Corporation. Mr. Spendlove received a
bachelors degree in accounting from Brigham Young
University and a masters degree in business administration
from California State University-Fresno. We believe that
Mr. Spendloves extensive energy industry background,
particularly his expertise in financial reporting, strategic
planning and oversight experience, brings important experience
and skill to the board.
Charles S. Parrish. Charles S. Parrish
was appointed Vice President, General Counsel, Secretary and a
member of the board of directors of our general partner in
December 2010. Mr. Parrish will devote the majority of his
time to his roles at Tesoro and he will also spend time, as
needed, devoted to our business and affairs. Initially, we
expect approximately 20% of his total business time will be
devoted to our business and affairs, although this amount may
increase or decrease in future periods as our business develops.
Mr. Parrish
126
has served as Executive Vice President, General Counsel and
Secretary for Tesoro Corporation since April 2009. Prior to his
current role with Tesoro, he served as Senior Vice President,
General Counsel and Secretary beginning in May 2006, and Vice
President, General Counsel and Secretary beginning in March
2005. Mr. Parrish leads Tesoros legal department and
contract administration function and government affairs group,
as well as the business ethics and compliance office.
Mr. Parrish joined Tesoro in 1994 and has since served in
numerous roles in the legal department. He works closely with
the Tesoros finance and financial reporting teams on all
matters related to Tesoros capital structure and SEC
reporting. In addition, Mr. Parrish provides counsel to
Tesoros management and board of directors on corporate
governance issues. Before joining Tesoro, he worked in private
practice with law firms in Houston and San Antonio,
primarily representing commercial lenders in loan transactions,
workouts and real estate matters. Mr. Parrish received a
bachelors degree in history from the University of
Virginia and a juris doctor from the University of Houston Law
School. He is a member of the State Bar of Texas and the
American Bar Association. We believe that
Mr. Parrishs extensive energy industry background,
particularly his expertise in corporate securities and
governance matters, brings important experience and skill to the
board.
Everett D. Lewis. Everett D. Lewis was
appointed a member of our general partners board of
directors in December 2010. Mr. Lewis has served as
Executive Vice President and Chief Operating Officer for Tesoro
Corporation since March 2008. Mr. Lewis provides strategic
and operational leadership to Tesoro and us and is directly
responsible for Tesoros refining, marketing, supply and
trading, logistics and marine functions at Tesoro. Prior to his
current role with Tesoro, Mr. Lewis served as Executive
Vice President Strategy and Asset Management. He
served as Senior Vice President, Corporate Strategic Planning
during 2004 and Senior Vice President, Planning and Optimization
from 2003 to 2004. He also served as Senior Vice President,
Planning and Risk Management from 2001 to 2003 and served as
Senior Vice President of Strategic Projects from 1999 to 2001.
Lewis started with Chevron USA in 1970 in a range of refinery
operations positions and then as Vice President Refining, Vice
President Refining Business Development, and Vice President
Supply and Trading for BHP, then was responsible for all
refining development for Trans-world Oil, including grassroots
refinery projects in India, South East Asia, the Middle East and
China before joining Tesoro. Mr. Lewis received a
bachelors degree in chemical engineering from Iowa State
University and a masters degree in business administration
with a concentration in finance from the University of Hawaii.
We believe that Mr. Lewiss extensive energy industry
background, particularly his expertise in corporate strategy and
operational excellence, brings important experience and skill to
the board.
Ralph J. Grimmer. Ralph J. Grimmer was
appointed Vice President, Operations of our general partner in
December 2010 and initially will spend approximately 70% of his
business time directly on our business and affairs although this
amount may increase or decrease in future periods as our
business develops. Mr. Grimmer has served as Vice
President, Logistics for Tesoro since November 2010. Prior to
his current role with Tesoro, he served as Vice President,
Competitor Analysis beginning in April 2010, Vice President,
Logistics beginning in June 2008, Vice President, Mergers and
Acquisitions beginning in December 2006 and Vice President,
Strategic Analysis beginning in May 2006. As Vice President,
Operations, Mr. Grimmer is responsible for our pipelines
and refined product terminals, all crude oil and refined
products trucking and all rail operations. Prior to joining
Tesoro in 2006, Mr. Grimmer served in a variety of
consulting, marketing and logistics positions, including as
Senior Consultant for Baker & OBrien, Inc. and
Vice President, Commercial Marketing and Distribution for Motiva
Enterprises LLC. Mr. Grimmer began his career with Texaco
in 1974 as a process engineer. Mr. Grimmer received a
bachelors degree in chemical engineering from Texas Tech
University.
Compensation
of Our Officers
We and our general partner were formed in December 2010.
Accordingly, neither we nor our general partner has accrued any
obligations with respect to management compensation or
retirement benefits for directors and executive officers for any
prior periods.
The officers of our general partner will manage the
day-to-day
affairs of our business. Except for our general partners
President, the officers of our general partner will have
responsibilities for both us and Tesoro and will devote part of
their business time to our business and part of their business
time to Tesoros business.
127
For our executive officers who are also providing services to
Tesoro, compensation will be paid by Tesoro and a portion of
that compensation will be reimbursed by us. The officers of our
general partner, as well as the employees of Tesoro who provide
services to us, may participate in employee benefit plans and
arrangements sponsored by Tesoro, including plans that may be
established in the future. Certain of our general partners
officers and employees and certain employees of Tesoro who
provide services to us currently hold grants under Tesoros
equity incentive plans and will retain these grants after the
closing of the offering. We anticipate that, in connection with
the closing of this offering, our general partner will adopt a
long-term incentive plan (LTIP) and certain of our general
partners officers, employees and non-employee directors,
and other key employees of Tesoro who make significant
contributions to our business will receive awards under the
LTIP. We expect that these awards, as well as future awards to
executive officers of our general partner, will be recommended
by the compensation committee of the board of directors of
Tesoro and approved by our general partner. The LTIP is
described in more detail below.
Compensation
of Our Directors
The officers or employees of our general partner or of Tesoro
who also serve as directors of our general partner will not
receive additional compensation for their service as a director
of our general partner. Directors of our general partner who are
not officers or employees of our general partner or of Tesoro
will receive compensation as non-employee directors.
During 2011, we anticipate that our general partner will adopt a
director compensation program under which our general
partners non-employee directors will be compensated for
their service as directors. We expect that, effective as of the
closing of this offering, each non-employee director will
receive a compensation package consisting of an annual retainer,
an additional retainer for service as the chair of a standing
committee, meeting attendance fees, and may also receive grants
of equity-based awards upon appointment to the board of
directors or as of the closing of this offering. In addition,
each director will be indemnified for his actions associated
with being a director to the fullest extent permitted under
Delaware law.
During 2011, we expect to provide the following annual
compensation to non-employee directors:
Elements
of Non-Employee Director Compensation Program(1)
|
|
|
|
|
Board of Directors Annual Retainer(2)
|
|
$
|
95,000
|
|
Annual Retainer for Audit and Conflicts Committee Chairs
|
|
$
|
10,000
|
|
Board and Committee Meeting Fees(3)
|
|
$
|
1,500 per meeting
|
|
|
|
|
(1) |
|
In addition to the retainers set forth above, we expect to
reimburse our non-employee directors for travel and lodging
expenses that they incur in connection with attending meetings
of the board of directors or its committees. |
|
|
|
(2) |
|
The annual retainer of $95,000 will be payable $45,000 in cash
and $50,000 in equity-based awards. If equity-based awards are
granted to non-employee directors under the annual compensation
package or upon first election to the board of directors under
the LTIP, they are expected to vest ratably based on continued
services over a specified period not to exceed three years. Cash
distributions may be paid on equity-based awards and distributed
at the time such awards vest. We expect that equitybased
awards will be granted annually during the first quarter of the
year. The number of units granted on such date will be
determined by dividing $50,000 by the average closing price of
our common units on the NYSE over a
multi-day
period ending on the last business day prior to the grant date
and rounding any resulting fractional units to the nearest whole
unit. |
|
|
|
(3) |
|
A meeting fee will be paid to a director for attendance in
person or by telephone. |
128
Our
Long-Term Incentive Plan
Our general partner intends to adopt the LTIP primarily for the
benefit of eligible officers, employees and directors of our
general partner and its affiliates, including Tesoro, who
perform services for us. We anticipate that, in connection with
the closing of this offering, as well as annually thereafter to
reward service or performance, the board of directors of our
general partner will grant awards to our general partners
outside directors and its executive officers and key employees
pursuant to the LTIP. We expect that awards under the LTIP for
executive officers of our general partner that are employed by
Tesoro will be recommended to our general partners board
of directors by the compensation committee of the board of
directors of Tesoro.
The description of the LTIP set forth below is a summary of the
anticipated material features of the LTIP. This summary,
however, does not purport to be a complete description of all of
the anticipated provisions of the LTIP. In addition, our general
partner is still in the process of implementing the LTIP and,
accordingly, this summary is subject to change prior to the
effectiveness of the registration statement of which this
prospectus is a part.
The LTIP will provide for the grant of unit awards, restricted
units, phantom units, unit options, unit appreciation rights,
distribution equivalent rights and other unit-based awards.
Subject to adjustment in the event of certain transactions or
changes in capitalization, an aggregate
of
common units may be delivered pursuant to awards under the LTIP.
Units that are cancelled or forfeited will be available for
delivery pursuant to other awards. Units that are withheld to
satisfy our general partners tax withholding obligations
or payment of an awards exercise price will not be
available for future awards. The LTIP will be administered by
our general partners board of directors. The LTIP will be
designed to promote our interests, as well as the interests of
our unitholders, by rewarding the officers, employees and
directors of our general partner for delivering desired
performance results, as well as by strengthening our general
partners ability to attract, retain and motivate qualified
individuals to serve as directors, consultants and employees.
Unit
Awards
Our general partners board of directors may grant unit
awards to eligible individuals under the LTIP. A unit award is
an award of common units that are fully vested upon grant and
are not subject to forfeiture. Unit awards may be paid in
addition to, or in lieu of, cash that would otherwise be payable
to a participant with respect to a bonus or an incentive
compensation award. The unit award may be wholly discretionary
in amount or it may be paid with respect to a bonus or an
incentive compensation award the amount of which is determined
based on the achievement of performance criteria or other
factors.
Restricted
Units and Phantom Units
A restricted unit is a common unit that is subject to
forfeiture. Upon vesting, the forfeiture restrictions lapse and
the recipient holds a common unit that is not subject to
forfeiture. A phantom unit is a notional unit that entitles the
grantee to receive a common unit upon the vesting of the phantom
unit or on a deferred basis upon specified future dates or
events or, in the discretion of our general partners board
of directors, cash equal to the fair market value of a common
unit. Our general partners board of directors may make
grants of restricted and phantom units under the LTIP that
contain such terms, consistent with the LTIP, as the board of
directors may determine are appropriate, including the period
over which restricted or phantom units will vest. The board of
directors may, in its discretion, base vesting on the
grantees completion of a period of service or upon the
achievement of specified financial objectives or other criteria
or upon a change of control (as defined in the LTIP) or as
otherwise described in an award agreement.
Distributions made by us with respect to awards of restricted
units may, in the discretion of the board of directors, be
subject to the same vesting requirements as the restricted
units. The board of directors, in its discretion, may also grant
tandem distribution equivalent rights with respect to phantom
units. Distribution equivalent rights are rights to receive an
amount equal to all or a portion of the cash distributions made
on units during the period a phantom unit remains outstanding.
129
Unit
Options and Unit Appreciation Rights
The LTIP may also permit the grant of options and unit
appreciation rights covering common units. Unit options
represent the right to purchase a number of common units at a
specified exercise price. Unit appreciation rights represent the
right to receive the appreciation in the value of a number of
common units over a specified exercise price, either in cash or
in common units as determined by the board of directors. Unit
options and unit appreciation rights may be granted to such
eligible individuals and with such terms as the board of
directors may determine, consistent with the LTIP; however, a
unit option or unit appreciation right must have an exercise
price equal to at least the fair market value of a common unit
on the date of grant.
Other
Unit-Based Awards
The LTIP may also permit the grant of other unit-based
awards, which are awards that, in whole or in part, are
valued or based on or related to the value of a unit. The
vesting of an other unit-based award may be based on a
participants continued service, the achievement of
performance criteria or other measures. On vesting or on a
deferred basis upon specified future dates or events, an other
unit-based award may be paid in cash
and/or in
units (including restricted units), as the board of directors of
our general partner may determine.
Source
of Common Units; Cost
Common units to be delivered with respect to awards may be
newly-issued units, common units acquired by our general partner
in the open market, common units already owned by our general
partner or us, common units acquired by our general partner
directly from us or any other person or any combination of the
foregoing. Our general partner will be entitled to reimbursement
by us for the cost incurred in acquiring such common units. With
respect to unit options, our general partner will be entitled to
reimbursement from us for the difference between the cost it
incurs in acquiring these common units and the proceeds it
receives from an optionee at the time of exercise of an option.
Thus, we will bear the cost of the unit options. If we issue new
common units with respect to these awards, the total number of
common units outstanding will increase, and our general partner
will remit the proceeds it receives from a participant, if any,
upon exercise of an award to us. With respect to any awards
settled in cash, our general partner will be entitled to
reimbursement by us for the amount of the cash settlement.
Amendment
or Termination of Long-Term Incentive Plan
The board of directors, at its discretion, may terminate the
LTIP at any time with respect to the common units for which a
grant has not previously been made. The LTIP will automatically
terminate on the 10th anniversary of the date it was
initially adopted by our general partner. The board of directors
will also have the right to alter or amend the LTIP or any part
of it from time to time or to amend any outstanding award made
under the LTIP, provided that no change in any outstanding award
may be made that would materially impair the vested rights of
the participant without the consent of the affected participant,
and/or
result in taxation to the participant under Section 409A of
the Code.
Compensation
Discussion and Analysis
We do not directly employ any of the persons responsible for
managing our business, and we do not have a compensation
committee. Our general partner will manage our operations and
activities, and its board of directors and officers will make
compensation decisions on our behalf. All of our general
partners executive officers and other personnel necessary
for our business to function will be employed and compensated by
our general partner or Tesoro, in each case subject to
reimbursement by us in accordance with the terms of the omnibus
agreement. For a detailed description of the reimbursement
arrangements among us, our general partner and Tesoro relating
to the executive officers and employees of our general partner
and the employees of Tesoro who provide services to us, please
refer to the discussion under Certain Relationships and
Related Party Transactions Agreements Governing the
Transactions Omnibus Agreement beginning on
page 139.
130
Responsibility and authority for compensation-related decisions
for executive officers of our general partner that are employed
by Tesoro will reside with the compensation committee of the
board of directors of Tesoro, subject to the terms of the
omnibus agreement. Responsibility and authority for
compensation-related decisions for executive officers of our
general partner that are employed by our general partner will
reside with the board of directors of our general partner, but
will be based in large part on the recommendation of the
compensation committee of the board of directors of Tesoro. All
determinations with respect to awards to be made under the LTIP
to executive officers and other employees of our general partner
and of Tesoro will be made by the board of directors of our
general partner or any committee thereof that may be established
for such purpose, following the recommendation of the
compensation committee of the board of directors of Tesoro.
We and our general partner were formed in December 2010.
Therefore, we incurred no cost or liability with respect to
compensation of our general partners executive officers,
nor has our general partner accrued any liabilities for
management compensation retirement benefits for our executive
officers for the fiscal year ended December 31, 2009 or for
any prior periods. Accordingly, we are not presenting any
compensation information for historical periods. Following the
closing of this offering, we expect that the most highly
compensated executive officers of our general partner, including
our general partners principal executive and financial
officers, will be Gregory J. Goff, our general partners
Chief Executive Officer, G. Scott Spendlove, our general
partners Vice President and Chief Financial Officer,
Phillip M. Anderson, our general partners President,
Charles S. Parrish, our general partners Vice President,
General Counsel and Secretary and Ralph J. Grimmer, our general
partners Vice President, Operations (collectively, our
named executive officers).
Each of our named executive officers, other than
Mr. Anderson and Mr. Grimmer, is also a named
executive officer of Tesoro and we expect that, with the
exception of Mr. Anderson and Mr. Grimmer, our named
executive officers will devote less than a majority of their
total business time to our general partner and us and will be
employed by Tesoro. Compensation paid or awarded by us during
our first fiscal year of operation and thereafter with respect
to our named executive officers that are employed by Tesoro and
our named executive officers that are employed by our general
partner will reflect only the portion of compensation expense
that is allocated to us pursuant to Tesoros allocation
methodology and subject to the terms of the omnibus agreement.
Tesoro has the ultimate decision-making authority with respect
to the total compensation of the named executive officers that
are employed by Tesoro and, subject to the terms of the omnibus
agreement, with respect to the portion of that compensation that
is allocated to us pursuant to Tesoros allocation
methodology. Any such compensation decisions will not be subject
to any approvals by the board of directors of our general
partner or any committees thereof.
We expect that the future compensation of our named executive
officers who are employed by Tesoro will continue to be
structured in a manner similar to how Tesoro currently
compensates its executive officers. We also expect that the
future compensation of our named executive officers who are
employed by our general partner will be structured in a manner
similar to how Tesoro currently compensates its executive
officers. Although the following discussion relating to
compensation paid by Tesoro is based on information provided in
Tesoros 2010 proxy statement, it does not purport to be a
complete discussion and analysis of Tesoros executive
compensation philosophy and practices. The elements of
compensation discussed below, and any decisions with respect to
future changes to the levels of such compensation, are subject
to the discretion of the compensation committee of Tesoros
board of directors, or, with respect to executive officers
employed by our general partner, our general partners
board of directors.
Tesoros
Compensation Philosophy
Tesoros total compensation philosophy is to provide a mix
of cash and equity awards, fixed versus variable compensation,
and employee benefits for named executive officers, senior
executives and other employees to:
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pay for performance with a significant percentage of total
compensation based upon financial and operational results;
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inspire teamwork and motivate superior individual performance;
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131
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compensate all employees competitively and equitably; and
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align executive performance with achieving sustained long-term
growth in stockholder value.
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Tesoro believes that annual incentive bonuses should be paid
only if the goals set by the compensation committee of its board
of directors are attained. In addition, Tesoro has adopted a
compensation recoupment, or clawback, policy that
provides that in the event of a material restatement of
financial results due to misconduct, Tesoros board of
directors will review all incentive payments that were made to
any then-existing senior vice president or above, including its
company controller, on the basis of having met or exceeded
specific performance targets in grants or awards which occur
during the
24-month
period prior to restatement. If such payments would have been
lower had they been calculated based on such restated results,
Tesoros board of directors will, to the extent permitted
by governing law, seek to recoup for the benefit of Tesoro such
payments to any then-existing senior vice president or above,
including its company controller, whose misconduct caused or
significantly contributed to the material restatement, as
determined by Tesoros board of directors.
Elements
of Executive Compensation
Tesoros executive compensation program is designed to
reflect the philosophy and objectives described above. The
elements of Tesoros executive pay are presented in the
table below and discussed in more detail in the following
paragraphs.
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Component
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Type of Payment/Benefit
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Purpose
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Base Salary
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Fixed annual cash payments with each executive eligible for
annual increase.
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Attract and retain talent; designed to be competitive with those
of comparable companies.
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Annual Cash Incentives
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Performance-based annual cash payment.
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Pay for performance. Focus on corporate, team/business unit and
individual goals.
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Long-term Incentives
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Stock options, phantom stock options, restricted stock, stock
appreciation rights, and performance units.
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Designed to align executive compensation with the long-term
interests of our stockholders by rewarding our executives for
excellent performance as it is reflected in our stock price.
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Other Executive Benefits
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Retirement benefits.
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Provide competitive level of benefits to attract and retain
executives and key management level employees.
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Health and Welfare Benefits
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Fixed compensation component, generally available to all
employees.
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Attract and retain talent. Equitable pay.
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Tesoro determines the appropriate level for each compensation
component based in part, but not exclusively, on comparative
analysis against a peer group of industrial companies (and other
companies that Tesoro believes compensate its executives in a
manner similar to mainstream industrial companies), its view of
internal pay equity and consistency, and other considerations it
deems relevant. The benefits provided to Tesoros
executives and employees are designed to be consistent in value
and, to a lesser degree, aligned with benefits offered by
companies with whom Tesoro competes for talent. In addition to
determining the appropriate level for each compensation
component, the compensation committee of Tesoros board of
directors reviews total compensation for alignment with its
philosophy and policies and for alignment with its peer group.
However, Tesoro believes that each compensation component should
be considered separately and that payments or awards derived
from one component should not negate or reduce payments or
awards derived from other components.
132
Tesoro has not adopted any formal or informal policies or
guidelines for allocating compensation between long-term and
annual compensation (base salary and annual performance
incentives), between cash and non-cash compensation, or among
different forms of non-cash compensation.
Base Salaries. Base salaries for
Tesoros named executive officers are reviewed each year.
When making base salary determinations, Tesoro considers
market-based salary rates at the 50th percentile of its
peer group, as well as individual roles and performance
contributions, the relative importance of the position to
Tesoro, the past salary history of the individual and the
competitive landscape for the position.
Annual Performance Incentives. Tesoro
has historically retained flexibility in establishing the terms
of its annual performance incentive compensation programs. For
Tesoros 2008 fiscal year, payments under Tesoros
annual performance incentive program required attainment of a
specified EBITDA threshold, with further determinations made
based on individual objectives. For its 2009 fiscal year, Tesoro
determined that a discretionary bonus program, rather than a
program involving fixed performance targets, was appropriate in
light of its rapidly changing business environment.
Tesoros target annual incentive opportunities have been
targeted to the 50th percentile of its peer group, with target
bonuses for its named executive officers as a percentage of
salary ranging from 70% to 120%.
Long-Term Incentives. Tesoro believes
that its senior executives, including its named executive
officers, should have an ongoing stake in Tesoros success
and that the executives interests should be aligned with
those of Tesoros stockholders. Accordingly, Tesoro
believes that its executives should have a considerable portion
of their total compensation provided in the form of equity-based
incentives. Tesoros long-term incentives in 2009 were in
the form of stock options, phantom stock options and shares of
restricted stock, granted under the Tesoro Corporation 2006
Long-Term Incentive Plan. Following the closing of this
offering, it is expected that a portion of the long-term
incentives provided to the executive officers and key employees
of our general partner and the key employees of Tesoro who
provide services to us will be provided in the form of awards
under our LTIP. When determining the value of long-term
incentive awards granted to its named executive officers, Tesoro
considers the value of awards granted to the named executive
officers of companies in its peer group (in 2009, Tesoro
targeted annual long-term equity awards for its named executive
officers at the 50th percentile of a peer group of companies),
internal pay equity, a comparison of jobs within the company
with similar responsibilities, scope, value and impact on
profitability and strategic goals, as well as individual
performance.
Retirement Plans. Tesoro maintains
non-contributory qualified and non-qualified retirement plans
that cover officers and other eligible employees of Tesoro.
Following the closing of this offering, our named executive
officers and other eligible employees of our general partner, as
well as employees of Tesoro who provide services to us, are
expected to continue to be eligible to participate in
Tesoros retirement plans in accordance with their terms.
Additional Compensation Components. In
the future, as Tesoro and our general partner formulate and
implement the compensation programs for our named executive
officers, Tesoro and our general partner may provide different
and/or
additional compensation components, benefits
and/or
perquisites to our named executive officers, to ensure that they
are provided with a balanced, comprehensive and competitive
compensation structure. We, Tesoro and our general partner
believe that it is important to maintain flexibility to adapt
compensation structures at this time to properly attract,
motivate and retain the top executive talent for which Tesoro
and our general partner compete.
Employment
Agreements With Named Executive Officers
Tesoro has entered into employment agreements with
Messrs. Goff and Parrish in order to ensure continued
stability, continuity and productivity among members of our
management team. These employment agreements contain severance
and change in control provisions, as described in more detail
below, which Tesoro provides to help it to attract and retain
talented individuals for these important positions. Our general
partner will generally be required, pursuant to the terms of the
omnibus agreement, to reimburse Tesoro for a portion of the
costs and expenses of the amounts provided to our named
executive officers under their employment agreements.
133
Employment
Agreement with Gregory J. Goff
Effective May 1, 2010, Tesoro entered into an employment
agreement with Gregory J. Goff that has a three-year term
commencing on May 1, 2010. Mr. Goffs base salary
is currently $900,000, and he currently participates in
Tesoros annual incentive compensation plan with a target
incentive bonus of at least 100% of his annual base salary, with
payments to be determined based upon the achievement of
performance goals established by the compensation committee of
Tesoros board of directors under such plan. Mr. Goff
received certain cash and equity awards as an inducement to
entering into his employment agreement, and, in addition,
Mr. Goff will receive a cash payment of $250,000 on
May 1, 2011, subject to his continued employment with
Tesoro on such date. In addition to the foregoing, Mr. Goff
received long-term incentive awards for fiscal year 2010 with a
target value of $3,000,000. The target awards for fiscal years
after 2010 will be at the discretion of the compensation
committee of Tesoros board of directors.
If Mr. Goffs employment with Tesoro is terminated
without cause or with good reason, as defined in his employment
agreement, he will receive a cash payment equal to two times the
sum of his base salary (as then in effect) plus the greater of
his highest annual bonus earned under the applicable annual
incentive compensation plan of Tesoro during the preceding three
years or $450,000, plus a pro-rated bonus for the year of
termination, as well as continued participation in Tesoros
group health benefit plans for a period of two and one-half
years following termination. If Mr. Goff is terminated
without cause or with good reason, as defined in his employment
agreement, within two years following a change in control, his
cash payment would equal three times the sum of his salary plus
his target bonus (in each case as then in effect), plus a
pro-rated bonus for the year of termination.
Mr. Goffs payments would be reduced as necessary to
avoid incurring excise taxes under Sections 280G and 4999
of the Internal Revenue Code unless not reducing the payments
would result in greater net after-tax proceeds to Mr. Goff.
If Mr. Goffs employment with Tesoro is terminated due
to his death or disability, Mr. Goff will receive a cash
payment equal to one times his annual base salary (less payments
received under a Tesoro-paid long-term disability plan in the
event of termination due to disability), plus a pro-rated bonus
for the year of termination.
Employment
Agreement with Charles S. Parrish
Mr. Parrishs employment agreement has an initial term
ending May 7, 2012 and renews thereafter for an additional
year on each annual anniversary date of the agreement (May 7),
unless Tesoro terminates the agreement in accordance with its
terms. Mr. Parrishs base salary is currently
$500,000, and he is entitled to participate in Tesoros
annual incentive compensation plan with a target incentive bonus
of at least 70% of his annual base salary, with payments to be
determined based upon the achievement of performance goals
established by the compensation committee of Tesoros board
of directors under such plan.
If Mr. Parrishs employment with Tesoro is terminated
without cause or with good reason, as defined in his employment
agreement, he will receive a cash payment equal to two times the
sum of his base salary and target annual bonus and a pro-rated
bonus for the year of termination, as well as continued
participation in Tesoros group health benefit plans for a
period of two and one-half years following termination. If
Mr. Parrish is terminated without cause or with good reason
prior to his 55th birthday, Tesoro will provide him, his
spouse and his dependents, at Tesoros expense, continuing
health coverage, but only to the extent such arrangements are
available to Tesoros retirees, until the earliest to occur
of Mr. Parrishs death or the date he becomes covered
for a comparable benefit by a subsequent employer. If such
termination is on or after his 55th birthday, he is
entitled to participate in Tesoros post-retirement benefit
programs on the same basis as other retirement eligible
employees of Tesoro. In addition, Mr. Parrish would
continue to vest in any unvested equity awards for a period of
two years following the date of his termination of employment.
Mr. Parrish would also receive additional years of service
and age credit under Tesoros applicable retirement benefit
plan to the extent necessary to determine his benefit thereunder
as if he had attained age 55 with 20 years of service.
If Mr. Parrish is terminated without cause or with good
reason within two years following a change in control, his cash
payment would equal three times the sum of his current base
salary plus his current base salary multiplied by his target
annual bonus percentage for the year in which his employment
terminates, plus a pro-rated bonus for the year of termination.
In addition, Mr. Parrish will receive three years of
additional service credit under the current nonqualified
supplemental pension plan applicable to him at the date of
134
termination. Mr. Parrish is entitled to a Section 280G
tax gross-up
payment if his termination-related payments become subject to
excise taxes imposed by Section 4999 of the Internal
Revenue Code. If Mr. Parrishs employment with Tesoro
is terminated due to his death, Mr. Parrishs estate
or beneficiary will receive a cash payment equal to one times
his annual base salary, plus a pro-rated bonus for the year of
termination, and will become fully vested in all outstanding and
unvested equity awards. If Mr. Parrishs employment
with Tesoro is terminated due to his disability,
Mr. Parrish will receive a cash payment equal to two times
his annual base salary (less payments received under a
Tesoro-paid long-term disability plan in the event of
termination due to disability).
Management
Stability Agreements With and Severance Benefits of Other Named
Executive Officers
Tesoro has entered into management stability agreements with
Messrs. Anderson, Spendlove and Grimmer in order to ensure
continued stability, continuity and productivity among members
of our management team. These management stability agreements
contain change in control provisions, as described in more
detail below, which Tesoro provides to help it to attract and
retain talented individuals for these important positions. In
addition, each of these named executive officers participates in
one of the severance policies maintained for Tesoros
employees, as described in more detail below. We will be
required to reimburse Tesoro for any amounts provided to our
named executive officers under their management stability
agreements in proportion to the percentage of their total
compensation allocated to us.
Management
Stability Agreement With and Severance Benefits of Phillip M.
Anderson
In the event of a change in control of Tesoro Corporation and
Mr. Andersons employment with Tesoro is terminated
without cause or with good reason, as defined in his management
stability agreement, he will receive a cash payment equal to two
times the sum of his base salary (as then in effect) plus target
annual bonus as well as a prorated bonus for the year of
termination if termination occurs during the fourth quarter of a
calendar year. Mr. Anderson will also receive continued
coverage and benefits comparable to Tesoros group health
and welfare benefits for a period of two years following
termination. In addition, Mr. Anderson will receive two
years of additional service credit under the current
non-qualified supplemental pension plan applicable to him at the
date of termination.
In addition to the terms set forth in his management stability
agreement, Mr. Anderson is eligible to receive severance
benefits in the event of certain involuntary terminations of
employment in accordance with Tesoros employee severance
policy which is calculated based on the employee years of
service and base salary but limited to one year of base pay plus
an additional two weeks of base pay.
Management
Stability Agreement With and Severance Benefits of G. Scott
Spendlove
In the event of a change in control of Tesoro Corporation and
Mr. Spendloves employment with Tesoro is terminated
without cause or with good reason, as defined in his management
stability agreement, he will receive a cash payment equal to two
and one-half times the sum of his base salary (as then in
effect) plus target annual bonus as well as a prorated bonus for
the year of termination if termination occurs during the fourth
quarter of a calendar year. Mr. Spendlove will also receive
continued coverage and benefits comparable to Tesoros
group health and welfare benefits for a period of thirty months
following termination. In addition, Mr. Spendlove will
receive two and one-half years of additional service credit
under the current non-qualified supplemental pension plan
applicable to him at the date of termination.
In addition to the terms set forth in his management stability
agreement, if Mr. Spendloves employment with Tesoro
is involuntarily terminated without cause, as defined in the
Tesoro Corporation Executive Severance and Change in Control
Plan, he will receive a cash payment equal to one and one-half
times the sum of his base salary (as then in effect) plus target
annual bonus as well as all earned but unpaid annual incentive
cash bonuses for the year prior to the year in which the
termination occurs. Mr. Spendlove will also receive
continued coverage and benefits comparable to Tesoros
group health and welfare benefits for a period of eighteen
months following termination or until he is eligible to
participate under another employers plans.
135
Management
Stability Agreement With and Severance Benefits of Ralph J.
Grimmer
In the event of a change in control of Tesoro Corporation and
Mr. Grimmers employment with Tesoro is terminated
without cause or with good reason, as defined in his management
stability agreement, he will receive a cash payment equal to two
times the sum of his base salary (as then in effect) plus target
annual bonus as well as a prorated bonus for the year of
termination if termination occurs during the fourth quarter of a
calendar year. Mr. Grimmer will also receive continued
coverage and benefits comparable to Tesoros group health
and welfare benefits for a period of two years following
termination. In addition, Mr. Grimmer will receive two
years of additional service credit under the current
non-qualified supplemental pension plan applicable to him at the
date of termination.
In addition to the terms set forth in his management stability
agreement, Mr. Grimmer is eligible to receive severance
benefits in the event of certain involuntary terminations of
employment in accordance with Tesoros employee severance
policy which is calculated based on the employee years of
service and base salary but limited to one year of base pay plus
an additional two weeks of base pay.
136
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of units
of Tesoro Logistics LP that will be issued upon the consummation
of this offering and the related transactions and held by
beneficial owners of 5% or more of the units, by directors of
Tesoro Logistics GP, LLC, our general partner, by each named
executive officer and by all directors and officers of our
general partner as a group.
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Percentage of
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Percentage of
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Percentage of
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Common
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Common
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Subordinated
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Subordinated
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Total
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Units to be
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Units to be
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Units to be
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Units to be
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Units to be
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Beneficially
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Beneficially
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Beneficially
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Beneficially
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Beneficially
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Name of Beneficial Owner(1)
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Owned
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Owned
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Owned
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Owned
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Owned
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Tesoro Corporation
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%
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%
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%
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Gregory J. Goff
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%
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%
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Phillip M. Anderson
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%
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%
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G. Scott Spendlove
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%
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%
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Charles S. Parrish
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%
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%
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Everett D. Lewis
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%
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%
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Ralph J. Grimmer
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%
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%
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All directors and executive officers as a group (6 persons)
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%
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%
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* |
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Less than 1%. |
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(1) |
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Unless otherwise indicated, the address for all beneficial
owners in this table is 19100 Ridgewood Parkway,
San Antonio, Texas
78259-1828. |
The following table sets forth, as of February 2, 2011, the
number of shares of common stock of Tesoro Corporation owned by
each of the directors and executive officers of our general
partner and all directors and executive officers of our general
partner as a group.
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Percentage of
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Shares
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Total
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Total
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Shares of
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Underlying
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Shares of
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Shares of
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Common
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Options
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Common
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Common
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Stock Owned
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Exercisable
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Stock
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Stock
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Directly or
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Within 60
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Beneficially
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Beneficially
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Name of Beneficial Owner(1)
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Indirectly(2)
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Days
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Owned
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Owned
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Gregory J. Goff(3)
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94,053
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94,053
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*
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Phillip M. Anderson(5)
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18,225
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23,500
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41,725
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*
|
G. Scott Spendlove
|
|
|
51,284
|
|
|
|
156,100
|
|
|
|
207,384
|
|
|
|
|
*
|
Charles S. Parrish
|
|
|
64,423
|
|
|
|
261,700
|
|
|
|
326,123
|
|
|
|
|
*
|
Everett D. Lewis(4)
|
|
|
162,250
|
|
|
|
401,800
|
|
|
|
564,050
|
|
|
|
|
*
|
Ralph J. Grimmer(6)
|
|
|
19,373
|
|
|
|
21,900
|
|
|
|
41,273
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (6 persons)
|
|
|
409,608
|
|
|
|
865,000
|
|
|
|
1,274,608
|
|
|
|
|
*
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
Unless otherwise indicated, the address for all beneficial
owners in this table is 19100 Ridgewood Parkway,
San Antonio, Texas
78259-1828. |
|
(2) |
|
Includes common stock issued under Tesoro Corporations
Thrift Plan. |
|
(3) |
|
Does not include 256,223 Restricted Stock Units
granted as part of an inducement grant. |
|
(4) |
|
Does not include 197,000 shares of Phantom Stock granted
under the Tesoro Corporation 2006 Long-Term Incentive Plan. |
|
(5) |
|
Does not include 29,200 SARs (Stock Appreciation Rights) granted
under the Tesoro Corporation 2006 Long-Term Stock Appreciation
Rights Plan. |
|
(6) |
|
Does not include 39,840 SARs (Stock Appreciation Rights) granted
under the Tesoro Corporation 2006 Long-Term Stock Appreciation
Rights Plan. |
137
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
After this offering, the general partner and its affiliates will
own
common units
and
subordinated units representing a %
limited partner interest in us. In addition, the general partner
will
own
general partner units representing a 2.0% general partner
interest in us.
Distributions
and Payments to Our General Partner and Its Affiliates
The following table summarizes the distributions and payments to
be made by us to our general partner and its affiliates in
connection with the formation, ongoing operation, and
liquidation of Tesoro Logistics LP. These distributions and
payments were determined by and among affiliated entities and,
consequently, are not the result of arms-length
negotiations.
Formation
Stage
|
|
|
The consideration received by our general partner and its
affiliates for the contribution of the assets and liabilities |
|
common
units;
|
|
|
|
subordinated
units;
|
|
|
|
general
partner units;
|
|
|
|
the incentive distribution rights;
|
|
|
|
$ million cash
distribution of the net proceeds of the offering, in part to
reimburse them for certain capital expenditures; and
|
|
|
|
an additional $50.0 million cash distribution funded
with borrowings under our revolving credit facility.
|
Operational
Stage
|
|
|
Distributions of available cash to our general partner and its
affiliates |
|
We will generally make cash distributions of 98.0% to the
unitholders, including Tesoro, as holder of an aggregate
of
common units
and subordinated
units, and 2.0% to the general partner. In addition, if
distributions exceed the minimum quarterly distribution and
other higher target distribution levels, our general partner
will be entitled to increasing percentages of the distributions,
up to 50.0% of the distributions above the highest target
distribution level. |
|
|
|
Assuming we have sufficient available cash to pay the full
minimum quarterly distribution on all of our outstanding units
for four quarters, our general partner and its affiliates would
receive an annual distribution of approximately
$ on the 2.0% general partner
interest and $ million on
their common units and subordinated units. |
|
|
|
Payments to our general partner and its affiliates |
|
Under our partnership agreement, we are required to reimburse
our general partner and its affiliates for all costs and
expenses that they incur on our behalf for managing and
controlling our business and operations. Except to the extent
specified under our omnibus agreement or our operational
services agreement, our general partner determines the amount of
these expenses and such determinations must be made in good
faith under the terms of our partnership agreement. The expenses
of non-executive employees will be allocated to us based on
weighted average headcount and the ratio of time spent by those
employees on our business and |
138
|
|
|
|
|
operations. Executive officer expenses will be allocated based
on the amount of time spent managing our business and
operations. These reimbursable expenses also include an
allocable portion of the compensation and benefits of employees
of Tesoro and employees and executive officers of our general
partner who provide services to us. Please read
Agreements Governing the Transactions Omnibus
Agreement beginning on page 139 and
Management Compensation Discussion and
Analysis beginning on page 130. |
|
|
|
|
|
In addition, we will pay Tesoro an annual service fee, initially
in the amount of $0.2 million, for services performed by
certain of Tesoros field-level employees at our Mandan
terminal and Salt Lake City storage facility. We will also
reimburse Tesoro for any direct costs actually incurred by
Tesoro in providing our pipelines, terminals and storage
facilities with certain operational services, such as security,
fire and safety, maintenance and certain environmental services
(such as permitting and wastewater management). Please read
Agreements Governing the Transactions
Operational Services Agreement beginning on page 143. |
|
|
|
Withdrawal or removal of our general partner |
|
If our general partner withdraws or is removed, its general
partner interest and its incentive distribution rights will
either be sold to the new general partner for cash or converted
into common units, in each case for an amount equal to the fair
market value of those interests. Please read The
Partnership Agreement Withdrawal or Removal of the
General Partner beginning on page 168. |
Liquidation
Stage
|
|
|
Liquidation |
|
Upon our liquidation, the partners, including our general
partner, will be entitled to receive liquidating distributions
according to their respective capital account balances. |
Agreements
Governing the Transactions
We and other parties have entered into or will enter into the
various agreements that will effect the transactions, including
the vesting of assets in, and the assumption of liabilities by,
us and our subsidiaries, and the application of the proceeds of
this offering. While we believe our agreements with Tesoro are
on terms no less favorable to either party than those that could
have been negotiated with an unaffiliated party, these
agreements will not be the result of arms-length
negotiations. All of the transaction expenses incurred in
connection with these transactions, including the expenses
associated with transferring assets into our subsidiaries, will
be paid for with the proceeds of this offering.
Omnibus
Agreement
Upon the closing of this offering, we will enter into an omnibus
agreement with Tesoro, Tesoro Refining and Marketing, certain of
Tesoros other subsidiaries, and our general partner that
will address the following matters:
|
|
|
|
|
our obligation to pay our general partner an annual corporate
services fee, initially in the amount of $2.5 million, for
the provision by Tesoro of certain centralized corporate
services;
|
|
|
|
Tesoros agreement not to compete with us under certain
circumstances;
|
|
|
|
our right of first offer to acquire certain of Tesoros
logistics assets;
|
139
|
|
|
|
|
an indemnity by Tesoro Alaska Company and Tesoro Refining and
Marketing Company for certain environmental, toxic tort and
other liabilities, and our obligation to indemnify Tesoro for
events and conditions associated with the operation of our
assets that occur on or after the closing of this offering and
for environmental and toxic tort liabilities related to our
assets to the extent Tesoro is not required to indemnify us;
|
|
|
|
Tesoro Refining and Marketing Companys obligation to
reimburse us for certain costs in excess of agreed thresholds
incurred in connection with renewing our current control center
services agreement, entering into a new similar agreement with
another third party or providing replacement services; and
|
|
|
|
the granting of a license from Tesoro to us with respect to use
of the Tesoro name and trademark.
|
So long as Tesoro controls our general partner, the omnibus
agreement will remain in full force and effect unless mutually
terminated by the parties. If Tesoro ceases to control our
general partner, either party may terminate the omnibus
agreement, provided that the indemnification obligations of
Tesoro Alaska Company and Tesoro Refining and Marketing Company
made under the omnibus agreement will remain in full force and
effect in accordance with their terms.
Payment of Administrative Fee. We will
pay Tesoro an annual corporate services fee, payable in equal
quarterly installments, initially in the amount of
$2.5 million, for the provision of various centralized
corporate services for our benefit. The agreement provides that
this amount will be adjusted annually, commencing on the second
year following this offering by a percentage equal to the change
in the consumer price index. Our general partner, with the
approval and consent of our conflicts committee, will also have
the right to agree to further increases in connection with
expansions of our operations through the acquisition or
construction of new assets or businesses or our growth, as
evidenced by distribution increases. Please read Risk
Factors Risks Inherent in an Investment in Us
beginning on page 32 and Conflicts of Interest and
Fiduciary Responsibilities Conflicts of
Interest We will reimburse the general partner and
its affiliates for expenses on page 155.
Noncompetition. Tesoro will agree, and
will cause its affiliates to agree not to engage in, whether by
acquisition or otherwise, the business of owning
and/or
operating crude oil or refined products pipelines, terminals or
storage facilities in the United States that are not within,
directly connected to, substantially dedicated to, or otherwise
an integral part of, any refinery owned, acquired or constructed
by Tesoro. This restriction will not apply to:
|
|
|
|
|
any assets owned by Tesoro at the closing of this offering
(including replacements or expansions of those assets);
|
|
|
|
any asset or business that Tesoro acquires or constructs that
has a fair market value of less than $5.0 million; and
|
|
|
|
any asset or business that Tesoro acquires or constructs that
has a fair market value of $5.0 million or more, if we have
been offered the opportunity to purchase the asset or business
for fair market value not later than six months after completion
of such acquisition or construction, and we decline to do so
with the concurrence of our conflicts committee.
|
Right of First Offer. Under the omnibus
agreement, if Tesoro decides to sell any of the assets listed
below, Tesoro will provide us with the opportunity to make the
first offer on them, in each case for a
10-year
period following the closing of this offering:
|
|
|
|
|
Golden Eagle Refined Products Terminal (Martinez,
California). This terminal is located at
Tesoros Golden Eagle refinery and consists of a truck
loading rack with three loading bays supplied by pipeline from
storage tanks located at Tesoros Golden Eagle refinery.
This terminal does not have refined product storage capacity.
Total throughput capacity for the terminal is estimated to be
approximately 38,000 bpd. For the year ended
December 31, 2009, approximately 15,100 bpd of refined
products were throughput at this terminal.
|
140
|
|
|
|
|
Golden Eagle Marine Terminal (Martinez,
California). This marine terminal is located
on the Sacramento River near Tesoros Golden Eagle refinery
and consists of a single-berth dock, five crude oil storage
tanks with a combined 425,000 barrels of capacity and
related pipelines. This terminal receives crude oil through
marine vessel deliveries for delivery to Tesoros Golden
Eagle refinery and Martinez terminal. Total throughput capacity
for the terminal is estimated to be approximately
145,000 bpd. For the year ended December 31, 2009,
approximately 61,000 bpd of crude oil were throughput at
this terminal.
|
|
|
|
Golden Eagle Wharf Facility (Martinez,
California). This wharf facility is located
on the Sacramento River near Tesoros Golden Eagle refinery
and consists of a single-berth dock and related pipelines. This
facility does not have crude oil or refined products storage
capacity and receives refined products from Tesoros Golden
Eagle refinery through interconnecting pipelines for delivery to
third-party marine vessels. This facility will require
substantial capital improvements, which may be in excess of
$100.0 million, in order to maintain compliance with
various governmental regulations after 2011. Total throughput
capacity for the facility is estimated to be approximately
50,000 bpd. For the year ended December 31, 2009,
approximately 28,500 bpd of crude oil were throughput at
this terminal.
|
|
|
|
Tesoro Alaska Pipeline (Nikiski,
Alaska). This common carrier pipeline
consists of approximately 69 miles of
10-inch
pipeline with capacity to transport approximately
48,000 bpd of refined products from Tesoros Kenai
refinery to the Anchorage airport and to a receiving station at
the Port of Anchorage that is connected to our Anchorage
terminal. From the receiving station, refined products are
delivered to our Anchorage terminal and other third-party
terminals. For the year ended December 31, 2009,
approximately 31,000 bpd of refined products were
transported through this pipeline.
|
|
|
|
Nikiski Dock and Storage Facility (Nikiski,
Alaska). This single-berth dock and storage
facility is located at Tesoros Kenai refinery and includes
five crude oil storage tanks with a combined capacity of
approximately 930,000 barrels, a ballast water treatment
facility and associated pipelines, pumps and metering stations.
The dock and storage facility receive crude oil from marine
tankers and from local production fields via pipeline and truck,
and deliver refined products from the refinery to third-party
marine vessels. For the year ended December 31, 2009,
approximately 54,000 bpd of crude oil and 20,000 bpd
of refined products were transported through this facility.
|
|
|
|
Nikiski Refined Products Terminal (Nikiski,
Alaska). This terminal is located at
Tesoros Kenai refinery and consists of a truck loading
rack with two loading bays connected by pipeline to
Tesoros Kenai refinery and six refined product storage
tanks with a combined capacity of 211,000 barrels. For the
year ended December 31, 2009, approximately 2,600 bpd
of refined products were throughput at this terminal.
|
|
|
|
Los Angeles Crude Oil and Refined Products Pipeline System
(Los Angeles, California). This pipeline
system, located in the Los Angeles, California metropolitan
area, consists of nine separate DOT-regulated pipelines totaling
approximately 17 miles in length that transport crude oil,
feedstocks and fuel oils to and from Tesoros Los Angeles
refinery, Tesoros Long Beach terminal and various third
party facilities. For the year ended December 31, 2009,
approximately 30,800 bpd of crude oil and 14,400 bpd
of refined products were transported through this pipeline
system.
|
|
|
|
Anacortes Refined Products Terminal (Anacortes,
Washington). This terminal is located at
Tesoros Anacortes refinery and consists of a truck loading
rack with two loading bays that receive diesel fuel from storage
tanks located at Tesoros Anacortes refinery. This terminal
does not have refined product storage capacity. For the year
ended December 31, 2009, approximately 1,700 bpd of
diesel fuel were throughput at this terminal.
|
|
|
|
Anacortes Marine Terminal and Storage Facility (Anacortes,
Washington). This marine terminal and storage
facility is located at Tesoros Anacortes refinery and
consists of a crude oil and refined products wharf facility, as
well as four storage tanks for crude oil and heavy products (one
of which is currently out of service) with a combined storage
capacity of 1.4 million barrels. The marine terminal and
|
141
|
|
|
|
|
storage facility receives crude oil and other feedstocks from
marine vessels and third-party pipelines for delivery to
Tesoros Anacortes refinery. The facility also delivers
refined products from the refinery to third-party marine
vessels. For the year ended December 31, 2009,
approximately 54,000 bpd of crude oil and refined products
were throughput at this terminal.
|
|
|
|
|
|
Long Beach Marine Terminal (Long Beach,
California). This marine terminal is leased
from the Port of Long Beach, California and consists of a dock
with two vessel berths. This terminal receives crude oil and
other feedstocks from marine vessels for delivery to
Tesoros Los Angeles refinery and other third-party
refineries, and receives refined and intermediate products from
the Los Angeles refinery for delivery to third-party marine
vessels. For the year ended December 31, 2009,
approximately 104,200 bpd of crude oil and refined and
intermediate products were throughput at this terminal.
|
The consummation and timing of any acquisition by us of the
assets covered by our right of first offer will depend upon,
among other things, Tesoros decision to sell an asset
covered by the right of first offer, our ability to reach an
agreement with Tesoro on price and other terms and our ability
to obtain financing on acceptable terms. Accordingly, we can
provide no assurance whether, when or on what terms we will be
able to successfully consummate any future acquisitions pursuant
to our right of first offer, and Tesoro is under no obligation
to accept any offer that we may choose to make.
Indemnification. Under the omnibus
agreement, Tesoro Alaska Company and Tesoro Refining and
Marketing Company, each of which is a wholly-owned subsidiary of
Tesoro Corporation, will indemnify us for all known and unknown
environmental and toxic tort liabilities associated with the
operation of our assets and occurring before the closing of this
offering. Tesoro Alaska Companys indemnification
obligations will cover only those liabilities relating to our
Alaska assets and operations, while Tesoro Refining and
Marketing Companys indemnification obligations will extend
to the rest of our assets and operations. Indemnification for
unknown environmental and toxic tort liabilities will be limited
to liabilities occurring on or before the closing of this
offering and identified prior to the earlier of the fifth
anniversary of the closing of this offering and the date that
Tesoro no longer controls our general partner (provided that, in
any event, such date shall not be earlier than the second
anniversary of the closing of this offering), and will be
subject to a $250,000 aggregate annual deductible before we are
entitled to indemnification in any calendar year.
Tesoro will also indemnify us for liabilities relating to:
|
|
|
|
|
the assets contributed to us, other than environmental and toxic
tort liabilities, that arise out of the ownership or operation
of the assets prior to the closing of this offering and that are
asserted during the period ending on the tenth anniversary of
the closing of this offering;
|
|
|
|
certain defects in title to the assets contributed to us and
failure to obtain certain consents and permits necessary to
conduct our business, in each case that are identified prior to
the earlier of the fifth anniversary of the closing of this
offering and the date that Tesoro no longer controls our general
partner (provided that, in any event, such date shall not be
earlier than the second anniversary of the closing of this
offering), subject to a $250,000 aggregate annual deductible
before we are entitled to indemnification in any calendar year;
|
|
|
|
legal actions related to the assets contributed to us that are
currently pending against Tesoro; and
|
|
|
|
events and conditions associated with any assets retained by
Tesoro.
|
We have agreed to indemnify Tesoro for events and conditions
associated with the operation of our assets that occur after the
closing of this offering and for environmental and toxic tort
liabilities related to our assets to the extent Tesoro is not
required to indemnify us as described above.
Reimbursement of Expenses and Completion of Certain
Projects by Tesoro. Tesoro Refining and
Marketing Company, a wholly owned subsidiary of Tesoro
Corporation, will reimburse us for any operating expenses and
capital expenditures related to certain repairs and maintenance
on our High Plains system and our terminals. We will be
reimbursed only for repairs and maintenance resulting from our
first routine inspections occurring after the closing of this
offering on the trunk line segments of, and all tankage on, our
142
High Plains system and at all of our refined product terminals.
These inspections are necessary in order to comply with DOT
pipeline integrity management rules and certain American
Petroleum Institute storage tank standards. Additionally, Tesoro
Refining and Marketing Company will reimburse us for certain
costs in excess of agreed thresholds incurred in connection with
renewing our current control center services agreement, entering
into a new similar agreement with another third party or
providing replacement services.
License of Name and Trademark. Tesoro
will grant us a nontransferable, nonexclusive, royalty free
right and license to use the name Tesoro and any
associated or related marks for as long as Tesoro controls our
general partner.
Operational
Services Agreement
Upon the closing of this offering, we will enter into an
operational services agreement with Tesoro under which Tesoro
will provide our pipelines, terminals and storage facilities
with certain operational services, such as security, fire and
safety, maintenance and certain environmental services (such as
permitting and wastewater management). We will reimburse Tesoro
for any direct costs actually incurred by Tesoro in providing
these services, except to the extent that Tesoro otherwise
provides such services in support of its own assets. In
addition, we will pay Tesoro an annual service fee, initially in
the amount of $0.2 million, for services performed by
certain of Tesoros field-level employees at our Mandan
terminal and Salt Lake City storage facility. Tesoro will adjust
this service fee annually at a rate up to the percentage change
in the consumer price index or, with the approval of our
conflicts committee, by any greater amount as may be determined
by Tesoro.
We may terminate any of the services provided by Tesoro upon
90 days prior written notice. The operational
services agreement will have an initial term of 10 years
and may be renewed for two additional five-year terms at
Tesoros option. Tesoro may terminate the agreement if
Tesoro no longer controls our general partner. Neither party may
assign its rights or obligations under the agreement, except
that Tesoro will be permitted to subcontract any of the services
provided to us under the agreement, provided the services
continue to be performed in a manner consistent with the better
of past practices or industry standards.
Commercial
Agreements with Tesoro
Under our various commercial agreements with Tesoro, we will
provide various pipeline transportation, trucking, terminal
distribution and storage services to Tesoro, and Tesoro will
commit to provide us with minimum monthly throughput volumes of
crude oil and refined products. We believe the terms and
conditions under these agreements are generally no less
favorable to either party than those that could have been
negotiated with unaffiliated parties with respect to similar
services. Tesoros obligations under these commercial
agreements will not terminate if Tesoro and its affiliates no
longer own our general partner. Our commercial agreements
include provisions that permit Tesoro to suspend, reduce or
terminate its obligations under the applicable agreement if
certain events occur. These events include Tesoro deciding to
permanently or indefinitely suspend refining operations at one
or more of its refineries, as well as our being subject to
certain force majeure events that would prevent us from
performing required services under the applicable agreement.
These force majeure events include acts of God, strikes,
lockouts or other industrial disturbances, wars, riots, fires,
floods, storms, orders of courts or governmental authorities,
explosions, terrorist acts, breakage, accident to machinery,
storage tanks or lines of pipe and inability to obtain or
unavoidable delays in obtaining material or equipment and
similar events or circumstances, so long as such events or
circumstances are beyond our reasonable control and could not
have been prevented by our due diligence.
High
Plains Pipeline Transportation Services Agreement
We will enter into a pipeline transportation services agreement
with Tesoro under which we will agree to transport crude oil on
our High Plains pipeline system to Tesoros Mandan
refinery. Under the agreement, Tesoro will be obligated to
transport an average of at least 49,000 bpd of crude oil
per month at the NDPSC committed rates from North Dakota origin
points to Tesoros Mandan refinery. Based on this minimum
throughput commitment and the pro forma weighted average
committed NDPSC tariff rates on the trunk line
143
segments of our High Plains pipeline system for the twelve
months ended September 30, 2010, Tesoro would have paid us
approximately $1.6 million per month under this agreement.
We will charge Tesoro fees at the lower NDPSC uncommitted tariff
rates for any volumes shipped from North Dakota origin points in
excess of the minimum throughput commitment, and we will charge
Tesoro at the FERC tariff rates for any volumes shipped from
Montana and other interstate origin points to the Mandan
refinery. We will also charge Tesoro an uncommitted pumpover
services fee of approximately $0.14 per barrel on each barrel
that we inject into our High Plains pipeline system from
adjacent tanks, as well as uncommitted gathering fees that vary
by gathering pipeline segment for each barrel of crude oil
gathered by our collector pipelines feeding our main pipeline
system.
Each month, Tesoro is obligated to pre-pay an estimated amount
representing Tesoros aggregate estimated committed
transportation fee for that month. The estimated prepayment is
calculated by multiplying Tesoros minimum throughput
commitment for such month by the weighted average committed
tariff rate paid by Tesoro for the total volumes it shipped from
North Dakota origin points on our High Plains pipeline system
during the full month prior to the month in which the prepayment
is made. The weighted average committed tariff rate is derived
from the published committed tariff rates for each of the North
Dakota origin points on our High Plains pipeline system and the
actual volumes shipped from each origin point in the applicable
period. Any volumes shipped by Tesoro from North Dakota origin
points in excess of its minimum volume commitment will be
charged at the applicable published uncommitted NDPSC tariff
rate and will not be factored into weighted average committed
tariff rates used to calculate future prepayments or shortfall
payments.
If Tesoro fails to transport aggregate volumes from North Dakota
origin points equal to its minimum throughput commitment during
any calendar month, then Tesoro will pay us a shortfall payment
equal to the volume of the shortfall multiplied by the weighted
average committed tariff rate paid by Tesoro for that month. The
amount of any shortfall payment paid by Tesoro will be credited
against any amounts owed by Tesoro for the transportation of
volumes from North Dakota origin points in excess of its minimum
throughput commitment during any of the succeeding three months.
Following such three-month period, any remaining portion of that
shortfall credit will expire.
Following the end of each month, we will add any shortfall
payment owed by Tesoro to, or deduct any applicable shortfall
credit from, the actual aggregate intrastate tariffs owed by
Tesoro for that month in order to determine the total intrastate
shipment fees owed by Tesoro. If total intrastate fees owed by
Tesoro for that month are greater than the amount prepaid by
Tesoro for that month, then Tesoro will pay us the difference.
If, however, the total amount prepaid by Tesoro for that month
is greater than the total intrastate fees owed by Tesoro for the
month, then we will refund Tesoro the difference. Any fees
incurred by Tesoro for interstate shipments, pumpover fees and
gathering fees will be in addition to the intrastate shipment
fees and will be paid by Tesoro separately.
We will file with FERC and NDPSC to adjust our tariff rates
annually at a rate equal to the percentage change in any
inflationary index promulgated by FERC, in accordance with
FERCs indexing methodology. If FERC terminates its
indexing methodology, we will file to adjust our tariff rates
annually by a percentage equal to the change in the consumer
price index. Tesoro has agreed not to challenge, or to cause
others to challenge or assist others in challenging, our tariffs
for the term of the agreement. However, this agreement does not
prevent future shippers from challenging our tariffs and any
related proration rules and, if any challenge were successful,
Tesoros minimum volume commitment under our High Plains
pipeline transportation services agreement could be invalidated,
and all of the volumes shipped on our High Plains pipeline
system would be at the lower uncommitted tariff rate.
If new laws or regulations that affect the services that we
provide to Tesoro under this agreement are enacted or
promulgated that require us to make substantial and
unanticipated capital expenditures, the agreement will provide
us with the right to file for an increased tariff rate to cover
Tesoros proportionate share of the cost of complying with
these laws or regulations, after we have made efforts to
mitigate their effect. We will also have the right to file for
an increased tariff rate to recover the amounts of any taxes
(other than income taxes, gross receipt taxes and similar taxes)
we incur on Tesoros behalf for the services we
144
provide to Tesoro under the agreement to the extent permitted by
law. We and Tesoro will negotiate in good faith to agree on the
level of the increased tariff rate. In addition, under the
agreement, Tesoro will reimburse us for any costs or expenses
associated with or related to any pipeline hydrotest commenced
during the 2011 calendar year on the trunk line segment of our
High Plains pipeline system extending from Ramburg, North Dakota
to Tesoros Mandan refinery, including any necessary
repairs to, or replacement of, the trunk line in order to
maintain capacity of at least 70,000 bpd.
Under the agreement, in accordance with the loss allowance
provisions of our tariffs, we are permitted to retain 0.2% of
the crude oil shipped on our High Plains pipeline system and, in
addition, Tesoro will bear any crude oil volume losses in excess
of that amount. To the extent that actual losses are less than
0.2% during any month, Tesoro will repurchase from us the
difference between the actual losses and the 0.2% allowance at a
price equal to that calendar months average for West Texas
Intermediate (Light Sweet Crude) oil, as quoted on the New York
Mercantile Exchange (NYMEX WTI), less a specified discount.
Tesoro is not permitted to suspend or reduce its obligations
under the agreement in connection with the shutdown of its
Mandan refinery for scheduled turnarounds or other regular
servicing or maintenance. If, however, Tesoro decides to
permanently or indefinitely suspend refining operations at the
Mandan refinery for a period that will continue for at least 12
consecutive months, then Tesoro may terminate the agreement on
no less than 12 months prior written notice to us,
unless Tesoro has publicly announced its intent to resume
operations at the Mandan refinery more than two months prior to
the expiration of the
12-month
notice period. During the
12-month
notice period, Tesoro will continue to owe shortfall payments
for any calendar month in which it does not transport aggregate
volumes equal to its minimum throughput commitment. The amount
of the shortfall payment for any month in which Tesoro does not
transport any volumes will be based on Tesoros minimum
throughput commitment for that month multiplied by the weighted
average committed tariff rate paid by Tesoro during the
12 months prior to Tesoros announcement of the
suspension of refining operations at the Mandan refinery. Tesoro
may deduct from such shortfall payment the aggregate amount of
any amounts paid by Tesoro during that month for transportation
of crude oil on our High Plains pipeline system.
If a force majeure event occurs, we must provide Tesoro with
written notice of the force majeure event and identify the
approximate length of time we believe that force majeure event
will continue. If we believe that a force majeure event will
continue for 12 consecutive months or more, we and Tesoro will
each have the right to terminate the agreement on no less than
12 months prior written notice to the other party.
However, if we receive a termination notice from Tesoro and
notify Tesoro within 30 days that we reasonably believe in
good faith that we will be able to provide the suspended
services under the agreement within a reasonable period of time,
then Tesoros termination notice will be deemed revoked and
the agreement will continue in full force and effect as if the
termination notice had never been given.
This agreement will have an initial term of 10 years and
may be renewed for two additional five-year terms at
Tesoros option. Upon the expiration or termination of the
agreement, Tesoro will have a limited right of first refusal to
enter into a new agreement with us on commercial terms that are
equal to or more favorable to us than any commercial terms
offered to us by a third party, so long as such right of first
refusal does not violate any law or regulatory policy then in
effect. This agreement may be assigned by us or Tesoro only with
the other partys prior written consent, except that we or
Tesoro may assign this agreement without the other partys
prior written consent in connection with our sale of our High
Plains pipeline system or Tesoros sale of the Mandan
refinery, respectively, and only if the transferee agrees to
assume all of the assigning partys obligations under the
agreement and is financially and operationally capable of
fulfilling the assigning partys obligations under the
agreement. In addition, we may not assign this agreement to one
of Tesoros competitors.
High
Plains Trucking Transportation Services Agreement
We will enter into a trucking transportation services agreement
with Tesoro under which we will coordinate the collection,
transportation and delivery of crude oil acquired by Tesoro in
Montana and North Dakota and intended for delivery by truck
into our High Plains pipeline system or other delivery points as
mutually agreed upon. We will also provide Tesoro with related
accounting and data services under the
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agreement. For these services, Tesoro will be obligated to pay
us an initial $2.72
per-barrel
transportation fee. In addition, Tesoro will be obligated to use
our trucking services for a minimum volume of crude oil equal to
an average of 22,000 bpd per month. Based on the minimum
volume commitment and the initial
per-barrel
transportation fee, Tesoro would have paid us approximately
$1.8 million per month under this agreement.
We will charge Tesoro separate uncommitted tank usage fees of
approximately $0.14 per barrel on each barrel that is delivered
by truck to our proprietary tanks located adjacent to injection
points along our High Plains pipeline system. The
per-barrel
fees that we will charge Tesoro will be adjusted annually by a
percentage equal to the change in the consumer price index. We
will also have the right to impose a monthly surcharge to cover
any increase in fuel prices (based on the applicable average
monthly index price for diesel fuel), as well as a mileage-based
surcharge to the extent that the average number of miles driven
by trucks we dispatch in connection with providing services
under the agreement increases in any month by more than 5.0%
over the average miles driven during the immediately preceding
three-month period.
If Tesoro fails to use us to gather, transport and deliver an
amount of crude oil equal to its minimum throughput commitment
during any calendar month, then Tesoro will pay us a shortfall
payment for the volume of any shortfall. The shortfall payment
will be equal to the volume of the shortfall multiplied by the
per-barrel
fee. The amount of any shortfall payment paid by Tesoro will be
credited against any amounts owed by Tesoro for volumes we
gather, transport and deliver in excess of its minimum
throughput commitment during any of the succeeding three months.
Following such three-month period, any remaining portion of that
shortfall credit will expire. Any volumes we gather, transport
and deliver in excess of Tesoros minimum throughput
commitment will be charged at the same
per-barrel
rate.
If we expand or extend our High Plains pipeline system to any
production location for volumes of crude oil that Tesoro is at
that time paying us to gather by truck, then Tesoro will be
entitled to a proportionate reduction in Tesoros minimum
throughput commitment to account for those volumes.
Tesoro will pay (or reimburse us for) all taxes (other than
income taxes, gross receipt taxes and similar taxes) that we
incur on Tesoros behalf for the services we provide to
Tesoro under the agreement. Furthermore, if new laws or
regulations that affect the services that we provide to Tesoro
under this agreement are enacted or promulgated that require us
to make substantial and unanticipated capital expenditures, the
agreement will provide us with the right to impose a monthly
surcharge to cover Tesoros proportionate share of the cost
of complying with these laws or regulations, after we have made
efforts to mitigate their effect. We and Tesoro will negotiate
in good faith to agree on the level of the monthly surcharge.
Under this agreement, we will have no obligation to measure
volume gains and losses, and will have no liability for physical
losses that may result from the transportation of Tesoros
crude oil through trucks we dispatch.
Tesoro is not permitted to suspend or reduce its obligations
under the agreement in connection with the shutdown of its
Mandan refinery for scheduled turnarounds or other regular
servicing or maintenance. If, however, Tesoro decides to
permanently or indefinitely suspend refining operations at the
Mandan refinery for a period that will continue for at least 12
consecutive months, then Tesoro may terminate the agreement on
no less than 12 months prior written notice to us,
unless Tesoro has publicly announced its intent to resume
operations at the Mandan refinery more than two months prior to
the expiration of the
12-month
notice period. During the
12-month
notice period, Tesoro will continue to owe shortfall payments
for any calendar month in which it does not transport aggregate
volumes equal to its minimum throughput commitment.
If a force majeure event occurs, we must provide Tesoro with
written notice of the force majeure event and identify the
approximate length of time we believe that force majeure event
will continue. If we believe that a force majeure event will
continue for 12 consecutive months or more, we and Tesoro will
each have the right to terminate the agreement on no less than
12 months prior written notice to the other party.
However, if we receive a termination notice from Tesoro and
notify Tesoro within 30 days that we reasonably believe in
good faith that we will be able to gather, transport and deliver
Tesoros minimum throughput commitment within a reasonable
period of time, then Tesoros termination notice will be
deemed revoked and the agreement will continue in full force and
effect as if the termination notice had never been given.
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This agreement will have an initial term of two years and will
automatically be extended for successive two-year terms, up to a
maximum of 10 years, unless earlier terminated by us or
Tesoro no later than three months prior to the expiration of any
term. Upon the termination or expiration of the agreement,
Tesoro will have a limited right of first refusal to enter into
a new agreement with us on commercial terms that are equal to or
more favorable to us than any commercial terms offered to us by
a third party. This agreement may be assigned by us or Tesoro
only with the other partys prior written consent, except
that we or Tesoro may assign this agreement without the other
partys prior written consent in connection with our sale
of our truck gathering operation or Tesoros sale of the
Mandan refinery, respectively, and only if the transferee agrees
to assume all of the assigning partys obligations under
the agreement and is financially and operationally capable of
fulfilling the assigning partys obligations under the
agreement. In addition, we may not assign this agreement to one
of Tesoros competitors.
Master
Terminalling Services Agreement
We will enter into a master terminalling services agreement with
Tesoro under which Tesoro will be obligated to throughput
minimum volumes of refined products equal to an aggregate
average of 100,000 bpd per month at our eight refined
products terminals. We will charge throughput fees for each
barrel distributed through our terminals. We will also charge
Tesoro separate fees, ranging from $0.05 to $1.05 per barrel,
for providing ancillary services such as ethanol blending and
additive injection. Based on Tesoros minimum throughput
commitment and the pro forma weighted average per barrel
terminalling fee (which includes throughput fees and related
ancillary services fees) for the twelve months ended
September 30, 2010, Tesoro would have paid us approximately
$2.4 million per month under this agreement.
The fees we will charge Tesoro will be adjusted annually by a
percentage equal to the change in the consumer price index.
Tesoro will reimburse us for any cleaning, degassing or other
preparation of storage tanks requested by Tesoro.
If Tesoro fails to throughput an amount of refined products
equal to its minimum throughput commitment during any calendar
month, then Tesoro will pay us a shortfall payment equal to the
volume of the shortfall multiplied by the weighted average
throughput fee (including any ancillary services fees) incurred
by Tesoro during that month. The amount of any shortfall payment
paid by Tesoro will be credited against any payments owed by
Tesoro during any of the following three months to the extent
that Tesoros throughput exceeds its minimum throughput
commitment for that month. Following such three-month period,
any remaining portion of that shortfall credit will expire.
Tesoro will pay (or reimburse us for) all taxes (other than
income taxes, gross receipt taxes and similar taxes) that we
incur on Tesoros behalf for the services we provide to
Tesoro under the agreement. Furthermore, if new laws or
regulations that affect the services that we provide to Tesoro
under this agreement are enacted or promulgated that require us
to make substantial and unanticipated capital expenditures, the
agreement will provide us with the right to impose a monthly
surcharge to cover Tesoros proportionate share of the cost
of complying with these laws or regulations, after we have made
efforts to mitigate their effect. We and Tesoro will negotiate
in good faith to agree on the level of the monthly surcharge.
Under the agreement, we are permitted to retain 0.25% of the
refined products we handle for Tesoro at our Anchorage, Boise,
Burley, Stockton and Vancouver terminals, and we will bear any
refined product volume losses in excess of that amount. To the
extent that actual losses are less than 0.25% during any month,
Tesoro will repurchase from us the difference between the actual
losses and the 0.25% allowance at a price equal to the average
local rack price for the applicable commodity for that month,
less a specified discount. For all of our other terminals, we
will have no obligation to measure volume gains and losses, and
will have no liability for or benefit from physical losses or
gains.
Tesoro is not permitted to suspend or reduce its obligations
under the agreement in connection with the shutdown of a
refinery for scheduled turnarounds or other regular servicing or
maintenance. If, however, Tesoro decides to permanently or
indefinitely suspend refining operations at any of its
refineries for a period that will continue for at least 12
consecutive months, then Tesoro may terminate its rights and
obligations relating to the affected terminals under the
agreement on no less than 12 months prior written
notice to us,
147
unless Tesoro has publicly announced its intent to resume
operations at the applicable refinery more than two months prior
to the expiration of the
12-month
notice period. During the
12-month
notice period, for any month in which Tesoro does not throughput
any volumes of refined products at an affected terminal,
Tesoros minimum volume commitment will be reduced by a
stipulated proportionate volume for the affected terminal,
provided that Tesoro will pay us a monthly curtailment fee
calculated by multiplying the number of days in the month times
the stipulated volume for the affected terminal times the
weighted average throughput fee (including any ancillary
services fees) incurred by Tesoro at the affected terminal
during the 12 calendar months prior to Tesoros
announcement of the suspension of refinery operations. A
separate shortfall fee calculation will be made for each
applicable month based on Tesoros reduced minimum volume
commitment and Tesoros throughput volumes at the
unaffected terminals. Upon the expiration of the
12-month
notice period, Tesoro will no longer owe us any curtailment fees
and will have no throughput obligation with respect to the
affected terminal, and Tesoros adjusted minimum volume
commitment will apply only to our unaffected terminals.
If a force majeure event occurs, we must provide Tesoro with
written notice of the force majeure event and identify the
approximate length of time we believe that force majeure event
will continue. If we believe that a force majeure event will
continue for 12 consecutive months or more, we and Tesoro will
each have the right to terminate the services under the
agreement on no less than 12 months prior written
notice to the other party, but only with respect to the affected
terminal. However, if we receive a termination notice from
Tesoro and notify Tesoro within 30 days that we reasonably
believe in good faith that we will be able to resume the
suspended services under the agreement within a reasonable
period of time, then Tesoros termination notice will be
deemed revoked and the agreement will continue in full force and
effect as if the termination notice had never been given. If
services relating to any terminal are terminated because of a
force majeure, Tesoro will be permitted to reduce its minimum
throughput commitment by an amount equal to a stipulated
proportionate volume for the affected terminal.
This agreement will have an initial term of 10 years and
may be renewed for two additional five-year terms at
Tesoros option. Upon the termination or expiration of the
agreement, Tesoro will have a limited right of first refusal to
enter into a new agreement with us on commercial terms that are
equal to or more favorable to us than any commercial terms
offered to us by a third party. This agreement may be assigned
by us or Tesoro only with the other partys prior written
consent, except that we or Tesoro may assign this agreement, in
whole or in party, without the other partys prior written
consent in connection with our sale of one or more of our
terminals or Tesoros sale of a refinery associated with
one of our terminals, respectively, and only if the transferee
agrees to assume all of the assigning partys obligations
under the agreement with respect to the terminal(s) and rights
assigned and is financially and operationally capable of
fulfilling the assigning partys obligations under the
agreement. In addition, we may not assign all or part of the
agreement to one of Tesoros competitors. If either we or
Tesoro assign rights and obligations under the agreement
relating to a specific terminal, then Tesoros minimum
volume commitment will be reduced by the amount of the
stipulated volume for that terminal, and both our and
Tesoros obligations will continue with respect to the
remaining terminals and Tesoros adjusted minimum volume
commitment. In such a case, the rights and obligations relating
to any applicable terminal, and its stipulated volume, would be
novated into an agreement with the assignee, and that assignee
would then become responsible for performance of the obligations
relating to that terminal.
Short-Haul
Pipeline Transportation Service Agreement
We will enter into short-haul pipeline transportation services
agreement with Tesoro under which Tesoro will pay us a $0.25
per-barrel
transportation fee for transporting minimum volumes of crude oil
and refined products equal to an average of 54,000 bpd per
month on our five Salt Lake City short-haul pipelines. Based on
Tesoros minimum throughput commitment and the initial
per-barrel
transportation fee, Tesoro would have paid us approximately
$0.4 million per month under this agreement.
If Tesoro fails to ship an amount of crude oil and refined
products equal to its full minimum throughput commitment during
any calendar month, then Tesoro will pay us a shortfall payment
equal to the volume of the shortfall multiplied by the
per-barrel
transportation fee. The amount of any shortfall payment paid by
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Tesoro will be credited against any amounts owed by Tesoro for
the transportation of volumes in excess of its minimum
throughput commitment on our five Salt Lake City short-haul
pipelines during any of the succeeding three months. Following
such three-month period, Tesoro will no longer be permitted to
credit any part of the shortfall payment against any amounts
owed by Tesoro. Any volumes we transport in excess of
Tesoros minimum throughput commitment will be charged at
the same
per-barrel
rate.
We will adjust the $0.25
per-barrel
transportation fee annually by a percentage equal to the change
in the consumer price index. Tesoro has agreed not to challenge,
or to cause others to challenge or assist others in challenging,
our requested exemption from FERC regulation for our short-haul
pipelines for the term of the agreement. If FERC denies our
requested exemption and asserts jurisdiction over transportation
service on our short-haul pipelines, then we would be required
to provide services under a tariff, in which case the agreement
and the
per-barrel
transportation fee may be adjusted to conform to FERC
requirements. In such a case, we and Tesoro would be required to
negotiate appropriate changes to the terms of the agreement to
restore to each party the economic benefits expected prior to
FERCs assertion of jurisdiction. Please read
Business Rate and Other Regulation
beginning on page 114 for information regarding our plans
to request an exemption from FERC regulation for our short-haul
pipelines.
Under this agreement, we will have no obligation to measure
volume gains and losses, and will have no liability for physical
losses that may result from the transportation of Tesoros
crude oil and refined products our through our crude oil and
refined product short-haul pipelines. Tesoro will pay (or
reimburse us for) all taxes (other than income taxes, gross
receipt taxes and similar taxes) that we incur on Tesoros
behalf for the services we provide to Tesoro under the
agreement. If new laws or regulations that affect the services
that we provide to Tesoro under this agreement are enacted or
promulgated that require us to make substantial and
unanticipated capital expenditures, the agreement will provide
us with the right to impose a monthly surcharge to cover
Tesoros proportionate share of the cost of complying with
these laws or regulations, after we have made efforts to
mitigate their effect. We and Tesoro will negotiate in good
faith to agree on the level of the monthly surcharge.
Tesoro is not permitted to suspend or reduce its obligations
under the agreement in connection with the shutdown of its Salt
Lake City refinery for scheduled turnarounds or other regular
servicing or maintenance. If, however, Tesoro decides to
permanently or indefinitely suspend refining operations at the
Salt Lake City refinery for a period that will continue for at
least 12 consecutive months, then Tesoro may terminate the
agreement on no less than 12 months prior written
notice to us, unless Tesoro has publicly announced its intent to
resume operations at the Salt Lake City refinery more than two
months prior to the expiration of the
12-month
notice period. During the
12-month
notice period, Tesoro will continue to owe shortfall payments
for any calendar month in which it does not transport aggregate
volumes equal to its minimum throughput commitment.
If a force majeure event occurs, we must provide Tesoro with
written notice of the force majeure event and identify the
approximate length of time we believe that force majeure event
will continue. If we believe that a force majeure event will
continue for 12 consecutive months or more, we and Tesoro will
each have the right to terminate the agreement on no less than
12 months prior written notice to the other party.
However, if we receive a termination notice from Tesoro and
notify Tesoro within 30 days that we reasonably believe in
good faith that we will be able to transport Tesoros
minimum throughput commitment within a reasonable period of
time, then Tesoros termination notice will be deemed
revoked and the agreement will continue in full force and effect
as if the termination notice had never been given.
This agreement will have an initial term of 10 years and
may be renewed for two additional five-year terms at
Tesoros option. Upon the termination or expiration of the
agreement, Tesoro will have a limited right of first refusal to
enter into a new agreement with us on commercial terms that are
equal to or more favorable to us than any commercial terms
offered to us by a third party. This agreement may be assigned
by us or Tesoro only with the other partys prior written
consent, except that we or Tesoro may assign this agreement
without the other partys prior written consent in
connection with our sale of all of our short-haul pipelines or
Tesoros sale of its Salt Lake City refinery, respectively,
and only if the transferee agrees to assume all of the assigning
partys obligations under the agreement and is financially
and operationally capable of fulfilling the
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assigning partys obligations under the agreement. In
addition, we may not assign this agreement to a competitor of
Tesoro.
Salt
Lake City Storage and Transportation Services
Agreement
We will also enter into a storage and transportation services
agreement with Tesoro under which Tesoro will pay us a $0.50
per-barrel
fee per month for storing crude oil and refined products at our
Salt Lake City storage facility and transporting crude oil and
refined products between the storage facility and Tesoros
Salt Lake City refinery through our four interconnecting
pipelines. Tesoros fees under this agreement will be for
the use of the existing shell capacity of our storage facility
(currently 878,000 barrels) and the existing capacity on
our four interconnecting pipelines, regardless of whether Tesoro
fully utilizes all of its contracted capacity. We will have the
right to adjust Tesoros
per-barrel
fee annually by a percentage equal to the change in the consumer
price index.
Tesoros obligation to pay the monthly fees will apply
through the term of the agreement, regardless of the actual
volumes of crude oil and refined products that we store and
transport for Tesoro. At the end of the term or as otherwise
requested by Tesoro, Tesoro will also reimburse us for any
cleaning, degassing or other preparation of storage tanks.
Tesoro will bear any crude oil or refined product volume losses
that may result from the storage or transportation of
Tesoros crude oil and refined products at our storage
facility and through our interconnecting pipelines,
respectively. In addition, Tesoro will pay (or reimburse us for)
all taxes (other than income taxes, gross receipt taxes and
similar taxes) that we incur on Tesoros behalf for the
services we provide to Tesoro under the agreement. Furthermore,
if new laws or regulations that affect the services that we
provide to Tesoro under this agreement are enacted or
promulgated that require us to make substantial and
unanticipated capital expenditures, the agreement will provide
us with the right to impose a monthly surcharge to cover
Tesoros proportionate share of the cost of complying with
these laws or regulations, after we have made efforts to
mitigate their effect. We and Tesoro will negotiate in good
faith to agree on the level of the monthly surcharge.
Under this agreement, we will have no obligation to measure
volume gains and losses, and will have no liability for physical
losses that may result from the storage or transportation of
Tesoros crude oil and refined products at our storage
facility or on our interconnecting pipelines, respectively.
Tesoro is not permitted to suspend or reduce its obligations
under the agreement in connection with the shutdown of its Salt
Lake City refinery for scheduled turnarounds or other regular
servicing or maintenance. If, however, Tesoro decides to
permanently or indefinitely suspend refining operations at the
Salt Lake City refinery for a period that will continue for at
least 12 consecutive months, then Tesoro may terminate the
agreement on no less than 12 months prior written
notice to us, unless Tesoro has publicly announced its intent to
resume operations at the Salt Lake City refinery more than two
months prior to the expiration of the
12-month
notice period. During the
12-month
period, Tesoro will be obligated to pay the full amount of any
monthly fees due under the agreement.
If a force majeure event occurs, we must provide Tesoro with
written notice of the force majeure event and identify the
approximate length of time we believe that force majeure event
will continue. If we believe that a force majeure event will
continue for 12 consecutive months or more, we and Tesoro will
each have the right to terminate the agreement on no less than
12 months prior written notice to the other party.
However, if we receive a termination notice from Tesoro and
notify Tesoro within 30 days that we reasonably believe in
good faith that we will be able to resume the suspended services
under the agreement within a reasonable period of time, then
Tesoros termination notice will be deemed revoked and the
agreement will continue in full force and effect as if the
termination notice had never been given.
This agreement will have an initial term of 10 years and
may be renewed for two additional five-year terms at
Tesoros option. Upon the termination or expiration of the
agreement, Tesoro will have a limited right of first refusal to
enter into a new agreement with us on commercial terms that are
equal to or more favorable to us than any commercial terms
offered to us by a third party. This agreement may be assigned
by us or Tesoro only with the other partys prior written
consent, except that we or Tesoro may assign this agreement
without the other partys prior written consent in
connection with our sale of our Salt Lake City storage
150
facility or Tesoros sale of its Salt Lake City refinery,
respectively, and only if the transferee agrees to assume all of
the assigning partys obligations under the agreement and
is financially and operationally capable of fulfilling the
assigning partys obligations under the agreement. In
addition, we may not assign this agreement to one of
Tesoros competitors.
Procedures
for Review, Approval and Ratification of Related Person
Transactions
The board of directors of our general partner will adopt a code
of business conduct and ethics in connection with the closing of
this offering that will provide that the board of directors of
our general partner or its authorized committee will
periodically review all related person transactions that are
required to be disclosed under SEC rules and, when appropriate,
initially authorize or ratify all such transactions. In the
event that the board of directors of our general partner or its
authorized committee considers ratification of a related person
transaction and determines not to so ratify, the code of
business conduct and ethics will provide that our management
will make all reasonable efforts to cancel or annul the
transaction.
The code of business conduct and ethics will provide that, in
determining whether or not to recommend the initial approval or
ratification of a related person transaction, the board of
directors of our general partner or its authorized committee
should consider all of the relevant facts and circumstances
available, including (if applicable) but not limited to:
(i) whether there is an appropriate business justification
for the transaction; (ii) the benefits that accrue to us as
a result of the transaction; (iii) the terms available to
unrelated third parties entering into similar transactions;
(iv) the impact of the transaction on a directors
independence (in the event the related person is a director, an
immediate family member of a director or an entity in which a
director or an immediately family member of a director is a
partner, shareholder, member or executive officer); (v) the
availability of other sources for comparable products or
services; (vi) whether it is a single transaction or a
series of ongoing, related transactions; and (vii) whether
entering into the transaction would be consistent with the code
of business conduct and ethics.
The code of business conduct and ethics described above will be
adopted in connection with the closing of this offering, and as
a result the transactions described above were not reviewed
under such policy.
151
CONFLICTS
OF INTEREST AND FIDUCIARY DUTIES
Conflicts
of Interest
Conflicts of interest exist and may arise in the future as a
result of the relationships between our general partner and its
affiliates, including Tesoro, on the one hand, and us and our
unaffiliated limited partners, on the other hand. The directors
and executive officers of our general partner have fiduciary
duties to manage our general partner in a manner beneficial to
its owners. At the same time, our general partner has a
fiduciary duty to manage us in a manner beneficial to us and our
unitholders.
Whenever a conflict arises between our general partner or its
affiliates, on the one hand, and us and our limited partners, on
the other hand, our general partner will resolve that conflict.
Our partnership agreement contains provisions that modify and
limit our general partners fiduciary duties to our
unitholders. Our partnership agreement also restricts the
remedies available to unitholders for actions taken by our
general partner that, without those limitations, might
constitute breaches of its fiduciary duty.
Our general partner will not be in breach of its obligations
under the partnership agreement or its fiduciary duties to us or
our unitholders if the resolution of the conflict is:
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approved by our conflicts committee, although our general
partner is not obligated to seek such approval;
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approved by the vote of a majority of the outstanding common
units, excluding any common units owned by our general partner
and any of its affiliates;
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on terms no less favorable to us than those generally being
provided to or available from unrelated third parties; or
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fair and reasonable to us, taking into account the totality of
the relationships between the parties involved, including other
transactions that may be particularly favorable or advantageous
to us.
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Our general partner may, but is not required to, seek the
approval of such resolution from our conflicts committee. In
connection with a situation involving a conflict of interest,
any determination by our general partner involving the
resolution of the conflict of interest must be made in good
faith, provided that, if our general partner does not seek
approval from our conflicts committee and its board of directors
determines that the resolution or course of action taken with
respect to the conflict of interest satisfies either of the
standards set forth in the third and fourth bullet points above,
then it will be presumed that, in making its decision, the board
of directors acted in good faith, and in any proceeding brought
by or on behalf of any limited partner or the partnership, the
person bringing or prosecuting such proceeding will have the
burden of overcoming such presumption. Unless the resolution of
a conflict is specifically provided for in our partnership
agreement, our general partner or our conflicts committee may
consider any factors it determines in good faith to consider
when resolving a conflict. When our partnership agreement
requires someone to act in good faith, it requires that person
to believe that he is acting in, or not opposed to, the best
interests of the partnership.
Conflicts of interest could arise in the situations described
below, among others.
Affiliates
of our general partner, including Tesoro, may compete with
us.
Our partnership agreement provides that our general partner will
be restricted from engaging in any business activities other
than acting as our general partner (or as general partner of
another company of which we are a partner or member) or those
activities incidental to its ownership of interests in us.
However, except as provided in the omnibus agreement, certain
affiliates of our general partner, including Tesoro, are not
prohibited from engaging in other businesses or activities,
including those that might compete with us.
Pursuant to the terms of our partnership agreement, the doctrine
of corporate opportunity, or any analogous doctrine, will not
apply to our general partner or any of its affiliates, including
its executive officers, directors and Tesoro. Any such
person or entity that becomes aware of a potential transaction,
agreement, arrangement or other matter that may be an
opportunity for us will not have any duty to
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communicate or offer such opportunity to us. Any such person or
entity will not be liable to us or to any limited partner for
breach of any fiduciary duty or other duty by reason of the fact
that such person or entity pursues or acquires such opportunity
for itself, directs such opportunity to another person or entity
or does not communicate such opportunity or information to us.
Therefore, except as provided in the omnibus agreement, Tesoro
may compete with us for acquisition opportunities and may own an
interest in entities that compete with us.
Our
general partner is allowed to take into account the interests of
parties other than us, such as Tesoro, in resolving
conflicts.
Our partnership agreement contains provisions that reduce the
fiduciary standards to which our general partner would otherwise
be held by state fiduciary duty law. For example, our
partnership agreement permits our general partner to make a
number of decisions in its individual capacity, as opposed to in
its capacity as our general partner. This entitles our general
partner to consider only the interests and factors that it
desires, and it has no duty or obligation to give any
consideration to any interest of, or factors affecting, us, our
affiliates or any limited partner. Examples include the exercise
of our general partners limited call right, its voting
rights with respect to the units it owns, its registration
rights and its determination whether or not to consent to any
merger or consolidation of the partnership.
Our
partnership agreement limits the liability and reduces the
fiduciary duties owed by our general partner, and also restricts
the remedies available to our unitholders for actions that,
without those limitations, might constitute breaches of its
fiduciary duty.
In addition to the provisions described above, our partnership
agreement contains provisions that restrict the remedies
available to our unitholders for actions that might otherwise
constitute breaches of our general partners fiduciary
duty. For example, our partnership agreement:
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provides that our general partner shall not have any liability
to us or our unitholders for decisions made in its capacity as
general partner so long as such decisions are made in good
faith, which requires that our general partner believes that the
decision was in, or not opposed to, our best interest;
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provides generally that affiliated transactions and resolutions
of conflicts of interest not approved by our conflicts committee
and not involving a vote of unitholders must either be
(1) on terms no less favorable to us than those generally
being provided to or available from unrelated third parties or
(2) fair and reasonable to us, as determined by
our general partner in good faith, provided that, in determining
whether a transaction or resolution is fair and
reasonable, our general partner may consider the totality
of the relationships between the parties involved, including
other transactions that may be particularly advantageous or
beneficial to us; and
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provides that our general partner and its executive officers and
directors will not be liable for monetary damages to us or our
limited partners resulting from any act or omission unless there
has been a final and non-appealable judgment entered by a court
of competent jurisdiction determining that our general partner
or its executive officers or directors acted in bad faith or
engaged in fraud or willful misconduct or, in the case of a
criminal matter, acted with knowledge that their conduct was
criminal.
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Except
in limited circumstances, our general partner has the power and
authority to conduct our business without unitholder
approval.
Under our partnership agreement, our general partner has full
power and authority to do all things, other than those items
that require unitholder approval or with respect to which our
general partner has sought conflicts committee approval, on such
terms as it determines to be necessary or appropriate to conduct
our business including, but not limited to, the following:
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the making of any expenditures, the lending or borrowing of
money, the assumption or guarantee of or other contracting for,
indebtedness and other liabilities, the issuance of evidences of
indebtedness, including indebtedness that is convertible into
our securities, and the incurring of any other obligations;
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the purchase, sale or other acquisition or disposition of our
securities, or the issuance of additional options, rights,
warrants and appreciation rights relating to our securities;
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the mortgage, pledge, encumbrance, hypothecation or exchange of
any or all of our assets;
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the negotiation, execution and performance of any contracts,
conveyances or other instruments;
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the distribution of our cash;
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the selection and dismissal of employees and agents, outside
attorneys, accountants, consultants and contractors and the
determination of their compensation and other terms of
employment or hiring;
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the maintenance of insurance for our benefit and the benefit of
our partners;
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the formation of, or acquisition of an interest in, the
contribution of property to, and the making of loans to, any
limited or general partnership, joint venture, corporation,
limited liability company or other entity;
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the control of any matters affecting our rights and obligations,
including the bringing and defending of actions at law or in
equity, otherwise engaging in the conduct of litigation,
arbitration or mediation and the incurring of legal expense, the
settlement of claims and litigation;
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the indemnification of any person against liabilities and
contingencies to the extent permitted by law;
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the making of tax, regulatory and other filings, or the
rendering of periodic or other reports to governmental or other
agencies having jurisdiction over our business or
assets; and
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the entering into of agreements with any of its affiliates to
render services to us or to itself in the discharge of its
duties as our general partner.
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Our partnership agreement provides that our general partner must
act in good faith when making decisions on our
behalf, and our partnership agreement further provides that in
order for a determination to be made in good faith,
our general partner must believe that the determination is in,
or not opposed to, our best interests. Please read The
Partnership Agreement Voting Rights beginning
on page 162 for information regarding matters that require
unitholder approval.
Actions
taken by our general partner may affect the amount of cash
available for distribution to unitholders or accelerate the
right to convert subordinated units.
The amount of cash that is available for distribution to
unitholders is affected by decisions of our general partner
regarding such matters as:
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the amount and timing of asset purchases and sales;
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borrowings;
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the issuance of additional units; and
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the creation, reduction or increase of reserves in any quarter.
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Our general partner determines the amount and timing of any
capital expenditures and whether a capital expenditure is
classified as a maintenance capital expenditure, which reduces
operating surplus, or expansion or investment capital
expenditures, which do not reduce operating surplus. This
determination can affect the amount of cash that is distributed
to our unitholders and to our general partner and the ability of
the subordinated units to convert into common units.
In addition, our general partner may use an amount, initially
equal to $ million, which
would not otherwise constitute available cash from operating
surplus, in order to permit the payment of cash distributions on
its units and incentive distribution rights. All of these
actions may affect the amount of cash distributed to our
unitholders and our general partner and may facilitate the
conversion of subordinated units into common
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units. Please read Provisions of our Partnership
Agreement Relating to Cash Distributions beginning on
page 62.
In addition, borrowings by us and our affiliates do not
constitute a breach of any duty owed by our general partner to
our unitholders, including borrowings that have the purpose or
effect of:
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enabling our general partner or its affiliates to receive
distributions on any subordinated units held by them or the
incentive distribution rights; or
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accelerating the expiration of the subordination period.
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For example, in the event we have not generated sufficient cash
from our operations to pay the minimum quarterly distribution on
our common units and our subordinated units, our partnership
agreement permits us to borrow funds, which would enable us to
make this distribution on all outstanding units. Please read
Provisions of our Partnership Agreement Relating to Cash
Distributions Subordination Period beginning
on page 65.
Our partnership agreement provides that we and our subsidiaries
may borrow funds from our general partner and its affiliates.
Our general partner and its affiliates may not borrow funds from
us, or our operating company and its operating subsidiaries.
We
will reimburse our general partner and its affiliates for
expenses.
We will reimburse our general partner and its affiliates,
including Tesoro, for costs incurred in managing and operating
our business and affairs. Our partnership agreement provides
that our general partner will determine the expenses that are
allocable to us, and it will charge on a fully allocated cost
basis for services provided to us. The fully allocated basis
charged by our general partner does not include a profit
component. We will also enter into an omnibus agreement and an
operational services agreement with Tesoro that will address our
reimbursement of our general partner and its affiliates for
these costs and services. Please read Certain
Relationships and Related Party Transactions beginning on
page 138.
Contracts
between us, on the one hand, and our general partner and its
affiliates, on the other hand, will not be the result of
arms-length negotiations.
Our partnership agreement allows our general partner to
determine, in good faith, any amounts to pay itself or its
affiliates for any services rendered to us. Our general partner
may also enter into additional contractual arrangements with any
of its affiliates on our behalf. While we believe the terms and
conditions under our agreements with Tesoro are generally no
less favorable to either party than those that could have been
negotiated with unaffiliated parties with respect to similar
services, neither our partnership agreement nor any of the other
agreements, contracts, and arrangements between us and our
general partner and its affiliates are or will be the result of
arms-length negotiations. Similarly, agreements, contracts
or arrangements between us and our general partner and its
affiliates that are entered into following the closing of this
offering will not be required to be negotiated on an
arms-length basis, although our general partner may
determine that our conflicts committee should make a
determination on our behalf with respect to such arrangements.
Our general partner will determine, in good faith, the terms of
any agreements, contracts or arrangement that we enter into
after the close of this offering.
Our general partner and its affiliates will have no obligation
to permit us to use any facilities or assets of our general
partner and its affiliates, except as may be provided in
contracts entered into specifically for such use. There is no
obligation of our general partner and its affiliates to enter
into any contracts of this kind.
Our
general partner intends to limit its liability regarding our
obligations.
Our general partner intends to limit its liability under
contractual arrangements so that counterparties to such
agreements have recourse only against our assets and not against
our general partner or its assets or any affiliate of our
general partner or its assets. Our partnership agreement
provides that any action taken by our
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general partner to limit its liability is not a breach of our
general partners fiduciary duties, even if we could have
obtained terms that are more favorable without the limitation on
liability.
Common
units are subject to our general partners limited call
right.
Our general partner may exercise its right to call and purchase
common units, as provided in our partnership agreement, or may
assign this right to one of its affiliates or to us. Our general
partner may use its own discretion, free of fiduciary duty
restrictions, in determining whether to exercise this right. As
a result, a common unitholder may have to sell his common units
at an undesirable time or price. Please read The
Partnership Agreement Limited Call Right
beginning on page 170.
Common
unitholders will have no right to enforce obligations of our
general partner and its affiliates under agreements with
us.
Any agreements between us, on the one hand, and our general
partner and its affiliates, on the other hand, will not grant to
the unitholders, separate and apart from us, the right to
enforce the obligations of our general partner and its
affiliates in our favor.
Our
general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
The attorneys, independent accountants and others who perform
services for us have been retained by our general partner.
Attorneys, independent accountants and others who perform
services for us are selected by our general partner or our
conflicts committee and may perform services for our general
partner and its affiliates. We may retain separate counsel for
ourselves or the holders of common units in the event of a
conflict of interest between our general partner and its
affiliates, on the one hand, and us or the holders of common
units, on the other, depending on the nature of the conflict. We
do not intend to do so in most cases.
Our
general partner may elect to cause us to issue common units to
it in connection with a resetting of the target distribution
levels related to our general partners incentive
distribution rights without the approval of our conflicts
committee or our unitholders. This election may result in lower
distributions to our common unitholders in certain
situations.
Our general partner has the right, at any time when there are no
subordinated units outstanding and it has received distributions
on its incentive distribution rights at the highest level to
which it is entitled (48.0%, in addition to distributions paid
on its 2.0% general partner interest) for each of the prior four
consecutive fiscal quarters, to reset the initial target
distribution levels at higher levels based on our distributions
at the time of the exercise of the reset election. Furthermore,
our general partner has the right to transfer our incentive
distribution rights at any time, and such transferee shall have
the same rights as the general partner relative to resetting
target distributions if our general partner concurs that the
tests for resetting target distributions have been fulfilled.
Following a reset election, the minimum quarterly distribution
will be adjusted to equal the reset minimum quarterly
distribution, and the target distribution levels will be reset
to correspondingly higher levels based on percentage increases
above the reset minimum quarterly distribution.
We anticipate that our general partner would exercise this reset
right in order to facilitate acquisitions or internal growth
projects that would not be sufficiently accretive to cash
distributions per common unit without such conversion; however,
it is possible that our general partner could exercise this
reset election at a time when we are experiencing declines in
our aggregate cash distributions or at a time when our general
partner expects that we will experience declines in our
aggregate cash distributions in the foreseeable future. In such
situations, our general partner may be experiencing, or may
expect to experience, declines in the cash distributions it
receives related to its incentive distribution rights and may
therefore desire to be issued our common units, which are
entitled to specified priorities with respect to our
distributions and which therefore may be more advantageous for
the general partner to own in lieu of the right to receive
incentive distribution payments based on target distribution
levels that are less certain to be achieved in the then current
business environment. As a result, a reset election may cause
our common unitholders to experience dilution in the
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amount of cash distributions that they would have otherwise
received had we not issued new common units to our general
partner in connection with resetting the target distribution
levels related to our general partners incentive
distribution rights. Please read Provisions of our
Partnership Agreement Relating to Cash Distributions
Distributions of Available Cash General Partner
Interest and Incentive Distribution Rights beginning on
page 67.
Fiduciary
Duties
Our general partner is accountable to us and our unitholders as
a fiduciary. Fiduciary duties owed to unitholders by our general
partner are prescribed by law and the partnership agreement. The
Delaware Act provides that Delaware limited partnerships may, in
their partnership agreements, modify or eliminate, except for
the contractual covenant of good faith and fair dealing, the
fiduciary duties owed by the general partner to limited partners
and the partnership.
Our partnership agreement contains various provisions
restricting the fiduciary duties that might otherwise be owed by
our general partner. We have adopted these provisions to allow
our general partner or its affiliates to engage in transactions
with us that would otherwise be prohibited by state-law
fiduciary standards and to take into account the interests of
other parties in addition to our interests when resolving
conflicts of interest. Without such modifications, such
transactions could result in violations of our general
partners state-law fiduciary duty standards. We believe
this is appropriate and necessary because the board of directors
of our general partner has fiduciary duties to manage our
general partner in a manner beneficial both to its owners as
well as to our unitholders. Without these modifications, our
general partners ability to make decisions involving
conflicts of interest would be restricted. The modifications to
the fiduciary standards enable our general partner to take into
consideration the interests of all parties involved, so long as
the resolution is fair and reasonable to us. These modifications
also enable our general partner to attract and retain
experienced and capable directors. These modifications
disadvantage the common unitholders because they restrict the
rights and remedies that would otherwise be available to
unitholders for actions that, without those limitations, might
constitute breaches of fiduciary duty, as described below, and
permit our general partner to take into account the interests of
third parties in addition to our interests when resolving
conflicts of interest. The following is a summary of the
material restrictions of the fiduciary duties owed by our
general partner to the limited partners:
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State law fiduciary duty standards |
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Fiduciary duties are generally considered to include an
obligation to act in good faith and with due care and loyalty.
The duty of care, in the absence of a provision in a partnership
agreement providing otherwise, would generally require a general
partner to act for the partnership in the same manner as a
prudent person would act on his own behalf. The duty of loyalty,
in the absence of a provision in a partnership agreement
providing otherwise, would generally prohibit a general partner
of a Delaware limited partnership from taking any action or
engaging in any transaction where a conflict of interest is
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Partnership agreement modified standards |
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Our partnership agreement contains provisions that waive or
consent to conduct by our general partner and its affiliates
that might otherwise raise issues as to compliance with
fiduciary duties or applicable law. For example, our partnership
agreement provides that when our general partner is acting in
its capacity as our general partner, as opposed to in its
individual capacity, it must act in good faith and
will not be subject to any other standard under applicable law.
In addition, when our general partner is acting in its
individual capacity, as opposed to in its capacity as our
general partner, it may act without any fiduciary obligation to
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limited partners whatsoever. These standards reduce the
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Our partnership agreement generally provides that affiliated
transactions and resolutions of conflicts of interest not
involving a vote of unitholders or that are not approved by our
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on terms no less favorable to us than those
generally being provided to or available from unrelated third
parties; or
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fair and reasonable to us, taking into
account the totality of the relationships between the parties
involved (including other transactions that may be particularly
favorable or advantageous to us).
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If our general partner does not seek approval from our conflicts
committee and its board of directors determines that the
resolution or course of action taken with respect to the
conflict of interest satisfies either of the standards set forth
in the bullet points above, then it will be presumed that, in
making its decision, the board of directors, which may include
board members affected by the conflict of interest, acted in
good faith, and in any proceeding brought by or on behalf of any
limited partner or the partnership, the person bringing or
prosecuting such proceeding will have the burden of overcoming
such presumption. These standards reduce the obligations to
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In addition to the other more specific provisions limiting the
obligations of our general partner, our partnership agreement
further provides that our general partner and its officers and
directors will not be liable for monetary damages to us or our
limited partners for errors of judgment or for any acts or
omissions unless there has been a final and non-appealable
judgment by a court of competent jurisdiction determining that
our general partner or its officers and directors acted in bad
faith or engaged in fraud or willful misconduct or, in the case
of a criminal matter, acted with knowledge that the conduct was
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Rights and remedies of unitholders |
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The Delaware Act generally provides that a limited partner may
institute legal action on behalf of the partnership to recover
damages from a third party where a general partner has refused
to institute the action or where an effort to cause a general
partner to do so is not likely to succeed. These actions include
actions against a general partner for breach of its fiduciary
duties or of the partnership agreement. In addition, the
statutory or case law of some jurisdictions may permit a limited
partner to institute legal action on behalf of himself and all
other similarly situated limited partners to recover damages
from a general partner for violations of its fiduciary duties to
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By purchasing our common units, each common unitholder
automatically agrees to be bound by the provisions in our
partnership agreement, including the provisions discussed above.
This is in accordance with the policy of the Delaware Act
favoring the principle of freedom of contract and the
enforceability of
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partnership agreements. The failure of a limited partner to sign
a partnership agreement does not render the partnership
agreement unenforceable against that person.
Under our partnership agreement, we must indemnify our general
partner and its officers, directors and managers, to the fullest
extent permitted by law, against liabilities, costs and expenses
incurred by our general partner or these other persons. We must
provide this indemnification unless there has been a final and
non-appealable judgment by a court of competent jurisdiction
determining that these persons acted in bad faith or engaged in
fraud or willful misconduct or, in the case of a criminal
matter, acted with knowledge that the conduct was unlawful. We
also must provide this indemnification for criminal proceedings
when our general partner or these other persons acted with no
knowledge that their conduct was unlawful. Thus, our general
partner could be indemnified for its negligent acts if it met
the requirements set forth above. To the extent that these
provisions purport to include indemnification for liabilities
arising under the Securities Act of 1933, or the Securities Act,
in the opinion of the SEC, such indemnification is contrary to
public policy and therefore unenforceable. Please read The
Partnership Agreement Indemnification on
page 172.
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DESCRIPTION
OF THE COMMON UNITS
The
Units
The common units and the subordinated units represent limited
partner interests in us. The holders of units are entitled to
participate in partnership distributions and exercise the rights
or privileges available to limited partners under our
partnership agreement. For a description of the relative rights
and preferences of holders of common units and subordinated
units in and to partnership distributions, please read this
section and Cash Distribution Policy and Restrictions on
Distributions. For a description of the rights and
privileges of limited partners under our partnership agreement,
including voting rights, please read The Partnership
Agreement beginning on page 162.
Transfer
Agent and Registrar
Duties
American Stock Transfer & Trust Company, LLC will serve as
registrar and transfer agent for our common units. We pay all
fees charged by the transfer agent for transfers of common
units, except the following that must be paid by unitholders:
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surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges;
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special charges for services requested by a holder of a common
unit; and
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other similar fees or charges.
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There is no charge to unitholders for disbursements of our cash
distributions. We will indemnify the transfer agent, its agents
and each of their stockholders, directors, officers and
employees against all claims and losses that may arise out of
acts performed or omitted for its activities in that capacity,
except for any liability due to any gross negligence or
intentional misconduct of the indemnified person or entity.
Resignation
or Removal
The transfer agent may resign, by notice to us, or be removed by
us. The resignation or removal of the transfer agent will become
effective upon our appointment of a successor transfer agent and
registrar and its acceptance of the appointment. If no successor
has been appointed and has accepted the appointment within
30 days after notice of the resignation or removal, the
general partner may act as the transfer agent and registrar
until a successor is appointed.
Transfer
of Common Units
Upon the transfer of a common unit in accordance with our
partnership agreement, the transferee of the common unit shall
be admitted as a limited partner with respect to the common
units transferred when such transfer and admission are reflected
in our books and records. Each transferee:
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represents that the transferee has the capacity, power and
authority to become bound by our partnership agreement;
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automatically becomes bound by the terms and conditions of, and
is deemed to have executed, our partnership agreement; and
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gives the consents, waivers and approvals contained in our
partnership agreement, such as the approval of all transactions
and agreements that we are entering into in connection with our
formation and this offering.
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Our general partner will cause any transfers to be recorded on
our books and records no less frequently than quarterly.
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We may, at our discretion, treat the nominee holder of a common
unit as the absolute owner. In that case, the beneficial
holders rights are limited solely to those that it has
against the nominee holder as a result of any agreement between
the beneficial owner and the nominee holder.
Common units are securities and any transfers are subject to the
laws governing the transfer of securities. In addition to other
rights acquired upon transfer, the transferor gives the
transferee the right to become a substituted limited partner in
our partnership for the transferred common units.
Until a common unit has been transferred on our books, we and
the transfer agent may treat the record holder of the common
unit as the absolute owner for all purposes, except as otherwise
required by law or stock exchange regulations.
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THE
PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our
partnership agreement, a form of which is included as
Appendix A to this prospectus. We will provide prospective
investors with a copy of this agreement upon request at no
charge.
We summarize the following provisions of the partnership
agreement elsewhere in this prospectus:
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with regard to distributions of available cash, please read
Cash Distribution Policy and Restrictions on
Distributions beginning on page 49;
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with regard to the transfer of common units, please read
Description of the Common Units Transfer of
Common Units beginning on page 160; and
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with regard to allocations of taxable income and taxable loss,
please read Material Federal Income Tax Consequences
beginning on page 175.
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Organization
and Duration
We were organized on December 3, 2010 and have a perpetual
existence.
Purpose
Our purpose under the partnership agreement is limited to any
business activity that is approved by our general partner and
that lawfully may be conducted by a limited partnership
organized under Delaware law, provided that our general partner
shall not cause us to engage, directly or indirectly, in any
business activity that the general partner determines would be
reasonably likely to cause us to be treated as an association
taxable as a corporation or otherwise taxable as an entity for
federal income tax purposes.
Although our general partner has the ability to cause us, our
principal operating subsidiary or its subsidiaries to engage in
activities other than the gathering, transportation and storage
of crude oil and the terminalling, transportation and storage of
refined products, our general partner has no current plans to do
so. The general partner is authorized in general to perform all
acts deemed necessary to carry out our purposes and to conduct
our business.
Capital
Contributions
Unitholders are not obligated to make additional capital
contributions, except as described below under
Limited Liability.
Voting
Rights
The following matters require the unitholder vote specified
below. Matters requiring the approval of a unit
majority require:
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during the subordination period, the approval of a majority of
our common units, excluding those common units held by our
general partner and its affiliates, and a majority of the
subordinated units, voting as separate classes; and
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after the subordination period, the approval of a majority of
our common units.
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Issuance of additional common units or units senior, equal to or
junior in rank to our common units
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No approval rights.
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Amendment of the partnership agreement
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Certain amendments may be made by the general partner without
the approval of the unitholders. Other amendments generally
require the approval of a unit majority. See
Amendment of the Partnership Agreement
beginning on page 165.
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Merger of our partnership or the sale of all or substantially
all of our assets
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Unit majority. See Merger, Sale or Other
Disposition of Assets on page 167.
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Dissolution of our partnership
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Unit majority. See Termination and
Dissolution on page 167.
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Reconstitution of our partnership upon dissolution
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Unit majority. See Termination and
Dissolution on page 167.
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Withdrawal of the general partner
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Under most circumstances, the approval of a majority of our
common units, excluding common units held by the general partner
and its affiliates, is required for the withdrawal of the
general partner prior
to ,
2021 in a manner which would cause a dissolution of our
partnership. See Withdrawal or Removal of the
General Partner beginning on page 168.
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Removal of the general partner
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Not less than
662/3%
of the outstanding common and subordinated units, voting as a
single class, including units held by our general partner and
its affiliates. See Withdrawal or Removal of
the General Partner beginning on page 168.
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Transfer of the general partner interest
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Our general partner may transfer all, but not less than all, of
its general partner interest in us without a vote of our
unitholders to an affiliate or another person in connection with
its merger or consolidation with or into, or sale of all or
substantially all of its assets to such person. The approval of
a majority of our common units, excluding common units held by
the general partner and its affiliates, is required in other
circumstances for a transfer of the general partner interest to
a third party prior
to ,
2021. See Transfer of General Partner
Interests on page 169.
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Transfer of incentive distribution rights
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Our general partner or its affiliates or a subsequent holder may
transfer any or all of its incentive distribution rights without
unitholder approval.
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Transfer of ownership interests in the general partner
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No approval required at any time. See Transfer
of Ownership Interests in General Partner on
page 169.
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Limited
Liability
Assuming that a limited partner does not participate in the
control of our business within the meaning of the Delaware Act
and that he otherwise acts in conformity with the provisions of
the partnership agreement, his liability under the Delaware Act
will be limited, subject to possible exceptions, to the amount
of capital he is obligated to contribute to us for his common
units plus his share of any undistributed profits and assets. If
it were determined, however, that the right, or exercise of the
right, by the limited partners as a group:
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to remove or replace the general partner;
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to approve some amendments to the partnership agreement; or
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to take other action under the partnership agreement;
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constituted participation in the control of our
business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for our obligations
under the laws of Delaware, to the same extent as
163
the general partner. This liability would extend to persons who
transact business with us who reasonably believe that the
limited partner is a general partner. Neither the partnership
agreement nor the Delaware Act specifically provides for legal
recourse against the general partner if a limited partner were
to lose limited liability through any fault of the general
partner. While this does not mean that a limited partner could
not seek legal recourse, we know of no precedent for this type
of a claim in Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if, after the distribution, all
liabilities of the limited partnership, other than liabilities
to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to
specific property of the partnership, would exceed the fair
value of the assets of the limited partnership. For the purpose
of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of
property subject to liability for which recourse of creditors is
limited shall be included in the assets of the limited
partnership only to the extent that the fair value of that
property exceeds the nonrecourse liability. The Delaware Act
provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was
in violation of the Delaware Act shall be liable to the limited
partnership for the amount of the distribution for three years.
Under the Delaware Act, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the
partnership, except the assignee is not obligated for
liabilities unknown to him at the time he became a limited
partner and that could not be ascertained from the partnership
agreement.
Our subsidiaries conduct business in nine states. Maintenance of
our limited liability as the sole member of our principal
operating subsidiary may require compliance with legal
requirements in the jurisdictions in which our principal
operating subsidiary conducts business, including qualifying our
subsidiaries to do business there.
Limitations on the liability of limited partners for the
obligations of a limited partner have not been clearly
established in many jurisdictions. If, by virtue of our
membership interest in the operating company or otherwise, it
were determined that we were conducting business in any state
without compliance with the applicable limited partnership or
limited liability company statute, or that the right or exercise
of the right by the limited partners as a group to remove or
replace the general partner, to approve some amendments to the
partnership agreement, or to take other action under the
partnership agreement constituted participation in the
control of our business for purposes of the statutes of
any relevant jurisdiction, then the limited partners could be
held personally liable for our obligations under the law of that
jurisdiction to the same extent as the general partner under the
circumstances. We will operate in a manner that the general
partner considers reasonable and necessary or appropriate to
preserve the limited liability of the limited partners.
Issuance
of Additional Securities
Our partnership agreement authorizes us to issue an unlimited
number of additional partnership securities for the
consideration and on the terms and conditions determined by our
general partner without the approval of the unitholders.
It is possible that we will fund acquisitions through the
issuance of additional common units, subordinated units or other
partnership securities. Holders of any additional common units
we issue will be entitled to share equally with the
then-existing holders of common units in our distributions of
available cash. In addition, the issuance of additional common
units or other partnership securities may dilute the value of
the interests of the then-existing holders of common units in
our net assets.
In accordance with Delaware law and the provisions of our
partnership agreement, we may also issue additional partnership
securities that, as determined by our general partner, may have
special voting rights to which the common units are not
entitled. In addition, our partnership agreement does not
prohibit our subsidiaries from issuing equity securities, which
may effectively rank senior to the common units.
Upon issuance of additional partnership securities (other than
the issuance of partnership securities issued in connection with
a reset of the incentive distribution target levels relating to
our general partners incentive distribution rights, the
issuance of partnership securities upon conversion of
outstanding partnership securities
164
or the issuance of partnership securities pursuant to the
underwriters option to purchase additional common units),
our general partner will be entitled, but not required, to make
additional capital contributions to the extent necessary to
maintain its 2.0% general partner interest in us. Our general
partners 2.0% interest in us will be reduced if we issue
additional units in the future and our general partner does not
contribute a proportionate amount of capital to us to maintain
its 2.0% general partner interest. Moreover, our general partner
will have the right, which it may from time to time assign in
whole or in part to any of its affiliates, to purchase common
units, subordinated units or other partnership securities
whenever, and on the same terms that, we issue those securities
to persons other than our general partner and its affiliates, to
the extent necessary to maintain the percentage interest of the
general partner and its affiliates, including such interest
represented by common and subordinated units, that existed
immediately prior to each issuance. The holders of common units
will not have preemptive rights to acquire additional common
units or other partnership securities.
Amendment
of the Partnership Agreement
General
Amendments to the partnership agreement may be proposed only by
or with the consent of the general partner, which consent may be
given or withheld in its sole discretion, except as discussed
below. In order to adopt a proposed amendment, other than the
amendments discussed below, the general partner must seek
written approval of the holders of the number of units required
to approve the amendment or call a meeting of the limited
partners to consider and vote upon the proposed amendment.
Except as we describe below, an amendment must be approved:
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during the subordination period, by a majority of our common
units, excluding those common units held by our general partner
and its affiliates, and a majority of the subordinated units,
voting as separate classes; and
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after the subordination period, by a majority of our common
units.
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We refer to the voting provisions described above as a
unit majority.
Prohibited
Amendments
No amendment may be made that would:
(1) enlarge the obligations of any limited partner without
its consent, unless approved by at least a majority of the type
or class of limited partner interests so affected; or
(2) enlarge the obligations of, restrict in any way any
action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable by us to the
general partner or any of its affiliates without the consent of
the general partner, which may be given or withheld at its
option.
The provision of the partnership agreement preventing the
amendments having the effects described in clauses (1) and
(2) above can be amended upon the approval of the holders
of at least 90% of the outstanding units voting together as a
single class. Upon completion of this offering, Tesoro will
own % of the outstanding common and
subordinated units.
No
Unitholder Approval
The general partner may generally make amendments to the
partnership agreement without the approval of any limited
partner or assignee to reflect:
(1) a change in our name, the location of our principal
place of business, our registered agent or our registered office;
(2) the admission, substitution, withdrawal, or removal of
partners in accordance with the partnership agreement;
165
(3) a change that, in the sole discretion of the general
partner, is necessary or appropriate for us to qualify or to
continue our qualification as a limited partnership or a
partnership in which the limited partners have limited liability
under the laws of any state or to ensure that neither we, our
principal operating subsidiary, nor its subsidiaries will be
treated as an association taxable as a corporation or otherwise
taxed as an entity for federal income tax purposes;
(4) an amendment that is necessary, in the opinion of our
counsel, to prevent us or our general partner or its directors,
officers, agents, or trustees from in any manner being subjected
to the provisions of the Investment Company Act of 1940, the
Investment Advisors Act of 1940, or plan asset regulations
adopted under the Employee Retirement Income Security Act of
1974 (ERISA), whether or not substantially similar to plan asset
regulations currently applied or proposed;
(5) subject to the limitations on the issuance of
additional partnership securities described above, an amendment
that in the discretion of the general partner is necessary or
advisable for the authorization of additional partnership
securities or rights to acquire partnership securities;
(6) any amendment expressly permitted in the partnership
agreement to be made by the general partner acting alone;
(7) an amendment effected, necessitated, or contemplated by
a merger agreement that has been approved under the terms of the
partnership agreement;
(8) any amendment that, in the discretion of the general
partner, is necessary or appropriate for the formation by us of,
or our investment in, any corporation, partnership, or other
entity, as otherwise permitted by the partnership agreement;
(9) a change in our fiscal year or taxable year and related
changes; or
(10) any other amendments substantially similar to any of
the matters described in (1) through (9) above.
In addition, the general partner may make amendments to the
partnership agreement without the approval of any limited
partner or assignee if those amendments, in the discretion of
the general partner:
(1) do not adversely affect the limited partners (or any
particular class of limited partners) in any material respect;
(2) are necessary or advisable to satisfy any requirements,
conditions, or guidelines contained in any opinion, directive,
order, ruling, or regulation of any federal or state agency or
judicial authority or contained in any federal or state statute;
(3) are necessary or advisable to facilitate the trading of
limited partner interests or to comply with any rule,
regulation, guideline, or requirement of any securities exchange
on which the limited partner interests are or will be listed for
trading;
(4) are necessary or advisable for any action taken by the
general partner relating to splits or combinations of units
under the provisions of the partnership agreement; or
(5) are required to effect the intent expressed in this
prospectus or the intent of the provisions of the partnership
agreement or are otherwise contemplated by the partnership
agreement.
Opinion
of Counsel and Unitholder Approval
Our general partner will not be required to obtain an opinion of
counsel that an amendment will not result in a loss of limited
liability to the limited partners or result in our being treated
as an entity for federal income tax purposes if one of the
amendments described above under No Unitholder
Approval should occur. No other amendments to the
partnership agreement will become effective without the approval
of holders of at least 90% of the common units and subordinated
units unless we obtain an opinion of counsel to the effect that
the amendment will not affect the limited liability under
applicable law of any of our limited partners.
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In addition to the above restrictions, any amendment that would
have a material adverse effect on the rights or preferences of
any type or class of outstanding units in relation to other
classes of units will require the approval of at least a
majority of the type or class of units so affected. Any
amendment that reduces the voting percentage required to take
any action must be approved by the affirmative vote of limited
partners constituting not less than the voting requirement
sought to be reduced.
Merger,
Sale, or Other Disposition of Assets
A merger or consolidation of us requires the consent of the
general partner. However, our general partner will have no duty
or obligation to consent to any merger, consolidation or
conversion and may decline to do so free of any fiduciary duty
or obligation whatsoever to us or the limited partners,
including any duty to act in good faith or in the best interests
of us or the limited partners.
In addition, the partnership agreement generally prohibits the
general partner, without the prior approval of the holders of
units representing a unit majority, from causing us to, among
other things, sell, exchange, or otherwise dispose of all or
substantially all of our assets in a single transaction or a
series of related transactions, including by way of merger,
consolidation, or other combination, or approving on our behalf
the sale, exchange, or other disposition of all or substantially
all of the assets of our subsidiaries. The general partner may,
however, mortgage, pledge, hypothecate, or grant a security
interest in all or substantially all of our assets without that
approval. The general partner may also sell all or substantially
all of our assets under a foreclosure or other realization upon
those encumbrances without that approval.
If conditions specified in the partnership agreement are
satisfied, the general partner may merge us or any of our
subsidiaries into, or convey some or all of our assets to, a
newly formed entity if the sole purpose of that merger or
conveyance is to change our legal form into another limited
liability entity. The unitholders are not entitled to
dissenters rights of appraisal under the partnership
agreement or applicable Delaware law in the event of a merger or
consolidation, a sale of substantially all of our assets, or any
other transaction or event.
Termination
and Dissolution
We will continue as a limited partnership until terminated under
the partnership agreement. We will dissolve upon:
(1) the election of the general partner to dissolve us, if
approved by the holders of units representing a unit majority;
(2) the entry of a decree of judicial dissolution of Tesoro
Logistics LP; or
(3) the withdrawal or removal of our general partner or any
other event that results in its ceasing to be the general
partner other than by reason of a transfer of its general
partner interest in accordance with the partnership agreement or
withdrawal or removal following approval and admission of a
successor.
Upon a dissolution under clause (3), the holders of a majority
of the outstanding common units and subordinated units, voting
as separate classes, may also elect, within specific time
limitations, to reconstitute us and continue our business on the
same terms and conditions described in the partnership agreement
by forming a new limited partnership on terms identical to those
in the partnership agreement and having as general partner an
entity approved by the holders of units representing a unit
majority, subject to our receipt of an opinion of counsel to the
effect that:
(1) the action would not result in the loss of limited
liability of any limited partner; and
(2) neither Tesoro Logistics LP, its principal operating
subsidiary, or any of our other subsidiaries would be treated as
an association taxable as a corporation or otherwise be taxable
as an entity for federal income tax purposes upon the exercise
of that right to continue (to the extent not previously taxed as
such).
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Liquidation
and Distribution of Proceeds
Upon our dissolution, unless we are reconstituted and continued
as a new limited partnership, the liquidator authorized to wind
up our affairs will, acting with all of the powers of the
general partner that the liquidator deems necessary or desirable
in its judgment, liquidate our assets and apply the proceeds of
the liquidation as provided in Provisions of our
Partnership Agreement Relating to Cash Distributions
Distributions of Cash Upon Liquidation beginning on
page 73. The liquidator may defer liquidation of our assets
for a reasonable period or distribute assets to partners in kind
if it determines that a sale would be impractical or would cause
undue loss to the partners.
Withdrawal
or Removal of the General Partner
Except as described below, our general partner has agreed not to
withdraw voluntarily as our general partner prior
to ,
2021 without obtaining the approval of the holders of at least a
majority of the outstanding common units, excluding common units
held by the general partner and its affiliates, and furnishing
an opinion of counsel regarding limited liability and tax
matters. On or
after ,
2021, our general partner may withdraw as general partner
without first obtaining approval of any unitholder by giving
90 days written notice, and that withdrawal will not
constitute a violation of the partnership agreement.
Notwithstanding the information above, our general partner may
withdraw without unitholder approval upon 90 days
notice to the limited partners if at least 50% of the
outstanding common units are held or controlled by one person
and its affiliates other than the general partner and its
affiliates. In addition, the partnership agreement permits our
general partner in some instances to sell or otherwise transfer
all of its general partner interest in us without the approval
of the unitholders. Please read Transfer of
General Partner Interest on page 169 and
Transfer of Incentive Distribution
Rights on page 169.
Upon withdrawal of our general partner under any circumstances,
other than as a result of a transfer by the general partner of
all or a part of its general partner interest in us, the holders
of a majority of the outstanding common units and subordinated
units, voting as separate classes, may select a successor to
that withdrawing general partner. If a successor is not elected,
or is elected but an opinion of counsel regarding limited
liability and tax matters cannot be obtained, we will be
dissolved, wound up, and liquidated, unless within 90 days
after that withdrawal, the holders of a majority of the
outstanding common units and subordinated units, voting as
separate classes, agree in writing to continue our business and
to appoint a successor general partner. Please read
Termination and Dissolution on
page 167.
Our general partner may not be removed unless that removal is
approved by the vote of the holders of not less than
662/3%
of the outstanding common and subordinated units, voting
together as a single class, including units held by the general
partner and its affiliates, and we receive an opinion of counsel
regarding limited liability and tax matters. Any removal of our
general partner is also subject to the approval of a successor
general partner by the vote of the holders of a majority of the
outstanding common units and subordinated units, voting as
separate classes. The ownership of more than
331/3%
of the outstanding common units and subordinated units by our
general partner and its affiliates would give it the practical
ability to prevent its removal. At the closing of this offering,
our general partner and its affiliates will
own % of the outstanding common
units and subordinated units.
Our partnership agreement also provides that if Tesoro Logistics
GP, LLC is removed as our general partner under circumstances
where cause does not exist and units held by the general partner
and its affiliates are not voted in favor of that removal:
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the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a
one-for-one
basis;
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any existing arrearages in payment of the minimum quarterly
distribution on our common units will be extinguished; and
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the general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests.
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168
In the event of removal of the general partner under
circumstances where cause exists or withdrawal of the general
partner where that withdrawal violates the partnership
agreement, a successor general partner will have the option to
purchase the general partner interest and incentive distribution
rights of the departing general partner for a cash payment equal
to the fair market value of those interests. Under all other
circumstances where the general partner withdraws or is removed
by the limited partners, the departing general partner will have
the option to require the successor general partner to purchase
the general partner interest of the departing general partner
and its incentive distribution rights for the fair market value.
In each case, this fair market value will be determined by
agreement between the departing general partner and the
successor general partner. If no agreement is reached, an
independent investment banking firm or other independent expert
selected by the departing general partner and the successor
general partner will determine the fair market value. Or, if the
departing general partner and the successor general partner
cannot agree upon an expert, then an expert chosen by agreement
of the experts selected by each of them will determine the fair
market value.
If the option described above is not exercised by either the
departing general partner or the successor general partner, the
departing general partners general partner interest and
its incentive distribution rights will automatically convert
into common units equal to the fair market value of those
interests as determined by an investment banking firm or other
independent expert selected in the manner described in the
preceding paragraph.
In addition, we will be required to reimburse the departing
general partner for all amounts due the departing general
partner, including all employee-related liabilities, including
severance liabilities, incurred for the termination of any
employees employed by the departing general partner or its
affiliates for our benefit.
Transfer
of General Partner Interest
Except for transfer by our general partner of all, but not less
than all, of its general partner interest in us to:
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an affiliate of the general partner (other than an
individual), or
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another entity as part of the merger or consolidation of the
general partner with or into another entity or the transfer by
the general partner of all or substantially all of its assets to
another entity, our general partner may not transfer all or any
part of its general partner interest in us to another person
prior
to ,
2021 without the approval of the holders of at least a majority
of the outstanding common units, excluding common units held by
the general partner and its affiliates. As a condition of this
transfer, the transferee must, among other things, assume the
rights and duties of the general partner, agree to be bound by
the provisions of the partnership agreement, and furnish an
opinion of counsel regarding limited liability and tax matters.
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Our general partner and its affiliates may at any time transfer
units to one or more persons, without unitholder approval,
except that they may not transfer subordinated units to us.
Transfer
of Ownership Interests in General Partner
At any time, the members of our general partner may sell or
transfer all or part of their respective membership interests in
our general partner to an affiliate or a third party without the
approval of our unitholders.
Transfer
of Incentive Distribution Rights
Our general partner or its affiliates or a subsequent holder may
transfer any or all of its incentive distribution rights without
unitholder approval.
Change of
Management Provisions
The partnership agreement contains specific provisions that are
intended to discourage a person or group from attempting to
remove Tesoro Logistics GP, LLC as our general partner or
otherwise change management.
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If any person or group other than the general partner and its
affiliates acquires beneficial ownership of 20% or more of any
class of units, that person or group loses voting rights on all
of its units. This loss of voting rights does not apply to any
person or group that acquires the units from our general partner
or its affiliates and any transferees of that person or group
approved by our general partner or to any person or group who
acquires the units with the prior approval of the board of
directors.
The partnership agreement also provides that if the general
partner is removed under circumstances where cause does not
exist and units held by the general partner and its affiliates
are not voted in favor of that removal:
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the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a
one-for-one
basis;
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any existing arrearages in payment of the minimum quarterly
distribution on our common units will be extinguished; and
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the general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests.
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Limited
Call Right
If at any time the general partner and its affiliates hold more
than 75% of the then-issued and outstanding partnership
securities of any class, the general partner will have the
right, which it may assign in whole or in part to any of its
affiliates or to us, to acquire all, but not less than all, of
the remaining partnership securities of the class held by
unaffiliated persons as of a record date to be selected by the
general partner, on at least 10 but not more than 60 days
notice. The purchase price in the event of this purchase is the
greater of: (1) the highest cash price paid by either of
the general partner or any of its affiliates for any partnership
securities of the class purchased within the 90 days
preceding the date on which the general partner first mails
notice of its election to purchase those partnership securities;
and (2) the current market price as of the date three days
before the date the notice is mailed.
As a result of the general partners right to purchase
outstanding partnership securities, a holder of partnership
securities may have his partnership securities purchased at an
undesirable time or price. The tax consequences to a unitholder
of the exercise of this call right are the same as a sale by
that unitholder of his common units in the market. Please read
Material Federal Income Tax Consequences
Disposition of Common Units beginning on page 184.
Meetings;
Voting
Except as described below regarding a person or group owning 20%
or more of any class of units then outstanding, unitholders who
are record holders of units on the record date will be entitled
to notice of, and to vote at, meetings of our limited partners
and to act upon matters for which approvals may be solicited. In
the case of common units held by the general partner on behalf
of non-citizen assignees, the general partner will distribute
the votes on those common units in the same ratios as the votes
of limited partners on other units are cast.
The general partner does not anticipate that any meeting of
unitholders will be called in the foreseeable future. Any action
that is required or permitted to be taken by the unitholders may
be taken either at a meeting of the unitholders or without a
meeting if consents in writing describing the action so taken
are signed by holders of the number of units necessary to
authorize or take that action at a meeting. Meetings of the
unitholders may be called by the general partner or by
unitholders owning at least 20% of the outstanding units of the
class for which a meeting is proposed. Unitholders may vote
either in person or by proxy at meetings. The holders of a
majority of the outstanding units of the class or classes for
which a meeting has been called, represented in person or by
proxy, will constitute a quorum unless any action by the
unitholders requires approval by holders of a greater percentage
of the units, in which case the quorum will be the greater
percentage.
170
Each record holder of a unit has a vote according to his
percentage interest in us, although additional limited partner
interests having special voting rights could be issued. Please
read Issuance of Additional Securities
beginning on page 164. However, if at any time any person or
group, other than the general partner and its affiliates, or a
direct or subsequently approved transferee of the general
partner or its affiliates, acquires, in the aggregate,
beneficial ownership of 20% or more of any class of units then
outstanding, that person or group will lose voting rights on all
of its units and the units may not be voted on any matter and
will not be considered to be outstanding when sending notices of
a meeting of unitholders, calculating required votes,
determining the presence of a quorum, or for other similar
purposes. Common units held in nominee or street name account
will be voted by the broker or other nominee in accordance with
the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise.
Except as the partnership agreement otherwise provides,
subordinated units will vote together with common units as a
single class.
Any notice, demand, request, report, or proxy material required
or permitted to be given or made to record holders of common
units under the partnership agreement will be delivered to the
record holder by us or by the transfer agent.
Status as
Limited Partner
By transfer of common units in accordance with our partnership
agreement, each transferee of common units will be admitted as a
limited partner with respect to the common units transferred
when such transfer and admission are reflected in our books and
records. Except as described above under
Limited Liability beginning on
page 163, the common units will be fully paid, and
unitholders will not be required to make additional
contributions.
Non-Citizen
Assignees; Redemption
If our general partner, with the advice of counsel, determines
we are subject to U.S. federal, state or local laws or
regulations that, in the reasonable determination of our general
partner, create a substantial risk of cancellation or forfeiture
of any property that we have an interest in because of the
nationality, citizenship or other related status of any limited
partner, then our general partner may adopt such amendments to
our partnership agreement as it determines necessary or
advisable to:
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obtain proof of the nationality, citizenship or other related
status of our member (and their owners, to the extent
relevant); and.
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permit us to redeem the units held by any person whose
nationality, citizenship or other related status creates
substantial risk of cancellation or forfeiture of any property
or who fails to comply with the procedures instituted by our
general partner to obtain proof of the nationality, citizenship
or other related status. The redemption price in the case of
such a redemption will be the average of the daily closing
prices per unit for the 20 consecutive trading days immediately
prior to the date set for redemption.
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A non-citizen assignee will not have the right to direct the
voting of his units and may not receive distributions in kind
upon our liquidation.
Non-Taxpaying
Assignees; Redemption
To avoid any adverse effect on the maximum applicable rates
chargeable to customers by us under Federal Energy Regulatory
Commission regulations, or in order to reverse an adverse
determination that has occurred regarding such maximum
applicable rate, our partnership agreement provides our general
partner the power to amend the agreement. If our general
partner, with the advice of counsel, determines that our not
being treated as an association taxable as a corporation or
otherwise taxable as an entity for U.S. federal income tax
purposes, coupled with the tax status (or lack of proof thereof)
of one or more of our limited partners, has, or is reasonably
likely to have, a material adverse effect on the maximum
applicable rates
171
chargeable to customers by us, then our general partner may
adopt such amendments to our partnership agreement as it
determines necessary or advisable to:
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obtain proof of the U.S. federal income tax status of our
member (and their owners, to the extent relevant); and
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permit us to redeem the units held by any person whose tax
status has or is reasonably likely to have a material adverse
effect on the maximum applicable rates or who fails to comply
with the procedures instituted by our general partner to obtain
proof of the U.S. federal income tax status. The redemption
price in the case of such a redemption will be the average of
the daily closing prices per unit for the 20 consecutive trading
days immediately prior to the date set for redemption.
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A non-taxpaying assignee will not have the right to direct the
voting of his units and may not receive distributions in kind
upon our liquidation.
Indemnification
Under the partnership agreement, in most circumstances, we will
indemnify the following persons, to the fullest extent permitted
by law, from and against all losses, claims, damages, or similar
events:
(1) the general partner;
(2) any departing general partner;
(3) any person who is or was an affiliate of the general
partner of our general partner or any departing general partner;
(4) any person who is or was a member, partner, officer,
director, employee, agent, or trustee of any entity described in
(1), (2) or (3) above; or
(5) any person designated by the general partner of our
general partner.
Any indemnification under these provisions will only be out of
our assets. Unless it otherwise agrees in its sole discretion,
the general partner will not be personally liable for, or have
any obligation to contribute or loan funds or assets to us to
enable us to effectuate, indemnification. We may purchase
insurance against liabilities asserted against and expenses
incurred by persons for our activities, regardless of whether we
would have the power to indemnify the person against liabilities
under the partnership agreement.
Books and
Reports
The general partner is required to keep appropriate books of our
business at our principal offices. The books will be maintained
for both tax and financial reporting purposes on an accrual
basis. For tax and fiscal reporting purposes, our fiscal year is
the calendar year.
We will furnish or make available to record holders of common
units, within 120 days after the close of each fiscal year,
an annual report containing audited financial statements and a
report on those financial statements by our independent public
accountants. Except for our fourth quarter, we will also furnish
or make available summary financial information within
90 days after the close of each quarter.
We will furnish each record holder of a unit with information
reasonably required for tax reporting purposes within
90 days after the close of each calendar year. This
information is expected to be furnished in summary form so that
some complex calculations normally required of partners can be
avoided. Our ability to furnish this summary information to
unitholders will depend on the cooperation of unitholders in
supplying us with specific information. Every unitholder will
receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax
returns, regardless of whether he supplies us with information.
172
Right to
Inspect Our Books and Records
The partnership agreement provides that a limited partner can,
for a purpose reasonably related to his interest as a limited
partner, upon reasonable demand and at his own expense, have
furnished to him:
(1) a current list of the name and last known address of
each partner;
(2) a copy of our tax returns;
(3) information as to the amount of cash, and a description
and statement of the agreed value of any other property or
services, contributed or to be contributed by each partner and
the date on which each became a partner;
(4) copies of the partnership agreement, the certificate of
limited partnership of the partnership, related amendments, and
powers of attorney under which they have been executed;
(5) information regarding the status of our business and
financial condition; and
(6) any other information regarding our affairs as is just
and reasonable.
The general partner may, and intends to, keep confidential from
the limited partners trade secrets or other information the
disclosure of which the general partner believes in good faith
is not in our best interests or that we are required by law or
by agreements with third parties to keep confidential.
Registration
Rights
Under the partnership agreement, we have agreed to register for
resale under the Securities Act and applicable state securities
laws any common units, subordinated units, or other partnership
securities proposed to be sold by the general partner or any of
its affiliates or their assignees if an exemption from the
registration requirements is not otherwise available. These
registration rights continue for two years following any
withdrawal or removal of Tesoro Logistics GP, LLC as our general
partner. We are obligated to pay all expenses incidental to the
registration, excluding underwriting discounts and commissions.
Please read Units Eligible for Future Sale beginning
on page 174.
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UNITS
ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered by this prospectus,
the general partner and its affiliates will hold an aggregate
of
common units
and
subordinated units. All of the subordinated units will convert
into common units at the end of the subordination period. The
sale of these common and subordinated units could have an
adverse impact on the price of our common units or on any
trading market that may develop.
The common units sold in this offering will generally be freely
transferable without restriction or further registration under
the Securities Act, except that any common units held by an
affiliate of ours may not be resold publicly except
in compliance with the registration requirements of the
Securities Act or under an exemption under Rule 144 or
otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer to be sold into the market in an amount
that does not exceed, during any three-month period, the greater
of:
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1% of the total number of the securities outstanding; or
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the average weekly reported trading volume of the common units
for the four weeks prior to the sale.
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Sales under Rule 144 are also subject to specific manner of
sale provisions, holding period requirements, notice
requirements and the availability of current public information
about us. A person who is not deemed to have been an affiliate
of ours at any time during the three months preceding a sale,
and who has beneficially owned our common units for at least six
months (provided we are in compliance with the current public
information requirement), or one year (regardless of whether we
are in compliance with the current public information
requirement), would be entitled to sell those common units under
Rule 144, subject only to the current public information
requirement. After beneficially owning Rule 144 restricted
units for at least one year, a person who is not deemed to have
been an affiliate of ours at any time during the 90 days
preceding a sale would be entitled to freely sell those common
units without regard to the public information requirements,
volume limitations, manner of sale provisions and notice
requirements of Rule 144.
Our partnership agreement provides that, after the subordination
period, we may issue an unlimited number of limited partner
interests of any type without a vote of the unitholders at any
time. The partnership agreement does not restrict our ability to
issue equity securities ranking junior to our common units at
any time. Any issuance of additional common units or other
equity securities would result in a corresponding decrease in
the proportionate ownership interest in us represented by, and
could adversely affect the cash distributions to and market
price of, common units then outstanding. Please read The
Partnership Agreement Issuance of Additional
Securities beginning on page 164.
Under our partnership agreement, our general partner and its
affiliates will have the right to cause us to register under the
Securities Act and applicable state securities laws the offer
and sale of any units that they hold. Subject to the terms and
conditions of the partnership agreement, these registration
rights allow our general partner and its affiliates or their
assignees holding any units to require registration of any of
these units and to include any of these units in a registration
by us of other units, including units offered by us or by any
unitholder. Our general partner and its affiliates will continue
to have these registration rights for two years following its
withdrawal or removal as our general partner. In connection with
any registration of this kind, we will indemnify each unitholder
participating in the registration and its officers, directors,
and controlling persons from and against any liabilities under
the Securities Act or any applicable state securities laws
arising from the registration statement or prospectus. We will
bear all costs and expenses incidental to any registration,
excluding any underwriting discount. Except as described below,
our general partner and its affiliates may sell their units in
private transactions at any time, subject to compliance with
applicable laws.
Tesoro, Tesoro Logistics GP, LLC, our general partner, and the
directors and executive officers of Tesoro Logistics GP, LLC
have agreed not to sell any common units they beneficially own
for a period of 180 days from the date of this prospectus.
Please read Underwriting beginning on page 194
for a description of these
lock-up
provisions.
174
MATERIAL
FEDERAL INCOME TAX CONSEQUENCES
This section is a summary of the material tax considerations
that may be relevant to prospective unitholders who are
individual citizens or residents of the U.S. and, unless
otherwise noted in the following discussion, is the opinion of
Latham & Watkins LLP, counsel to our general partner
and us, insofar as it relates to legal conclusions with respect
to matters of U.S. federal income tax law. This section is
based upon current provisions of the Internal Revenue Code of
1986, as amended (the Internal Revenue Code),
existing and proposed Treasury regulations promulgated under the
Internal Revenue Code (the Treasury Regulations) and
current administrative rulings and court decisions, all of which
are subject to change. Later changes in these authorities may
cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise
requires, references in this section to us or
we are references to Tesoro Logistics LP and our
operating subsidiaries.
The following discussion does not comment on all federal income
tax matters affecting us or our unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or
residents of the U.S. and has only limited application to
corporations, estates, trusts, nonresident aliens or other
unitholders subject to specialized tax treatment, such as
tax-exempt institutions, foreign persons, IRAs, real estate
investment trusts (REITs) or mutual funds. In addition, the
discussion only comments, to a limited extent, on state, local,
and foreign tax consequences. Accordingly, we encourage each
prospective unitholder to consult his own tax advisor in
analyzing the federal, state, local and foreign tax consequences
particular to him of the ownership or disposition of common
units.
No ruling has been or will be requested from the IRS regarding
any matter affecting us or prospective unitholders. Instead, we
will rely on opinions of Latham & Watkins LLP. Unlike
a ruling, an opinion of counsel represents only that
counsels best legal judgment and does not bind the IRS or
the courts. Accordingly, the opinions and statements made herein
may not be sustained by a court if contested by the IRS. Any
contest of this sort with the IRS may materially and adversely
impact the market for the common units and the prices at which
common units trade. In addition, the costs of any contest with
the IRS, principally legal, accounting and related fees, will
result in a reduction in cash available for distribution to our
unitholders and our general partner and thus will be borne
indirectly by our unitholders and our general partner.
Furthermore, the tax treatment of us, or of an investment in us,
may be significantly modified by future legislative or
administrative changes or court decisions. Any modifications may
or may not be retroactively applied.
All statements as to matters of federal income tax law and legal
conclusions with respect thereto, but not as to factual matters,
contained in this section, unless otherwise noted, are the
opinion of Latham & Watkins LLP and are based on the
accuracy of the representations made by us.
For the reasons described below, Latham & Watkins LLP
has not rendered an opinion with respect to the following
specific federal income tax issues: (i) the treatment of a
unitholder whose common units are loaned to a short seller to
cover a short sale of common units (please read
Tax Consequences of Unit Ownership
Treatment of Short Sales on page 181); (ii) whether
our monthly convention for allocating taxable income and losses
is permitted by existing Treasury Regulations (please read
Disposition of Common Units
Allocations Between Transferors and Transferees on
page 185); and (iii) whether our method for
depreciating Section 743 adjustments is sustainable in
certain cases (please read Tax Consequences of
Unit Ownership Section 754 Election
beginning on page 182 and Uniformity of
Units beginning on page 186).
Partnership
Status
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each partner of a partnership is
required to take into account his share of items of income,
gain, loss and deduction of the partnership in computing his
federal income tax liability, regardless of whether cash
distributions are made to him by the partnership. Distributions
by a partnership to a partner are generally not taxable to the
partnership or the partner unless the amount of cash distributed
to him is in excess of the partners adjusted basis in his
partnership interest. Section 7704 of the Internal Revenue
Code provides that publicly traded partnerships will,
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as a general rule, be taxed as corporations. However, an
exception, referred to as the Qualifying Income
Exception, exists with respect to publicly traded
partnerships of which 90% or more of the gross income for every
taxable year consists of qualifying income.
Qualifying income includes income and gains derived from the
transportation, processing, storage and marketing of crude oil,
natural gas and products thereof. Other types of qualifying
income include interest (other than from a financial business),
dividends, gains from the sale of real property and gains from
the sale or other disposition of capital assets held for the
production of income that otherwise constitutes qualifying
income. We estimate that less
than % of our current gross income
is not qualifying income; however, this estimate could change
from time to time. Based upon and subject to this estimate, the
factual representations made by us and our general partner and a
review of the applicable legal authorities, Latham &
Watkins LLP is of the opinion that at least 90% of our current
gross income constitutes qualifying income. The portion of our
income that is qualifying income may change from time to time.
No ruling has been or will be sought from the IRS and the IRS
has made no determination as to our status or the status of our
operating subsidiaries for federal income tax purposes or
whether our operations generate qualifying income
under Section 7704 of the Internal Revenue Code. Instead,
we will rely on the opinion of Latham & Watkins LLP on
such matters. It is the opinion of Latham & Watkins
LLP that, based upon the Internal Revenue Code, its regulations,
published revenue rulings and court decisions and the
representations described below that:
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We will be classified as a partnership for federal income tax
purposes; and
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Each of our operating subsidiaries will be disregarded as an
entity separate from us for federal income tax purposes.
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In rendering its opinion, Latham & Watkins LLP has
relied on factual representations made by us and our general
partner. The representations made by us and our general partner
upon which Latham & Watkins LLP has relied include:
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Neither we nor the operating subsidiaries has elected or will
elect to be treated as a corporation;
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For each taxable year, more than 90% of our gross income has
been and will be income of the type that Latham &
Watkins LLP has opined or will opine is qualifying
income within the meaning of Section 7704(d) of the
Internal Revenue Code; and
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We believe that these representations have been true in the past
and expect that these representations will continue to be true
in the future.
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If we fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery (in which case
the IRS may also require us to make adjustments with respect to
our unitholders or pay other amounts), we will be treated as if
we had transferred all of our assets, subject to liabilities, to
a newly formed corporation, on the first day of the year in
which we fail to meet the Qualifying Income Exception, in return
for stock in that corporation, and then distributed that stock
to the unitholders in liquidation of their interests in us. This
deemed contribution and liquidation should be tax-free to
unitholders and us so long as we, at that time, do not have
liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal
income tax purposes.
If we were taxed as a corporation in any taxable year, either as
a result of a failure to meet the Qualifying Income Exception or
otherwise, our items of income, gain, loss and deduction would
be reflected only on our tax return rather than being passed
through to our unitholders, and our net income would be taxed to
us at corporate rates. In addition, any distribution made to a
unitholder would be treated as taxable dividend income, to the
extent of our current and accumulated earnings and profits, or,
in the absence of earnings and profits, a nontaxable return of
capital, to the extent of the unitholders tax basis in his
common units, or taxable capital gain, after the
unitholders tax basis in his common units is reduced to
zero. Accordingly, taxation as a corporation would result in a
material reduction in a unitholders cash flow and
after-tax return and thus would likely result in a substantial
reduction of the value of the units.
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The discussion below is based on Latham & Watkins
LLPs opinion that we will be classified as a partnership
for federal income tax purposes.
Limited
Partner Status
Unitholders of Tesoro Logistics LP will be treated as partners
of Tesoro Logistics LP for federal income tax purposes. Also,
unitholders whose common units are held in street name or by a
nominee and who have the right to direct the nominee in the
exercise of all substantive rights attendant to the ownership of
their common units will be treated as partners of Tesoro
Logistics LP for federal income tax purposes.
A beneficial owner of common units whose units have been
transferred to a short seller to complete a short sale would
appear to lose his status as a partner with respect to those
units for federal income tax purposes. Please read
Tax Consequences of Unit Ownership
Treatment of Short Sales on page 181.
Income, gain, deductions or losses would not appear to be
reportable by a unitholder who is not a partner for federal
income tax purposes, and any cash distributions received by a
unitholder who is not a partner for federal income tax purposes
would therefore appear to be fully taxable as ordinary income.
These holders are urged to consult their tax advisors with
respect to their tax consequences of holding common units in
Tesoro Logistics LP. The references to unitholders
in the discussion that follows are to persons who are treated as
partners in Tesoro Logistics LP for federal income tax purposes.
Tax
Consequences of Unit Ownership
Flow-Through
of Taxable Income
Subject to the discussion below under
Entity-Level Collections beginning
on page 179, we will not pay any federal income tax.
Instead, each unitholder will be required to report on his
income tax return his share of our income, gains, losses and
deductions without regard to whether we make cash distributions
to him. Consequently, we may allocate income to a unitholder
even if he has not received a cash distribution. Each unitholder
will be required to include in income his allocable share of our
income, gains, losses and deductions for our taxable year ending
with or within his taxable year. Our taxable year ends on
December 31.
Treatment
of Distributions
Distributions by us to a unitholder generally will not be
taxable to the unitholder for federal income tax purposes,
except to the extent the amount of any such cash distribution
exceeds his tax basis in his common units immediately before the
distribution. Our cash distributions in excess of a
unitholders tax basis generally will be considered to be
gain from the sale or exchange of the common units, taxable in
accordance with the rules described under
Disposition of Common Units beginning on
page 184. Any reduction in a unitholders share of our
liabilities for which no partner, including the general partner,
bears the economic risk of loss, known as nonrecourse
liabilities, will be treated as a distribution by us of
cash to that unitholder. To the extent our distributions cause a
unitholders at-risk amount to be less than
zero at the end of any taxable year, he must recapture any
losses deducted in previous years. Please read
Limitations on Deductibility of Losses
beginning on page 178.
A decrease in a unitholders percentage interest in us
because of our issuance of additional common units will decrease
his share of our nonrecourse liabilities, and thus will result
in a corresponding deemed distribution of cash. This deemed
distribution may constitute a non-pro rata distribution. A
non-pro rata distribution of money or property may result in
ordinary income to a unitholder, regardless of his tax basis in
his common units, if the distribution reduces the
unitholders share of our unrealized
receivables, including depreciation recapture, depletion
recapture
and/or
substantially appreciated inventory items, each as
defined in the Internal Revenue Code, and collectively,
Section 751 Assets. To that extent, the
unitholder will be treated as having been distributed his
proportionate share of the Section 751 Assets and then
having exchanged those assets with us in return for the non-pro
rata portion of the actual distribution made to him. This latter
deemed exchange will generally result in the unitholders
realization of ordinary income, which will
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equal the excess of (i) the non-pro rata portion of that
distribution over (ii) the unitholders tax basis
(generally zero) for the share of Section 751 Assets deemed
relinquished in the exchange.
Ratio
of Taxable Income to Distributions
We estimate that a purchaser of common units in this offering
who owns those common units from the date of closing of this
offering through the record date for distributions for the
period ending December 31, 2013, will be allocated, on a
cumulative basis, an amount of federal taxable income for that
period that will be % or less of
the cash distributed with respect to that period. Thereafter, we
anticipate that the ratio of allocable taxable income to cash
distributions to the unitholders will increase. These estimates
are based upon the assumption that gross income from operations
will approximate the amount required to make the minimum
quarterly distribution on all units and other assumptions with
respect to capital expenditures, cash flow, net working capital
and anticipated cash distributions. These estimates and
assumptions are subject to, among other things, numerous
business, economic, regulatory, legislative, competitive and
political uncertainties beyond our control. Further, the
estimates are based on current tax law and tax reporting
positions that we will adopt and with which the IRS could
disagree. Accordingly, we cannot assure you that these estimates
will prove to be correct. The actual percentage of distributions
that will constitute taxable income could be higher or lower
than expected, and any differences could be material and could
materially affect the value of the common units. For example,
the ratio of allocable taxable income to cash distributions to a
purchaser of common units in this offering will be greater, and
perhaps substantially greater, than our estimate with respect to
the period described above if:
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gross income from operations exceeds the amount required to make
minimum quarterly distributions on all units, yet we only
distribute the minimum quarterly distributions on all
units; or
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we make a future offering of common units and use the proceeds
of the offering in a manner that does not produce- substantial
additional deductions during the period described above, such as
to repay indebtedness outstanding at the time of this offering
or to acquire property that is not eligible for depreciation or
amortization for federal income tax purposes or that is
depreciable or amortizable at a rate significantly slower than
the rate applicable to our assets at the time of this offering.
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Basis
of Common Units
A unitholders initial tax basis for his common units will
be the amount he paid for the common units plus his share of our
nonrecourse liabilities. That basis will be increased by his
share of our income and by any increases in his share of our
nonrecourse liabilities. That basis will be decreased, but not
below zero, by distributions from us, by the unitholders
share of our losses, by any decreases in his share of our
nonrecourse liabilities and by his share of our expenditures
that are not deductible in computing taxable income and are not
required to be capitalized. A unitholder will have no share of
our debt that is recourse to our general partner to the extent
of the general partners net value as defined
in regulations under Section 752 of the Internal Revenue
Code, but will have a share, generally based on his share of
profits, of our nonrecourse liabilities. Please read
Disposition of Common Units
Recognition of Gain or Loss beginning on page 184.
Limitations
on Deductibility of Losses
The deduction by a unitholder of his share of our losses will be
limited to the tax basis in his units and, in the case of an
individual unitholder, estate, trust, or corporate unitholder
(if more than 50% of the value of the corporate
unitholders stock is owned directly or indirectly by or
for five or fewer individuals or some tax-exempt organizations)
to the amount for which the unitholder is considered to be
at risk with respect to our activities, if that is
less than his tax basis. A common unitholder subject to these
limitations must recapture losses deducted in previous years to
the extent that distributions cause his at-risk amount to be
less than zero at the end of any taxable year. Losses disallowed
to a unitholder or recaptured as a result of these limitations
will carry forward and will be allowable as a deduction to the
extent that his at-risk amount is subsequently increased,
provided such losses do not exceed such common unitholders
tax basis in his common units. Upon
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the taxable disposition of a unit, any gain recognized by a
unitholder can be offset by losses that were previously
suspended by the at-risk limitation but may not be offset by
losses suspended by the basis limitation. Any loss previously
suspended by the at-risk limitation in excess of that gain would
no longer be utilizable.
In general, a unitholder will be at risk to the extent of the
tax basis of his units, excluding any portion of that basis
attributable to his share of our nonrecourse liabilities,
reduced by (i) any portion of that basis representing
amounts otherwise protected against loss because of a guarantee,
stop loss agreement or other similar arrangement and
(ii) any amount of money he borrows to acquire or hold his
units, if the lender of those borrowed funds owns an interest in
us, is related to the unitholder or can look only to the units
for repayment. A unitholders at-risk amount will increase
or decrease as the tax basis of the unitholders units
increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of
our nonrecourse liabilities.
In addition to the basis and at-risk limitations on the
deductibility of losses, the passive loss limitations generally
provide that individuals, estates, trusts and some closely-held
corporations and personal service corporations can deduct losses
from passive activities, which are generally trade or business
activities in which the taxpayer does not materially
participate, only to the extent of the taxpayers income
from those passive activities. The passive loss limitations are
applied separately with respect to each publicly traded
partnership. Consequently, any passive losses we generate will
only be available to offset our passive income generated in the
future and will not be available to offset income from other
passive activities or investments, including our investments or
a unitholders investments in other publicly traded
partnerships, or salary or active business income. Passive
losses that are not deductible because they exceed a
unitholders share of income we generate may be deducted in
full when he disposes of his entire investment in us in a fully
taxable transaction with an unrelated party. The passive loss
limitations are applied after other applicable limitations on
deductions, including the at-risk rules and the basis limitation.
A unitholders share of our net income may be offset by any
of our suspended passive losses, but it may not be offset by any
other current or carryover losses from other passive activities,
including those attributable to other publicly traded
partnerships.
Limitations
on Interest Deductions
The deductibility of a non-corporate taxpayers
investment interest expense is generally limited to
the amount of that taxpayers net investment
income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for
investment;
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our interest expense attributed to portfolio income; and
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the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
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The computation of a unitholders investment interest
expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a unit.
Net investment income includes gross income from property held
for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than
interest, directly connected with the production of investment
income, but generally does not include gains attributable to the
disposition of property held for investment or (if applicable)
qualified dividend income. The IRS has indicated that the net
passive income earned by a publicly traded partnership will be
treated as investment income to its unitholders. In addition,
the unitholders share of our portfolio income will be
treated as investment income.
Entity-Level Collections
If we are required or elect under applicable law to pay any
federal, state, local or foreign income tax on behalf of any
unitholder or our general partner or any former unitholder, we
are authorized to pay those taxes from our funds. That payment,
if made, will be treated as a distribution of cash to the
unitholder on whose
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behalf the payment was made. If the payment is made on behalf of
a person whose identity cannot be determined, we are authorized
to treat the payment as a distribution to all current
unitholders. We are authorized to amend our partnership
agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of units and to adjust later
distributions, so that after giving effect to these
distributions, the priority and characterization of
distributions otherwise applicable under our partnership
agreement is maintained as nearly as is practicable. Payments by
us as described above could give rise to an overpayment of tax
on behalf of an individual unitholder in which event the
unitholder would be required to file a claim in order to obtain
a credit or refund.
Allocation
of Income, Gain, Loss and Deduction
In general, if we have a net profit, our items of income, gain,
loss and deduction will be allocated among our general partner
and the unitholders in accordance with their percentage
interests in us. At any time that distributions are made to the
common units in excess of distributions to the subordinated
units, or incentive distributions are made to our general
partner, gross income will be allocated to the recipients to the
extent of these distributions. If we have a net loss, that loss
will be allocated first to our general partner and the
unitholders in accordance with their percentage interests in us
to the extent of their positive capital accounts and, second, to
our general partner.
Specified items of our income, gain, loss and deduction will be
allocated to account for (i) any difference between the tax
basis and fair market value of our assets at the time of an
offering and (ii) any difference between the tax basis and
fair market value of any property contributed to us by the
general partner and its affiliates that exists at the time of
such contribution, together referred to in this discussion as
the Contributed Property. The effect of these
allocations, referred to as Section 704(c) Allocations, to
a unitholder purchasing common units from us in this offering
will be essentially the same as if the tax bases of our assets
were equal to their fair market values at the time of this
offering. In the event we issue additional common units or
engage in certain other transactions in the future,
reverse Section 704(c) Allocations, similar to
the Section 704(c) Allocations described above, will be
made to the general partner and all of our unitholders
immediately prior to such issuance or other transactions to
account for the difference between the book basis
for purposes of maintaining capital accounts and the fair market
value of all property held by us at the time of such issuance or
future transaction. In addition, items of recapture income will
be allocated to the extent possible to the unitholder who was
allocated the deduction giving rise to the treatment of that
gain as recapture income in order to minimize the recognition of
ordinary income by some unitholders. Finally, although we do not
expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be
allocated in an amount and manner sufficient to eliminate the
negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction,
other than an allocation required by the Internal Revenue Code
to eliminate the difference between a partners
book capital account, credited with the fair market
value of Contributed Property, and tax capital
account, credited with the tax basis of Contributed Property,
referred to in this discussion as the Book-Tax
Disparity, will generally be given effect for federal
income tax purposes in determining a partners share of an
item of income, gain, loss or deduction only if the allocation
has substantial economic effect. In any other case,
a partners share of an item will be determined on the
basis of his interest in us, which will be determined by taking
into account all the facts and circumstances, including:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon
liquidation.
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Latham & Watkins LLP is of the opinion that, with the
exception of the issues described in
Section 754 Election beginning on
page 182 and Disposition of Common
Units Allocations Between Transferors and
Transferees on page 185, allocations under our
partnership agreement will be given
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effect for federal income tax purposes in determining a
partners share of an item of income, gain, loss or
deduction.
Treatment
of Short Sales
A unitholder whose units are loaned to a short
seller to cover a short sale of units may be considered as
having disposed of those units. If so, he would no longer be
treated for tax purposes as a partner with respect to those
units during the period of the loan and may recognize gain or
loss from the disposition.
As a result, during this period:
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any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
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any cash distributions received by the unitholder as to those
units would be fully taxable; and
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all of these distributions would appear to be ordinary income.
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Because there is no direct or indirect controlling authority on
the issue relating to partnership interests, Latham &
Watkins LLP has not rendered an opinion regarding the tax
treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units; therefore,
unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller
are urged to modify any applicable brokerage account agreements
to prohibit their brokers from borrowing and loaning their
units. The IRS has previously announced that it is studying
issues relating to the tax treatment of short sales of
partnership interests. Please also read
Disposition of Common Units
Recognition of Gain or Loss beginning on page 184.
Alternative
Minimum Tax
Each unitholder will be required to take into account his
distributive share of any items of our income, gain, loss or
deduction for purposes of the alternative minimum tax. The
current minimum tax rate for noncorporate taxpayers is 26% on
the first $175,000 of alternative minimum taxable income in
excess of the exemption amount and 28% on any additional
alternative minimum taxable income. Prospective unitholders are
urged to consult with their tax advisors as to the impact of an
investment in units on their liability for the alternative
minimum tax.
Tax
Rates
Under current law, the highest marginal U.S. federal income
tax rate applicable to ordinary income of individuals is 35% and
the highest marginal U.S. federal income tax rate
applicable to long-term capital gains (generally, capital gains
on certain assets held for more than twelve months) of
individuals is 15%. These rates are subject to change by new
legislation at any time.
The recently enacted Patient Protection and Affordable Care Act
of 2010, as amended by the Health Care and Education
Reconciliation Act of 2010 is scheduled to impose a 3.8%
Medicare tax on certain net investment income earned by
individuals, estates and trusts for taxable years beginning
after December 31, 2012. For these purposes, net investment
income generally includes a unitholders allocable share of
our income and gain realized by a unitholder from a sale of
units. In the case of an individual, the tax will be imposed on
the lesser of (i) the unitholders net investment
income or (ii) the amount by which the unitholders
modified adjusted gross income exceeds $250,000 (if the
unitholder is married and filing jointly or a surviving spouse),
$125,000 (if the unitholder is married and filing separately) or
$200,000 (in any other case). In the case of an estate or trust,
the tax will be imposed on the lesser of (i) undistributed
net investment income, or (ii) the excess adjusted gross
income over the dollar amount at which the highest income tax
bracket applicable to an estate or trust begins.
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Section 754
Election
We will make the election permitted by Section 754 of the
Internal Revenue Code. That election is irrevocable without the
consent of the IRS unless there is a constructive termination of
the partnership. Please read Disposition of
Common Units Constructive Termination on
page 186. The election will generally permit us to adjust a
common unit purchasers tax basis in our assets
(inside basis) under Section 743(b) of the
Internal Revenue Code to reflect his purchase price. This
election does not apply with respect to a person who purchases
common units directly from us. The Section 743(b)
adjustment belongs to the purchaser and not to other
unitholders. For purposes of this discussion, the inside basis
in our assets with respect to a unitholder will be considered to
have two components: (i) his share of our tax basis in our
assets (common basis) and (ii) his
Section 743(b) adjustment to that basis.
We will adopt the remedial allocation method as to all our
properties. Where the remedial allocation method is adopted, the
Treasury Regulations under Section 743 of the Internal
Revenue Code require a portion of the Section 743(b)
adjustment that is attributable to recovery property that is
subject to depreciation under Section 168 of the Internal
Revenue Code and whose book basis is in excess of its tax basis
to be depreciated over the remaining cost recovery period for
the propertys unamortized Book-Tax Disparity. Under
Treasury
Regulation Section 1.167(c)-1(a)(6),
a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the Internal
Revenue Code, rather than cost recovery deductions under
Section 168, is generally required to be depreciated using
either the straight-line method or the 150% declining balance
method. Under our partnership agreement, our general partner is
authorized to take a position to preserve the uniformity of
units even if that position is not consistent with these and any
other Treasury Regulations. Please read
Uniformity of Units beginning on
page 186.
We intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized
Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful
life applied to the propertys unamortized Book-Tax
Disparity, or treat that portion as
non-amortizable
to the extent attributable to property which is not amortizable.
This method is consistent with the methods employed by other
publicly traded partnerships but is arguably inconsistent with
Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets. To the extent this Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken,
we may take a depreciation or amortization position under which
all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in
our assets. This kind of aggregate approach may result in lower
annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please read
Uniformity of Units beginning on
page 186. A unitholders tax basis for his common
units is reduced by his share of our deductions (whether or not
such deductions were claimed on an individuals income tax
return) so that any position we take that understates deductions
will overstate the common unitholders basis in his common
units, which may cause the unitholder to understate gain or
overstate loss on any sale of such units. Please read
Disposition of Common Units
Recognition of Gain or Loss beginning on page 184.
Latham & Watkins LLP is unable to opine as to whether
our method for depreciating Section 743 adjustments is
sustainable for property subject to depreciation under
Section 167 of the Internal Revenue Code or if we use an
aggregate approach as described above, as there is no direct or
indirect controlling authority addressing the validity of these
positions. Moreover, the IRS may challenge our position with
respect to depreciating or amortizing the Section 743(b)
adjustment we take to preserve the uniformity of the units. If
such a challenge were sustained, the gain from the sale of units
might be increased without the benefit of additional deductions.
A Section 754 election is advantageous if the
transferees tax basis in his units is higher than the
units share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of
the election, the transferee would have, among other items, a
greater amount of depreciation deductions and his share of any
gain or loss on a sale of our assets would be less. Conversely,
a Section 754 election is disadvantageous if the
transferees tax basis in his units is lower than those
units share of the aggregate tax
182
basis of our assets immediately prior to the transfer. Thus,
the fair market value of the units may be affected either
favorably or unfavorably by the election. A basis adjustment is
required regardless of whether a Section 754 election is
made in the case of a transfer of an interest in us if we have a
substantial built-in loss immediately after the transfer, or if
we distribute property and have a substantial basis reduction.
Generally, a built-in loss or a basis reduction is substantial
if it exceeds $250,000.
The calculations involved in the Section 754 election are
complex and will be made on the basis of assumptions as to the
value of our assets and other matters. For example, the
allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue
Code. The IRS could seek to reallocate some or all of any
Section 743(b) adjustment allocated by us to our tangible
assets to goodwill instead. Goodwill, as an intangible asset, is
generally nonamortizable or amortizable over a longer period of
time or under a less accelerated method than our tangible
assets. We cannot assure you that the determinations we make
will not be successfully challenged by the IRS and that the
deductions resulting from them will not be reduced or disallowed
altogether. Should the IRS require a different basis adjustment
to be made, and should, in our opinion, the expense of
compliance exceed the benefit of the election, we may seek
permission from the IRS to revoke our Section 754 election.
If permission is granted, a subsequent purchaser of units may be
allocated more income than he would have been allocated had the
election not been revoked.
Tax
Treatment of Operations
Accounting
Method and Taxable Year
We use the year ending December 31 as our taxable year and the
accrual method of accounting for federal income tax purposes.
Each unitholder will be required to include in income his share
of our income, gain, loss and deduction for our taxable year
ending within or with his taxable year. In addition, a
unitholder who has a taxable year ending on a date other than
December 31 and who disposes of all of his units following the
close of our taxable year but before the close of his taxable
year must include his share of our income, gain, loss and
deduction in income for his taxable year, with the result that
he will be required to include in income for his taxable year
his share of more than twelve months of our income, gain, loss
and deduction. Please read Disposition of
Common Units Allocations Between Transferors and
Transferees on page 185.
Initial
Tax Basis, Depreciation and Amortization
The tax basis of our assets will be used for purposes of
computing depreciation and cost recovery deductions and,
ultimately, gain or loss on the disposition of these assets. The
federal income tax burden associated with the difference between
the fair market value of our assets and their tax basis
immediately prior to (i) this offering will be borne by our
general partner and its affiliates, and (ii) any other
offering will be borne by our general partner and all of our
unitholders as of that time. Please read Tax
Consequences of Unit Ownership Allocation of Income,
Gain, Loss and Deduction on page 180.
To the extent allowable, we may elect to use the depreciation
and cost recovery methods, including bonus depreciation to the
extent available, that will result in the largest deductions
being taken in the early years after assets subject to these
allowances are placed in service. Please read
Uniformity of Units beginning on
page 186. Property we subsequently acquire or construct may
be depreciated using accelerated methods permitted by the
Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain, determined by reference
to the amount of depreciation previously deducted and the nature
of the property, may be subject to the recapture rules and taxed
as ordinary income rather than capital gain. Similarly, a
unitholder who has taken cost recovery or depreciation
deductions with respect to property we own will likely be
required to recapture some or all of those deductions as
ordinary income upon a sale of his interest in us. Please read
Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction on
page 180 and Disposition of Common
Units Recognition of Gain or Loss beginning on
page 184.
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The costs we incur in selling our units (called
syndication expenses) must be capitalized and cannot
be deducted currently, ratably or upon our termination. There
are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as
syndication expenses, which may not be amortized by us. The
underwriting discounts and commissions we incur will be treated
as syndication expenses.
Valuation and Tax Basis of Our
Properties. The federal income tax
consequences of the ownership and disposition of units will
depend in part on our estimates of the relative fair market
values, and the initial tax bases, of our assets. Although we
may from time to time consult with professional appraisers
regarding valuation matters, we will make many of the relative
fair market value estimates ourselves. These estimates and
determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair
market value or basis are later found to be incorrect, the
character and amount of items of income, gain, loss or
deductions previously reported by unitholders might change, and
unitholders might be required to adjust their tax liability for
prior years and incur interest and penalties with respect to
those adjustments.
Disposition
of Common Units
Recognition
of Gain or Loss
Gain or loss will be recognized on a sale of units equal to the
difference between the amount realized and the unitholders
tax basis for the units sold. A unitholders amount
realized will be measured by the sum of the cash or the fair
market value of other property received by him plus his share of
our nonrecourse liabilities. Because the amount realized
includes a unitholders share of our nonrecourse
liabilities, the gain recognized on the sale of units could
result in a tax liability in excess of any cash received from
the sale.
Prior distributions from us that in the aggregate were in excess
of cumulative net taxable income for a common unit and,
therefore, decreased a unitholders tax basis in that
common unit will, in effect, become taxable income if the common
unit is sold at a price greater than the unitholders tax
basis in that common unit, even if the price received is less
than his original cost.
Except as noted below, gain or loss recognized by a unitholder,
other than a dealer in units, on the sale or
exchange of a unit will generally be taxable as capital gain or
loss. Capital gain recognized by an individual on the sale of
units held for more than twelve months will generally be taxed
at a maximum U.S. federal income tax rate of 15%. However,
a portion of this gain or loss, which will likely be
substantial, will be separately computed and taxed as ordinary
income or loss under Section 751 of the Internal Revenue
Code to the extent attributable to assets giving rise to
depreciation recapture or other unrealized
receivables or to inventory items we own. The
term unrealized receivables includes potential
recapture items, including depreciation recapture. Ordinary
income attributable to unrealized receivables, inventory items
and depreciation recapture may exceed net taxable gain realized
upon the sale of a unit and may be recognized even if there is a
net taxable loss realized on the sale of a unit. Thus, a
unitholder may recognize both ordinary income and a capital loss
upon a sale of units. Capital losses may offset capital gains
and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gains in the
case of corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Upon a sale or other disposition of less than all of
those interests, a portion of that tax basis must be allocated
to the interests sold using an equitable
apportionment method, which generally means that the tax
basis allocated to the interest sold equals an amount that bears
the same relation to the partners tax basis in his entire
interest in the partnership as the value of the interest sold
bears to the value of the partners entire interest in the
partnership. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling unitholder who can
identify common units transferred with an ascertainable holding
period to elect to use the actual holding period of the common
units transferred. Thus, according to the ruling discussed
above, a common unitholder will be unable to select high or low
basis common units to sell as would be the case with corporate
stock, but, according to the Treasury Regulations, he may
designate specific common units sold for purposes of
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determining the holding period of units transferred. A
unitholder electing to use the actual holding period of common
units transferred must consistently use that identification
method for all subsequent sales or exchanges of common units. A
unitholder considering the purchase of additional units or a
sale of common units purchased in separate transactions is urged
to consult his tax advisor as to the possible consequences of
this ruling and application of the Treasury Regulations.
Specific provisions of the Internal Revenue Code affect the
taxation of some financial products and securities, including
partnership interests, by treating a taxpayer as having sold an
appreciated partnership interest, one in which gain
would be recognized if it were sold, assigned or terminated at
its fair market value, if the taxpayer or related persons
enter(s) into:
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a short sale;
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an offsetting notional principal contract; or
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a futures or forward contract;
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in each case, with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or
forward contract with respect to the partnership interest, the
taxpayer will be treated as having sold that position if the
taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of
the Treasury is also authorized to issue regulations that treat
a taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Allocations
Between Transferors and Transferees
In general, our taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be
subsequently apportioned among the unitholders in proportion to
the number of units owned by each of them as of the opening of
the applicable exchange on the first business day of the month,
which we refer to in this prospectus as the Allocation
Date. However, gain or loss realized on a sale or other
disposition of our assets other than in the ordinary course of
business will be allocated among the unitholders on the
Allocation Date in the month in which that gain or loss is
recognized. As a result, a unitholder transferring units may be
allocated income, gain, loss and deduction realized after the
date of transfer.
Although simplifying conventions are contemplated by the
Internal Revenue Code and most publicly traded partnerships use
similar simplifying conventions, the use of this method may not
be permitted under existing Treasury Regulations as there is no
direct or indirect controlling authority on this issue.
Recently, the Department of the Treasury and the IRS issued
proposed Treasury Regulations that provide a safe harbor
pursuant to which a publicly traded partnership may use a
similar monthly simplifying convention to allocate tax items
among transferor and transferee unitholders, although such tax
items must be prorated on a daily basis. Existing publicly
traded partnerships are entitled to rely on these proposed
Treasury Regulations; however, they are not binding on the IRS
and are subject to change until final Treasury Regulations are
issued. Accordingly, Latham & Watkins LLP is unable to
opine on the validity of this method of allocating income and
deductions between transferor and transferee unitholders because
the issue has not been finally resolved by the IRS or the
courts. If this method is not allowed under the Treasury
Regulations, or only applies to transfers of less than all of
the unitholders interest, our taxable income or losses
might be reallocated among the unitholders. We are authorized to
revise our method of allocation between transferor and
transferee unitholders, as well as unitholders whose interests
vary during a taxable year, to conform to a method permitted
under future Treasury Regulations.
A unitholder who owns units at any time during a quarter and who
disposes of them prior to the record date set for a cash
distribution for that quarter will be allocated items of our
income, gain, loss and deductions attributable to that quarter
but will not be entitled to receive that cash distribution.
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Notification
Requirements
A unitholder who sells any of his units is generally required to
notify us in writing of that sale within 30 days after the
sale (or, if earlier, January 15 of the year following the
sale). A purchaser of units who purchases units from another
unitholder is also generally required to notify us in writing of
that purchase within 30 days after the purchase. Upon
receiving such notifications, we are required to notify the IRS
of that transaction and to furnish specified information to the
transferor and transferee. Failure to notify us of a purchase
may, in some cases, lead to the imposition of penalties.
However, these reporting requirements do not apply to a sale by
an individual who is a citizen of the U.S. and who effects
the sale or exchange through a broker who will satisfy such
requirements.
Constructive
Termination
We will be considered to have been terminated for tax purposes
if there are sales or exchanges which, in the aggregate,
constitute 50% or more of the total interests in our capital and
profits within a twelve-month period. For purposes of measuring
whether the 50% threshold is reached, multiple sales of the same
interest are counted only once. A constructive termination
results in the closing of our taxable year for all unitholders.
In the case of a unitholder reporting on a taxable year other
than a fiscal year ending December 31, the closing of our
taxable year may result in more than twelve months of our
taxable income or loss being includable in his taxable income
for the year of termination. A constructive termination
occurring on a date other than December 31 will result in us
filing two tax returns (and unitholders could receive two
Schedules K-1 if the relief discussed below is not available)
for one fiscal year and the cost of the preparation of these
returns will be borne by all common unitholders. We would be
required to make new tax elections after a termination,
including a new election under Section 754 of the Internal
Revenue Code, and a termination would result in a deferral of
our deductions for depreciation. A termination could also result
in penalties if we were unable to determine that the termination
had occurred. Moreover, a termination might either accelerate
the application of, or subject us to, any tax legislation
enacted before the termination. The IRS has recently announced a
publicly traded partnership technical termination relief
procedure whereby if a publicly traded partnership that has
technically terminated requests publicly traded partnership
technical termination relief and the IRS grants such relief,
among other things, the partnership will only have to provide
one
Schedule K-1
to unitholders for the year notwithstanding two partnership tax
years.
Uniformity
of Units
Because we cannot match transferors and transferees of units, we
must maintain uniformity of the economic and tax characteristics
of the units to a purchaser of these units. In the absence of
uniformity, we may be unable to completely comply with a number
of federal income tax requirements, both statutory and
regulatory. A lack of uniformity can result from a literal
application of Treasury Regulation
Section 1.167(c)-1(a)(6).
Any non-uniformity could have a negative impact on the value of
the units. Please read Tax Consequences of
Unit Ownership Section 754 Election
beginning on page 182.
We intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized
Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful
life applied to the propertys unamortized Book-Tax
Disparity, or treat that portion as nonamortizable, to the
extent attributable to property the common basis of which is not
amortizable, consistent with the regulations under
Section 743 of the Internal Revenue Code, even though that
position may be inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets. Please read Tax Consequences of
Unit Ownership Section 754 Election
beginning on page 182. To the extent that the
Section 743(b) adjustment is attributable to appreciation
in value in excess of the unamortized Book-Tax Disparity, we
will apply the rules described in the Treasury Regulations and
legislative history. If we determine that this position cannot
reasonably be taken, we may adopt a depreciation and
amortization position under which all purchasers acquiring units
in the same month would receive depreciation and amortization
deductions, whether attributable to common basis or a
Section 743(b) adjustment, based upon the same applicable
rate as if they had purchased a direct interest in our assets.
If this position is adopted, it may result in lower annual
depreciation and amortization deductions than would otherwise be
allowable to some
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unitholders and risk the loss of depreciation and amortization
deductions not taken in the year that these deductions are
otherwise allowable. This position will not be adopted if we
determine that the loss of depreciation and amortization
deductions will have a material adverse effect on the
unitholders. If we choose not to utilize this aggregate method,
we may use any other reasonable depreciation and amortization
method to preserve the uniformity of the intrinsic tax
characteristics of any units that would not have a material
adverse effect on the unitholders. In either case, and as stated
above under Tax Consequences of Unit
Ownership Section 754 Election beginning
on page 182, Latham & Watkins LLP has not
rendered an opinion with respect to these methods. Moreover, the
IRS may challenge any method of depreciating the
Section 743(b) adjustment described in this paragraph. If
this challenge were sustained, the uniformity of units might be
affected, and the gain from the sale of units might be increased
without the benefit of additional deductions. Please read
Disposition of Common Units
Recognition of Gain or Loss beginning on page 184.
Tax-Exempt
Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations and
other foreign persons raises issues unique to those investors
and, as described below to a limited extent, may have
substantially adverse tax consequences to them. If you are a
tax-exempt entity or a
non-U.S. person,
you should consult your tax advisor before investing in our
common units. Employee benefit plans and most other
organizations exempt from federal income tax, including
individual retirement accounts and other retirement plans, are
subject to federal income tax on unrelated business taxable
income. Virtually all of our income allocated to a unitholder
that is a tax-exempt organization will be unrelated business
taxable income and will be taxable to it.
Non-resident aliens and foreign corporations, or beneficiaries
of trusts or estates, that own units will be considered to be
engaged in business in the U.S. because of the ownership of
units. As a consequence, they will be required to file federal
tax returns to report their share of our income, gain, loss or
deduction and pay federal income tax at regular rates on their
share of our net income or gain. Moreover, under rules
applicable to publicly traded partnerships, our quarterly
distribution to foreign unitholders will be subject to
withholding at the highest applicable effective tax rate. Each
foreign unitholder must obtain a taxpayer identification number
from the IRS and submit that number to our transfer agent on a
Form W-8BEN
or applicable substitute form in order to obtain credit for
these withholding taxes. A change in applicable law may require
us to change these procedures.
In addition, because a foreign corporation that owns units will
be treated as engaged in a U.S. trade or business, that
corporation may be subject to the U.S. branch profits tax
at a rate of 30%, in addition to regular federal income tax, on
its share of our earnings and profits, as adjusted for changes
in the foreign corporations U.S. net
equity, that is effectively connected with the conduct of
a U.S. trade or business. That tax may be reduced or
eliminated by an income tax treaty between the U.S. and the
country in which the foreign corporate unitholder is a
qualified resident. In addition, this type of
unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue
Code.
A foreign unitholder who sells or otherwise disposes of a common
unit will be subject to U.S. federal income tax on gain
realized from the sale or disposition of that unit to the extent
the gain is effectively connected with a U.S. trade or
business of the foreign unitholder. Under a ruling published by
the IRS, interpreting the scope of effectively connected
income, a foreign unitholder would be considered to be
engaged in a trade or business in the U.S. by virtue of the
U.S. activities of the partnership, and part or all of that
unitholders gain would be effectively connected with that
unitholders indirect U.S. trade or business.
Moreover, under the Foreign Investment in Real Property Tax Act,
a foreign common unitholder generally will be subject to
U.S. federal income tax upon the sale or disposition of a
common unit if (i) he owned (directly or constructively
applying certain attribution rules) more than 5% of our common
units at any time during the five-year period ending on the date
of such disposition and (ii) 50% or more of the fair market
value of all of our assets consisted of U.S. real property
interests at any time during the shorter of the period during
which such unitholder held the common units or the five-year
period ending on the date of disposition. Currently, more than
50% of our assets consist of U.S. real property interests
and we do not expect that to change in the
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foreseeable future. Therefore, foreign unitholders may be
subject to federal income tax on gain from the sale or
disposition of their units.
Administrative
Matters
Information
Returns and Audit Procedures
We intend to furnish to each unitholder, within 90 days
after the close of each calendar year, specific tax information,
including a
Schedule K-1,
which describes his share of our income, gain, loss and
deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take
various accounting and reporting positions, some of which have
been mentioned earlier, to determine each unitholders
share of income, gain, loss and deduction. We cannot assure you
that those positions will yield a result that conforms to the
requirements of the Internal Revenue Code, Treasury Regulations
or administrative interpretations of the IRS. Neither we nor
Latham & Watkins LLP can assure prospective
unitholders that the IRS will not successfully contend in court
that those positions are impermissible. Any challenge by the IRS
could negatively affect the value of the units.
The IRS may audit our federal income tax information returns.
Adjustments resulting from an IRS audit may require each
unitholder to adjust a prior years tax liability, and
possibly may result in an audit of his return. Any audit of a
unitholders return could result in adjustments not related
to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for
purposes of federal tax audits, judicial review of
administrative adjustments by the IRS and tax settlement
proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership
proceeding rather than in separate proceedings with the
partners. The Internal Revenue Code requires that one partner be
designated as the Tax Matters Partner for these
purposes. Our partnership agreement names Tesoro Logistics GP,
LLC as our Tax Matters Partner.
The Tax Matters Partner has made and will make some elections on
our behalf and on behalf of unitholders. In addition, the Tax
Matters Partner can extend the statute of limitations for
assessment of tax deficiencies against unitholders for items in
our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the
IRS unless that unitholder elects, by filing a statement with
the IRS, not to give that authority to the Tax Matters Partner.
The Tax Matters Partner may seek judicial review, by which all
the unitholders are bound, of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek
judicial review, judicial review may be sought by any unitholder
having at least a 1% interest in profits or by any group of
unitholders having in the aggregate at least a 5% interest in
profits. However, only one action for judicial review will go
forward, and each unitholder with an interest in the outcome may
participate.
A unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is
not consistent with the treatment of the item on our return.
Intentional or negligent disregard of this consistency
requirement may subject a unitholder to substantial penalties.
Nominee
Reporting
Persons who hold an interest in us as a nominee for another
person are required to furnish to us:
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the name, address and taxpayer identification number of the
beneficial owner and the nominee;
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whether the beneficial owner is:
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(1) a person that is not a U.S. person;
(2) a foreign government, an international organization or
any wholly owned agency or instrumentality of either of the
foregoing; or
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(3) a tax-exempt entity;
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the amount and description of units held, acquired or
transferred for the beneficial owner; and
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specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from
dispositions.
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Brokers and financial institutions are required to furnish
additional information, including whether they are
U.S. persons and specific information on units they
acquire, hold or transfer for their own account. A penalty of
$50 per failure, up to a maximum of $100,000 per calendar year,
is imposed by the Internal Revenue Code for failure to report
that information to us. The nominee is required to supply the
beneficial owner of the units with the information furnished to
us.
Accuracy-Related Penalties. An
additional tax equal to 20% of the amount of any portion of an
underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or
regulations, substantial understatements of income tax and
substantial valuation misstatements, is imposed by the Internal
Revenue Code. No penalty will be imposed, however, for any
portion of an underpayment if it is shown that there was a
reasonable cause for that portion and that the taxpayer acted in
good faith regarding that portion.
For individuals, a substantial understatement of income tax in
any taxable year exists if the amount of the understatement
exceeds the greater of 10% of the tax required to be shown on
the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to
penalty generally is reduced if any portion is attributable to a
position adopted on the return:
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for which there is, or was, substantial
authority; or
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as to which there is a reasonable basis and the pertinent facts
of that position are disclosed on the return.
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If any item of income, gain, loss or deduction included in the
distributive shares of unitholders might result in that kind of
an understatement of income for which no
substantial authority exists, we must disclose the
pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for
unitholders to make adequate disclosure on their returns and to
take other actions as may be appropriate to permit unitholders
to avoid liability for this penalty. More stringent rules apply
to tax shelters, which we do not believe includes
us, or any of our investments, plans or arrangements.
A substantial valuation misstatement exists if (a) the
value of any property, or the adjusted basis of any property,
claimed on a tax return is 150% or more of the amount determined
to be the correct amount of the valuation or adjusted basis,
(b) the price for any property or services (or for the use
of property) claimed on any such return with respect to any
transaction between persons described in Internal Revenue Code
Section 482 is 200% or more (or 50% or less) of the amount
determined under Section 482 to be the correct amount of
such price, or (c) the net Internal Revenue Code
Section 482 transfer price adjustment for the taxable year
exceeds the lesser of $5 million or 10% of the
taxpayers gross receipts.
No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds
$5,000 ($10,000 for most corporations). If the valuation claimed
on a return is 200% or more than the correct valuation or
certain other thresholds are met, the penalty imposed increases
to 40%. We do not anticipate making any valuation misstatements.
In addition, the 20% accuracy-related penalty also applies to
any portion of an underpayment of tax that is attributable to
transactions lacking economic substance. To the extent that such
transactions are not disclosed, the penalty imposed is increased
to 40%. Additionally, there is no reasonable cause defense to
the imposition of this penalty to such transactions.
Reportable Transactions. If we were to
engage in a reportable transaction, we (and possibly
you and others) would be required to make a detailed disclosure
of the transaction to the IRS. A transaction may be a reportable
transaction based upon any of several factors, including the
fact that it is a type of tax avoidance transaction publicly
identified by the IRS as a listed transaction or
that it produces certain kinds of losses
189
for partnerships, individuals, S corporations, and trusts
in excess of $2 million in any single year, or
$4 million in any combination of six successive tax years.
Our participation in a reportable transaction could increase the
likelihood that our federal income tax information return (and
possibly your tax return) would be audited by the IRS. Please
read Information Returns and Audit
Procedures on page 188.
Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, you may be subject to the following
additional consequences:
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accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-Related
Penalties on page 189;
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for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability; and
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in the case of a listed transaction, an extended statute of
limitations.
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We do not expect to engage in any reportable
transactions.
Recent
Legislative Developments
The present federal income tax treatment of publicly traded
partnerships, including us, or an investment in our common units
may be modified by administrative, legislative or judicial
interpretation at any time. For example, the U.S. House of
Representatives recently passed legislation that would provide
for substantive changes to the definition of qualifying income
and the treatment of certain types of income earned from profits
interests in partnerships. It is possible that these legislative
efforts could result in changes to the existing federal income
tax laws that affect publicly traded partnerships. As previously
and currently proposed, we do not believe any such legislation
would affect our tax treatment as a partnership. However, the
proposed legislation could be modified in a way that could
affect us. We are unable to predict whether any of these
changes, or other proposals, will ultimately be enacted. Any
such changes could negatively impact the value of an investment
in our units.
State,
Local, Foreign and Other Tax Considerations
In addition to federal income taxes, you likely will be subject
to other taxes, such as state, local and foreign income taxes,
unincorporated business taxes, and estate, inheritance or
intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in
which you are a resident. Although an analysis of those various
taxes is not presented here, each prospective unitholder should
consider their potential impact on his investment in us. We will
initially own property or do business in Alaska, California,
Colorado, Idaho, Montana, North Dakota, Texas, Utah and
Washington. Many of these states impose a personal income tax on
individuals; certain of these states also impose an income tax
on corporations and other entities. We may also own property or
do business in other jurisdictions in the future. Although you
may not be required to file a return and pay taxes in some
jurisdictions because your income from that jurisdiction falls
below the filing and payment requirement, you will be required
to file income tax returns and to pay income taxes in many of
these jurisdictions in which we do business or own property and
may be subject to penalties for failure to comply with those
requirements. In some jurisdictions, tax losses may not produce
a tax benefit in the year incurred and may not be available to
offset income in subsequent taxable years. Some of the
jurisdictions may require us, or we may elect, to withhold a
percentage of income from amounts to be distributed to a
unitholder who is not a resident of the jurisdiction.
Withholding, the amount of which may be greater or less than a
particular unitholders income tax liability to the
jurisdiction, generally does not relieve a nonresident
unitholder from the obligation to file an income tax return.
Amounts withheld will be treated as if distributed to
unitholders for purposes of determining the amounts distributed
by us. Please read Tax Consequences of Unit
Ownership Entity-Level Collections
beginning on page 179. Based on current law and our
estimate of our future operations, our general partner
anticipates that any amounts required to be withheld will not be
material.
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It is the responsibility of each unitholder to investigate
the legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each
prospective unitholder is urged to consult his tax counsel or
other advisor with regard to those matters. Further, it is the
responsibility of each unitholder to file all state, local and
foreign, as well as U.S. federal tax returns, that may be
required of him. Latham & Watkins LLP has not rendered
an opinion on the state, local or foreign tax consequences of an
investment in us.
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INVESTMENT
IN TESORO LOGISTICS LP BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to
additional considerations because the investments of these plans
are subject to the fiduciary responsibility and prohibited
transaction provisions of ERISA and the restrictions imposed by
Section 4975 of the Internal Revenue Code, and provisions
under any federal, state, local,
non-U.S. or
other laws or regulations that are similar to such provisions of
the Internal Revenue Code or ERISA (collectively, Similar
Laws). For these purposes, the term employee benefit
plan includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified
employee pension plans and tax deferred annuities or individual
requirement accounts or annuities (IRAs) established
or maintained by an employer or employee organization, and
entities whose underlying assets are considered to include
plan assets if such plans, accounts and
arrangements. Among other things, consideration should be given
to:
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whether the investment is prudent under
Section 404(a)(1)(B) of ERISA;
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whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(l)(C) of
ERISA; and
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whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential
after-tax investment return. Please read Material Federal
Income Tax Consequences Tax-Exempt Organizations and
Other Investors beginning on page 187; and
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whether making such an investment will comply with the
delegation of control and prohibited transaction provisions of
ERISA, the Internal Revenue Code and any other applicable
Similar Laws.
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The person with investment discretion with respect to the assets
of an employee benefit plan, often called a fiduciary, should
determine whether an investment in us is authorized by the
appropriate governing instrument and is a proper investment for
the plan.
Section 406 of ERISA and Section 4975 of the Internal
Revenue Code prohibit employee benefit plans, and IRAs that are
not considered part of an employee benefit plan, from engaging
in specified transactions involving plan assets with
parties that with respect to the plan, are parties in
interest under ERISA or disqualified persons
under the Internal Revenue Code unless an exemption is
available. A party in interest or disqualified person who
engages in a non-exempt prohibited transaction may be subject to
excise taxes and other penalties and liabilities under ERISA and
the Internal Revenue Code. In addition, the fiduciary of the
ERISA plan that engaged in such a non-exempt prohibited
transaction may be subject to penalties and liabilities under
ERISA and the Internal Revenue Code.
In addition to considering whether the purchase of common units
is a prohibited transaction, a fiduciary should consider whether
the plan will, by investing in us, be deemed to own an undivided
interest in our assets, with the result that general partner
would be a fiduciary of such plan and our operations would be
subject to the regulatory restrictions of ERISA, including its
prohibited transaction rules, as well as the prohibited
transaction rules of the Internal Revenue Code, ERISA and any
other applicable Similar Laws.
The Department of Labor regulations provide guidance with
respect to whether, in certain circumstances, the assets of an
entity in which employee benefit plans acquire equity interests
would be deemed plan assets. Under these
regulations, an entitys assets would not be considered to
be plan assets if, among other things:
(a) the equity interests acquired by the employee benefit
plan are publicly offered securities i.e., the
equity interests are widely held by 100 or more investors
independent of the issuer and each other, are freely
transferable and are registered under certain provisions of the
federal securities laws;
(b) the entity is an operating
company, i.e., it is primarily engaged in the
production or sale of a product or service, other than the
investment of capital, either directly or through a
majority-owned subsidiary or subsidiaries; or
192
(c) there is no significant investment by benefit plan
investors, which is defined to mean that less than 25% of the
value of each class of equity interest is held by the employee
benefit plans referred to above that are subject to ERISA and
IRAs and other similar vehicles that are subject to
Section 4975 of the Internal Revenue Code.
Our assets should not be considered plan assets
under these regulations because it is expected that the
investment will satisfy the requirements in (a) and
(b) above.
In light of the serious penalties imposed on persons who engage
in prohibited transactions or other violations, plan fiduciaries
contemplating a purchase of common units should consult with
their own counsel regarding the consequences under ERISA, the
Internal Revenue Code and other Similar Laws.
193
UNDERWRITING
Citigroup Global Markets Inc., Wells Fargo Securities, LLC,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Credit Suisse Securities (USA) LLC are acting as joint
book-running managers of the offering and as representatives of
the underwriters named below. Subject to the terms and
conditions stated in the underwriting agreement dated the date
of this prospectus, each underwriter named below has severally
agreed to purchase, and we have agreed to sell to that
underwriter, the number of common units set forth opposite the
underwriters name.
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Number of
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Underwriter
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Common Units
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Citigroup Global Markets Inc.
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Wells Fargo Securities, LLC
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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Credit Suisse Securities (USA) LLC
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Barclays Capital Inc.
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Deutsche Bank Securities Inc.
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J.P. Morgan Securities LLC
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Raymond James & Associates, Inc.
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Total
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The underwriting agreement provides that the obligations of the
underwriters to purchase the common units included in this
offering are subject to approval of legal matters by counsel and
to other conditions. The underwriters are obligated to purchase
all the common units (other than those covered by the
underwriters option to purchase additional common units
described below) if they purchase any of the common units.
Common units sold by the underwriters to the public will
initially be offered at the initial public offering price set
forth on the cover of this prospectus. Any common units sold by
the underwriters to securities dealers may be sold at a discount
from the initial public offering price not to exceed
$ per common unit. If all the
common units are not sold at the initial public offering price,
the underwriters may change the offering price and the other
selling terms. The representatives have advised us that the
underwriters do not intend to confirm sales to discretionary
accounts that exceed % of the total
number of common units offered by them.
If the underwriters sell more common units than the total number
set forth in the table above, we have granted to the
underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase up
to
additional common units at the public offering price less the
underwriting discount. The underwriters may exercise the option
solely for the purpose of covering over-allotments, if any, in
connection with this offering. To the extent the option is
exercised, each underwriter must purchase a number of additional
common units approximately proportionate to that
underwriters initial purchase commitment. Any common units
issued or sold under the option will be issued and sold on the
same terms and conditions as the other common units that are the
subject of this offering.
We, our general partner, certain of our general partners
officers and directors, certain of our affiliates, including
Tesoro, and certain of their officers and directors have agreed
that, for a period of 180 days from the date of this
prospectus, we and they will not, without the prior written
consent of Citigroup Global Markets Inc., Wells Fargo
Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Credit Suisse Securities (USA) LLC, offer,
pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer
or dispose of, directly or indirectly, any common units or any
securities convertible into or exercisable or exchangeable for
common units, or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic
consequences of ownership of the common units, whether any such
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transaction described above is to be settled by delivery of
common units or such other securities, in cash or otherwise.
Citigroup Global Markets Inc., Wells Fargo Securities, LLC,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Credit Suisse Securities (USA) LLC, in their joint discretion,
may release any of the securities subject to these
lock-up
agreements at any time without notice. Notwithstanding the
foregoing, if (i) during the last 17 days of the
180-day
restricted period, we issue an earnings release or material news
or a material event relating to our company occurs; or
(ii) prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
restricted period, the restrictions described above shall
continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event. Citigroup
Global Markets Inc., Wells Fargo Securities, LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Credit Suisse
Securities (USA) LLC do not have any present intention or any
understandings, implicit or explicit, to release any of the
common units or other securities subject to the
lock-up
agreements prior to the expiration of the
lock-up
period described above.
Prior to this offering, there has been no public market for our
common units. Consequently, the initial public offering price
for the common units was determined by negotiations between us
and the representative. Among the factors considered in
determining the initial public offering price were our results
of operations, our current financial condition, our future
prospects, our markets, the economic conditions in and future
prospects for the industry in which we compete, our management,
and currently prevailing general conditions in the equity
securities markets, including current market valuations of
publicly traded companies considered comparable to our company.
We cannot assure you, however, that the price at which the
common units will sell in the public market after this offering
will not be lower than the initial public offering price or that
an active trading market in our common units will develop and
continue after this offering.
We intend to apply to list our common units on the NYSE under
the symbol TLLP. The underwriters have undertaken to
sell the minimum number of common units to the minimum number of
beneficial owners necessary to meet the NYSE distribution
requirements for trading.
The following table shows the underwriting discount that we are
to pay to the underwriters in connection with this offering.
These amounts are shown assuming both no exercise and full
exercise of the underwriters option to purchase additional
common units.
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Paid by Tesoro Logistics LP
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No Exercise
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Full Exercise
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Per common unit
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$
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$
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Total
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$
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$
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We will pay Citigroup Global Markets Inc. a structuring fee
equal to 0.25% of the gross proceeds of this offering for the
evaluation, analysis and structuring of our partnership.
Additionally, we will pay a third party advisor an advisory fee
of $2,000,000 for advice rendered to us in connection with our
formation, structuring and this offering. We will pay this third
party advisor a quarterly fee equal to $125,000, payable at the
beginning of each quarter, commencing as of October 1,
2010. This fee will be fully creditable against the advisory
fee. Furthermore, we have agreed to reimburse the advisor for
its reasonable
out-of-pocket
expenses, including the fees and expenses of its legal counsel,
resulting from or arising out of its engagement and the
performance of its obligations thereunder.
In connection with this offering, the underwriters may purchase
and sell common units in the open market. Purchases and sales in
the open market may include short sales, purchases to cover
short positions, which may include purchases pursuant to the
underwriters option to purchase additional common units,
and stabilizing purchases.
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Short sales involve secondary market sales by the underwriters
of a greater number of common units than they are required to
purchase in this offering.
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Covered short sales are sales of common units in an
amount up to the number of common units represented by the
underwriters option to purchase additional common units.
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Naked short sales are sales of common units in an
amount in excess of the number of common units represented by
the underwriters option to purchase additional common
units.
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Covering transactions involve purchases of common units either
pursuant to the underwriters option to purchase additional
common units or in the open market after the distribution has
been completed in order to cover short positions.
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To close a naked short position, the underwriters must purchase
common units in the open market after the distribution has been
completed. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward
pressure on the price of the common units in the open market
after pricing that could adversely affect investors who purchase
in this offering.
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To close a covered short position, the underwriters must
purchase common units in the open market after the distribution
has been completed or must exercise the underwriters
option to purchase additional common units. In determining the
source of common units to close the covered short position, the
underwriters will consider, among other things, the price of
common units available for purchase in the open market as
compared to the price at which they may purchase common units
through the underwriters option to purchase additional
common units.
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Stabilizing transactions involve bids to purchase common units
so long as the stabilizing bids do not exceed a specified
maximum.
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Purchases to cover short positions and stabilizing purchases, as
well as other purchases by the underwriters for their own
accounts, may have the effect of preventing or retarding a
decline in the market price of the common units. They may also
cause the price of the common units to be higher than the price
that would otherwise exist in the open market in the absence of
these transactions. The underwriters may conduct these
transactions on the NYSE, in the
over-the-counter
market or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.
A prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters. The
representatives may agree to allocate a number of common units
to underwriters for sale to their online brokerage account
holders. The representatives will allocate common units to
underwriters that may make Internet distributions on the same
basis as other allocations. In addition, common units may be
sold by the underwriters to securities dealers who resell common
units to online brokerage account holders.
Other than the prospectus in electronic format, the information
on any underwriters or selling group members website
and any information contained in any other website maintained by
an underwriter or selling group member is not part of the
prospectus or the registration statement of which this
prospectus forms a part, has not been approved
and/or
endorsed by us or any underwriter or selling group member in its
capacity as underwriter or selling group member and should not
be relied upon by investors.
We estimate that the expenses of the offering, not including the
underwriting discount, will be approximately
$ , all of which will be paid by
us.
If you purchase common units offered in this prospectus, you may
be required to pay stamp taxes and other charges under the laws
and practices of the country of purchase, in addition to the
offering price listed on the cover page of this prospectus.
Certain of the underwriters and their affiliates have engaged,
and may in the future engage, in commercial banking, investment
banking and advisory services for us, Tesoro and our respective
affiliates from time to time in the ordinary course of their
business for which they have received customary fees and
reimbursement of expenses. In addition, affiliates of Citigroup
Global Markets Inc., Wells Fargo Securities, LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and J.P. Morgan
Securities LLC are lenders under Tesoros revolving credit
facility. None of the underwriters has provided or will provide
financing, investment
196
or advisory services to the Partnership during the
180-day
period prior to or the
90-day
period following the date of this prospectus.
The underwriters and their respective affiliates are full
service financial institutions engaged in various activities,
which may include securities trading, commercial and investment
banking, financial advisory, investment management, principal
investment, hedging, financing and brokerage activities. In the
ordinary course of their various business activities, the
underwriters and their respective affiliates may make or hold a
broad array of investments and actively trade debt and equity
securities (or related derivative securities) and financial
instruments (including bank loans) for their own account and for
the accounts of their customers and may at any time hold long
and short positions in such securities and instruments. Such
investment and securities activities may involve securities and
instruments of the issuer.
Because the Financial Industry Regulatory Authority, Inc., or
FINRA, views the common units offered hereby as interests in a
direct participation program, there is no conflict of interest
between us and the underwriters under Rule 5121 of the
FINRA Rules and the offering is being made in compliance with
Rule 2310 of the FINRA Rules. Investor suitability with
respect to the common units should be judged similarly to the
suitability with respect to other securities that are listed for
trading on a national securities exchange.
We, our general partner and certain of our affiliates have
agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to
make because of any of those liabilities.
Notice to
Prospective Investors in the European Economic
Area
In relation to each member state of the European Economic Area
that has implemented the Prospectus Directive (each, a relevant
member state), with effect from and including the date on which
the Prospectus Directive is implemented in that relevant member
state (the relevant implementation date), an offer of securities
described in this prospectus may not be made to the public in
that relevant member state other than:
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to any legal entity that is authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
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to any legal entity that has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts;
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to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to
obtaining the prior consent of the representatives; or
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in any other circumstances that do not require the publication
of a prospectus pursuant to Article 3 of the Prospectus
Directive,
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provided that no such offer of securities shall require us or
any underwriter to publish a prospectus pursuant to
Article 3 of the Prospectus Directive.
For purposes of this provision, the expression an offer of
securities to the public in any relevant member state
means the communication in any form and by any means of
sufficient information on the terms of the offer and the
securities to be offered so as to enable an investor to decide
to purchase or subscribe for the securities, as the expression
may be varied in that member state by any measure implementing
the Prospectus Directive in that member state, and the
expression Prospectus Directive means Directive
2003/71/EC
and includes any relevant implementing measure in each relevant
member state.
We have not authorized and do not authorize the making of any
offer of securities through any financial intermediary on their
behalf, other than offers made by the underwriters with a view
to the final placement of the securities as contemplated in this
prospectus. Accordingly, no purchaser of the securities, other
than the underwriters, is authorized to make any further offer
of the securities on behalf of us or the underwriters.
197
Notice to
Prospective Investors in the United Kingdom
We may constitute a collective investment scheme as
defined by section 235 of the Financial Services and
Markets Act 2000 (FSMA) that is not a
recognised collective investment scheme for the
purposes of FSMA (CIS) and that has not been
authorised or otherwise approved. As an unregulated scheme, it
cannot be marketed in the United Kingdom to the general public,
except in accordance with FSMA. This prospectus is only being
distributed in the United Kingdom to, and is only directed at:
(i) if we are a CIS and are marketed by a person who is an
authorised person under FSMA, (a) investment professionals
falling within Article 14(5) of the Financial Services and
Markets Act 2000 (Promotion of Collective Investment Schemes)
Order 2001, as amended (the CIS Promotion Order) or
(b) high net worth companies and other persons falling
within Article 22(2)(a) to (d) of the CIS Promotion
Order; or
(ii) otherwise, if marketed by a person who is not an
authorised person under FSMA, (a) persons who fall within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005, as amended (the
Financial Promotion Order) or (b) Article
49(2)(a) to (d) of the Financial Promotion Order; and
(iii) in both cases (i) and (ii) to any other
person to whom it may otherwise lawfully be made, (all such
persons together being referred to as relevant
persons). The common units are only available to, and any
invitation, offer or agreement to subscribe, purchase or
otherwise acquire such common units will be engaged in only
with, relevant persons. Any person who is not a relevant person
should not act or rely on this prospectus or any of its contents.
An invitation or inducement to engage in investment activity
(within the meaning of Section 21 of FSMA) in connection
with the issue or sale of any common units which are the subject
of the offering contemplated by this prospectus will only be
communicated or caused to be communicated in circumstances in
which Section 21(1) of FSMA does not apply to us.
Notice to
Prospective Investors in Germany
This prospectus has not been prepared in accordance with the
requirements for a securities or sales prospectus under the
German Securities Prospectus Act
(Wertpapierprospektgesetz), the German Sales Prospectus
Act (Verkaufsprospektgesetz), or the German Investment
Act (Investmentgesetz). Neither the German Federal
Financial Services Supervisory Authority (Bundesanstalt
für Finanzdienstleistungsaufsicht BaFin)
nor any other German authority has been notified of the
intention to distribute the common units in Germany.
Consequently, the common units may not be distributed in Germany
by way of public offering, public advertisement or in any
similar manner and this prospectus and any other document
relating to this offering, as well as information or statements
contained therein, may not be supplied to the public in Germany
or used in connection with any offer for subscription of the
common units to the public in Germany or any other means of
public marketing. The common units are being offered and sold in
Germany only to qualified investors which are referred to in
Section 3, paragraph 2 no. 1, in connection with
Section 2, no. 6, of the German Securities Prospectus
Act, Section 8f paragraph 2 no. 4 of the German
Sales Prospectus Act, and in Section 2 paragraph 11
sentence 2 no. 1 of the German Investment Act. This
prospectus is strictly for use of the person who has received
it. It may not be forwarded to other persons or published in
Germany.
This offering of our common units does not constitute an offer
to buy or the solicitation or an offer to sell the common units
in any circumstances in which such offer or solicitation is
unlawful.
Notice to
Prospective Investors in the Netherlands
The common units may not be offered or sold, directly or
indirectly, in the Netherlands, other than to qualified
investors (gekwalificeerde beleggers) within the meaning
of Article 1:1 of the Dutch Financial Supervision Act
(Wet op het financieel toezicht).
198
VALIDITY
OF THE COMMON UNITS
The validity of our common units will be passed upon for us by
Latham & Watkins LLP, Houston, Texas. Certain legal
matters in connection with our common units offered hereby will
be passed upon for the underwriters by Vinson & Elkins
L.L.P., Houston, Texas.
EXPERTS
The combined financial statements of Tesoro Logistics LP
Predecessor at December 31, 2008 and 2009, and for the
years then ended, appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP,
independent registered public accounting firm, as set forth in
their report thereon appearing elsewhere herein, and are
included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
The combined financial statements of Tesoro Logistics LP
Predecessor for the year ended December 31, 2007, appearing
in this prospectus and registration statement have been audited
by Weaver and Tidwell L.L.P., independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm experts in accounting and
auditing.
The balance sheet of Tesoro Logistics LP at December 13,
2010 appearing in this prospectus and registration statement has
been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and is included in reliance
upon such report given on the authority of such firm as experts
in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-l
regarding our common units. This prospectus does not contain all
of the information found in the registration statement. For
further information regarding us and the common units offered by
this prospectus, you may desire to review the full registration
statement, including its exhibits and schedules, filed under the
Securities Act. The registration statement of which this
prospectus forms a part, including its exhibits and schedules,
may be inspected and copied at the public reference room
maintained by the SEC at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of the materials may
also be obtained from the SEC at prescribed rates by writing to
the public reference room maintained by the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a website on the internet at
http://www.sec.gov.
Our registration statement, of which this prospectus constitutes
a part, can be downloaded from the SECs website and can
also be inspected and copied at the offices of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York
10005.
We intend to furnish our unitholders annual reports containing
our audited financial statements and furnish or make available
quarterly reports containing our unaudited interim financial
information for the first three fiscal quarters of each of our
fiscal years.
Tesoro Corporation is subject to the information requirements of
the Securities Exchange Act of 1934, and in accordance therewith
files reports and other information with the SEC. You may read
Tesoros filings on the SECs website and at the
public reference room described above. Tesoro Corporations
common stock trades on the NYSE under the symbol TSO.
FORWARD
LOOKING STATEMENTS
Some of the information in this prospectus may contain
forward-looking statements. These statements can be identified
by the use of forward-looking terminology including
may, believe, will,
expect, anticipate,
estimate, continue, or other similar
words. These statements discuss future expectations, contain
projections of results of operations or of financial condition,
or state other forward-looking
200
information. These forward-looking statements involve risks and
uncertainties. When considering these forward-looking
statements, you should keep in mind the risk factors and other
cautionary statements in this prospectus. The risk factors and
other factors noted throughout this prospectus could cause our
actual results to differ materially from those contained in any
forward-looking statement.
201
INDEX TO
FINANCIAL STATEMENTS
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TESORO LOGISTICS LP
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F-2
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F-3
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F-4
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F-5
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TESORO LOGISTICS LP PREDECESSOR
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HISTORICAL COMBINED FINANCIAL STATEMENTS
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F-9
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F-10
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F-11
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F-12
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F-13
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F-14
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F-15
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TESORO LOGISTICS LP
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HISTORICAL BALANCE SHEET
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F-27
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F-28
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F-29
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F-1
TESORO
LOGISTICS LP
Set forth below are the unaudited pro forma combined balance
sheet of Tesoro Logistics LP (the Partnership) as of
September 30, 2010 and the unaudited pro forma combined
statements of operations of the Partnership for the year ended
December 31, 2009 and the nine months ended
September 30, 2010. References to we,
us and our mean the Partnership and its
combined subsidiaries, unless the context otherwise requires.
References to Tesoro mean Tesoro Corporation and its
consolidated subsidiaries other than us and our combined
subsidiaries and our general partner. The pro forma combined
financial statements for the Partnership have been derived from
the historical combined financial statements of Tesoro Logistics
LP Predecessor, our predecessor for accounting purposes (the
Predecessor), set forth elsewhere in this prospectus
and are qualified in their entirety by reference to such
historical combined financial statements and related notes
contained therein. The pro forma combined financial statements
have been prepared on the basis that the Partnership will be
treated as a partnership for U.S. federal income tax
purposes. The unaudited pro forma combined financial statements
should be read in conjunction with the accompanying notes and
with the historical combined financial statements and related
notes set forth elsewhere in this Prospectus.
The Partnership will own and operate the businesses of the
Predecessor effective with the closing of this offering. The
contribution of the Predecessors business to us will be
recorded at historical cost as it is considered to be a
reorganization of entities under common control. The pro forma
combined financial statements give pro forma effect to the
matters set forth in the notes to these unaudited pro forma
combined financial statements.
The pro forma balance sheet and the pro forma statements of
operations were derived by adjusting the historical combined
financial statements of the Predecessor. The adjustments are
based upon currently available information and certain estimates
and assumptions; therefore, actual adjustments will differ from
the pro forma adjustments. However, management believes that the
assumptions provide a reasonable basis for presenting the
significant effects of the contemplated transactions and that
the pro forma adjustments give appropriate effect to those
assumptions and are properly applied in the pro forma combined
financial information.
The unaudited pro forma combined financial statements may not be
indicative of the results that actually would have occurred if
the Partnership had assumed the operations of the Predecessor on
the dates indicated or that would be obtained in the future.
F-2
TESORO
LOGISTICS LP
September 30,
2010
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Predecessor
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Transaction
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Partnership
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Historical
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Adjustments
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Pro Forma
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(In thousands)
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ASSETS
|
CURRENT ASSETS
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|
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Cash
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$
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|
|
$
|
200,000
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(a)
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$
|
3,000
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|
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|
|
|
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50,000
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(b)
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|
|
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|
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(12,500
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)(c)
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|
|
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(7,000
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)(d)
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|
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|
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|
|
(2,000
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)(e)
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|
|
|
|
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|
|
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|
(225,500
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)(f)
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|
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|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
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Trade
|
|
|
196
|
|
|
|
(196
|
)(g)
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|
Affiliate
|
|
|
3,464
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|
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|
(3,464
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)(g)
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Total Current Assets
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3,660
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|
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|
(660
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)
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|
3,000
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Property, Plant and Equipment, net
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133,151
|
|
|
|
|
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133,151
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OTHER NON-CURRENT ASSETS:
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|
|
|
|
|
|
|
|
|
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|
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Deferred charges
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|
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|
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|
2,000
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(e)
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|
2,000
|
|
|
|
|
|
|
|
|
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|
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|
Total Assets
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|
$
|
136,811
|
|
|
$
|
1,340
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|
|
$
|
138,151
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|
|
|
|
|
|
|
|
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|
|
|
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LIABILITIES AND EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
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|
Accounts payable
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|
|
|
|
|
|
|
|
|
|
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|
Trade
|
|
|
1,681
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|
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|
(1,681
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)(g)
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|
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Affiliate
|
|
|
323
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|
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|
(323
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)(g)
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|
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Accrued liabilities
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|
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2,624
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|
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|
(2,624
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)(g)
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Total current liabilities
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4,628
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|
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|
(4,628
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)
|
|
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OTHER NONCURRENT LIABILITIES
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|
|
1,639
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|
|
|
(1,639
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)(g)
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|
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|
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DEBT
|
|
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|
50,000
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(b)
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|
50,000
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EQUITY
|
|
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|
|
|
|
|
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Division equity
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|
|
130,544
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|
|
(130,544
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)(h)
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Partners capital
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|
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200,000
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(a)
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88,151
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|
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|
|
(12,500
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)(c)
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|
|
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|
|
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|
(7,000
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)(d)
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|
|
|
|
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|
|
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|
2,607
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(g)
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130,544
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(h)
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|
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|
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(225,500
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)(f)
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Common unitholders public
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Common unitholders Tesoro
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Subordinated unitholders Tesoro
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General partner
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|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
130,544
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|
(42,393
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)
|
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|
88,151
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|
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|
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|
|
|
|
|
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Total Liabilities and Equity
|
|
$
|
136,811
|
|
|
$
|
1,340
|
|
|
$
|
138,151
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
See accompanying notes to unaudited pro forma combined financial
statements.
F-3
TESORO
LOGISTICS LP
Year
Ended December 31, 2009 and Nine Months Ended
September 30, 2010
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|
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|
|
|
|
|
|
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|
|
|
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|
Year Ended December 31, 2009
|
|
|
Nine Months Ended September 30, 2010
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|
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|
Predecessor
|
|
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Transaction
|
|
|
Partnership
|
|
|
Predecessor
|
|
|
Transaction
|
|
|
Partnership
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per unit amounts)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering
|
|
$
|
19,422
|
|
|
$
|
29,405
|
(i)
|
|
$
|
48,827
|
|
|
$
|
14,177
|
|
|
$
|
23,284
|
(i)
|
|
$
|
37,461
|
|
Terminalling, transportation and storage
|
|
|
3,237
|
|
|
|
38,899
|
(i)
|
|
|
42,136
|
|
|
|
2,797
|
|
|
|
30,368
|
(i)
|
|
|
33,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
22,659
|
|
|
|
68,304
|
|
|
|
90,963
|
|
|
|
16,974
|
|
|
|
53,652
|
|
|
|
70,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense
|
|
|
32,566
|
|
|
|
2,933
|
(j)
|
|
|
35,499
|
|
|
|
25,990
|
|
|
|
2,842
|
(j)
|
|
|
28,832
|
|
Depreciation expense
|
|
|
8,820
|
|
|
|
|
|
|
|
8,820
|
|
|
|
5,983
|
|
|
|
|
|
|
|
5,983
|
|
General and administrative expense
|
|
|
3,141
|
|
|
|
867
|
(k)
|
|
|
4,008
|
|
|
|
2,337
|
|
|
|
669
|
(k)
|
|
|
3,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
|
44,527
|
|
|
|
3,800
|
|
|
|
48,327
|
|
|
|
34,310
|
|
|
|
3,511
|
|
|
|
37,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(21,868
|
)
|
|
|
64,504
|
|
|
|
42,636
|
|
|
|
(17,336
|
)
|
|
|
50,141
|
|
|
|
32,805
|
|
Interest expense
|
|
|
|
|
|
|
2,306
|
(l)
|
|
|
2,306
|
|
|
|
|
|
|
|
1,730
|
(l)
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(21,868
|
)
|
|
$
|
62,198
|
|
|
$
|
40,330
|
|
|
$
|
(17,336
|
)
|
|
$
|
48,411
|
|
|
$
|
31,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partners interest in net income (loss)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Limited partners interest in net income (loss)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Net income (loss) per limited partner unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Subordinated units
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Weighted average number of limited partner units outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units (basic and diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated units (basic and diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma combined financial
statements.
F-4
TESORO
LOGISTICS LP
|
|
Note 1.
|
Basis of
Presentation, the Offering and Other Transactions
|
The historical combined financial information is derived from
the historical combined financial statements of the Predecessor.
The pro forma adjustments have been prepared as if the
transactions to be effected at the closing of this offering had
taken place as of September 30, 2010, in the case of the
pro forma balance sheet, and as of January 1, 2009, in the
case of the pro forma statements of operations.
The pro forma combined financial statements give pro forma
effect to:
|
|
|
|
|
Tesoros contribution of all of our predecessors
assets and operations to us (excluding working capital and other
noncurrent liabilities as described in note 2(g) below);
|
|
|
|
our execution of multiple long-term commercial agreements with
Tesoro and the recognition of incremental revenues under those
agreements that were not recognized by our predecessor;
|
|
|
|
certain intrastate tariff increases on our High Plains pipeline
system;
|
|
|
|
our execution of an omnibus agreement and an operational
services agreement with Tesoro;
|
|
|
|
the consummation of this offering and our issuance
of
common units to the
public, general
partner units and the incentive distribution rights to our
general partner
and common
units
and
subordinated units to Tesoro;
|
|
|
|
|
|
the application of the net proceeds of this offering, together
with the proceeds from borrowings under our revolving credit
facility, as described in Use of Proceeds on
page 46; and
|
|
|
|
|
|
the effect of the transactions on certain of our historical
general and administrative expenses, resulting in total pro
forma general and administrative expenses of $4.0 million
for the year ended December 31, 2009. This amount includes:
|
|
|
|
|
|
a fixed fee, initially in the amount of $2.5 million per
year that we will pay to Tesoro under the omnibus agreement for
the provision of treasury, accounting, legal and other
centralized corporate services to us following the closing of
this offering;
|
|
|
|
costs of $1.5 million for estimated employee-related
expenses that we expect to incur related to the management of
our logistics assets; and
|
Upon completion of this offering, Tesoro Logistics LP
anticipates incurring incremental annual general and
administrative expense of approximately $3.0 million per
year as a result of being a separate publicly traded
partnership, including costs associated with annual and
quarterly reports to unitholders, financial statement audit, tax
return and
Schedule K-1
preparation and distribution, investor relations activities,
registrar and transfer agent fees, incremental director and
officer liability insurance premiums, independent director
compensation and incremental employee benefit costs. The
unaudited pro forma combined financial statements do not reflect
these incremental general and administrative expenses.
|
|
Note 2.
|
Pro Forma
Adjustments and Assumptions
|
(a) Reflects the assumed gross offering proceeds to the
Partnership of $200.0 million from the issuance and sale
of
common units at an assumed initial public offering price of
$ per common unit.
(b) Reflects the borrowing of $50.0 million under our
revolving credit facility.
(c) Reflects the payment of estimated underwriter discounts
and a structuring fee totaling $12.5 million, which will be
allocated to the public common units.
F-5
TESORO
LOGISTICS LP
NOTES TO
UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS (Continued)
(d) Reflects $5.0 million for estimated expenses
associated with the offering relating to legal and consulting
services, audit expenses, printing charges, filing fees and
other costs and also includes a $2.0 million advisory fee
associated with the offering.
(e) Represents $2.0 million of debt issuance costs
incurred in connection with entering into our revolving credit
facility.
(f) Reflects the distribution to Tesoro of
$175.5 million in proceeds from the public offering of
common units, in part to reimburse it for certain capital
expenditures, and an additional cash distribution of
$50.0 million funded with a borrowing under our revolving
credit facility.
(g) Tesoro will retain the working capital and other
noncurrent liabilities of the Predecessor, as these balances
represent assets and liabilities related to the
Predecessors operations prior to the closing of the
offering.
(h) Represents the conversion of the adjusted equity of the
Predecessor of $ million from
division equity to common and subordinated limited partner
equity of the Partnership and the general partners
interest in the Partnership. The conversion is as follows:
|
|
|
|
|
$ million
for
common units;
|
|
|
|
$ million
for
subordinated units; and
|
|
|
|
$ million for the general
partners interest.
|
After the conversion, the partners equity amounts of the
common and subordinated unitholders are
each %
of total equity, with the
remaining % equity representing the
general partner interest.
(i) The pro forma revenues reflect recognition of affiliate
revenues for pipelines and terminals contributed to us that have
not been previously recorded in the historical financial records
of the Predecessor. Product volumes used in the calculations are
historical volumes transported on or terminalled in facilities
included in the Predecessors financial statements. Tariff
rates and service fees were calculated using the rates and fees
in the commercial agreements to be entered into with Tesoro at
the closing of this offering and increased intrastate tariff
rates on our High Plains pipeline in effect at the time of
closing of this offering.
(j) Represents operating and maintenance expenses of
$1.9 million for the year ended December 31, 2009 and
$2.0 million for the nine months ended September 30,
2010, primarily related to purchased additives, inspections and
port charges based on historical levels of such purchases and
services that have not previously been allocated to the
Predecessor but will be charged to the Partnership after the
closing of this offering. Also includes $1.0 million for
the year ended December 31, 2009 and $0.8 million for
the nine months ended September 30, 2010 for business
interruption and property insurance premiums that the
Partnership expects to incur based on estimates from the
Partnerships insurance broker.
(k) Reflects higher employee-related expenses of
$0.9 million and $0.7 million, for the year ended
December 31, 2009 and for the nine months ended
September 30, 2010, respectively, related to Tesoro
personnel who have been identified to be assigned to manage the
Partnerships
day-to-day
operations after the closing of this offering.
(l) Reflects interest expense at 2.8% on the
$50.0 million borrowing under our $150.0 million
revolving credit facility and an estimated 0.50% commitment fee
for the unutilized portion of the facility, as well as the
related amortization of debt issuance costs incurred with
entering into the facility. A 1.0% change in the interest rate
associated with this borrowing would result in a
$0.5 million increase in interest expense.
F-6
TESORO
LOGISTICS LP
NOTES TO
UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3.
|
Pro Forma
Net Income Per Unit
|
Pro forma net income per unit is determined by dividing the pro
forma net income per unit that would have been allocated to the
common and subordinated unitholders, which is 98% of pro forma
net income, by the number of common and subordinated units
expected to be outstanding at the closing of our initial public
offering. For purposes of this calculation, the number of common
and subordinated units assumed to be outstanding
was . All units were assumed
to have been outstanding since January 1, 2009. Basic and
diluted pro forma net income per unit is equal as there are no
dilutive units at the date of closing of the initial public
offering of the common units of the Partnership. Pursuant to the
partnership agreement, to the extent that the quarterly
distributions exceed certain targets, the general partner is
entitled to receive certain incentive distributions that will
result in less net income proportionately being allocated to the
holders of common and subordinated units. The pro forma net
income per unit calculations assume that no incentive
distributions were made to the general partner because no such
distribution would have been made based upon the pro forma
available cash from operating surplus for the period.
Staff Accounting Bulletin 1.B.3 requires that certain
distributions to owners prior to or coincident with an initial
public offering be considered as distributions in contemplation
of that offering. Upon completion of this offering, we intend to
distribute approximately
$ million, comprised of
$ million from the proceeds
from the public offering of common units and $50.0 million
funded with a borrowing under the revolving credit facility, to
a subsidiary of Tesoro. Assuming additional common units were
issued to give effect to this distribution, pro forma net income
per limited partners unit for common units would have been
$ and
$ for the twelve months ended
December 31, 2010 and nine months ended September 30,
2010, respectively. During the same periods, the pro forma net
income per limited partners unit for subordinated units
would have been $ and
$ , respectively.
|
|
Note 4.
|
Commercial
Agreements with Tesoro
|
In connection with the closing of this offering, we will enter
into various long term, fee-based commercial agreements with
Tesoro under which we will provide various pipeline
transportation, trucking, terminal distribution and storage
services to Tesoro, and Tesoro will commit to provide us with
minimum monthly throughput volumes of crude oil and refined
products. We believe the terms and conditions under these
agreements are generally no less favorable to either party than
those that could have been negotiated with unaffiliated parties
with respect to similar services. These commercial agreements
with Tesoro will include:
|
|
|
|
|
a 10-year
pipeline transportation services agreement under which Tesoro
will pay us fees for gathering and transporting crude oil on our
High Plains pipeline system;
|
|
|
|
a two-year trucking transportation services agreement under
which Tesoro will pay us fees for crude oil trucking and related
services and scheduling and dispatching services that we provide
through our High Plains truck-based crude oil gathering
operation;
|
|
|
|
a 10-year
master terminalling services agreement under which Tesoro will
pay us fees for providing terminalling services at our eight
refined products terminals;
|
|
|
|
a 10-year
pipeline transportation services agreement under which Tesoro
will pay us fees for transporting crude oil and refined products
on our five Salt Lake City short-haul pipelines; and
|
|
|
|
a 10-year
storage and transportation services agreement under which Tesoro
will pay us fees for storing crude oil and refined products at
our Salt Lake City storage facility and transporting crude oil
and refined products between the storage facility and
Tesoros Salt Lake City refinery through interconnecting
pipelines on a dedicated basis.
|
F-7
TESORO
LOGISTICS LP
NOTES TO
UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS (Continued)
Each of these agreements, other than the storage and
transportation services agreement, will contain minimum
throughput commitments. Tesoros fees under the storage and
transportation services agreement will be for the use of the
existing capacity at our Salt Lake City storage facility and on
our pipelines connecting the storage facility to Tesoros
Salt Lake City refinery. The fees under each agreement are
indexed for inflation and, except for the trucking
transportation services agreement, these agreements give Tesoro
the option to renew for two five-year terms. The trucking
transportation services agreement will renew automatically for
up to four successive two-year terms. Additionally, these
agreements include provisions that permit Tesoro to suspend,
reduce or terminate its obligations under the applicable
agreement if certain events occur. These events include Tesoro
deciding to permanently or indefinitely suspend refining
operations at one or more of its refineries as well as our being
subject to certain force majeure events that would prevent us
from performing required services under the applicable agreement.
F-8
The Board of Directors of
Tesoro Corporation
We have audited the accompanying combined balance sheets of
Tesoro Logistics LP Predecessor (Predecessor) as of
December 31, 2008 and 2009, and the related combined
statements of operations, division equity, and cash flows for
the years then ended. These combined financial statements are
the responsibility of the Predecessors management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial
statements are free of material misstatement. We were not
engaged to perform an audit of the Predecessors internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Predecessors internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the combined
financial position of Tesoro Logistics LP Predecessor at
December 31, 2008 and 2009, and the combined results of
their operations and their cash flows for the years then ended
in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Antonio, Texas
January 3, 2011
F-9
To the Board of Directors of
Tesoro Corporation
We have audited the accompanying combined balance sheet of
Tesoro Logistics LP Predecessor (the Predecessor) as
of December 31, 2007, and the related combined statement of
operations, division equity, and cash flows for the year ended
December 31, 2007. The Predecessors management is
responsible for these financial statements. Our responsibility
is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial
statements are free of material misstatement. We were not
engaged to perform an audit of the Predecessors internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Predecessors internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined
financial statements, assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the combined
financial position of Tesoro Logistics LP Predecessor as of
December 31, 2007, and the results of its operations and
its cash flows for the year ended December 31, 2007, in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Weaver and Tidwell, L.L.P.
Houston, Texas
January 3, 2011
F-10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, less allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
82
|
|
|
$
|
14
|
|
|
$
|
196
|
|
Affiliate
|
|
|
2,830
|
|
|
|
3,146
|
|
|
|
3,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
2,912
|
|
|
|
3,160
|
|
|
|
3,660
|
|
Property, Plant and Equipment, net
|
|
|
138,785
|
|
|
|
138,055
|
|
|
|
133,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
141,697
|
|
|
$
|
141,215
|
|
|
$
|
136,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND DIVISION EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
2,219
|
|
|
$
|
1,834
|
|
|
$
|
1,681
|
|
Affiliate
|
|
|
330
|
|
|
|
323
|
|
|
|
323
|
|
Accrued liabilities
|
|
|
5,567
|
|
|
|
2,430
|
|
|
|
2,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
8,116
|
|
|
|
4,587
|
|
|
|
4,628
|
|
OTHER NONCURRENT LIABILITIES
|
|
|
570
|
|
|
|
912
|
|
|
|
1,639
|
|
COMMITMENTS AND CONTINGENCIES (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVISION EQUITY
|
|
|
133,011
|
|
|
|
135,716
|
|
|
|
130,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Division Equity
|
|
$
|
141,697
|
|
|
$
|
141,215
|
|
|
$
|
136,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
20,504
|
|
|
$
|
21,029
|
|
|
$
|
19,297
|
|
|
$
|
14,143
|
|
|
$
|
14,087
|
|
|
|
|
|
Third-party
|
|
|
142
|
|
|
|
161
|
|
|
|
125
|
|
|
|
96
|
|
|
|
90
|
|
|
|
|
|
Terminalling, transportation and storage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party
|
|
|
3,251
|
|
|
|
3,297
|
|
|
|
3,237
|
|
|
|
2,324
|
|
|
|
2,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
23,897
|
|
|
|
24,487
|
|
|
|
22,659
|
|
|
|
16,563
|
|
|
|
16,974
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense
|
|
|
26,858
|
|
|
|
29,741
|
|
|
|
32,566
|
|
|
|
24,209
|
|
|
|
25,990
|
|
|
|
|
|
Depreciation expense
|
|
|
6,342
|
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
6,975
|
|
|
|
5,983
|
|
|
|
|
|
General and administrative expense
|
|
|
2,800
|
|
|
|
2,525
|
|
|
|
3,141
|
|
|
|
2,340
|
|
|
|
2,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
|
36,000
|
|
|
|
38,891
|
|
|
|
44,527
|
|
|
|
33,524
|
|
|
|
34,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(12,103
|
)
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(16,961
|
)
|
|
$
|
(17,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-12
|
|
|
|
|
Balance, January 1, 2007
|
|
$
|
112,698
|
|
Net Loss2007
|
|
|
(12,103
|
)
|
Contributions
|
|
|
24,753
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
125,348
|
|
Net Loss2008
|
|
|
(14,404
|
)
|
Contributions
|
|
|
22,067
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
133,011
|
|
Net Loss2009
|
|
|
(21,868
|
)
|
Contributions
|
|
|
24,573
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
135,716
|
|
Net Lossnine months ended September 30, 2010
(unaudited)
|
|
|
(17,336
|
)
|
Contributions (unaudited)
|
|
|
12,164
|
|
|
|
|
|
|
Balance, September 30, 2010 (unaudited)
|
|
$
|
130,544
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,103
|
)
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(16,961
|
)
|
|
$
|
(17,336
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,342
|
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
6,975
|
|
|
|
5,983
|
|
Loss on asset disposals
|
|
|
225
|
|
|
|
476
|
|
|
|
1,114
|
|
|
|
1,043
|
|
|
|
506
|
|
Changes in current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(40
|
)
|
|
|
(28
|
)
|
|
|
68
|
|
|
|
(146
|
)
|
|
|
(182
|
)
|
Accounts receivableaffiliates
|
|
|
|
|
|
|
625
|
|
|
|
|
|
|
|
(187
|
)
|
|
|
|
|
Changes in current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(179
|
)
|
|
|
414
|
|
|
|
(16
|
)
|
|
|
(86
|
)
|
|
|
212
|
|
Accounts payableaffiliates
|
|
|
(138
|
)
|
|
|
|
|
|
|
(323
|
)
|
|
|
|
|
|
|
(318
|
)
|
Accrued liabilities
|
|
|
12
|
|
|
|
202
|
|
|
|
(492
|
)
|
|
|
(394
|
)
|
|
|
411
|
|
Other noncurrent liabilities
|
|
|
178
|
|
|
|
45
|
|
|
|
373
|
|
|
|
470
|
|
|
|
727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(5,703
|
)
|
|
|
(6,045
|
)
|
|
|
(12,324
|
)
|
|
|
(9,286
|
)
|
|
|
(9,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(6,443
|
)
|
|
|
(16,022
|
)
|
|
|
(12,249
|
)
|
|
|
(11,295
|
)
|
|
|
(2,167
|
)
|
Wilmington purchase
|
|
|
(12,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(19,050
|
)
|
|
|
(16,022
|
)
|
|
|
(12,249
|
)
|
|
|
(11,295
|
)
|
|
|
(2,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent contribution
|
|
|
24,753
|
|
|
|
22,067
|
|
|
|
24,573
|
|
|
|
20,581
|
|
|
|
12,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
24,753
|
|
|
|
22,067
|
|
|
|
24,573
|
|
|
|
20,581
|
|
|
|
12,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures included in accounts payable and accrued
expenses at period end
|
|
$
|
1,062
|
|
|
$
|
3,700
|
|
|
$
|
685
|
|
|
$
|
719
|
|
|
$
|
104
|
|
See accompanying notes to combined financial statements.
F-14
TESORO
LOGISTICS LP PREDECESSOR
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
|
|
Note 1.
|
Description
of Business
|
Tesoro Logistics LP Predecessor, our predecessor for accounting
purposes (the Predecessor), include the assets,
liabilities and results of operations of certain crude oil
gathering and refined products terminalling, transportation and
storage assets of Tesoro Corporation (as described below, the
Contributed Assets) operated and held by Tesoro
Alaska Company, Tesoro Refining and Marketing Company and Tesoro
High Plains Pipeline Company LLC prior to their contribution to
Tesoro Logistics LP (the Partnership) in connection
with the Partnerships proposed initial public offering.
The Partnership was formed in December 2010 as a Delaware
limited partnership. As used in this report, the terms
Tesoro Logistics LP, our partnership,
we, our, us, or like terms
refer to the Predecessor. References in this report to
Tesoro refer collectively to Tesoro Corporation and
its consolidated subsidiaries, other than Tesoro Logistics LP,
its combined subsidiaries and its general partner.
Our initial assets consist of a crude oil gathering system in
the Bakken Shale/Williston Basin area of North Dakota and
Montana, eight refined products terminals in the midwestern and
western United States and a crude oil and refined products
storage facility and five related short-haul pipelines in Utah.
Our assets and operations are organized into the following two
segments:
Crude Oil Gathering. Our common carrier
crude oil gathering system in North Dakota and Montana, which we
refer to as our High Plains system, includes an approximate
23,000 barrels per day (bpd) truck-based crude oil
gathering operation and approximately 700 miles of pipeline
and related storage assets with the current capacity to deliver
up to 70,000 bpd to Tesoros Mandan, North Dakota
refinery. This system gathers and transports crude oil produced
from the Williston Basin, including production from the Bakken
Shale formation.
Terminalling, Transportation and
Storage. We own and operate eight refined
products terminals with aggregate truck and barge delivery
capacity of approximately 229,000 bpd. The terminals
provide distribution primarily for refined products produced at
Tesoros refineries located in Los Angeles and Martinez,
California; Salt Lake City, Utah; Kenai, Alaska; Anacortes,
Washington; and Mandan, North Dakota. We also own and operate
assets that exclusively support Tesoros Salt Lake City
refinery, including a refined products and crude oil storage
facility with total shell capacity of approximately
878,000 barrels and three short-haul crude oil supply
pipelines and two short-haul refined product delivery pipelines
connected to third-party interstate pipelines.
We generate revenue by charging fees for gathering, transporting
and storing crude oil and for terminalling, transporting and
storing refined products. Since we do not own any of the crude
oil or refined products that we handle and do not engage in the
trading of crude oil or refined products, we have minimal direct
exposure to risks associated with fluctuating commodity prices,
although these risks indirectly influence our activities and
results of operations over the long term.
|
|
Note 2.
|
Basis of
Presentation
|
The accompanying financial statements and related notes present
the combined financial position, results of operations, cash
flows and division equity of the Predecessor. The combined
financial statements include financial data at historical cost
as the contribution of assets is considered to be a
reorganization of entities under common control.
We have evaluated subsequent events through January 3,
2011. Any material subsequent events that occurred during this
time have been properly recognized or disclosed in our financial
statements.
F-15
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
The combined financial statements as of September 30, 2010
and for the nine months ended September 30, 2009 and 2010,
included herein, are unaudited. These financial statements
reflect all adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results of
the interim periods. Such adjustments are considered to be of a
normal recurring nature. Results of operations for the nine
month period ended September 30, 2010, are not necessarily
indicative of the results of operations that will be realized
for the year ending December 31, 2010.
|
|
Note 3.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates
We prepare our combined financial statements in conformity with
accounting principles generally accepted in the United States of
America (U.S. GAAP), which requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
periods presented. Changes in facts and circumstances may result
in revised estimates and actual results could differ from those
estimates.
Accounts
Receivable
The majority of the accounts receivable are due from Tesoro.
Credit for non-affiliated customers is extended based on an
evaluation of each customers financial condition and in
certain circumstances, collateral, such as letters of credit or
guarantees, is required. Our allowance for doubtful accounts is
based on various factors including current sales amounts,
historical charge-offs and specific accounts identified as high
risk. Uncollectible accounts receivable are charged against the
allowance for doubtful accounts when all reasonable efforts to
collect the amounts due have been exhausted.
Earnings
Per Share
During the periods presented, we were wholly owned by Tesoro.
Accordingly, we have not calculated earnings per share.
Property,
Plant and Equipment
Property, plant and equipment are stated at the lower of
historical cost less accumulated depreciation or fair value, if
impaired. We capitalize all construction-related direct labor
and material costs, as well as indirect construction costs.
Indirect construction costs include general engineering, taxes
and the cost of funds used during construction. Costs, including
complete asset replacements and enhancements or upgrades that
increase the original efficiency, productivity or capacity of
property, plant and equipment, are also capitalized. The costs
of repairs, minor replacements and maintenance projects, which
do not increase the original efficiency, productivity or
capacity of property, plant and equipment, are expensed as
incurred.
We compute depreciation of property, plant and equipment using
the straight-line method, based on the estimated useful life
(primarily 15 to 28 years) and salvage value of each asset. We
depreciate leasehold improvements over the lesser of the lease
term or the economic life of the asset.
Revenue
Recognition
Revenues are recognized as crude oil and refined products are
shipped through, delivered by or stored in our pipelines,
terminals and storage facility assets, as applicable. All
revenues are based on regulated tariff
F-16
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
rates or contractual rates. The only historic revenues reflected
in the financial statements are from third party use of our
pipelines and terminals and Tesoros use of our High Plains
system. Tesoro was not charged fees for services rendered with
respect to any trucking, terminal, storage or short haul
pipeline transportation services, as they were operated as a
component of Tesoros petroleum refining and marketing
businesses.
Impairment
of Long-Lived Assets
We review property, plant and equipment and other long-lived
assets for impairment whenever events or changes in business
circumstances indicate the net book values of the assets may not
be recoverable. Impairment is indicated when the undiscounted
cash flows estimated to be generated by those assets are less
than the assets net book value. If this occurs, an
impairment loss is recognized for the difference between the
fair value and net book value. Factors that indicate potential
impairment include: a significant decrease in the market value
of the asset, operating or cash flow losses associated with the
use of the asset, and a significant change in the assets
physical condition or use. No impairments of long-lived assets
were recorded during the periods included in these financial
statements.
Income
Taxes
Our operations are currently included in Tesoros
consolidated federal income tax return. Following the initial
public offering of the Partnership, our operations will be
treated as a partnership for federal income tax purposes, with
each partner being separately taxed on its share of the taxable
income. Therefore, we have excluded income taxes from these
combined financial statements.
Environmental
and Asset Retirement Obligations
Tesoro has historically capitalized environmental expenditures
that extend the life or increase the capacity of facilities as
well as expenditures that prevent environmental contamination.
We expensed costs that do not contribute to current or future
revenue generation. We have recorded liabilities when
environmental assessments
and/or
remedial efforts are probable and can be reasonably estimated.
Cost estimates were based on the expected timing and the extent
of remedial actions required by governing agencies, experience
gained from similar sites for which environmental assessments or
remediation have been completed, and the amount of our
anticipated liability, considering the proportional liability
and financial abilities of other responsible parties. Estimated
liabilities were not discounted to present value. Environmental
expenses are recorded primarily as operating and maintenance
expenses.
An asset retirement obligation (ARO) is an estimated
liability for the cost to retire a tangible asset. We have
recorded AROs at fair value in the period in which we have a
legal obligation to incur this liability and can make a
reasonable estimate of the fair value of the liability. When the
liability was initially recorded, the cost was capitalized by
increasing the book value of the related long-lived tangible
asset. The liability was accreted to its estimated settlement
value and the related capitalized cost was depreciated over the
assets useful life. Settlement dates were estimated by
considering our past practice, industry practice,
managements intent and estimated economic lives.
Estimates of the fair value for certain AROs could not be made
as settlement dates (or range of dates) associated with these
assets were not estimable because we intend to operate and
maintain our assets as long as supply and demand for petroleum
products exists. These AROs include hazardous materials
disposal, site restoration, and removal or dismantlement
requirements associated with the closure of our terminal
facilities or pipelines, including the demolition or removal of
tanks, pipelines or other equipment.
F-17
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
Imbalances
Tesoro Logistics LP Predecessor does not purchase or produce
crude oil or refined product inventories. We experience
imbalances as a result of variances in meter readings and in
other measurement methods, and volume fluctuations within our
crude oil gathering system due to pressure and temperature
changes. We record revenues related to imbalances and value
those revenues using quoted market prices of the applicable
commodities. At December 31, 2009 and September 30,
2010, we did not have any imbalance liabilities or assets on the
combined balance sheets as imbalances were settled prior to
period end.
Related
Party Transactions
Substantially all of the related party transactions discussed
below were settled immediately through division equity. The
balance in accounts receivable and payable from affiliated
companies represents the amount owed from or to Tesoro related
to the remaining affiliate transactions. Revenues from
affiliates in the combined statements of operations consist of
revenues from gathering and transportation services to Tesoro
and its affiliates based on regulated tariff rates for the
FERC-regulated portions of our High Plains pipeline system.
General and administrative expenses in the combined statements
of operations include affiliate costs totaling
$2.0 million, $1.8 million and $2.2 million for
the years ended December 31, 2007, 2008 and 2009,
respectively, and $1.7 million and $1.6 million for
the nine months ended September 30, 2009 and 2010,
respectively. In addition, operating and maintenance expenses in
the combined statements of operations include affiliate costs
totaling $4.1 million, $3.7 million and
$3.5 million for the years ended December 31, 2007,
2008 and 2009, respectively, and $2.7 million and
$2.3 million for the nine months ended September 30,
2009 and 2010, respectively. These expenses were incurred by
Tesoro to cover costs of corporate functions such as legal,
accounting, treasury, human resources, engineering, information
technology, insurance, administration, and other corporate
services and include related stock-based compensation,
retirement and pension benefit plan expenses. These allocations
were based on an approximate weighted average headcount and time
ratio of Tesoro employees who contributed services to us. In
managements estimation, the allocation methodologies used
are reasonable and result in an allocation to us of our actual
costs of doing business.
The employees supporting our operations are employees of Tesoro
and its affiliates. Their payroll costs and thrift plan costs
are charged to us by Tesoro. Tesoro carries employee-related
liabilities in its financial statements, including the
liabilities related to the employee pension, postretirement
medical and life plans, stock-based compensation and other
incentive compensation.
Historically, we participated in Tesoros centralized cash
management program under which cash receipts and cash
disbursements were processed through Tesoros cash accounts
with a corresponding credit or charge to an affiliate account.
The affiliate account is included in division equity. Following
its initial public offering, the Partnership will maintain
separate cash accounts.
Depreciation
Expense
We calculate depreciation using the straight-line method based
on the estimated useful lives and salvage values of our assets.
When assets are placed into service, we make estimates with
respect to their useful lives that we believe are reasonable.
However, factors such as maintenance levels, economic conditions
impacting the demand for these assets, and regulatory or
environmental requirements could cause us to change our
estimates, thus impacting the future calculation of depreciation.
F-18
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
Contingencies
In the ordinary course of business, we become party to lawsuits,
administrative proceedings and governmental investigations,
including environmental, regulatory and other matters. Damages
or penalties may be sought from us in some matters for which the
likelihood of loss may be possible but the amount of loss is not
currently estimable. As a result, we have not established
accruals for such matters. On the basis of existing information,
we believe that the resolution of any such matters, individually
or in the aggregate, will not have a material adverse effect on
our financial position or results of operations.
New
Accounting Pronouncements
Fair
Value Option
In February 2007, the Financial Accounting Standards Board
(FASB) issued a standard which permits entities to
measure many financial instruments and certain other items at
fair value at specified election dates that are not currently
required to be measured at fair value. Unrealized gains and
losses on items for which the fair value option has been elected
should be reported in earnings at each subsequent reporting
date. The provisions of this standard were effective for us as
of January 1, 2008. We elected not to adopt the fair value
option under this standard.
FASB
Accounting Standards Codification
In June 2009, the FASB established the FASB Accounting Standards
Codification (the Codification) as the exclusive
authoritative source for nongovernmental U.S. GAAP, except
for SEC rules and interpretive releases. The Codification is a
compilation of U.S. GAAP previously issued by several
standard setters. Future FASB accounting standards will update
the Codification and will be referred to as Accounting
Standards Updates. The Codification became effective for
us in 2009, and did not impact our financial position or results
of operations.
Fair
Value Measurements
In September 2006, the FASB issued a standard which defines fair
value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The standard
applies under other accounting pronouncements that require or
permit fair value measurements and does not require any new fair
value measurements. The standard establishes a fair value
hierarchy that prioritizes the use of inputs used in valuation
techniques into the following three levels:
level 1quoted prices in active markets for identical
assets and liabilities; level 2observable inputs
other than quoted prices in active markets for identical assets
and liabilities; and level 3unobservable inputs that
are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. The
standards provisions for financial assets and financial
liabilities, which became effective as of January 1, 2008,
had no material impact on our financial position or results of
operations as we currently do not hold any financial instruments.
We adopted a standard on January 1, 2009, that expanded the
framework and disclosures for measuring the fair value of
nonfinancial assets and nonfinancial liabilities, including:
|
|
|
|
|
acquired or impaired goodwill;
|
|
|
|
the initial recognition of asset retirement obligations; and
|
|
|
|
impaired property, plant and equipment.
|
F-19
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
The adoption of this standard did not impact our financial
position or results of operations.
In January 2010, the FASB amended the standard covering fair
value measurements to require additional disclosures, including
transfers in and out of levels 1 and 2 fair value
measurements, the gross basis presentation of the reconciliation
of level 3 fair value measurements, and fair value
measurement disclosure at the class level, as opposed to
category level, as previously required. This guidance is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for disclosures related to
level 3 fair value measurements, which are effective for
fiscal years beginning after December 15, 2010 (including
interim periods). The adoption of the amendment did not impact
our financial position or results of operations.
|
|
Note 4.
|
Related
Party Transactions
|
Tesoro and its affiliates provide certain services including
legal, accounting, treasury, human resources, engineering,
information technology, insurance, administration, and other
corporate services. It is Tesoros policy to charge these
expenses, first on the basis of direct usage when identifiable,
with the remainder allocated to us on the basis of headcount and
estimated time allocated to the Contributed Assets. The
allocated expenses also include stock-based compensation for
employees providing these services. In addition, the allocated
expenses include incentive compensation, and retirement and
pension benefit plan expenses related to the employees providing
these services, including those employees that oversee
operational aspects of the business. See further discussion
regarding the allocation of such expenses in Notes 8 and 9
below.
A summary of expenses directly charged and allocated to us by
Tesoro are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Operating and maintenance expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
4,101
|
|
|
$
|
3,683
|
|
|
$
|
3,505
|
|
|
$
|
2,720
|
|
|
$
|
2,309
|
|
Direct
|
|
|
22,757
|
|
|
|
26,058
|
|
|
|
29,061
|
|
|
|
21,489
|
|
|
|
23,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,858
|
|
|
$
|
29,741
|
|
|
$
|
32,566
|
|
|
$
|
24,209
|
|
|
$
|
25,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
2,024
|
|
|
$
|
1,767
|
|
|
$
|
2,226
|
|
|
$
|
1,666
|
|
|
$
|
1,643
|
|
Direct
|
|
|
776
|
|
|
|
758
|
|
|
|
915
|
|
|
|
674
|
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,800
|
|
|
$
|
2,525
|
|
|
$
|
3,141
|
|
|
$
|
2,340
|
|
|
$
|
2,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
|
|
Note 5.
|
Property,
Plant and Equipment
|
Property, Plant and Equipment, at cost, is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil GatheringPipelines
|
|
$
|
94,294
|
|
|
$
|
94,292
|
|
|
$
|
94,437
|
|
Terminalling, Transportation and Storage:
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminals
|
|
|
74,596
|
|
|
|
79,103
|
|
|
|
78,993
|
|
Salt Lake City storage facility
|
|
|
8,563
|
|
|
|
8,563
|
|
|
|
8,563
|
|
Salt Lake City pipelines
|
|
|
9,545
|
|
|
|
10,486
|
|
|
|
10,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Terminalling, Transportation and Storage
|
|
|
92,704
|
|
|
|
98,152
|
|
|
|
98,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property, Plant and Equipment
|
|
|
186,998
|
|
|
|
192,444
|
|
|
|
192,991
|
|
Accumulated Depreciation
|
|
|
(48,213
|
)
|
|
|
(54,389
|
)
|
|
|
(59,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
$
|
138,785
|
|
|
$
|
138,055
|
|
|
$
|
133,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6.
|
Accrued
Liabilities
|
Accrued liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee costsaffiliate
|
|
$
|
439
|
|
|
$
|
285
|
|
|
$
|
801
|
|
Accrued vacation
|
|
|
491
|
|
|
|
513
|
|
|
|
386
|
|
Property tax
|
|
|
591
|
|
|
|
571
|
|
|
|
614
|
|
Capital expenditures
|
|
|
2,863
|
|
|
|
217
|
|
|
|
|
|
Environmental liabilities
|
|
|
813
|
|
|
|
434
|
|
|
|
350
|
|
Other
|
|
|
370
|
|
|
|
410
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
5,567
|
|
|
$
|
2,430
|
|
|
$
|
2,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7.
|
Other
Noncurrent Liabilities
|
Other noncurrent liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental remediation
|
|
$
|
503
|
|
|
$
|
869
|
|
|
$
|
1,599
|
|
Asset retirement obligations
|
|
|
67
|
|
|
|
43
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other noncurrent liabilities
|
|
$
|
570
|
|
|
$
|
912
|
|
|
$
|
1,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
|
|
Note 8.
|
Stock-Based
Compensation
|
Tesoros stock-based compensation programs consist of stock
options, restricted common stock, and stock appreciation rights
issued to certain officers and other key employees. The fair
value of each stock option issued is estimated on the grant date
using the Black-Scholes option-pricing model and is amortized
over the vesting period using the straight-line method. These
awards generally will become exercisable after one year in 33%
annual increments and expire ten years from the date of grant.
The fair value of restricted common stock on the grant date is
equal to the market value of a share of Tesoro stock on that
date. The fair value of a stock appreciation right is estimated
at the end of each reporting period using the Black-Scholes
option-pricing model. These awards generally vest ratably over
three years following the date of grant and expire seven years
from the grant date.
Certain Tesoro employees supporting our operations were
historically granted these types of awards. We have allocated
expenses for stock-based compensation costs to the Contributed
Assets. These costs (benefits) totaled $0.2 million,
$(0.1) million and $0.2 million for the years ended
December 31, 2007, 2008 and 2009, respectively, and
$0.1 million and $0.2 million during the nine months
ended September 30, 2009 and September 30, 2010,
respectively. All stock-based compensation expense is included
in our general and administrative expense.
|
|
Note 9.
|
Retirement
and Pension Benefit Plan
|
Employees supporting our operations participate in the
retirement and pension benefit plans of Tesoro. We have been
allocated expenses for costs associated with such retirement and
pension benefit plans based on employee headcount and estimated
time allocated to the Contributed Assets. Our share of such
costs for the years ended December 31, 2007, 2008 and 2009
was $0.9 million, $1.0 million and $1.3 million,
respectively. Our share of such costs for the nine months ended
September 30, 2009 and 2010 was $1.0 million and
$0.3 million, respectively. Retirement and pension benefit
plan expenses are included in our general and administrative
expense and operating and maintenance expense.
|
|
Note 10.
|
Major
Customers and Concentrations of Credit Risk
|
In 2007, 2008 and 2009, one affiliated customer, Tesoro Refining
and Marketing Company, accounted for approximately 86%, 86% and
85%, respectively, of our total revenues. For the nine months
ended September 30, 2009 and 2010, Tesoro Refining and
Marketing Company, accounted for approximately 85% and 83%,
respectively, of our total revenues. Tesoro Refining and
Marketing Company is a customer of our crude oil gathering
segment. No revenues were recorded with Tesoro Refining and
Marketing Company in the terminalling, transportation and
storage segment.
|
|
Note 11.
|
Commitments
and Contingencies
|
Operating
Leases
We have various cancellable and noncancellable operating leases
related to land, trucks, terminals, right of way permits and
other operating facilities. In general, these leases have
remaining primary terms up to 10 years and typically
contain multiple renewal options. Total lease expense for all
operating leases, including leases with a term of one month or
less, was $2.1 million, $1.8 million and
$1.9 million for the years ended December 31, 2007,
2008 and 2009, respectively.
F-22
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
Our minimum annual lease payments as of December 31, 2009,
for operating leases having initial or remaining noncancellable
lease terms in excess of one year were (in thousands):
|
|
|
|
|
2010
|
|
$
|
1,948
|
|
2011
|
|
|
1,794
|
|
2012
|
|
|
1,140
|
|
2013
|
|
|
888
|
|
2014
|
|
|
521
|
|
Thereafter
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,652
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
Matters
We have historically recorded expenses for environmental
remediation at a number of operated pipeline, terminal and
storage properties. Environmental liabilities are based on
estimates including engineering assessments and it is reasonably
possible that our estimates will change and that additional
remediation costs will be incurred as more information becomes
available. Changes in our environmental liabilities for the
years ended December 31, 2008 and 2009 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Balance, January 1
|
|
$
|
906
|
|
|
$
|
1,316
|
|
Additions
|
|
|
853
|
|
|
|
800
|
|
Expenditures
|
|
|
(443
|
)
|
|
|
(813
|
)
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
1,316
|
|
|
$
|
1,303
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12.
|
Asset
Retirement Obligations
|
We have recorded asset retirement obligations for requirements
imposed by certain regulations pertaining to hazardous materials
disposal and other cleanup obligations. Our asset retirement
obligations primarily include environmental remediation
obligations related to site restorations. Changes in asset
retirement obligations for the years ended December 31,
2008 and 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Balance, January 1
|
|
$
|
62
|
|
|
$
|
67
|
|
Accretion expense
|
|
|
5
|
|
|
|
6
|
|
Changes in amount of estimated cash flows
|
|
|
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
67
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
The decrease in asset retirement obligations during 2009 was due
to changes in the estimated cash flows for certain retirement
obligations at our Vancouver terminal. The retirement
obligations were reduced because it was determined that the
estimated cost to complete the retirement obligations was less
than the previous estimate.
F-23
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
|
|
Note 13.
|
Segment
Disclosures
|
Our reportable segments consist of (1) crude oil gathering
and (2) terminalling, transportation and storage. Our
reportable segments are strategic business units that offer
different services. The segments are managed separately because
each segment requires different industry knowledge, technology
and marketing strategies. The accounting policies of the
segments are the same as those described in Note 3, Summary
of Significant Accounting Policies. We evaluate the performance
of each segment based on its respective operating income, before
affiliate general and administrative expense. Affiliate general
and administrative expenses are not allocated to the operating
segments since the expenses relate primarily to the overall
management at the entity level. Segment information as of and
for the periods ended is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminalling,
|
|
|
|
|
|
|
|
|
|
Transportation and
|
|
|
|
|
|
|
Crude Oil Gathering
|
|
|
Storage
|
|
|
Total
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
20,504
|
|
|
$
|
|
|
|
$
|
20,504
|
|
Third-party
|
|
|
142
|
|
|
|
3,251
|
|
|
|
3,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
|
20,646
|
|
|
|
3,251
|
|
|
|
23,897
|
|
Operating and maintenance expense
|
|
|
(14,520
|
)
|
|
|
(12,338
|
)
|
|
|
(26,858
|
)
|
Depreciation expense
|
|
|
(3,187
|
)
|
|
|
(3,155
|
)
|
|
|
(6,342
|
)
|
Allocated general and administrative expense
|
|
|
(453
|
)
|
|
|
(323
|
)
|
|
|
(776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
2,486
|
|
|
|
(12,565
|
)
|
|
|
(10,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
(2,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
$
|
(12,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminalling,
|
|
|
|
|
|
|
|
|
|
Transportation and
|
|
|
|
|
|
|
Crude Oil Gathering
|
|
|
Storage
|
|
|
Total
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
21,029
|
|
|
$
|
|
|
|
$
|
21,029
|
|
Third-party
|
|
|
161
|
|
|
|
3,297
|
|
|
|
3,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
|
21,190
|
|
|
|
3,297
|
|
|
|
24,487
|
|
Operating and maintenance expense
|
|
|
(17,029
|
)
|
|
|
(12,712
|
)
|
|
|
(29,741
|
)
|
Depreciation expense
|
|
|
(3,066
|
)
|
|
|
(3,559
|
)
|
|
|
(6,625
|
)
|
Allocated general and administrative expense
|
|
|
(471
|
)
|
|
|
(287
|
)
|
|
|
(758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
624
|
|
|
|
(13,261
|
)
|
|
|
(12,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
(1,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
$
|
(14,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminalling,
|
|
|
|
|
|
|
|
|
|
Transportation and
|
|
|
|
|
|
|
Crude Oil Gathering
|
|
|
Storage
|
|
|
Total
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
19,297
|
|
|
$
|
|
|
|
$
|
19,297
|
|
Third-party
|
|
|
125
|
|
|
|
3,237
|
|
|
|
3,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
|
19,422
|
|
|
|
3,237
|
|
|
|
22,659
|
|
Operating and maintenance expense
|
|
|
(18,962
|
)
|
|
|
(13,604
|
)
|
|
|
(32,566
|
)
|
Depreciation expense
|
|
|
(3,073
|
)
|
|
|
(5,747
|
)
|
|
|
(8,820
|
)
|
Allocated general and administrative expense
|
|
|
(536
|
)
|
|
|
(379
|
)
|
|
|
(915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
|
(3,149
|
)
|
|
|
(16,493
|
)
|
|
|
(19,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
(2,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
$
|
(21,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2009 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
14,143
|
|
|
$
|
|
|
|
$
|
14,143
|
|
Third-party
|
|
|
96
|
|
|
|
2,324
|
|
|
|
2,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
|
14,239
|
|
|
|
2,324
|
|
|
|
16,563
|
|
Operating and maintenance expense
|
|
|
(14,336
|
)
|
|
|
(9,873
|
)
|
|
|
(24,209
|
)
|
Depreciation expense
|
|
|
(2,307
|
)
|
|
|
(4,668
|
)
|
|
|
(6,975
|
)
|
Allocated general and administrative expense
|
|
|
(382
|
)
|
|
|
(292
|
)
|
|
|
(674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
|
(2,786
|
)
|
|
|
(12,509
|
)
|
|
|
(15,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
(1,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
$
|
(16,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
(Information as of September 30, 2010 and for the nine
months ended September 30, 2009 and 2010
is unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminalling,
|
|
|
|
|
|
|
|
|
|
Transportation and
|
|
|
|
|
|
|
Crude Oil Gathering
|
|
|
Storage
|
|
|
Total
|
|
|
Nine months ended September 30, 2010 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
14,087
|
|
|
$
|
|
|
|
$
|
14,087
|
|
Third-party
|
|
|
90
|
|
|
|
2,797
|
|
|
|
2,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
|
14,177
|
|
|
|
2,797
|
|
|
|
16,974
|
|
Operating and maintenance expense
|
|
|
(15,735
|
)
|
|
|
(10,255
|
)
|
|
|
(25,990
|
)
|
Depreciation expense
|
|
|
(2,317
|
)
|
|
|
(3,666
|
)
|
|
|
(5,983
|
)
|
Allocated general and administrative expense
|
|
|
(424
|
)
|
|
|
(270
|
)
|
|
|
(694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
|
(4,299
|
)
|
|
|
(11,394
|
)
|
|
|
(15,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and unallocated general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
(1,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
$
|
(17,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual-based capital expenditures by reportable segment were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering
|
|
$
|
838
|
|
|
$
|
945
|
|
|
$
|
92
|
|
|
$
|
86
|
|
|
$
|
224
|
|
Terminalling, transportation and storage
|
|
|
18,402
|
|
|
|
17,716
|
|
|
|
9,142
|
|
|
|
8,228
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures
|
|
$
|
19,240
|
|
|
$
|
18,661
|
|
|
$
|
9,234
|
|
|
$
|
8,314
|
|
|
$
|
1,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets by reportable segment were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering
|
|
$
|
73,928
|
|
|
$
|
71,207
|
|
|
$
|
69,362
|
|
Terminalling, transportation and storage
|
|
|
67,769
|
|
|
|
70,008
|
|
|
|
67,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
141,697
|
|
|
$
|
141,215
|
|
|
$
|
136,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
To the Partners of
Tesoro Logistics LP
We have audited the accompanying balance sheet of Tesoro
Logistics LP (the Partnership) as of December 13, 2010.
This balance sheet is the responsibility of the
Partnerships management. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free
from material misstatement. We were not engaged to perform an
audit of the Partnerships internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Partnerships internal control over financial
reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the balance sheet referred to above present
fairly, in all material respects, the financial position of
Tesoro Logistics LP at December 13, 2010 in conformity with
U.S. generally accepted accounting principles.
San Antonio, Texas
January 3, 2011
F-27
|
|
|
|
|
ASSETS
|
|
|
|
|
Cash
|
|
$
|
1,000
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,000
|
|
|
|
|
|
|
PARTNERS CAPITAL
|
|
|
|
|
Limited Partner
|
|
$
|
980
|
|
General Partner
|
|
|
20
|
|
|
|
|
|
|
Total Partners Equity
|
|
$
|
1,000
|
|
|
|
|
|
|
See accompanying notes to balance sheet.
F-28
NOTES TO
BALANCE SHEET
|
|
Note 1.
|
Nature of
Operations
|
Tesoro Logistics LP (the Partnership) is a Delaware
limited partnership formed on December 3, 2010. Tesoro
Logistics GP, LLC (the General Partner) is a limited
liability company formed on December 3, 2010 to become the
general partner of the Partnership.
On December 13, 2010, Tesoro Corporation, a Delaware
corporation, contributed $980 to the Partnership in exchange for
a 98.0% limited partner interest and the General Partner
contributed $20 to the Partnership in exchange for a 2.0%
general partner interest. There have been no other transactions
involving the Partnership as of December 13, 2010.
|
|
Note 2.
|
Subsequent
Events
|
We have evaluated subsequent events through January 3,
2011. Any material subsequent events that have occurred during
this time have been properly recognized or disclosed in our
Balance Sheet or Notes to the Balance Sheet.
F-29
Representing Limited Partner
Interests
Tesoro Logistics LP
PRELIMINARY PROSPECTUS
,
2011
Citi
Wells Fargo
Securities
BofA Merrill Lynch
Credit Suisse
Barclays Capital
Deutsche Bank
Securities
J.P. Morgan
Raymond James
PART II
INFORMATION
NOT REQUIRED IN THE REGISTRATION STATEMENT
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
Set forth below are the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered
hereby. With the exception of the Securities and Exchange
Commission registration fee, the FINRA filing fee and the NYSE
filing fee, the amounts set forth below are estimates.
|
|
|
|
|
SEC registration fee
|
|
$
|
26,703
|
|
FINRA filing fee
|
|
|
23,500
|
|
NYSE listing fee
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Fees and expenses of legal counsel
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Transfer agent and registrar fees
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be provided by amendment. |
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
The section of the prospectus entitled The Partnership
Agreement Indemnification discloses that we
will generally indemnify officers, directors and affiliates of
the general partner to the fullest extent permitted by the law
against all losses, claims, damages or similar events and is
incorporated herein by this reference. Reference is also made to
Section of the Underwriting Agreement to be
filed as an exhibit to this registration statement in which
Tesoro Logistics LP and certain of its affiliates will agree to
indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as
amended, and to contribute to payments that may be required to
be made in respect of these liabilities. Subject to any terms,
conditions or restrictions set forth in the partnership
agreement,
Section 17-108
of the Delaware Act empowers a Delaware limited partnership to
indemnify and hold harmless any partner or other persons from
and against all claims and demands whatsoever.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
On December 13, 2010, in connection with the formation of
the partnership, Tesoro Logistics LP issued to (i) Tesoro
Logistics GP, LLC the 2.0% general partner interest in the
partnership for $20 and (ii) to Tesoro Corporation the
98.0% limited partner interest in the partnership for $980 in an
offering exempt from registration under Section 4(2) of the
Securities Act. There have been no other sales of unregistered
securities within the past three years.
The following documents are filed as exhibits to this
registration statement:
II-1
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
1
|
.1*
|
|
|
|
Form of Underwriting Agreement (including form of Lock-up
Agreement)
|
|
3
|
.1**
|
|
|
|
Certificate of Limited Partnership of Tesoro Logistics LP
|
|
3
|
.2*
|
|
|
|
Form of First Amended and Restated Agreement of Limited
Partnership of Tesoro Logistics LP (included as Appendix A
to the Prospectus)
|
|
3
|
.3**
|
|
|
|
Certificate of Formation of Tesoro Logistics GP, LLC
|
|
3
|
.4*
|
|
|
|
Form of Amended and Restated Limited Liability Company Agreement
of Tesoro Logistics GP, LLC
|
|
5
|
.1*
|
|
|
|
Opinion of Latham & Watkins, LLP as to the legality of
the securities being registered
|
|
8
|
.1*
|
|
|
|
Opinion of Latham & Watkins, LLP relating to tax
matters
|
|
10
|
.1*
|
|
|
|
Form of Credit Agreement
|
|
10
|
.2*
|
|
|
|
Form of Contribution, Conveyance and Assumption Agreement
|
|
10
|
.3*
|
|
|
|
Form of Long-Term Incentive Plan
|
|
10
|
.4*
|
|
|
|
Form of Omnibus Agreement
|
|
10
|
.5*
|
|
|
|
Form of Operational Services Agreement
|
|
10
|
.6*
|
|
|
|
Form of High Plains Pipeline Transportation Services Agreement
|
|
10
|
.7*
|
|
|
|
Form of Trucking Transportation Services Agreement
|
|
10
|
.8*
|
|
|
|
Form of Master Terminalling Services Agreement
|
|
10
|
.9*
|
|
|
|
Form of Short-Haul Pipeline Transportation Services Agreement.
|
|
10
|
.10*
|
|
|
|
Form of Storage and Transportation Services Agreement
|
|
10
|
.11*
|
|
|
|
Employment Agreement of Gregory J. Goff
|
|
10
|
.12*
|
|
|
|
Employment Agreement of Charles S. Parrish
|
|
21
|
.1*
|
|
|
|
List of Subsidiaries of Tesoro Logistics LP
|
|
23
|
.1
|
|
|
|
Consent of Ernst & Young LLP
|
|
23
|
.2
|
|
|
|
Consent of Weaver and Tidwell, L.L.P.
|
|
23
|
.3*
|
|
|
|
Consent of Latham & Watkins, LLP (contained in
Exhibit 5.1)
|
|
23
|
.4*
|
|
|
|
Consent of Latham & Watkins, LLP (contained in
Exhibit 8.1)
|
|
24
|
.1**
|
|
|
|
Powers of Attorney (contained on the signature page to this
Registration Statement)
|
|
|
|
* |
|
To be filed by amendment. |
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
II-2
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) The undersigned registrant undertakes to send to each
common unitholder, at least on an annual basis, a detailed
statement of any transactions with Tesoro or its subsidiaries
(including the registrants general partner) and of fees,
commissions, compensation and other benefits paid, or accrued to
Tesoro or its subsidiaries (including the registrants
general partner) for the fiscal year completed, showing the
amount paid or accrued to each recipient and the services
performed.
(4) The registrant undertakes to provide to the common
unitholders the financial statements required by
Form 10-K
for the first full fiscal year of operations of the company.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Registration
Statement
(No. 333-171525)
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Antonio, State of Texas, on
February 9, 2011.
Tesoro Logistics LP
|
|
|
|
By:
|
Tesoro Logistics GP, LLC
its General Partner
|
|
|
By:
|
/s/ Gregory
J. Goff
|
Gregory J. Goff
Chairman of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement
(No. 333-171525)
has been signed below by the following persons in the capacities
indicated on February 9, 2011.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Gregory
J. Goff
Gregory
J. Goff
|
|
Chairman of the Board of Directors and Chief Executive
Officer (Principal Executive Officer)
|
|
|
|
/s/ G.
Scott Spendlove
G.
Scott Spendlove
|
|
Director, Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ Phillip
M. Anderson
Phillip
M. Anderson
|
|
Director and President
|
|
|
|
/s/ Charles
S. Parrish
Charles
S. Parrish
|
|
Director, Vice President, General Counsel and Secretary
|
|
|
|
/s/ Everett
D. Lewis
Everett
D. Lewis
|
|
Director
|
II-4
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
1
|
.1*
|
|
|
|
Form of Underwriting Agreement (including form of Lock-up
Agreement)
|
|
3
|
.1**
|
|
|
|
Certificate of Limited Partnership of Tesoro Logistics LP
|
|
3
|
.2*
|
|
|
|
Form of First Amended and Restated Agreement of Limited
Partnership of Tesoro Logistics LP (included as Appendix A to
the Prospectus)
|
|
3
|
.3**
|
|
|
|
Certificate of Formation of Tesoro Logistics GP, LLC
|
|
3
|
.4*
|
|
|
|
Form of Amended and Restated Limited Liability Company Agreement
of Tesoro Logistics GP, LLC
|
|
5
|
.1*
|
|
|
|
Opinion of Latham & Watkins, LLP as to the legality of the
securities being registered
|
|
8
|
.1*
|
|
|
|
Opinion of Latham & Watkins, LLP relating to tax matters
|
|
10
|
.1*
|
|
|
|
Form of Credit Agreement
|
|
10
|
.2*
|
|
|
|
Form of Contribution, Conveyance and Assumption Agreement
|
|
10
|
.3*
|
|
|
|
Form of Long-Term Incentive Plan
|
|
10
|
.4*
|
|
|
|
Form of Omnibus Agreement
|
|
10
|
.5*
|
|
|
|
Form of Operational Services Agreement
|
|
10
|
.6*
|
|
|
|
Form of High Plains Pipeline Transportation Services Agreement
|
|
10
|
.7*
|
|
|
|
Form of Trucking Transportation Services Agreement
|
|
10
|
.8*
|
|
|
|
Form of Master Terminalling Services Agreement
|
|
10
|
.9*
|
|
|
|
Form of Short-Haul Pipeline Transportation Services Agreement.
|
|
10
|
.10*
|
|
|
|
Form of Storage and Transportation Services Agreement
|
|
10
|
.11*
|
|
|
|
Employment Agreement of Gregory J. Goff
|
|
10
|
.12*
|
|
|
|
Employment Agreement of Charles D. Parrish
|
|
21
|
.1*
|
|
|
|
List of Subsidiaries of Tesoro Logistics LP
|
|
23
|
.1
|
|
|
|
Consent of Ernst & Young LLP
|
|
23
|
.2
|
|
|
|
Consent of Weaver and Tidwell, L.L.P.
|
|
23
|
.3*
|
|
|
|
Consent of Latham & Watkins, LLP (contained in Exhibit 5.1)
|
|
23
|
.4*
|
|
|
|
Consent of Latham & Watkins, LLP (contained in Exhibit 8.1)
|
|
24
|
.1**
|
|
|
|
Powers of Attorney (contained on the signature page to this
Registration Statement)
|
|
|
|
* |
|
To be filed by amendment. |