As filed with the Securities and Exchange Commission on
April 12, 2011
Registration
No. 333-171525
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 6
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Tesoro Logistics LP
(Exact name of Registrant as
Specified in Its Charter)
|
|
|
|
|
Delaware
|
|
4610
|
|
27-4151603
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(Primary Standard Industrial
Classification Code Number)
|
|
(I.R.S. Employer
Identification Number)
|
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:
|
|
|
William N. Finnegan IV
Brett E. Braden
Latham & Watkins LLP
717 Texas Avenue, Suite 1600
Houston, Texas 77002
(713) 546-5400
|
|
David P. Oelman
D. Alan Beck, Jr.
Vinson & Elkins L.L.P.
1001 Fannin Street, Suite 2500
Houston, Texas 77002
(713) 758-2222
|
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):
|
|
|
|
Large
accelerated
filer o
|
Accelerated
filer o
|
Non-accelerated
filer þ
|
Smaller
reporting
company o
|
(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.
|
SUBJECT TO COMPLETION, DATED
APRIL 12, 2011.
PRELIMINARY PROSPECTUS
12,500,000 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 12,500,000 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 $19.00 and $21.00. We have
been approved to list our common units on the New York Stock
Exchange under the symbol TLLP subject to official
notice of issuance.
Investing in our common units involves risks. See Risk
Factors beginning on page 17. These risks include the
following:
|
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
Unitholders have very limited voting rights and, even if they
are dissatisfied, they cannot remove our general partner without
its consent.
|
|
|
|
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.
|
|
|
|
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.
|
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.
|
|
|
|
|
|
|
|
|
|
|
Per Common Unit
|
|
Total
|
|
Public Offering Price
|
|
$
|
|
|
|
$
|
|
|
Underwriting Discount(1)
|
|
$
|
|
|
|
$
|
|
|
Proceeds to Tesoro Logistics LP(2)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1)
|
|
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.
|
(2)
|
|
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.
|
To the extent that the underwriters sell more than 12,500,000
common units in this offering, the underwriters have the option
to purchase up to an additional 1,875,000 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 net proceeds from such sale
will be used to redeem common units issued to Tesoro
Corporation. Such units were issued (and upon redemption, such
net proceeds will be paid) to Tesoro Corporation in partial
consideration of its contribution of assets to us at the closing
of this offering.
The underwriters expect to deliver the common units to
purchasers on or
about ,
2011 through the book-entry facilities of The Depository
Trust Company.
|
|
|
|
Citi
|
Wells Fargo Securities |
BofA Merrill Lynch |
Credit Suisse |
Barclays Capital
Deutsche Bank
Securities
J.P. Morgan
Raymond James
RBC Capital Markets
,
2011.
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
6
|
|
|
|
|
8
|
|
|
|
|
8
|
|
|
|
|
8
|
|
|
|
|
9
|
|
|
|
|
13
|
|
|
|
|
17
|
|
|
|
|
17
|
|
|
|
|
32
|
|
|
|
|
41
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
53
|
|
|
|
|
55
|
|
|
|
|
61
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
66
|
|
|
|
|
67
|
|
|
|
|
67
|
|
|
|
|
68
|
|
|
|
|
71
|
|
|
|
|
71
|
|
|
|
|
72
|
|
|
|
|
75
|
|
|
|
|
79
|
|
i
|
|
|
|
|
|
|
Page
|
|
|
|
|
79
|
|
|
|
|
79
|
|
|
|
|
81
|
|
|
|
|
82
|
|
|
|
|
83
|
|
|
|
|
84
|
|
|
|
|
87
|
|
|
|
|
91
|
|
|
|
|
92
|
|
|
|
|
93
|
|
|
|
|
93
|
|
|
|
|
93
|
|
|
|
|
94
|
|
|
|
|
95
|
|
|
|
|
95
|
|
|
|
|
96
|
|
|
|
|
97
|
|
|
|
|
98
|
|
|
|
|
98
|
|
|
|
|
102
|
|
|
|
|
108
|
|
|
|
|
109
|
|
|
|
|
112
|
|
|
|
|
112
|
|
|
|
|
113
|
|
|
|
|
113
|
|
|
|
|
117
|
|
|
|
|
122
|
|
|
|
|
123
|
|
|
|
|
123
|
|
|
|
|
124
|
|
|
|
|
124
|
|
|
|
|
124
|
|
|
|
|
126
|
|
|
|
|
127
|
|
|
|
|
127
|
|
|
|
|
128
|
|
|
|
|
133
|
|
|
|
|
134
|
|
|
|
|
136
|
|
|
|
|
137
|
|
|
|
|
137
|
|
|
|
|
138
|
|
ii
|
|
|
|
|
|
|
Page
|
|
|
|
|
138
|
|
|
|
|
142
|
|
|
|
|
143
|
|
|
|
|
143
|
|
|
|
|
155
|
|
|
|
|
156
|
|
|
|
|
156
|
|
|
|
|
161
|
|
|
|
|
164
|
|
|
|
|
164
|
|
|
|
|
164
|
|
|
|
|
164
|
|
|
|
|
166
|
|
|
|
|
166
|
|
|
|
|
166
|
|
|
|
|
166
|
|
|
|
|
166
|
|
|
|
|
167
|
|
|
|
|
168
|
|
|
|
|
169
|
|
|
|
|
171
|
|
|
|
|
171
|
|
|
|
|
172
|
|
|
|
|
172
|
|
|
|
|
173
|
|
|
|
|
174
|
|
|
|
|
174
|
|
|
|
|
174
|
|
|
|
|
174
|
|
|
|
|
174
|
|
|
|
|
175
|
|
|
|
|
175
|
|
|
|
|
176
|
|
|
|
|
176
|
|
|
|
|
176
|
|
|
|
|
177
|
|
|
|
|
177
|
|
|
|
|
178
|
|
|
|
|
179
|
|
|
|
|
179
|
|
|
|
|
181
|
|
|
|
|
181
|
|
|
|
|
187
|
|
|
|
|
188
|
|
iii
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 $20.00 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. Unless the context otherwise requires, 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
1
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, 2010, we had pro forma
EBITDA of approximately $52.9 million and pro forma net
income of approximately $42.5 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, 2010, we
had pro forma revenue of $49.6 million from our crude oil
gathering segment and $43.6 million from our terminalling,
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 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:
|
|
|
|
|
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.
|
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 79 and Certain Relationships and Related
Party Transactions Agreements Governing the
Transactions Commercial Agreements with Tesoro
beginning on page 143.
2
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:
|
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
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:
|
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
3
Growth
Opportunities
Crude Oil Gathering. Tesoro has recently
announced an expansion of its Mandan refinery from 58,000 to
68,000 barrels per day and their intent to utilize our High
Plains system to deliver the incremental crude oil supply.
Tesoro expects the refinery expansion to be complete by the
second quarter of 2012, at which point we estimate that the
incremental crude oil shipped utilizing our High Plains system
will generate approximately $7.0 million of additional annual
revenue offset by less than $1.0 million of incremental annual
operating costs. In order to meet Tesoros requirements, we
expect to spend approximately $6.0 million to $7.0 million of
expansion capital on our High Plains system, of which $3.6
million will be spent during the twelve months ending March 31,
2012, to add additional pumping, tankage and truck unloading
capacity. In addition, 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.
Together with Tesoro, we are also presently engaged in
discussions with certain producers to expand our pipeline
gathering network to new and proposed drilling locations where
these producers have announced plans to conduct extensive Bakken
Shale development operations. 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.
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 second 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 through a network of nearly 1,200 retail
stations, primarily under the
Tesoro®,
Shell®,
and USA
Gasolinetm
brands. For the year ended December 31, 2010, Tesoro had
consolidated revenues of approximately $20.6 billion,
operating income of $140.0 million, a net loss of
$29.0 million and, as of December 31, 2010, had
consolidated total assets of approximately $8.7 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 57.8% 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
4
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,
transfer or otherwise dispose of any of those assets. As of
December 31, 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 $193.0 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, transfer or otherwise dispose of
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
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 138.
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 142.
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 156 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.
|
|
|
|
|
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.
|
5
|
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
Unitholders have very limited voting rights and, even if they
are dissatisfied, they cannot remove our general partner without
its consent.
|
|
|
|
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.
|
|
|
|
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.
|
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:
|
|
|
|
|
we will issue 2,754,891 common units and 15,254,891 subordinated
units to Tesoro, representing an aggregate 57.8% limited partner
interest in us, and 622,649 general partner units,
representing a 2.0% general partner interest in us, and all of
our incentive distribution rights to our general partner;
|
|
|
|
|
|
we will issue 12,500,000 common units to the public in this
offering, representing a 40.2% limited partner interest in us,
and will apply the net proceeds as described in Use of
Proceeds on page 46;
|
|
|
|
|
|
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;
|
|
|
|
Tesoro will enter into multiple long-term commercial agreements
with us; and
|
|
|
|
Tesoro will enter into an omnibus agreement and an operational
services agreement with us.
|
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:
|
|
|
|
|
Public common units
|
|
|
40.2
|
%
|
Tesoro common units
|
|
|
8.8
|
%
|
Tesoro subordinated units
|
|
|
49.0
|
%
|
General partner units
|
|
|
2.0
|
%
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
|
|
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 124.
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.tesorologistics.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 156.
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
|
|
|
Common units offered to the public |
|
12,500,000 common units. |
|
|
|
14,375,000 common units if the underwriters exercise in full
their option to purchase additional common units from us. |
|
Units outstanding after this offering |
|
15,254,891 common units and 15,254,891 subordinated units, each
representing a 49.0% limited partner interest in us. |
|
Use of proceeds |
|
We expect to receive net proceeds of $225.0 million from
this offering, after deducting underwriting discounts,
structuring and advisory fees, and estimated offering expenses.
We intend to retain $3.0 million of the net proceeds for
working capital purposes, and, after the payment of
$2.0 million of debt issuance costs, use
$220.0 million to make a cash distribution to Tesoro. 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. |
|
|
|
The cash distributions to Tesoro from the proceeds of this
offering and the borrowing under our revolving credit facility
will be made in consideration of its contribution of assets to
us and to reimburse Tesoro for certain capital expenditures
incurred with respect to these assets. We are funding these
distributions through a combination of net proceeds from this
offering and borrowings under our revolving credit facility in
order to optimize our capital structure. |
|
|
|
|
|
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. These net proceeds will be paid to Tesoro
in partial consideration of its contribution of assets to us. |
|
|
|
Cash distributions |
|
We intend to make a minimum quarterly distribution of $0.3375
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. |
|
|
|
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 June 30, 2011, based on
the actual length of that period. |
|
|
|
In general, we will pay any cash distributions we make each
quarter in the following manner: |
|
|
|
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 $0.3375 plus any
arrearages from prior quarters;
|
9
|
|
|
|
|
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 $0.3375;
and
|
|
|
|
third, 98.0% to all unitholders, pro rata,
and 2.0% to our general partner, until each unit has received a
distribution of $0.388125.
|
|
|
|
If cash distributions to our unitholders exceed $0.388125 per
unit in any quarter, our general partner will receive, in
addition to distributions on its 2.0% general partner interest,
increasing 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 61. |
|
|
|
Pro forma cash available for distribution generated during the
year ended December 31, 2010 was approximately
$46.0 million. 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
distributions on our general partners 2.0% interest is
approximately $42.0 million (or an average of approximately
$10.5 million per quarter). As a result, for the year ended
December 31, 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
subordinated units and the corresponding distributions on our
general partners 2.0% interest during those periods.
Please read Cash Distribution Policy and Restrictions on
Distributions Unaudited Pro Forma Available Cash for
the Year Ended December 31, 2010 beginning on
page 51. |
|
|
|
We believe, based on our financial forecast and related
assumptions included in Cash Distribution Policy and
Restrictions on Distributions Estimated EBITDA for
the Twelve Months Ending March 31, 2012 that we will
have sufficient available cash to pay the aggregate minimum
quarterly distribution of $42.0 million on all of our common
units and subordinated units and the corresponding distributions
on our general partners 2.0% interest for the twelve
months ending March 31, 2012. 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. |
|
Subordinated units |
|
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 |
10
|
|
|
|
|
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. |
|
Conversion of subordinated units |
|
The subordination period will end on the first business day
after we have earned and paid at least (1) $1.35 (the
minimum quarterly distribution on an annualized basis) on each
outstanding common unit and subordinated unit and the
corresponding distributions on our general partners 2.0%
interest for each of three consecutive, non-overlapping four
quarter periods ending on or after June 30, 2014 or
(2) $2.025 (150.0% of the annualized minimum quarterly
distribution) on each outstanding common unit and subordinated
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. |
|
|
|
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. |
|
|
|
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 64. |
|
Issuance of additional units |
|
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 178 and The Partnership
Agreement Issuance of Additional Securities
beginning on page 168. |
|
Limited voting rights |
|
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 59.0% of our common and subordinated units (or
52.8% 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 166. |
|
Limited call right |
|
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 |
11
|
|
|
|
|
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 174. |
|
Estimated ratio of taxable income to distributions |
|
We estimate that if you own the common units you purchase in
this offering through the record date for distributions for the
period ending December 31, 2013, you will be allocated, on
a cumulative basis, an amount of federal taxable income for that
period that will be 20% or less of the cash distributed to you
with respect to that period. For example, if you receive an
annual distribution of $1.35 per unit, we estimate that your
average allocable federal taxable income per year will be no
more than approximately $0.27 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 182 for the basis of this
estimate. |
|
Material federal income tax consequences |
|
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 179. |
|
Exchange listing |
|
We have applied 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, 2008, 2009 and 2010 are derived
from the audited 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 79.
The summary pro forma combined financial data presented in the
following table as of and for the year ended December 31,
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 December 31, 2010, and the pro
forma statement of operations for the year ended
December 31, 2010 assumes that the offering and the related
transactions occurred as of January 1, 2010. 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 pipeline
system;
|
|
|
|
our execution of an omnibus agreement and an operational
services agreement with Tesoro;
|
|
|
|
|
|
the consummation of this offering and our issuance of 12,500,000
common units to the public, 622,649 general partner units and
the incentive distribution rights to our general partner and
2,754,891 common units and 15,254,891 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 $3.2 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 Factors
Affecting the Comparability of Our Financial Results
beginning on page 82, 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
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Tesoro Logistics LP Predecessor Historical
|
|
|
Year Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per unit data and operating
information)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering
|
|
$
|
21,190
|
|
|
$
|
19,422
|
|
|
$
|
19,592
|
|
|
$
|
49,566
|
|
Terminalling, transportation and storage
|
|
|
3,297
|
|
|
|
3,237
|
|
|
|
3,708
|
|
|
|
43,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
24,487
|
|
|
|
22,659
|
|
|
|
23,300
|
|
|
|
93,154
|
|
Operating and maintenance expense(2)
|
|
|
29,741
|
|
|
|
32,566
|
|
|
|
32,972
|
|
|
|
36,824
|
|
Depreciation expense
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
8,006
|
|
|
|
8,006
|
|
General and administrative expense(3)
|
|
|
2,525
|
|
|
|
3,141
|
|
|
|
3,198
|
|
|
|
3,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(14,404
|
)
|
|
|
(21,868
|
)
|
|
|
(20,876
|
)
|
|
|
44,882
|
|
Interest expense, net(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(20,876
|
)
|
|
$
|
42,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
850
|
|
Common unitholders interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,811
|
|
Subordinated unitholders interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,811
|
|
Pro forma net income (loss) per common unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.36
|
|
Pro forma net income (loss) per subordinated unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.36
|
|
Balance Sheet Data (at year end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, net
|
|
$
|
138,785
|
|
|
$
|
138,055
|
|
|
$
|
131,606
|
|
|
$
|
131,606
|
|
Total Assets
|
|
|
141,697
|
|
|
|
141,215
|
|
|
|
135,577
|
|
|
|
136,606
|
|
Total Liabilities
|
|
|
8,686
|
|
|
|
5,499
|
|
|
|
6,750
|
|
|
|
50,000
|
|
Total Division Equity/Partners Capital
|
|
|
133,011
|
|
|
|
135,716
|
|
|
|
128,827
|
|
|
|
86,606
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(6,045
|
)
|
|
$
|
(12,324
|
)
|
|
$
|
(11,426
|
)
|
|
|
|
|
Investing activities
|
|
|
(16,022
|
)
|
|
|
(12,249
|
)
|
|
|
(2,561
|
)
|
|
|
|
|
Financing activities
|
|
|
22,067
|
|
|
|
24,573
|
|
|
|
13,987
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(5)
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(12,870
|
)
|
|
$
|
52,888
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
$
|
8,475
|
|
|
$
|
3,319
|
|
|
$
|
1,703
|
|
|
$
|
1,703
|
|
Expansion(6)
|
|
|
10,186
|
|
|
|
5,915
|
|
|
|
367
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,661
|
|
|
$
|
9,234
|
|
|
$
|
2,070
|
|
|
$
|
2,070
|
|
Operating Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline throughput (bpd)(7)
|
|
|
54,737
|
|
|
|
52,806
|
|
|
|
50,695
|
|
|
|
50,695
|
|
Average pipeline revenue per barrel(8)
|
|
$
|
1.06
|
|
|
$
|
1.01
|
|
|
$
|
1.06
|
|
|
$
|
1.35
|
|
Trucking volume (bpd)
|
|
|
23,752
|
|
|
|
22,963
|
|
|
|
23,305
|
|
|
|
23,305
|
|
Average trucking revenue per barrel(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.91
|
|
Terminalling, transportation and storage segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal throughput (bpd)
|
|
|
112,868
|
|
|
|
113,135
|
|
|
|
113,950
|
|
|
|
113,950
|
|
Average terminal revenue per barrel(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.79
|
|
Short-haul pipeline throughput (bpd)
|
|
|
68,890
|
|
|
|
62,822
|
|
|
|
60,666
|
|
|
|
60,666
|
|
Average short-haul pipeline revenue per barrel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
Storage capacity reserved (shell capacity barrels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878,000
|
|
Storage per shell capacity barrel (per month)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
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. The pro forma operating and maintenance expenses
primarily reflect $1.4 million for purchased additives
based on historical levels of such purchases that have not
previously been allocated to the Predecessor but will be charged
to the Partnership after the closing of this offering, as well
as $1.1 million for business interruption, property and
pollution liability insurance premiums that we expect to incur
based on estimates from our insurance broker, $0.8 million
for employee-related expenses which have not been previously
recorded in the historical financial records of Tesoro Logistics
LP Predecessor, and $0.3 million for an annual service fee
that we will pay Tesoro under the terms of our operational
services agreement. |
|
|
|
(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 $0.2 million, but do not
include the estimated $3.2 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 a $3.5 million truck
rack expansion project at our Los Angeles terminal in 2008. |
|
(7) |
|
Pro forma and historical pipeline throughput for 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 service fees for services
such as ethanol blending and additive injection. |
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tesoro Logistics LP
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Tesoro Logistics LP Predecessor Historical
|
|
|
Year Ended
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Reconciliation of EBITDA to net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(20,876
|
)
|
|
$
|
42,472
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
8,006
|
|
|
|
8,006
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(12,870
|
)
|
|
$
|
52,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of EBITDA to net cash from (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
(6,045
|
)
|
|
$
|
(12,324
|
)
|
|
$
|
(11,426
|
)
|
|
|
|
|
Changes in assets and liabilities
|
|
|
(1,258
|
)
|
|
|
390
|
|
|
|
(932
|
)
|
|
|
|
|
Loss on asset disposals
|
|
|
(476
|
)
|
|
|
(1,114
|
)
|
|
|
(512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(12,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the year ended December 31, 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:
|
|
|
|
|
the effects of the global economic downturn on Tesoros
business and the business of its suppliers, customers, business
partners and lenders;
|
|
|
|
the risk of contract cancellation, non-renewal or failure to
perform by Tesoros customers, and Tesoros inability
to replace such contracts
and/or
customers;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
Tesoros ability to remain in compliance with the terms of
its outstanding indebtedness;
|
|
|
|
changes in the cost or availability of third-party pipelines,
terminals and other means of delivering and transporting crude
oil, feedstocks and refined products;
|
|
|
|
state and federal environmental, economic, health and safety,
energy and other policies and regulations, and any changes in
those policies and regulations;
|
|
|
|
environmental incidents and violations and related remediation
costs, fines and other liabilities; and
|
|
|
|
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 $0.3375
per unit per quarter, or $1.35 per unit on an annualized basis,
we will require available cash of approximately
$10.5 million per quarter, or approximately
$42.0 million per year, based on the number of common units
and subordinated units and the general partner interest 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:
|
|
|
|
|
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;
|
|
|
|
the amount of cash reserves established by our general
partner; and
|
|
|
|
other business risks affecting our cash levels.
|
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
twelve months ending March 31, 2012. 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 and our operational services agreement 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 and operational services agreement
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 a
material breach of the agreement by us or 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 commercial 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. Under the agreements, Tesoro has the right to
terminate the agreement with respect to any services for which
performance will be suspended by a force majeure event for a
period in excess of 12 months. Additionally, under the
commercial agreements, Tesoro has the right to terminate such
agreements in the event of a material breach by us, subject to a
15 business-day cure period.
Generally, although Tesoro is not entitled to claim a force
majeure event under the commercial agreements, 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 and in the
operational service agreement, force majeure events include any
acts or occurrences that prevent services from being performed
under the applicable agreement, such as:
|
|
|
|
|
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 the service providers reasonable
control and could not have been prevented by the service
providers due diligence.
|
19
Accordingly, under our commercial agreements 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, 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.
20
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. 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 December 31,
2010, Tesoro had long-term indebtedness of approximately
$1.8 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;
|
21
|
|
|
|
|
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;
|
|
|
|
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, business interruption and
pollution liability 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:
|
|
|
|
|
increased fuel efficiency standards for vehicles;
|
|
|
|
more stringent refined products specifications;
|
|
|
|
renewable fuels standards;
|
|
|
|
availability of alternative energy sources;
|
|
|
|
potential and enacted climate change legislation;
|
|
|
|
the Environmental Protection Agency (EPA) regulation of
greenhouse gas emissions under the Clean Air Act; and
|
|
|
|
increased refining capacity or decreased refining capacity
utilization.
|
22
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 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:
|
|
|
|
|
the volatility and uncertainty of regional pricing differentials;
|
|
|
|
the availability of drilling rigs for producers;
|
|
|
|
weather-related curtailment of operations by producers and
disruptions to truck gathering operations;
|
|
|
|
the nature and extent of governmental regulation and
taxation; and
|
|
|
|
the anticipated future prices of crude oil and of refined
products in markets which Tesoros Mandan refinery serves.
|
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
23
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 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 flows and ability to make distributions
to unitholders.
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 cash flow. 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 cash flow. Any
acquisition involves potential risks, including, among other
things:
|
|
|
|
|
mistaken assumptions about revenues and costs, including
synergies;
|
|
|
|
the assumption of unknown liabilities;
|
|
|
|
limitations on rights to indemnity from the seller;
|
|
|
|
mistaken assumptions about the overall costs of equity or debt;
|
|
|
|
the diversion of managements attention from other business
concerns;
|
|
|
|
unforeseen difficulties operating in new product areas or new
geographic areas; and
|
|
|
|
customer or key employee losses at the acquired businesses.
|
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.
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
25
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 property leased by us
and Tesoro 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. Assuming we receive consent
from the Port of Vancouver to Tesoros assignment to us,
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
terms. Our lease with the Municipality 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. The lessee under the Port
of Vancouver lease is Tesoro Refining and Marketing Company.
Tesoro Refining and Marketing Company has agreed to assign the
lease to us, subject to consent from the Port of Vancouver.
Until such time, we only have a license
26
(from Tesoro Refining and Marketing Company) to enter, access,
use and operate the terminal. There is no guarantee the Port of
Vancouver will consent to the assignment of the lease. In the
event the license for our Vancouver terminal is found to be an
assignment of the lease or sublease of the terminal without
consent of the Port of Vancouver in violation of the lease, the
Port of Vancouver may have remedies for breach of the lease,
including termination of the lease if Tesoro Refining and
Marketing Company does not exercise its cure rights with respect
to such breach in a timely manner. Additionally if the license
is otherwise found to be unenforceable, we would lose our right
to use and operate the property, which would have a material
adverse effect on our financial condition, results of
operations, cash flows and ability to make distributions to
unitholders.
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, our revolving credit facility
will restrict our ability to, among other things:
|
|
|
|
|
make certain cash distributions;
|
|
|
|
incur certain indebtedness;
|
|
|
|
create certain liens;
|
|
|
|
make certain investments; and
|
|
|
|
merge or sell all or substantially all of our assets.
|
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 87 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 87.
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:
|
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
we may be more vulnerable to competitive pressures or a downturn
in our business or the economy generally; and
|
27
|
|
|
|
|
our flexibility in responding to changing business and economic
conditions may be limited.
|
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 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. Please see Certain
Relationships and Related Party Transactions
Agreement Governing the Transactions Omnibus
Agreement beginning on page 138.
28
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 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 113.
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.
29
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 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
30
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.
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 or may be appealed
without rehearing to the U.S. Court of Appeals. 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. In addition, the provisions of our High
Plains pipeline transportation services agreement regarding our
agreement to provide, and Tesoros agreement to purchase,
certain crude oil volume losses could be viewed as a preference
to Tesoro and could result in negation of that provision and
possible penalties. 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
31
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 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 57.8% 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:
|
|
|
|
|
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;
|
32
|
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
Except in limited circumstances, our general partner has the
power and authority to conduct our business without unitholder
approval;
|
|
|
|
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;
|
|
|
|
Our general partner determines the amount and timing of many of
our cash expenditures and whether a cash expenditure is
classified as an expansion capital expenditure, which does not
reduce operating surplus. This determination can affect the
amount of cash that is distributed to our unitholders and to our
general partner, the amount of adjusted operating surplus in any
given period and the ability of the subordinated units to
convert into common units;
|
|
|
|
Our general partner determines which costs incurred by it are
reimbursable by us;
|
|
|
|
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;
|
|
|
|
Our partnership agreement permits us to classify up to
$30.0 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;
|
|
|
|
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;
|
|
|
|
Our general partner intends to limit its liability regarding our
contractual and other obligations;
|
|
|
|
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;
|
|
|
|
Our general partner controls the enforcement of obligations owed
to us by our general partner and its affiliates, including our
commercial agreements with Tesoro;
|
|
|
|
Our general partner decides whether to retain separate counsel,
accountants, or others to perform services for us; and
|
|
|
|
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.
|
33
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 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 138 and Conflicts of Interest and Fiduciary
Duties beginning on page 156.
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:
|
|
|
|
|
how to allocate business opportunities among us and its other
affiliates;
|
|
|
|
whether to exercise its limited call right;
|
|
|
|
how to exercise its voting rights with respect to the units it
owns;
|
|
|
|
whether to exercise its registration rights;
|
|
|
|
whether to elect to reset target distribution levels; and
|
|
|
|
whether or not to consent to any merger or consolidation of the
partnership or amendment to the partnership agreement.
|
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 161.
34
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:
|
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
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
|
|
|
|
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:
|
(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 156.
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 $0.3 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 59.0% 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
36
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 $17.22 per common unit.
The assumed initial public offering price of $20.00 per common
unit exceeds our pro forma net tangible book value of $2.78 per
unit. Based on an assumed initial public offering price of
$20.00 per common unit, you will incur immediate and substantial
dilution of $17.22 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:
|
|
|
|
|
our unitholders proportionate ownership interest in us
will decrease;
|
|
|
|
the amount of cash available for distribution on each unit may
decrease;
|
|
|
|
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;
|
|
|
|
the ratio of taxable income to distributions may increase;
|
|
|
|
the relative voting strength of each previously outstanding unit
may be diminished; and
|
|
|
|
the market price of our common units may decline.
|
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 2,754,891 common units and 15,254,891
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 178. 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.
37
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, 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:
|
|
|
|
|
any assets owned by Tesoro at the closing of this offering
(including replacements or expansions of those assets);
|
|
|
|
any assets acquired or constructed by Tesoro to replace one of
our assets that no longer provides services to Tesoro due to the
occurrence of a force majeure event under one of our commercial
agreements with Tesoro that prevents us from providing services
under such agreement;
|
|
|
|
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.
|
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 are terminable by either party 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
18.1% of our common units. At the end of the subordination
period (which could occur as early as June 30, 2012),
assuming no additional issuances of common units (other than
upon the conversion of the subordinated units) and no exercise
of the underwriters option to purchase additional common units,
our general partner and its affiliates
38
will own approximately 59.0% of our common units. For additional
information about the call right, please read The
Partnership Agreement Limited Call Right
beginning on page 174.
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:
|
|
|
|
|
we were conducting business in a state but had not complied with
that particular states partnership statute; or
|
|
|
|
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.
|
Please read The Partnership Agreement Limited
Liability beginning on page 167 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
12,500,000 publicly traded common units. In addition,
Tesoro will own 2,754,891 common and
15,254,891 subordinated units, representing an aggregate
57.8% 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:
|
|
|
|
|
our quarterly distributions;
|
|
|
|
our quarterly or annual earnings or those of other companies in
our industry;
|
|
|
|
announcements by us or our competitors of significant contracts
or acquisitions;
|
39
|
|
|
|
|
changes in accounting standards, policies, guidance,
interpretations or principles;
|
|
|
|
general economic conditions;
|
|
|
|
the failure of securities analysts to cover our common units
after this offering or changes in financial estimates by
analysts;
|
|
|
|
future sales of our common units; and
|
|
|
|
other factors described in these Risk Factors.
|
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 68.
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 175.
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 176.
The
NYSE does not require a publicly traded limited partnership like
us to comply with certain of its corporate governance
requirements.
We have been approved to list our common units on the NYSE
subject to official notice of issuance. 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 124.
Tax
Risks
In addition to reading the following risk factors, please read
Material Federal Income Tax Consequences beginning
on page 179 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 188 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 186 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 189.
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
44
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 190 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.
45
USE OF
PROCEEDS
We expect to receive net proceeds of approximately
$225.0 million from the sale of 12,500,000 common
units offered by this prospectus, after deducting underwriting
discounts, structuring and advisory fees and estimated offering
expenses. We intend to use these proceeds as follows:
|
|
|
|
|
$220.0 million will be distributed to Tesoro, in part to
reimburse Tesoro for certain capital expenditures it incurred
with respect to assets contributed to us;
|
|
|
|
$2.0 million for debt issuance costs; and
|
|
|
|
$3.0 million for working capital purposes.
|
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 cash distributions to Tesoro from
the proceeds of this offering and the borrowing under our
revolving credit facility will be made in consideration of its
contribution of assets to us and to reimburse Tesoro for certain
capital expenditures incurred with respect to these assets. We
are funding these distributions through a combination of net
proceeds from this offering and borrowings under our revolving
credit facility in order to optimize our capital structure.
The table below sets forth our anticipated use of the expected
net proceeds from this offering after deducting underwriting
discounts, structuring and advisory fees and estimated offering
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Application of
|
|
|
of
|
|
|
|
Proceeds
|
|
|
Proceeds
|
|
|
|
(In thousands)
|
|
|
Distribution to Tesoro
|
|
$
|
220.0
|
|
|
|
97.8
|
%
|
Debt issuance costs
|
|
|
2.0
|
|
|
|
0.9
|
|
Working capital purposes
|
|
|
3.0
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
225.0
|
|
|
|
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 net proceeds per common unit in
this offering before expenses but after deducting underwriting
discounts and the structuring fee. These net proceeds will be
paid to Tesoro in partial consideration of its contribution of
assets to us. 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 198.
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 $11.7 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:
|
|
|
|
|
the historical cash and cash equivalents and capitalization of
our predecessor as of December 31, 2010; and
|
|
|
|
|
|
our pro forma capitalization as of December 31, 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 December 31, 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
|
|
$
|
128.8
|
|
|
|
|
|
Held by public:
|
|
|
|
|
|
|
|
|
Common units
|
|
|
|
|
|
|
225.0
|
|
Held by Tesoro:
|
|
|
|
|
|
|
|
|
Common units
|
|
|
|
|
|
|
(21.4
|
)
|
Subordinated units
|
|
|
|
|
|
|
(118.7
|
)
|
General partner units
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
Total division equity/partners capital
|
|
|
128.8
|
|
|
|
86.6
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
128.8
|
|
|
$
|
136.6
|
|
|
|
|
|
|
|
|
|
|
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
December 31, 2010, after giving effect to the offering of
common units and the related transactions, our net tangible book
value was approximately $86.6 million, or $2.78 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
|
|
|
|
|
|
$
|
20.00
|
|
Pro forma net tangible book value per unit before the offering(1)
|
|
$
|
7.07
|
|
|
|
|
|
Decrease in net tangible book value per unit attributable to
purchasers in the offering
|
|
|
(4.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Pro forma net tangible book value per unit after the
offering(2)
|
|
|
|
|
|
|
2.78
|
|
|
|
|
|
|
|
|
|
|
Immediate dilution in net tangible book value per common unit to
purchasers in the offering
|
|
|
|
|
|
$
|
17.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Determined by dividing the number of units (2,754,891 common
units, 15,254,891 subordinated units and 622,649 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 (15,254,891 total
common units, 15,254,891 subordinated units and 622,649 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 millions)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
General partner and its affiliates(1)(2)
|
|
|
18.6
|
|
|
|
59.8
|
%
|
|
$
|
(138.4
|
)
|
|
|
(159.8
|
)%
|
Purchasers in this offering
|
|
|
12.5
|
|
|
|
40.2
|
%
|
|
|
225.0
|
|
|
|
259.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
31.1
|
|
|
|
100.0
|
%
|
|
$
|
86.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Upon the consummation of the transactions contemplated by this
prospectus, our general partner and its affiliates will own
2,754,891 common units, 15,254,891 subordinated units and
622,649 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 December 31, 2010, after giving effect to
the application of the net proceeds of the offering, is as
follows: |
|
|
|
|
|
|
|
(In millions)
|
|
|
Book value of net assets contributed
|
|
$
|
131.6
|
|
Less: Distribution to Tesoro from net proceeds of this offering
|
|
|
(220.0
|
)
|
Distribution to Tesoro from borrowings under our revolving
credit facility
|
|
|
(50.0
|
)
|
|
|
|
|
|
Total consideration
|
|
$
|
(138.4
|
)
|
|
|
|
|
|
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 204 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 87.
|
|
|
|
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 59.0% of the outstanding common units and
subordinated units. Please read The Partnership
Agreement Amendment of the Partnership
Agreement beginning on page 169.
|
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 62. 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
$0.3375 per unit for each complete quarter, or $1.35 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 April 1, 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 June 30, 2011 based on the actual
50
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
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Number of Units
|
|
|
One Quarter
|
|
|
(Four Quarters)
|
|
|
Publicly held common units
|
|
|
12,500,000
|
|
|
$
|
4.2
|
|
|
$
|
16.8
|
|
Common units held by Tesoro
|
|
|
2,754,891
|
|
|
|
0.9
|
|
|
|
3.6
|
|
Subordinated units held by Tesoro
|
|
|
15,254,891
|
|
|
|
5.2
|
|
|
|
20.8
|
|
General partner units held by Tesoro
|
|
|
622,649
|
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
31,132,431
|
|
|
$
|
10.5
|
|
|
$
|
42.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $0.388125 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 64. 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 156.
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,
2010
If we had completed the transactions contemplated in this
prospectus on January 1, 2010, pro forma available cash
generated for the year ended December 31, 2010 would have
been approximately $46.0 million. This amount would have
been sufficient to pay the minimum quarterly distribution of
$0.3375 per unit per quarter ($1.35 per unit on an annualized
basis) on all of our common units and subordinated units for
such periods and the corresponding distributions on our general
partners 2.0% interest. Although all of the information
that we would require in order to calculate pro forma results of
operations and pro forma available cash for the quarter ended
March 31, 2011 is not yet available, based on our review of
preliminary information available to us as of the date of this
prospectus, we believe that the results of operations for the
assets that will be contributed to us at the closing of this
offering for the quarter ended March 31, 2011 are
consistent with the results of operations for those assets on a
quarterly basis for the year ended December 31, 2010 and
our expectations for the year ending December 31, 2011 and
the twelve months ending March 31, 2012. As a result, we do
not anticipate that our pro forma results of operations or pro
forma available cash for the quarter ended March 31, 2011
would be materially
51
different than our pro forma results of operations or pro forma
available cash for the year ended December 31, 2010 or our
estimated results of operations and cash available for
distribution for the twelve months ending March 31, 2012 in
terms of having sufficient cash available to pay the full
minimum quarterly distribution for all of our common units and
subordinated units and the related distribution on our general
partners 2.0% interest. We will not pay a distribution
with respect to the quarter ended March 31, 2011.
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 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, 2010, the amount of cash that would
have been available for distribution to our unitholders and our
general partner, 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
|
|
|
|
December 31, 2010
|
|
|
|
(In thousands)
|
|
|
Pro Forma Net Income(1)
|
|
$
|
42,472
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
Interest expense, net(2)
|
|
|
2,410
|
|
Depreciation expense
|
|
|
8,006
|
|
|
|
|
|
|
EBITDA(3)
|
|
$
|
52,888
|
|
Less:
|
|
|
|
|
Cash interest paid, net(2)
|
|
|
2,010
|
|
Maintenance capital expenditures
|
|
|
1,703
|
|
Incremental general and administrative expense of being a
separate publicly traded partnership(4)
|
|
|
3,225
|
|
|
|
|
|
|
Pro Forma Available Cash
|
|
$
|
45,950
|
|
|
|
|
|
|
Pro Forma Cash Distributions:
|
|
|
|
|
Annualized minimum quarterly distribution per unit(5)
|
|
$
|
1.35
|
|
|
|
|
|
|
Distributions to public common unitholders
|
|
|
16,875
|
|
Distributions to Tesoro common units
|
|
|
3,719
|
|
Distributions to Tesoro subordinated units
|
|
|
20,594
|
|
|
|
|
|
|
Distributions to our general partner
|
|
|
841
|
|
|
|
|
|
|
Total distributions to unitholders and general partner
|
|
|
42,029
|
|
|
|
|
|
|
Excess
|
|
|
3,921
|
|
|
|
|
|
|
Percent of aggregate annualized minimum quarterly distributions
payable to common unitholders
|
|
|
100.0
|
%
|
Percent of aggregate annualized minimum quarterly distributions
payable to subordinated unitholders
|
|
|
100.0
|
%
|
|
|
|
(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 year ended
December 31, 2010 includes a shortfall payment from Tesoro
of $1.8 million under the High Plains 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.
|
(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
$3.2 million of estimated annual incremental general and
administrative expenses that we expect to incur as a result of
being a separate publicly traded partnership.
|
52
|
|
|
(5)
|
|
Assumes the issuance of 622,649
general partner units and the incentive distribution rights to
our general partner, 2,754,891 common units and 15,254,891
subordinated units to Tesoro and 12,500,000 common units to
the public.
|
Estimated
EBITDA for the Twelve Months Ending March 31,
2012
In order to fund the aggregate minimum quarterly distribution on
all common units and subordinated units and the corresponding
distribution on our general partners 2.0% interest for the
twelve months ending March 31, 2012, totaling
$42.0 million, we will need to generate EBITDA of at least
$48.7 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 estimated EBITDA of
$52.9 million for the twelve months ending March 31,
2012. 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 twelve months
ending March 31, 2012. 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 common
units and subordinated units and the corresponding distribution
on our general partners 2.0% interest 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 and the corresponding
distributions on our general partners 2.0% interest for
the twelve months ending March 31, 2012. 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 79. 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 and our general partner 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.
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.
53
Tesoro
Logistics LP
Statement
of Estimated EBITDA
|
|
|
|
|
|
|
Twelve Months
|
|
|
|
Ending
|
|
|
|
March 31, 2012
|
|
|
|
(In thousands)
|
|
|
REVENUES:
|
|
|
|
|
Crude oil gathering:
|
|
|
|
|
Affiliate
|
|
$
|
51,765
|
|
Third-party
|
|
|
|
|
Terminalling, transportation and storage:
|
|
|
|
|
Affiliate
|
|
$
|
42,462
|
|
Third-party
|
|
|
3,071
|
|
|
|
|
|
|
Total Revenues
|
|
|
97,298
|
|
COSTS AND EXPENSES:
|
|
|
|
|
Operating and maintenance expense
|
|
|
37,747
|
|
Depreciation expense
|
|
|
9,166
|
|
General and administrative expense(1)
|
|
|
6,667
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
|
53,580
|
|
|
|
|
|
|
OPERATING INCOME
|
|
$
|
43,718
|
|
Interest expense, net
|
|
|
2,410
|
|
|
|
|
|
|
NET INCOME
|
|
|
41,308
|
|
Plus:
|
|
|
|
|
Interest expense, net
|
|
|
2,410
|
|
Depreciation expense
|
|
|
9,166
|
|
|
|
|
|
|
Estimated EBITDA(2)(3)
|
|
|
52,884
|
|
Less:
|
|
|
|
|
Cash interest paid, net
|
|
|
2,010
|
|
Maintenance capital expenditures
|
|
|
4,642
|
|
Expansion capital expenditures
|
|
|
10,400
|
|
Plus:
|
|
|
|
|
Cash on hand and borrowings to fund expansion capital
expenditures
|
|
|
10,400
|
|
|
|
|
|
|
Estimated cash available for distribution(3)
|
|
|
46,232
|
|
|
|
|
|
|
Distributions to public common unitholders
|
|
|
16,875
|
|
Distributions to Tesoro common units
|
|
|
3,719
|
|
Distributions to Tesoro subordinated units
|
|
|
20,594
|
|
Distributions to our general partner
|
|
$
|
841
|
|
|
|
|
|
|
Total distributions to unitholders and general partner
|
|
|
42,029
|
|
|
|
|
|
|
Excess of cash available for distribution over aggregate
annualized minimum quarterly distributions
|
|
|
4,203
|
|
Calculation of minimum estimated EBITDA necessary to pay
aggregate annualized minimum quarterly distributions:
|
|
|
|
|
Estimated EBITDA
|
|
|
52,884
|
|
Excess of cash available for distribution over aggregate
annualized minimum quarterly distributions
|
|
|
4,203
|
|
|
|
|
|
|
Minimum estimated EBITDA necessary to pay aggregate annualized
minimum quarterly distributions
|
|
$
|
48,681
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately $3.2 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. |
|
(3) |
|
Estimated EBITDA and estimated cash available for distribution
include approximately $12.9 million of forecasted revenues
from services provided to Tesoro in excess of contracted
minimums under our commercial agreements with Tesoro. |
54
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 twelve months ending
March 31, 2012. 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 82. 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 twelve months ending March 31, 2012.
Revenues
We estimate that we will generate revenue of $97.3 million
for the twelve months ending March 31, 2012, as compared to
pro forma revenues of $93.2 million for the year ended
December 31, 2010. Based on our assumptions for the twelve
months ending March 31, 2012, we expect approximately 97%
of our forecasted revenues to be generated by our commercial
agreements with, and tariffs paid by, Tesoro and 84% 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 year ended
December 31, 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 we
handle and by variations between such weighted average amounts
per barrel and actual rates applied to such volumes.
55
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
|
|
|
|
Year
|
|
|
Twelve Months
|
|
|
|
|
|
Minimum
|
|
|
|
Ended
|
|
|
Ending
|
|
|
|
|
|
as a
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
Contracted
|
|
|
Percentage
|
|
|
|
2010
|
|
|
2012
|
|
|
Minimum
|
|
|
of Forecast
|
|
|
Crude oil pipeline throughput (bpd)
|
|
|
50,695
|
(1)
|
|
|
58,000
|
(2)
|
|
|
49,000
|
|
|
|
84
|
%
|
Trucking volume (bpd)
|
|
|
23,305
|
|
|
|
22,900
|
|
|
|
22,000
|
|
|
|
96
|
%
|
Terminal throughput (bpd)
|
|
|
113,950
|
|
|
|
115,200
|
|
|
|
100,000
|
|
|
|
87
|
%
|
Short-haul pipeline throughput (bpd)
|
|
|
60,666
|
|
|
|
65,800
|
|
|
|
54,000
|
|
|
|
82
|
%
|
Storage capacity reserved (barrels)
|
|
|
878,000
|
|
|
|
878,000
|
|
|
|
878,000
|
|
|
|
100
|
%
|
|
|
|
(1) |
|
While the annual average throughput for North Dakota origin
points for the year ending December 31, 2010 exceeded the
minimum throughput commitment under the terms of the High Plains
pipeline transportation services agreement, because of the
scheduled turnaround at Tesoros Mandan refinery during
April and May of 2010, a shortfall payment resulted during the
year in the amount of $1.8 million on a pro forma basis. |
|
(2) |
|
Of the 58,000 bpd forecasted for the twelve months ending
March 31, 2012, 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, 5,200 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 3,800 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
twelve months ending March 31, 2012 will be
$51.8 million, as compared to $49.6 million for the
year ended December 31, 2010, on a pro forma basis. Of the
total revenues forecasted for this segment, $41.7 million,
or 81%, 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 79.
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
|
|
|
|
Year
|
|
|
Twelve Months
|
|
|
|
Ended
|
|
|
Ending
|
|
|
|
December 31, 2010
|
|
|
March 31, 2012
|
|
|
Revenues (in millions):
|
|
|
|
|
|
|
|
|
Pipeline gathering(1)
|
|
$
|
25.0
|
|
|
$
|
27.2
|
|
Trucking
|
|
|
24.6
|
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
49.6
|
|
|
|
51.8
|
|
|
|
|
|
|
|
|
|
|
Revenue (per barrel):
|
|
|
|
|
|
|
|
|
Pipeline gathering(1)
|
|
$
|
1.35
|
|
|
$
|
1.28
|
|
Trucking
|
|
|
2.91
|
|
|
|
2.94
|
|
|
|
|
(1) |
|
While the annual average throughput for North Dakota origin
points for the year ending December 31, 2010 exceeded the
minimum throughput commitment under the terms of the High Plains
pipeline transportation services agreement, because of the
scheduled turnaround at Tesoros Mandan refinery during |
56
|
|
|
|
|
April and May of 2010, a shortfall payment resulted during the
year in the amount of $1.8 million on a pro forma basis. |
Pipeline Gathering Services. We estimate that
total revenues attributable to the pipeline portion of our crude
oil gathering segment will be $27.2 million, or $1.28 per
barrel, for the twelve months ending March 31, 2012, as
compared to $25.0 million, or $1.35 per barrel, for the
year ended December 31, 2010, on a pro forma basis. The
pipeline gathering portion of this segment includes revenues
from trunkline transportation, pipeline gathering and pumpover
services. Of the $27.2 million for the pipeline gathering
portion, $19.9 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 $1.11 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 $7.3 million of forecasted revenue for the twelve
months ending March 31, 2012 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, 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 $24.6 million, or $2.94
per truck-hauled barrel, for the twelve months ending
March 31, 2012. 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 $2.8 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 $24.6 million for the
forecast period are relatively flat compared to the year ended
December 31, 2010.
Terminalling, Transportation and Storage
Revenues. We estimate that our total
terminalling, transportation and storage services revenues for
the twelve months ending March 31, 2012 will be
$45.5 million, as compared to $43.6 million for the
year ended December 31, 2010. Of the total forecasted
revenues, $39.5 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
57
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
|
|
|
|
Year Ended
|
|
|
Twelve Months Ending
|
|
|
|
December 31, 2010
|
|
|
March 31, 2012
|
|
|
|
(In millions, except per barrel amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Terminalling
|
|
$
|
32.8
|
|
|
$
|
34.0
|
|
Short-Haul Pipeline
|
|
|
|
|
|
|
|
|
Transportation
|
|
|
5.5
|
|
|
|
6.1
|
|
Storage
|
|
|
5.3
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43.6
|
|
|
$
|
45.5
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Terminalling (per barrel)
|
|
$
|
0.79
|
|
|
$
|
0.81
|
|
Short-Haul Pipeline
|
|
|
|
|
|
|
|
|
Transportation (per barrel)
|
|
|
0.25
|
|
|
|
0.25
|
|
Storage (per shell capacity barrel, per month)
|
|
|
0.50
|
|
|
|
0.51
|
|
Terminalling. We estimate that total revenues
attributable to our terminalling services will be
$34.0 million, or $0.81 per barrel, for the twelve months
ending March 31, 2012. Of this amount, $29.3 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
$4.7 million of forecasted revenue is the result of
terminalling volumes of approximately 9,400 bpd for third
parties and 5,800 bpd for Tesoro in excess of Tesoros
minimum throughput commitments, and for related ancillary
services. Of the approximately 9,400 bpd terminalled for
third parties, approximately 3,200 bpd is subject to
month-to-month
contracts, and approximately 6,200 bpd is subject to
contracts with terms ranging from 90 days to one year. The
increase in our forecasted revenues for the forecast period
compared to the year ended December 31, 2010 primarily
relates to higher terminalling volume as the result of our
expansion capital projects at our Salt Lake City and Burley
terminals and increased utilization of our Los Angeles terminal
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.
Short-Haul Pipeline Transportation. We
estimate that total revenues attributable to our short-haul
pipeline transportation business will be $6.1 million for
the twelve months ending March 31, 2012. 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 $1.2 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, 2010
primarily relates to higher anticipated throughput volumes
during the forecast period.
Storage Services. We estimate that our storage
revenues will be $5.4 million for the twelve months ending
March 31, 2012. 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 be obligated to pay us $0.50 per barrel of tank shell
capacity per month for these storage and transportation services.
58
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
$37.7 million for the twelve months ending March 31,
2012 as compared to $36.8 million for the year ended
December 31, 2010, on a pro forma basis. The increase in
our forecasted operating and maintenance expenses compared to
the year ended December 31, 2010 is primarily related to
escalation. 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 $6.7 million for the twelve months ending
March 31, 2012, compared to $3.4 million for the year
ended December 31, 2010, on a pro forma basis. These
expenses consist of:
|
|
|
|
|
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 138;
|
|
|
|
|
|
approximately $1.0 million of direct costs for estimated
employee-related expenses relating to the management of our
assets; and
|
|
|
|
|
|
approximately $3.2 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.
|
By comparison, for the year ended December 31, 2010, our
predecessor recorded total general and administrative expenses
of approximately $3.2 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
$9.2 million for the twelve months ending March 31,
2012, compared to approximately $8.0 million for the year
ended December 31, 2010, on a pro forma basis. Depreciation
expense is expected to increase for the twelve months ending
March 31, 2012 compared to the year ended December 31,
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
$2.4 million for the twelve months ending March 31,
2012. Our interest expense for the year ended December 31,
2010, on a pro forma basis, was also approximately
$2.4 million. Our interest expense for the twelve months
ending March 31, 2012 is based on the following assumptions:
|
|
|
|
|
we will have average borrowings of approximately
$54.8 million under our revolving credit facility, with an
estimated average interest rate of 2.8% through March 31,
2012. 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.
|
|
|
|
|
|
interest expense includes commitment fees for the unused portion
of our revolving credit facility at an assumed rate of 0.50%;
|
59
|
|
|
|
|
interest expense also includes the amortization of debt issuance
costs incurred in connection with our revolving credit
facility; and
|
|
|
|
we will remain in compliance with the financial and other
covenants in our revolving credit facility.
|
Capital
Expenditures
We estimate that total capital expenditures for the twelve
months ending March 31, 2012 will be $15.0 million as
compared to pro forma capital expenditures of $2.1 million
for the year ended December 31, 2010. This forecast
estimate is based on the following assumptions:
|
|
|
|
|
Maintenance Capital Expenditures. We
estimate that our maintenance capital expenditures will be
$4.6 million for the twelve months ending March 31,
2012, of which $1.7 million relates to our High Plains
pipeline system, $1.4 million relates to short-haul
pipeline and terminal integrity projects and the remaining
$1.5 million relates primarily to tank maintenance and
replacement of rack loading equipment at certain of our
terminals. Maintenance capital expenditures were
$1.7 million for the year ended December 31, 2010.
|
|
|
|
|
|
Expansion Capital Expenditures. We have
assumed expansion capital expenditures of our existing assets of
$10.4 million for the twelve months ending
March 31, 2012. Of this amount, $3.6 million relates
to additional truck unloading, tankage and pumping capacity on
the High Plains System relating to Tesoros announced
expansion of the Mandan Refinery. We do not expect to realize
any revenues from this expansion during the forecast period but
expect to realize approximately $7.0 million of additional
annual revenue, offset by less than $1.0 million of
incremental annual operating costs, beginning in the second
quarter of 2012 once the expansion project is complete.
|
The remaining $6.8 million of assumed expansion capital
expenditures relates to several projects to expand the services
offered and the capacity of our terminals. We expect to spend
$2.4 million on the addition of ethanol blending
capabilities at our Salt Lake City and Burley terminals. We
expect to spend approximately $2.0 million at our Los
Angeles terminal to add the ability to unload transmix for
transportation to Tesoros Los Angeles refinery. We expect
to spend approximately $4.5 million at our Stockton
terminal, of which $2.4 million will be spent during the
twelve months ending March 31, 2012, to add 8,000
barrels per day of additional storage capacity that will allow
us to increase the volume delivered through our terminal. Our
forecast for the twelve months ending March 31, 2012 includes
$1.2 million of EBITDA related to these terminal expansion
projects. After the completion of these terminal expansion
projects during the first quarter of 2012, we expect to realize
approximately $3.3 million of incremental EBITDA for a
total of $4.5 million on an annual basis.
Although we expect to make several interconnections on our High
Plains Pipeline System, we do not expect to make capital
expenditures to complete those connections. Expansion capital
expenditures were $0.4 million for the year ended
December 31, 2010.
Regulatory,
Industry and Economic Factors
Our forecast of estimated EBITDA for the twelve months ending
March 31, 2012 is based on the following significant
assumptions related to regulatory, industry and economic factors:
|
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
there will not be any material accidents, weather-related
incidents, unscheduled downtime or similar unanticipated events
with respect to our assets or Tesoros refineries;
|
|
|
|
there will not be a shortage of skilled labor; and
|
|
|
|
there will not be any material adverse changes in the refining
industry, the midstream energy sector or market, or overall
economic conditions.
|
60
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
June 30, 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 June 30, 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:
|
|
|
|
|
less, the amount of cash reserves established by our
general partner at the date of determination of available cash
for the quarter to:
|
|
|
|
|
|
provide for the proper conduct of our business (including
reserves for our future capital expenditures and anticipated
future credit needs subsequent to that quarter);
|
|
|
|
comply with applicable law, any of our debt instruments or other
agreements; and
|
|
|
|
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);
|
|
|
|
|
|
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.
|
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 $0.3375
per unit, or $1.35 per unit 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 87 for a discussion of certain covenants to be
included in our revolving credit facility that may restrict our
ability to make distributions.
61
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 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 $0.388125 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:
|
|
|
|
|
$30.0 million (as described below); plus
|
|
|
|
|
|
all of our cash receipts after the closing of this offering,
excluding cash from interim capital transactions (as defined
below) provided that cash receipts from the termination of a
commodity hedge or interest rate hedge prior to its specified
termination date shall be included in operating surplus in equal
quarterly installments over the remaining scheduled life of such
commodity hedge or interest rate hedge; plus
|
|
|
|
|
|
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
|
|
|
|
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
|
|
|
|
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
|
|
|
|
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
|
|
|
|
the amount of cash reserves established by our general partner
to provide funds for future operating expenditures; less
|
|
|
|
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.
|
62
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 a basket of
$30.0 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:
|
|
|
|
|
repayments of working capital borrowings where such borrowings
have previously been deemed to have been repaid (as described
above);
|
|
|
|
payments (including prepayments and prepayment penalties) of
principal of and premium on indebtedness other than working
capital borrowings;
|
|
|
|
expansion capital expenditures;
|
|
|
|
|
|
payment of transaction expenses (including taxes) relating to
interim capital transactions;
|
|
|
|
|
|
distributions to partners (including distributions in respect of
our incentive distribution rights);
|
|
|
|
repurchases of partnership interests (excluding repurchases we
make to satisfy obligations under employee benefit
plans); or
|
|
|
|
any other payments made in connection with this offering that
are described under Use of Proceeds on page 46.
|
Capital Surplus and Interim Capital
Transactions. We define cash from interim
capital transactions to include proceeds from:
|
|
|
|
|
borrowings other than working capital borrowings;
|
|
|
|
issuances of our equity and debt securities; and
|
|
|
|
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.
|
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 or operating income. Examples of maintenance
capital expenditures include capital expenditures associated
63
with the repair, refurbishment and replacement of pipelines and
terminals. Maintenance capital expenditures are included in
operating expenditures and thus will reduce operating surplus.
Expansion capital expenditures are cash expenditures incurred
for acquisitions or capital improvements that we expect will
increase our operating capacity 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 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.
Expansion capital expenditures are not 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.
Cash expenditures that are made for more than one purpose will
be allocated among maintenance capital expenditures, expansion
capital expenditures and any other applicable purposes 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
$0.3375 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 June 30, 2014,
that each of the following tests are met:
|
|
|
|
|
distributions of available cash from operating surplus on each
of the outstanding common units and subordinated units equaled
or exceeded the minimum quarterly distribution for each of the
three consecutive, non-overlapping four-quarter periods
immediately preceding that date;
|
|
|
|
|
|
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 and subordinated units on a
fully diluted weighted average basis during those periods plus
the corresponding distributions on our general partners
2.0% interest; and
|
|
|
|
|
|
there are no arrearages in payment of the minimum quarterly
distribution on our common units.
|
64
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 shortfall payments
that would be paid by Tesoro under our existing commercial
agreements upon the suspension or reduction of operations by
Tesoro (or similar fees under future contracts) expected to be
received during such period. For a more detailed discussion of
curtailment fees and shortfall payments that would be paid by
Tesoro under our existing commercial agreements upon the
suspension or reduction of operations by Tesoro, please read
Certain Relationships and Related Party
Transactions Agreements Governing the
Transactions Commercial Agreements with Tesoro
beginning on page 143.
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:
|
|
|
|
|
distributions of available cash from operating surplus on each
of the outstanding common units and subordinated units equaled
or exceeded $2.025 (150.0% of the annualized minimum quarterly
distribution) for the immediately preceding four-quarter
period; and
|
|
|
|
|
|
the adjusted operating surplus (as defined below)
generated during the immediately preceding four-quarter period
equaled or exceeded the sum of $2.025 (150.0% of the annualized
minimum quarterly distribution) on each of the outstanding
common units and subordinated units during that period on a
fully diluted weighted average basis plus the corresponding
distributions on our general partners 2.0% interest and on
the incentive distribution rights; and
|
|
|
|
|
|
there are no arrearages in payment of the minimum quarterly
distribution on our common units.
|
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 shortfall payments
that would be paid by Tesoro under our existing commercial
agreements upon the suspension or reduction of operations by
Tesoro (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:
|
|
|
|
|
the subordination period will end and each subordinated unit
will immediately convert into one common unit;
|
|
|
|
any existing arrearages in payment of the minimum quarterly
distribution on our common units will be extinguished; and
|
|
|
|
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.
|
65
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:
|
|
|
|
|
operating surplus (excluding the first bullet of the definition
of operating surplus) generated with respect to that period;
less
|
|
|
|
any net increase in working capital borrowings with respect to
such period; less
|
|
|
|
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
|
|
|
|
any net decrease in working capital borrowings with respect to
such period; plus
|
|
|
|
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
|
|
|
|
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.
|
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:
|
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
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
|
|
|
|
thereafter, in the manner described in General
Partner Interest and Incentive Distribution Rights below.
|
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:
|
|
|
|
|
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
|
|
|
|
thereafter, in the manner described in General
Partner Interest and Incentive Distribution Rights below.
|
66
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 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:
|
|
|
|
|
we have distributed available cash from operating surplus to the
unitholders in an amount equal to the minimum quarterly
distribution; and
|
|
|
|
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:
|
|
|
|
|
first, 98.0% to all unitholders, pro rata, and 2.0% to our
general partner, until each unitholder receives a total of
$0.388125 per unit for that quarter (the first target
distribution);
|
|
|
|
|
|
second, 85.0% to all unitholders, pro rata, and 15.0% to our
general partner, until each unitholder receives a total of
$0.421875 per unit for that quarter (the second target
distribution);
|
|
|
|
|
|
third, 75.0% to all unitholders, pro rata, and 25.0% to our
general partner, until each unitholder receives a total of
$0.506250 per unit for that quarter (the third target
distribution); and
|
|
|
|
|
|
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
67
capital necessary to maintain its 2.0% general partner interest
and that our general partner owns all of the incentive
distribution rights.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marginal Percentage Interest
|
|
|
Total Quarterly Distribution
|
|
in Distributions
|
|
|
per Unit Target Amount
|
|
Unitholders
|
|
General Partner
|
|
Minimum Quarterly Distribution
|
|
$
|
0.3375
|
|
|
|
|
|
|
|
98.0
|
%
|
|
|
2.0
|
%
|
First Target Distribution
|
|
above $
|
0.3375
|
|
|
up to $
|
0.388125
|
|
|
|
98.0
|
%
|
|
|
2.0
|
%
|
Second Target Distribution
|
|
above $
|
0.388125
|
|
|
up to $
|
0.421875
|
|
|
|
85.0
|
%
|
|
|
15.0
|
%
|
Third Target Distribution
|
|
above $
|
0.421875
|
|
|
up to $
|
0.506250
|
|
|
|
75.0
|
%
|
|
|
25.0
|
%
|
Thereafter
|
|
above $
|
0.506250
|
|
|
|
|
|
|
|
50.0
|
%
|
|
|
50.0
|
%
|
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.
68
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:
|
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
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
|
|
|
|
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 $0.55.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marginal Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest in Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
Incentive
|
|
|
|
|
|
|
Quarterly Distribution
|
|
|
Common
|
|
|
Partner
|
|
|
Distribution
|
|
|
Quarterly Distribution per Unit
|
|
|
|
per Unit Prior to Reset
|
|
|
Unitholders
|
|
|
Interest
|
|
|
Rights
|
|
|
Following Hypothetical Reset
|
|
|
Minimum Quarterly Distribution
|
|
|
|
|
|
$
|
0.3375
|
|
|
|
98.0
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
$
|
0.5500
|
|
First Target Distribution
|
|
above $
|
0.3375
|
|
|
up to $
|
0.388125
|
|
|
|
98.0
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
above $
|
0.5500
|
|
|
up to $
|
0.6325(1
|
)
|
Second Target Distribution
|
|
above $
|
0.388125
|
|
|
up to $
|
0.421875
|
|
|
|
85.0
|
%
|
|
|
2.0
|
%
|
|
|
13.0
|
%
|
|
above $
|
0.6325
|
(1)
|
|
up to $
|
0.6875(2
|
)
|
Third Target Distribution
|
|
above $
|
0.421875
|
|
|
up to $
|
0.506250
|
|
|
|
75.0
|
%
|
|
|
2.0
|
%
|
|
|
23.0
|
%
|
|
above $
|
0.6875
|
(2)
|
|
up to $
|
0.825(3
|
)
|
Thereafter
|
|
|
|
|
|
above $
|
0.506250
|
|
|
|
50.0
|
%
|
|
|
2.0
|
%
|
|
|
48.0
|
%
|
|
|
|
|
|
above $
|
0.825(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. |
69
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 30,509,782 common
units outstanding, our general partner has maintained its 2.0%
general partner interest, and the average distribution to each
common unit was $0.55 for the two quarters prior to the reset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
$
|
0.3375
|
|
|
$
|
10,297,051
|
|
|
$
|
|
|
|
$
|
210,144
|
|
|
$
|
|
|
|
$
|
210,144
|
|
|
$
|
10,507,195
|
|
First Target Distribution
|
|
above $
|
0.3375
|
|
|
up to $
|
0.388125
|
|
|
|
1,544,558
|
|
|
|
|
|
|
|
31,522
|
|
|
|
|
|
|
|
31,522
|
|
|
|
1,576,080
|
|
Second Target Distribution
|
|
above $
|
0.388125
|
|
|
up to $
|
0.421875
|
|
|
|
1,029,705
|
|
|
|
|
|
|
|
24,228
|
|
|
|
157,484
|
|
|
|
181,712
|
|
|
|
1,211,417
|
|
Third Target Distribution
|
|
above $
|
0.421875
|
|
|
up to $
|
0.506250
|
|
|
|
2,574,263
|
|
|
|
|
|
|
|
68,647
|
|
|
|
789,441
|
|
|
|
858,088
|
|
|
|
3,432,351
|
|
Thereafter
|
|
|
|
|
|
above $
|
0.506250
|
|
|
|
1,334,803
|
|
|
|
|
|
|
|
53,392
|
|
|
|
1,281,411
|
|
|
|
1,334,803
|
|
|
|
2,669,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,780,380
|
|
|
$
|
|
|
|
$
|
387,933
|
|
|
$
|
2,228,336
|
|
|
$
|
2,616,269
|
|
|
$
|
19,396,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 34,561,302 common units outstanding,
our general partners 2.0% interest has been maintained,
and the average distribution to each common unit would be $0.55.
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 $2,228,336, 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 $0.55.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
$
|
0.5500
|
|
|
$
|
16,780,380
|
|
|
$
|
2,228,336
|
|
|
$
|
387,933
|
|
|
$
|
|
|
|
$
|
2,616,269
|
|
|
$
|
19,396,649
|
|
First Target Distribution
|
|
above $
|
0.5500
|
|
|
up to $
|
0.6325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Target Distribution
|
|
above $
|
0.6325
|
|
|
up to $
|
0.6875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Target Distribution
|
|
above $
|
0.6875
|
|
|
up to $
|
0.8250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
above $
|
0.8250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,780,380
|
|
|
$
|
2,228,336
|
|
|
$
|
387,933
|
|
|
$
|
|
|
|
$
|
2,616,269
|
|
|
$
|
19,396,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
70
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
71
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;
72
|
|
|
|
|
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
73
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.
74
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, 2009 and 2010 are derived from
audited combined financial statements of our predecessor. The
selected historical combined financial data of our predecessor
as of December 31, 2006 is 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 79.
The selected pro forma combined financial data presented in the
following table as of and for the year ended December 31,
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 December 31, 2010 and the pro
forma statement of operations for the year ended
December 31, 2010 assumes that the offering and the related
transactions occurred as of January 1, 2010. 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 12,500,000
common units to the public, 622,649 general partner units and
the incentive distribution rights to our general partner and
18,009,783 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 $3.2 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 82, our future
results of operations will not be comparable to our
predecessors historical results.
75
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 16.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tesoro Logistics LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Tesoro Logistics LP Predecessor Historical
|
|
|
Year Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per unit data and operating
information)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering
|
|
$
|
17,948
|
|
|
$
|
20,646
|
|
|
$
|
21,190
|
|
|
$
|
19,422
|
|
|
$
|
19,592
|
|
|
$
|
49,566
|
|
Terminalling, transportation and storage
|
|
|
2,983
|
|
|
|
3,251
|
|
|
|
3,297
|
|
|
|
3,237
|
|
|
|
3,708
|
|
|
|
43,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
20,931
|
|
|
|
23,897
|
|
|
|
24,487
|
|
|
|
22,659
|
|
|
|
23,300
|
|
|
|
93,154
|
|
Operating and maintenance expense(2)
|
|
|
25,560
|
|
|
|
26,858
|
|
|
|
29,741
|
|
|
|
32,566
|
|
|
|
32,972
|
|
|
|
36,824
|
|
Depreciation expense
|
|
|
6,011
|
|
|
|
6,342
|
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
8,006
|
|
|
|
8,006
|
|
General and administrative expense(3)
|
|
|
2,218
|
|
|
|
2,800
|
|
|
|
2,525
|
|
|
|
3,141
|
|
|
|
3,198
|
|
|
|
3,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(12,858
|
)
|
|
|
(12,103
|
)
|
|
|
(14,404
|
)
|
|
|
(21,868
|
)
|
|
|
(20,876
|
)
|
|
|
44,882
|
|
Interest expense, net(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(12,858
|
)
|
|
$
|
(12,103
|
)
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(20,876
|
)
|
|
$
|
42,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partner interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
850
|
|
Common unitholders interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,811
|
|
Subordinated unitholders interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,811
|
|
Pro forma Net Income (Loss) per common unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.36
|
|
Pro forma Net Income (Loss) per subordinated unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.36
|
|
Balance Sheet Data (at year end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, net
|
|
$
|
114,524
|
|
|
$
|
127,226
|
|
|
$
|
138,785
|
|
|
$
|
138,055
|
|
|
$
|
131,606
|
|
|
$
|
131,606
|
|
Total Assets
|
|
|
117,787
|
|
|
|
130,752
|
|
|
|
141,697
|
|
|
|
141,215
|
|
|
|
135,577
|
|
|
|
136,606
|
|
Total Liabilities
|
|
|
5,089
|
|
|
|
5,404
|
|
|
|
8,686
|
|
|
|
5,499
|
|
|
|
6,750
|
|
|
|
50,000
|
|
Total Division Equity/Partners Capital
|
|
|
112,698
|
|
|
|
125,348
|
|
|
|
133,011
|
|
|
|
135,716
|
|
|
|
128,827
|
|
|
|
86,606
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(6,524
|
)
|
|
$
|
(5,703
|
)
|
|
$
|
(6,045
|
)
|
|
$
|
(12,324
|
)
|
|
$
|
(11,426
|
)
|
|
|
|
|
Investing activities
|
|
|
(4,641
|
)
|
|
|
(19,050
|
)
|
|
|
(16,022
|
)
|
|
|
(12,249
|
)
|
|
|
(2,561
|
)
|
|
|
|
|
Financing activities
|
|
|
11,165
|
|
|
|
24,753
|
|
|
|
22,067
|
|
|
|
24,573
|
|
|
|
13,987
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(5)
|
|
$
|
(6,847
|
)
|
|
$
|
(5,761
|
)
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(12,870
|
)
|
|
$
|
52,888
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
$
|
4,312
|
|
|
$
|
3,713
|
|
|
$
|
8,475
|
|
|
$
|
3,319
|
|
|
$
|
1,703
|
|
|
$
|
1,703
|
|
Expansion(6)
|
|
|
915
|
|
|
|
15,527
|
|
|
|
10,186
|
|
|
|
5,915
|
|
|
|
367
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,227
|
|
|
$
|
19,240
|
|
|
$
|
18,661
|
|
|
$
|
9,234
|
|
|
$
|
2,070
|
|
|
$
|
2,070
|
|
Operating Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline throughput (bpd)(7)
|
|
|
54,639
|
|
|
|
56,232
|
|
|
|
54,737
|
|
|
|
52,806
|
|
|
|
50,695
|
|
|
|
50,695
|
|
Average pipeline revenue per barrel(8)
|
|
$
|
0.90
|
|
|
$
|
1.01
|
|
|
$
|
1.06
|
|
|
$
|
1.01
|
|
|
$
|
1.06
|
|
|
$
|
1.35
|
|
Trucking volume (bpd)
|
|
|
17,759
|
|
|
|
18,560
|
|
|
|
23,752
|
|
|
|
22,963
|
|
|
|
23,305
|
|
|
|
23,305
|
|
Average trucking revenue per barrel(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.91
|
|
Terminalling, transportation and storage segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal throughput (bpd)(9)
|
|
|
79,752
|
|
|
|
103,305
|
|
|
|
112,868
|
|
|
|
113,135
|
|
|
|
113,950
|
|
|
|
113,950
|
|
Average terminal revenue per barrel(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.79
|
|
Short-haul pipeline throughput (bpd)
|
|
|
79,139
|
|
|
|
69,298
|
|
|
|
68,890
|
|
|
|
62,822
|
|
|
|
60,666
|
|
|
|
60,666
|
|
Average short-haul pipeline revenue per barrel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.25
|
|
Storage capacity reserved (shell capacity barrels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878,000
|
|
Storage per shell capacity barrel (per month)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.50
|
|
76
|
|
|
(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. The pro forma operating and maintenance expenses
primarily reflect $1.4 million for purchased additives
based on historical levels of such purchases that have not
previously been allocated to the Predecessor but will be charged
to the Partnership after the closing of this offering, as well
as $1.1 million for business interruption, property and
pollution liability insurance premiums that we expect to incur
based on estimates from our insurance broker, $0.8 million
for employee-related expenses which have not been previously
recorded in the historical financial records of Tesoro Logistics
LP Predecessor, and $0.3 million for an annual service fee
that we will pay Tesoro under the terms of our operational
services agreement. |
|
|
|
(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 $0.2 million, but do not
include the estimated $3.2 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 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 service fees for services
such as ethanol blending and additive injection. |
|
(9) |
|
Terminal throughput includes throughput from our Los Angeles
terminal following its acquisition by Tesoro in May 2007. |
77
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
|
|
|
Year Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Reconciliation of EBITDA to net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income(Loss)
|
|
$
|
(12,858
|
)
|
|
$
|
(12,103
|
)
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(20,876
|
)
|
|
$
|
42,472
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
6,011
|
|
|
|
6,342
|
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
8,006
|
|
|
|
8,006
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(6,847
|
)
|
|
$
|
(5,761
|
)
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(12,870
|
)
|
|
$
|
52,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of EBITDA to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from used in operating activities
|
|
$
|
(6,524
|
)
|
|
$
|
(5,703
|
)
|
|
$
|
(6,045
|
)
|
|
$
|
(12,324
|
)
|
|
$
|
(11,426
|
)
|
|
|
|
|
Changes in assets and liabilities
|
|
|
(82
|
)
|
|
|
167
|
|
|
|
(1,258
|
)
|
|
|
390
|
|
|
|
(932
|
)
|
|
|
|
|
Loss on asset disposals
|
|
|
(241
|
)
|
|
|
(225
|
)
|
|
|
(476
|
)
|
|
|
(1,114
|
)
|
|
|
(512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(6,847
|
)
|
|
$
|
(5,761
|
)
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(12,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
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
79
throughput commitment and the pro forma weighted average
committed tariff rate on the trunk line segments of our High
Plains pipeline system for the year ended December 31,
2010, Tesoro would have paid us approximately $1.7 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 $0.15 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
$0.57 per barrel (based on the pro forma weighted average
per-barrel
gathering fee for the year ended December 31,
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 year ended December 31, 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 $0.15
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 year
ended December 31, 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 be obligated to 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 year ended December 31, 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 be obligated to 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
80
use of the 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 year ended December 31, 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:
|
|
|
|
|
utilize the remaining uncommitted capacity on, or add additional
capacity to, our High Plains system, and to optimize the entire
system;
|
|
|
|
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;
|
|
|
|
increase throughput volumes at our refined products terminals
and provide additional ancillary services at those terminals,
such as ethanol blending and additive injection; and
|
|
|
|
identify and execute organic expansion projects, and capture
incremental Tesoro or third-party volumes.
|
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
81
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:
|
|
|
|
|
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;
|
|
|
|
the ability of our assets to generate sufficient cash flow to
make distributions to our unitholders;
|
|
|
|
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 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
82
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 $0.2 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 138. We also expect to
incur an additional $3.2 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 $0.3375 per unit per quarter ($1.35 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, subject to certain
exceptions, 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
83
value in excess of $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, transfer or otherwise dispose
of 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,
2008, 2009 and 2010. The results of operations by segment are
discussed in further detail following this combined overview
discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
24,487
|
|
|
$
|
22,659
|
|
|
$
|
23,300
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense
|
|
|
29,741
|
|
|
|
32,566
|
|
|
|
32,972
|
|
Depreciation expense
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
8,006
|
|
General and administrative expense
|
|
|
2,525
|
|
|
|
3,141
|
|
|
|
3,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
|
38,891
|
|
|
|
44,527
|
|
|
|
44,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(20,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(1)
|
|
$
|
(7,779
|
)
|
|
$
|
(13,048
|
)
|
|
$
|
(12,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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. |
Year
Ended December 31, 2010 compared to Year Ended
December 31, 2009
Net loss decreased by $1.0 million, or 5%, to
$20.9 million in 2010 as compared to $21.9 million in
2009. The terminalling, transportation and storage segment had a
$1.6 million decrease in operating losses primarily due to
lower depreciation expenses and operating and maintenance
expenses. This decrease in net loss was partially offset by an
increase in crude oil gathering operating losses of
$0.6 million primarily attributable to higher 2010 contract
labor costs and truck lease expenses. Total general and
administrative expenses were relatively unchanged in 2010.
84
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except volumes)
|
|
|
Revenues
|
|
$
|
21,190
|
|
|
$
|
19,422
|
|
|
$
|
19,592
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses
|
|
|
17,029
|
|
|
|
18,962
|
|
|
|
19,684
|
|
Depreciation expense
|
|
|
3,066
|
|
|
|
3,073
|
|
|
|
3,097
|
|
Allocated general and administrative expense
|
|
|
471
|
|
|
|
536
|
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
$
|
20,566
|
|
|
$
|
22,571
|
|
|
$
|
23,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
$
|
624
|
|
|
$
|
(3,149
|
)
|
|
$
|
(3,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes (bpd):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline
|
|
|
54,737
|
|
|
|
52,806
|
|
|
|
50,695
|
(1)
|
Trucking
|
|
|
23,752
|
|
|
|
22,963
|
|
|
|
23,305
|
|
|
|
|
(1) |
|
Average daily throughput volumes decreased in 2010 due to a
scheduled turnaround at Tesoros Mandan refinery in April
and May of 2010. |
Year
Ended December 31, 2010 compared to Year Ended
December 31, 2009
Revenues increased by $0.2 million, or 1%, to
$19.6 million in 2010 as compared to $19.4 million in
2009. Although average pipeline throughput decreased by
2,111 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.
Operating and maintenance expense increased $0.7 million,
or 4%, to $19.7 million in 2010 compared to
$19.0 million in 2009 as a result of increased trucking
costs for contract labor and truck lease expenses of
$2.2 million and approximately $0.8 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 $1.7 million during
2010 and a decrease of $0.4 million in nonrecurring
environmental expenses.
Depreciation expense was unchanged at $3.1 million for 2010
compared to 2009 as minor amounts of assets were placed in
service or retired during both years.
85
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 years.
Results
of Operations Terminalling, Transportation and
Storage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands except volumes)
|
|
|
Revenues(1)
|
|
$
|
3,297
|
|
|
$
|
3,237
|
|
|
$
|
3,708
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses
|
|
|
12,712
|
|
|
|
13,604
|
|
|
|
13,288
|
|
Depreciation expense
|
|
|
3,559
|
|
|
|
5,747
|
|
|
|
4,909
|
|
Allocated general and administrative expense
|
|
|
287
|
|
|
|
379
|
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
$
|
16,558
|
|
|
$
|
19,730
|
|
|
$
|
18,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
$
|
(13,261
|
)
|
|
$
|
(16,493
|
)
|
|
$
|
(14,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes (bpd)
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminal throughput
|
|
|
112,868
|
|
|
|
113,135
|
|
|
|
113,950
|
|
Short-haul pipeline throughput(2)
|
|
|
68,890
|
|
|
|
62,822
|
|
|
|
60,666
|
|
|
|
|
(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 decreased due to a scheduled
turnaround at Tesoros Salt Lake City refinery in March and
April of 2010. |
Year
Ended December 31, 2010 compared to Year Ended
December 31, 2009
Revenues increased $0.5 million, or 15%, to
$3.7 million in 2010 as compared to $3.2 million in
2009, primarily due to increases in third-party throughput
volumes at our Vancouver and Anchorage terminals.
Operating and maintenance expense decreased $0.3 million,
or 2%, to $13.3 million in 2010 compared to
$13.6 million in 2009 primarily due to a decrease in losses
on fixed asset disposals as an additional $0.6 million of
losses were recognized in 2009 related to the retirement of
certain assets at our Los Angeles terminal. In addition, repairs
and maintenance and employee costs decreased by
$0.3 million due to initiatives to reduce costs. The
decrease was partially offset by an increase of
$0.6 million in environmental costs at our Stockton and
Anchorage terminals.
Depreciation expense decreased $0.8 million, or 15%, to
$4.9 million in 2010 compared to $5.7 million in 2009
due to the acceleration of depreciation on a portion of our Los
Angeles terminal that was retired in 2009.
86
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.
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.
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 $0.3375 per
unit per quarter, which equates to $10.5 million per
quarter, or $42.0 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 will enter into a
$150.0 million senior secured revolving credit agreement
with Bank of America, N.A., as administrative agent, and a
syndicate of lenders. The credit facility will be available to
fund working capital, finance acquisitions and finance other
capital expenditures and will allow us to request that the
maximum amount of the credit facility be increased up to an
aggregate of $300.0 million, subject to receiving increased
commitments from the lenders. Our obligations under the credit
agreement will be secured by a first priority lien on
substantially all of our material assets. The credit facility
will mature on the third anniversary of the closing date for the
credit facility. Borrowings under the credit facility will bear
interest at either a base rate (3.25% as of March 28,
2011), plus an applicable margin, or a Eurodollar rate (0.25% as
of March 28, 2011), plus an applicable margin. The
applicable margin varies based upon our Consolidated Leverage
Ratio, as defined in the credit agreement. 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.
The credit agreement will contain affirmative and negative
covenants customary for transactions of this nature that, among
other things, limit or restrict our ability (as well as the
ability of our subsidiaries) to:
|
|
|
|
|
permit the ratio of our consolidated EBITDA to our consolidated
interest charges as of the end of any fiscal quarter, for the
immediately preceding four quarter period, to be less than 3.00
to 1.00;
|
|
|
|
|
|
permit the ratio of our consolidated funded debt to our
consolidated EBITDA as of the end of any fiscal quarter, for the
immediately preceding four quarter period, to be greater than
4.50 to 1.00 during a temporary period from the date of
consummation of certain acquisitions (as described in the credit
|
87
|
|
|
|
|
agreement) until the last day of the third consecutive quarter
following such acquisitions, and greater than 4.00 to 1.00 at
all other times;
|
|
|
|
|
|
incur additional debt, subject to customary carve outs for
certain permitted additional debt, or incur certain liens on
assets, subject to customary carve outs for certain permitted
liens;
|
|
|
|
|
|
make certain cash distributions, provided that we may make
quarterly distributions of available cash so long as no default
under the credit agreement then exists or would result
therefrom, and provided that no more than $20 million may
be drawn on the revolving credit facility to fund such quarterly
distributions;
|
|
|
|
|
|
dispose of assets in excess of an annual threshold amount;
|
|
|
|
|
|
make certain amendments, modifications or supplements to
organization documents and material contracts;
|
|
|
|
|
|
engage in business activities other than our business as
described herein or ancillary thereto;
|
|
|
|
|
|
engage in certain mergers or consolidations and transfers of
assets; and
|
|
|
|
|
|
enter into non arms-length transactions with affiliates.
|
The credit agreement will also contain events of default
customary for transactions of this nature, including the failure
by Tesoro to own a majority of the equity interests of our
general partner, and termination of a material contract if such
termination could reasonably be expected to have a material
adverse effect on us. Upon the occurrence and during the
continuation of an event of default under the credit agreement,
the lenders may, among other things, terminate their revolving
loan commitments, accelerate and declare the outstanding loans
to be immediately due and payable and exercise remedies against
us and the collateral as may be available to the lenders under
the credit agreement and other loan documents.
Cash
Flows
Net cash from (used in) operating activities, investing
activities and financing activities for the years ended
December 31, 2008, 2009 and 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
|
(In thousands)
|
|
Net cash used in operating activities
|
|
$
|
(6,045
|
)
|
|
$
|
(12,324
|
)
|
|
$
|
(11,426
|
)
|
Net cash used in investing activities
|
|
|
(16,022
|
)
|
|
|
(12,249
|
)
|
|
|
(2,561
|
)
|
Net cash from financing activities
|
|
|
22,067
|
|
|
|
24,573
|
|
|
|
13,987
|
|
Cash Flows Used in Operating
Activities. Cash flows used in operating
activities for the year ended December 31, 2010 decreased
$0.9 million, or 7%, to $11.4 million from
$12.3 million for the year ended December 31, 2009.
The decrease 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, and decreased working
capital requirements for 2010 compared to 2009.
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 Investing
Activities. Cash flows used in investing
activities for the year ended December 31, 2010 decreased
$9.6 million, or 79%, to $2.6 million from
$12.2 million for the year ended December 31, 2009 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.
88
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 year ended
December 31, 2010 decreased $10.6 million, or 43%, to
$14.0 million from $24.6 million for the year ended
December 31, 2009 due to lower capital contributions from
Tesoro, due to lower capital expenditures in 2010.
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.
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, 2008, 2009 and
2010, our predecessor incurred a total of $8.5 million,
$3.3 million and $1.7 million, respectively, in
maintenance capital expenditures and expended
$10.2 million, $5.9 million and $0.4 million,
respectively, for expansion capital expenditures, including the
expansion of our Los Angeles terminal truck rack in 2008. Our
predecessors capital funding requirements were funded by
capital contributions from Tesoro.
We have budgeted maintenance capital expenditures of
approximately $4.6 million and expansion capital
expenditures of approximately $10.4 million for the twelve
months ending March 31, 2012. Of the $4.6 million in
maintenance capital expenditures, $1.7 million relates to
our High Plains pipeline system, $1.4 million relates to
short-haul pipeline and terminal integrity projects and the
remaining $1.5 million relates primarily to tank
maintenance and replacement of rack loading equipment at certain
of our terminals. Of the $10.4 million in expansion capital
expenditures, $3.6 million relates to additional truck
unloading, tankage and pumping capacity on the High Plains
System relating to Tesoros announced expansion of the
Mandan Refinery. The remaining $6.8 million of assumed
expansion capital expenditures relates to several projects to
expand the services offered and the capacity of our terminals.
We anticipate that these capital expenditures will be funded
primarily with cash from operations and borrowings under our
revolving credit facility. 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,
2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012-2013
|
|
|
2014-2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations(1)
|
|
$
|
1,770
|
|
|
$
|
2,718
|
|
|
$
|
974
|
|
|
$
|
150
|
|
|
$
|
5,612
|
|
Other purchase obligations(2)
|
|
|
246
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
270
|
|
Capital expenditure obligations(3)
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,218
|
|
|
$
|
2,742
|
|
|
$
|
974
|
|
|
$
|
150
|
|
|
$
|
6,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
(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. |
Due to the uncertainty as to the timing of future cash flows for
noncurrent environmental liabilities and asset retirement
obligations, we excluded the future cash flows of noncurrent
liabilities from the table above.
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, 2008, 2009 and 2010.
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 113.
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 138.
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.
90
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 2010, environmental liabilities of
$1.3 million and $2.1 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 138.
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 3 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
91
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 138 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, 2010, we did not have any outstanding
lawsuits, administrative proceedings or governmental
investigations.
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, 2009, we did not have any imbalance
liabilities or assets on our combined balance sheet, as any
imbalances were settled prior to year end. At December 31,
2010, we had an imbalance asset of approximately
$0.2 million included in affiliate receivable on our
combined balance sheet. 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.
92
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, 2010, we had pro forma
EBITDA of approximately $52.9 million and pro forma net
income of approximately $42.5 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, 2010, we
had pro forma revenue of $49.6 million from our crude oil
gathering segment and $43.6 million from our terminalling,
93
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:
|
|
|
|
|
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.
|
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.
94
For the year ended December 31, 2010, 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 $81.3 million as compared to pro forma revenue
for that period of $93.2 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
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 138 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 142.
Contribution Agreement. At the closing
of this offering, we will enter into a contribution agreement
with Tesoro under which Tesoro will contribute all of our
initial assets to us, including our High Plains system and our
terminals, and under which Tesoro will grant us a license to
enter, use and operate our Vancouver terminal until the Port of
Vancouver consents to Tesoros assignment to us of the
Vancouver terminal lease. Please read Certain
Relationships and Related Party Transactions
Agreements Governing the Transactions Contribution
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:
|
|
|
|
|
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.
|
|
|
|
|
|
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. Tesoro has recently announced
an expansion of its Mandan refinery. To meet Tesoros
additional requirements, we expect to spend $6.0 to
$7.0 million of expansion capital on our High Plains system
to add additional pumping, tankage and truck unloading capacity.
Additionally, with expected production growth in the Bakken
|
95
|
|
|
|
|
Shale/Williston Basin area, we are evaluating opportunities to
further 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.
|
|
|
|
|
|
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 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.
|
|
|
|
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.
|
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:
|
|
|
|
|
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.
|
|
|
|
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
|
96
|
|
|
|
|
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.
|
|
|
|
|
|
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 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.
|
|
|
|
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.
|
|
|
|
|
|
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.
|
Our
Relationship with Tesoro
One of our principal strengths is our relationship with Tesoro.
Tesoro is currently the second 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 through a network of nearly 1,200
retail stations, primarily under the
Tesoro®,
Shell®,
and USA
Gasolinetm
brands. For the year ended December 31, 2010, Tesoro had
consolidated revenues of approximately $20.6 billion,
operating income of $140.0 million, a net loss of
$29.0 million and, as of December 31, 2010, had
consolidated gross assets of approximately $8.7 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 December 31, 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 $193.0 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 138. Tesoro will also retain a significant interest in
us through its ownership of a 57.8% 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.
97
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 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 156.
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
rigs as of December 2008 to 163 as of January 2011. 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.
98
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
99
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Crude oil transported through (bpd):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipelines(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Dakota
|
|
|
34,501
|
|
|
|
41,417
|
|
|
|
45,947
|
|
|
|
48,953
|
|
|
|
46,004
|
|
Montana
|
|
|
20,138
|
|
|
|
14,815
|
|
|
|
8,790
|
|
|
|
3,853
|
|
|
|
4,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pipelines
|
|
|
54,639
|
|
|
|
56,232
|
|
|
|
54,737
|
|
|
|
52,806
|
|
|
|
50,695
|
|
Trucking
|
|
|
17,759
|
|
|
|
18,560
|
|
|
|
23,752
|
|
|
|
22,963
|
|
|
|
23,305
|
|
|
|
|
(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 111.
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
100
payment for their crude oil sales to Tesoro. We charge
per-barrel
tariffs and service fees for picking up and 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. Tesoro has
recently announced an expansion of its Mandan refinery from
58,000 to 68,000 barrels per day and their intent to utilize our
High Plains system to deliver the incremental crude oil supply.
Tesoro expects the refinery expansion to be complete by the
second quarter of 2012, at which point we estimate that the
incremental crude oil shipped utilizing our High Plains system
will generate approximately $7.0 million of additional
annual revenue offset by less than $1.0 million of
incremental annual operating costs. In order to meet
Tesoros requirements, we expect to spend approximately
$6.0 million to $7.0 million of expansion capital on
our High Plains system, of which $3.6 million will be spent
during the twelve months ending March 31, 2012, to add
additional pumping, tankage and truck unloading capacity. 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.
101
The following map shows the locations of the pipelines in our
High Plains system and related potential 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 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
102
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,
2010, the total volume of refined products distributed through
our refined product terminals was as follows: gasoline and
gasoline blendstocks-72%; diesel fuel-23% and jet fuel-5%.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Refined products terminalled for: (bpd)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
70,039
|
|
|
|
91,340
|
|
|
|
102,670
|
|
|
|
103,454
|
|
|
|
104,754
|
|
Third parties
|
|
|
9,713
|
|
|
|
11,965
|
|
|
|
10,198
|
|
|
|
9,681
|
|
|
|
9,196
|
|
Refined products terminalled at (bpd):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles, California
|
|
|
|
|
|
|
19,702
|
|
|
|
32,696
|
|
|
|
33,603
|
|
|
|
35,286
|
|
Stockton, California
|
|
|
6,851
|
|
|
|
7,663
|
|
|
|
7,053
|
|
|
|
7,160
|
|
|
|
8,526
|
|
Salt Lake City, Utah(1)
|
|
|
24,006
|
|
|
|
25,236
|
|
|
|
26,074
|
|
|
|
26,802
|
|
|
|
25,457
|
|
Anchorage, Alaska
|
|
|
16,433
|
|
|
|
15,358
|
|
|
|
14,704
|
|
|
|
14,914
|
|
|
|
15,132
|
|
Mandan, North Dakota
|
|
|
7,800
|
|
|
|
9,244
|
|
|
|
9,213
|
|
|
|
9,300
|
|
|
|
9,963
|
|
Vancouver, Washington(2)
|
|
|
10,204
|
|
|
|
12,968
|
|
|
|
10,824
|
|
|
|
10,089
|
|
|
|
8,432
|
|
Boise, Idaho
|
|
|
9,934
|
|
|
|
9,039
|
|
|
|
8,295
|
|
|
|
7,598
|
|
|
|
7,677
|
|
Burley, Idaho
|
|
|
4,524
|
|
|
|
4,095
|
|
|
|
4,009
|
|
|
|
3,669
|
|
|
|
3,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
79,752
|
|
|
|
103,305
|
|
|
|
112,868
|
|
|
|
113,135
|
|
|
|
113,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (barrels, in thousands)
|
|
|
29,109
|
|
|
|
37,706
|
|
|
|
41,310
|
|
|
|
41,294
|
|
|
|
41,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes transported through (bpd):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-haul crude oil pipelines
|
|
|
52,252
|
|
|
|
46,776
|
|
|
|
46,457
|
|
|
|
42,561
|
|
|
|
39,389
|
|
Short-haul refined products pipelines
|
|
|
26,887
|
|
|
|
22,522
|
|
|
|
22,433
|
|
|
|
20,261
|
|
|
|
21,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
79,139
|
|
|
|
69,298
|
|
|
|
68,890
|
|
|
|
62,822
|
|
|
|
60,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 2010 are lower due to the suspension of
operations at Tesoros Anacortes refinery following a fire
at that refinery in April 2010. |
103
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, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
66,000
|
|
|
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
|
|
|
|
|
1,672,000
|
|
|
|
|
|
|
|
239,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
104
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.
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 six storage tanks with 20,000 barrels of diesel
capacity and 46,000 barrels of gasoline capacity.
105
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 Municipality 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
Our Vancouver, Washington terminal is leased by Tesoro 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. Tesoro has granted us a license (for the
term of the lease) to enter, access, use and operate the
terminal. Tesoro has agreed to assign this lease to us, subject
to receipt of consent from the Port of Vancouver. Until such
time, we only have a license from Tesoro Refining and Marketing
Company to enter, access, use and operate the terminal. Please
read Title to Properties and Risk
Factors We do not own all of the land on which our
pipelines and terminals are located, which could result in
disruptions of our operations. 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 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.
106
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. After the closing of this
offering, 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 are also pursuing and undertaking
several organic growth projects to expand the services offered
and the capacity of our terminals. For example, we plan to add
ethanol receiving and blending facilities at our Salt Lake City
and Boise terminals and to provide transmix unloading services
at our Los Angeles terminal. Additionally, we are expanding the
storage capacity of our Stockton terminal by adding an
additional 8,000 barrels per day of capacity, which will
allow us to increase throughput. We are in discussions with
Tesoro to make investments within Tesoros Mandan refinery
to increase the volumes we deliver through our Mandan terminal.
We believe we will have additional opportunities to expand our
business at our existing terminals to handle incremental Tesoro
volumes on a more cost-effective basis than competing
third-party terminals.
107
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:
|
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
a wharf facility located in Martinez, California consisting of a
dock and related pipelines that receives refined products and
intermediate feedstocks from marine vessels for delivery to
Tesoros Golden Eagle refinery through interconnecting
pipelines, and receives refined products from the Golden Eagle
refinery for delivery to marine vessels;
|
|
|
|
a common carrier pipeline consisting of approximately
69 miles of
10-inch
pipeline used to transport refined products from Tesoros
Kenai refinery to Anchorage International Airport, a receiving
station at the Port of Anchorage and third-party terminals;
|
|
|
|
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
also delivers refined products from the refinery to marine
vessels;
|
|
|
|
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;
|
|
|
|
a crude oil and refined products pipeline system consisting of
approximately 17 miles of pipelines used to transport crude
oil, feedstocks and refined products between Tesoros Los
Angeles refinery and Tesoros Long Beach terminal and to
various third-party facilities;
|
|
|
|
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;
|
|
|
|
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 marine vessels; and
|
|
|
|
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 other
third-party refineries and terminals and delivers refined and
intermediate products from the Los Angeles refinery to marine
vessels and third-party customers.
|
As of December 31, 2010, the aggregate gross book value of
these assets was approximately $240.0 million, as compared
to approximately $193.0 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.
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
108
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 has announced
further phases of its Bakken expansion program to be completed
in stages between 2011 and 2013, 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 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 region of the United States. As of
December 31, 2010, Tesoro employed approximately
5,300 full-time employees.
109
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, 2010, the percentages of crude
oil and other feedstocks and refined products that we
transported or terminalled for Tesoro:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Crude
|
|
Percent of
|
|
|
Refining
|
|
Commodities
|
|
Oil/Feedstocks
|
|
Refined Products
|
|
|
Capacity
|
|
Serviced by
|
|
Volumes Handled
|
|
Handled by
|
Tesoro Refinery
|
|
(bpd)
|
|
Our Assets
|
|
by Our Assets
|
|
Our Assets
|
|
Los Angeles, California
|
|
|
97,000
|
|
|
Refined Products
|
|
|
None
|
|
|
|
33%
|
|
Martinez, California
|
|
|
166,000
|
|
|
Refined Products
|
|
|
None
|
|
|
|
6%
|
|
Salt Lake City, Utah
|
|
|
58,000
|
|
|
Crude Oil/
|
|
|
79%
|
|
|
|
91%
|
|
|
|
|
|
|
|
Feedstocks and
Refined Products
|
|
|
|
|
|
|
|
|
Kenai, Alaska
|
|
|
72,000
|
|
|
Refined Products
|
|
|
None
|
|
|
|
28%
|
|
Mandan, North Dakota
|
|
|
58,000
|
|
|
Crude Oil/
|
|
|
100%
|
|
|
|
19%
|
|
|
|
|
|
|
|
Feedstocks and
Refined Products
|
|
|
|
|
|
|
|
|
Anacortes, Washington
|
|
|
120,000
|
|
|
Refined Products
|
|
|
None
|
|
|
|
21%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Refineries We Service)
|
|
|
571,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kapolei, Hawaii
|
|
|
93,500
|
|
|
None
|
|
|
None
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (All Refineries)
|
|
|
664,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010, the
refinery processed an average of approximately 98,800 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 33% 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.
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,
2010, the refinery processed an
110
average of approximately 124,000 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 two 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, 2010, the refinery processed an average of
approximately 50,100 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 50% of this refinerys production
through our terminal in Salt Lake City and approximately 41% 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 79% 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
60 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, 2010, the refinery processed an average of
approximately 53,400 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. Tesoros
Alaska refinery delivers approximately 28% 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, 2010, the refinery processed an average of
approximately 50,800 bpd of crude oil and other feedstock.
The 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.
111
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 19% 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 70 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, 2010, the refinery processed an average
of approximately 39,300 bpd of crude oil and other
feedstock. These results were lower than prior years 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 21% 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.
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
112
our own property, business interruption and pollution liability
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, except for marine charterers liability
since we do not charter vessels, and subject to Tesoros
deductibles and limits under those policies. For example, we
will have coverage for sudden and accidental pollution events
from our operations generally, and liability arising from marine
terminal operations under Tesoros liability policies. The
marine terminal operators policy provides coverage of
$10.0 million, subject to a $150,000 deductible, and an
additional $500.0 million in umbrella coverage, for a total
of $510.0 million in coverage for releases from our marine
terminal operations into coastal waters. 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
113
and therefore are grandfathered. FERC may change grandfathered
rates upon complaint only after it is shown that:
|
|
|
|
|
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;
|
|
|
|
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
|
|
|
|
a provision of the tariff is unduly discriminatory or
preferential.
|
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.
114
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:
|
|
|
|
|
the overall cost of service, including operating costs and
overhead;
|
|
|
|
the allocation of overhead and other administrative and general
expenses to the regulated entity;
|
115
|
|
|
|
|
the appropriate capital structure to be utilized in calculating
rates;
|
|
|
|
the appropriate rate of return on equity and interest rates on
debt;
|
|
|
|
the rate base, including the proper starting rate base;
|
|
|
|
the throughput underlying the rate; and
|
|
|
|
the proper allowance for federal and state income taxes.
|
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,
116
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.
117
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
118
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
119
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. The OSROs are rated
and certified by the United States Coast Guard and are required
to annually demonstrate their response capability to the United
States Coast Guard and state agencies. The OSROs rated and
certified to respond to open water spills (which include those
OSROs with which we contract at our marine terminals) must
demonstrate the capability to recover up to 50,000 barrels
of oil per day and store up to 100,000 barrels of recovered
oil at any given time. The OSROs
120
rated and certified to respond to inland spills must demonstrate
the capability to recover from 1,875 to 7,500 barrels of
oil per day and store from 3,750 to 15,000 barrels of
recovered oil at any given time.
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. Our spill response capability at our marine terminals
meets the United States Coast Guard and state requirements to
either deploy on-water containment equipment two times the
length of a vessel at our dock or have smaller vessels available
to recover 50 barrels of oil per day and store 100 barrels
of recovered oil at any given time. Our spill response
capabilities at our other facilities meet applicable federal and
state requirements. 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. We also maintain
insurance to protect against the risk of spills. Please see
Insurance beginning on page 112 for a
discussion of coverages.
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.
121
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 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 2010, we have accrued
$1.3 million and $2.1 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.
The lessee under the Port of Vancouver lease on which our
Vancouver, Washington terminal is located is Tesoro Refining and
Marketing Company. Tesoro Refining and Marketing Company has
agreed to assign the lease to us, subject to consent from the
Port of Vancouver. Until such time, we only have a license from
Tesoro Refining and Marketing Company to enter, access, use and
operate the terminal. There is no guarantee the Port of
Vancouver will consent to the assignment of the lease. In the
event the Port of Vancouver concludes that the license for our
Vancouver terminal is a violation of the lease and we are unable
to occupy
122
and use the Vancouver Terminal pursuant to the license, we have
agreed with Tesoro Refining and Marketing Company to enter into
an operating agreement pursuant to which we will operate the
Vancouver Terminal on substantially the same economic terms and
conditions as would have been the case had the license remained
in effect or the lease had been assigned to us.
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. Under our omnibus agreement, Tesoro
Corporation, through certain of its subsidiaries, will indemnify
us 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.
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. Certain
employees of Tesoro Refining and Marketing Company that are
covered by existing collective bargaining agreements will be
transferred to our general partner on or before
December 31, 2011. Under our omnibus agreement, our general
partner will indemnify Tesoro Refining and Marketing Company for
any liabilities incurred by Tesoro Refining and Marketing
Company in connection with the applicable collective bargaining
agreements covering the transferred 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.
123
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 one member 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 additional
independent member within three months of the listing of our
common units on the NYSE 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
|
Raymond J. Bromark
|
|
|
65
|
|
|
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
124
or decrease in future periods as our business develops.
Previously he was Senior Vice President, Commercial with
ConocoPhillips Corporation, 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
125
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.
Raymond J. Bromark was elected as a member of the
board of directors of our general partner in March 2011.
Mr. Bromark is a retired Partner of PricewaterhouseCoopers,
LLP (PwC), an international accounting and
consulting firm. He joined PwC in 1967 and became a Partner in
1980. He was Partner and Head of the Professional, Technical,
Risk and Quality Group of PwC from 2000 to 2006, a Global Audit
Partner from 1994 to 2000 and Deputy Vice Chairman, Auditing and
Business Advisory Services from 1990 to 1994. In addition, he
served as a consultant to PwC from 2006 to 2007.
Mr. Bromark has been a director of CA Technologies, a
provider of IT management software and solutions, since 2007 and
chairs its audit committee. In previous years Mr. Bromark
has participated as a member of the University of
Delawares Weinberg Center for Corporate Governances
Advisory Board. Mr. Bromark was PwCs representative
on the AICPAs Center for Public Company Audit Firms
Executive Committee. He has also been a member of the Financial
Accounting Standards Board Advisory Council, the Public Company
Accounting Oversight Boards Standing Advisory Group, the
AICPAs Special Committee on Financial Reporting, the
AICPAs SEC Practice Section Executive Committee and
the AICPAs Ethics Executive Committee. We believe that
Mr. Bromarks extensive experience in accounting,
auditing, financial reporting, and compliance and regulatory
matters; deep understanding of financial controls and
familiarity with large public company audit clients; and
extensive experience in leadership positions at PwC bring
important and necessary skills 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.
Director
Independence
The board of directors of our general partner has affirmatively
determined that Mr. Bromark is independent as defined under
the independence standards established by the NYSE and the
Exchange Act.
126
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. 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 based on the amount of time spent by such officers
managing our business and operations. 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. In connection with the closing of this
offering, our general partner has adopted a long-term incentive
plan. 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 our long-term incentive plan. 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 long-term incentive plan 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.
In connection with this offering, our general partner has
adopted a director compensation program under which our general
partners non-employee directors will be compensated for
their service as directors. 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. 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 will 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 Committee Chair
|
|
$10,000
|
Board and Committee Meeting Fees(3)
|
|
$1,500 per meeting
|
|
|
|
(1)
|
|
In addition to the retainers set
forth above, we will 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 a unit-based award of
phantom limited partnership units. Unit-based awards granted to
non-employee directors under the annual compensation package or
upon first election to the board of directors under our
long-term incentive plan, will vest one year from the date of
grant, contingent on continued service by the director. Cash
distributions may be paid on equity-based awards and distributed
at the time such awards vest. We expect that unit-based awards
will be granted annually during the first quarter of the year,
or on the date a director commences his or her services as a
board member, provided that the initial unit-based award for
non-employee directors serving at the time of the consummation
of this offering will be made upon the consummation of this
offering. The number of units granted upon the consummation of
this offering will be determined by dividing $50,000 by the per
unit offering price in this offering and for annual grants going
forward, the number of units will be determined by dividing
$50,000 by the average closing price of our common units on the
NYSE over a ten business-day period ending on the third 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.
|
127
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 138.
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. 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
long-term incentive plan 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, 2010 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.
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. 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. The following discussion reflects Tesoros
executive compensation philosophy and pay practices as they
relate to how officers, directors and employees of our general
partner will be compensated. 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
128
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 compensation philosophy is to offer competitive
compensation and benefit programs that will attract and retain
the talented executives and employees who are critical to
executing Tesoros strategic priorities and committed to
increasing stockholder value while adhering to Tesoros
core values.
Tesoros executive compensation program is designed around
the following principles:
|
|
|
|
|
Rewarding leaders for superior execution and delivery of
outstanding business results and driving a performance-oriented
culture;
|
|
|
|
Promoting and sustaining exceptional performance over time to
generate long-term growth in stockholder value; and
|
|
|
|
Inspiring teamwork and motivating superior individual
performance.
|
Tesoros executive compensation program is comprised of a
mix of fixed and variable cash and equity-based pay with a
significant portion of actual total compensation dependent on
meeting financial and operational objectives.
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.
|
|
|
|
|
Component
|
|
Type of Payment/Benefit
|
|
Purpose
|
|
Base Salary
|
|
Fixed annual cash payments with each executive eligible for
annual increase.
|
|
Attract and retain talent. Designed to be competitive with those
of comparable companies.
|
Annual Cash Incentives
|
|
Performance-based annual cash payment.
|
|
Pay for performance. Focus on corporate, team/business unit and
individual goals.
|
Long-term Incentives
|
|
Stock options, restricted stock, and performance units.
|
|
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.
|
Other Executive Benefits
|
|
Retirement benefits.
|
|
Provide competitive level of benefits.
|
Health and Welfare Benefits
|
|
Fixed compensation component, generally available to all
employees.
|
|
Attract and retain talent.
|
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
129
that payments or awards derived from one component should not
negate or reduce payments or awards derived from other
components.
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, experience,
performance, the relative importance of the position to Tesoro,
the past salary history of the individual and the competitive
landscape for the position (with no particular goals or
weightings assigned to these factors).
Annual Performance Incentives. Tesoro
believes that annual cash based incentives promote
managements efforts to drive the achievement of annual
performance goals and objectives which in turn help create
additional shareholder value.
2011
Incentive Compensation Program
On February 1, 2011, Tesoros compensation committee
of the board of directors approved the terms of the 2011
Incentive Compensation Program (the ICP or the
Program) for Tesoros named executive officers
and other senior executives. The Program consists of two equally
weighted components: Corporate and Business Unit performance
outlined below. Tesoros compensation committee has
discretion to adjust individual awards upward or downward by up
to 25% based on their assessment of an individual
executives performance relative to successful achievement
of goals, business plan execution, and other leadership
attributes.
Component 1 Tesoros Corporate
Performance weighted as 50% of total bonus
opportunity measured against target with the range of outcomes
between 0% to 200%. Corporate performance metrics include the
following:
|
|
|
|
|
Achievement of Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA) measured on a margin neutral
basis
|
|
|
|
Safety Targeted improvement in recordable incidents
|
|
|
|
Process Safety Management Targeted improvement in
the number of process safety incidents
|
|
|
|
Environmental Targeted improvement in the number of
environmental incidents
|
|
|
|
Cost Management Measurement of non-capital cash
expenditure versus budget
|
Component 2 Business Unit
Performance weighted as 50% of total bonus
opportunity measured against target with the range of outcomes
between 0% to 200%. Business Unit performance is measured
through balanced scorecards with performance metrics including,
but not limited to:
|
|
|
|
|
Safety and Environmental
|
|
|
|
Cost Management
|
|
|
|
Improvements in EBITDA
|
|
|
|
Business improvement and value creation initiatives
|
Under the Program, Tesoros compensation committee has the
right to exercise its discretionary authority to pay bonuses
under the Program at any level, regardless of performance
attained against the targets established under the ICP. The
employees of our general partner will be eligible to participate
in Tesoros 2011 ICP. The portion of the ICP related to
business unit performance will be tied to the success of
achieving performance metrics related to Tesoros logistics
assets.
130
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.
In addition, our general partner has adopted the Tesoro
Logistics LP 2011 Long-term Incentive Plan (2011
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. 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 2011 LTIP. Tesoro
will determine the overall amount of all long-term equity
incentive compensation to be granted annually for the officers
and employees of our general partner. The portion of such
compensation to be delivered from the 2011 LTIP will be
granted by our general partners board of directors,
following the recommendation of Tesoros Compensation
Committee. Awards under the 2011 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
and are subject to reimbursement under the terms of the omnibus
agreement. We expect that awards to our executive officers under
our 2011 LTIP will generally be made on an annual basis in the
form of phantom units that vest based on the achievement of
total unitholder return goals over a specified period as
compared to a peer group of companies to be determined by our
board. The description set forth below is a summary of the
material features of the 2011 LTIP.
The 2011 LTIP provides 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 750,000 common units
may be delivered pursuant to awards under the 2011 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 2011 LTIP will be administered by our general
partners board of directors. The 2011 LTIP is 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 2011 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, at 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 2011 LTIP that
contain such terms, consistent with the 2011 LTIP, as the board
of directors may determine are appropriate, including the period
over which restricted or phantom units will vest.
131
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 2011 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.
Unit
Options and Unit Appreciation Rights
The 2011 LTIP also permits 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 2011 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 2011 LTIP also permits 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 its allocated portion of the amount of
the cash settlement.
Amendment
or Termination of 2011 LTIP
The board of directors, at its discretion, may terminate the
2011 LTIP at any time with respect to the common units for which
a grant has not previously been made. The 2011 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 2011
LTIP or any part of it from time to time or to amend any
outstanding award made under the 2011 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.
132
Equity
Awards to be Granted in Connection with this
Offering
In connection with the consummation of this offering, we expect
that our general partner will make grants of equity awards to
certain of our named executive officers. These awards are
expected to consist of time vesting phantom units that will vest
over a period of three years in equal annual installments,
subject to accelerated vesting in the event of certain
terminations of employment as set forth in the applicable award
agreement. The named executive officers that will receive such
awards and the number of phantom units to be granted will be
determined following a recommendation to be made by the
compensation committee of the board of directors of Tesoro at
its next meeting after the closing of this offering.
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 its
management team. These employment agreements contain severance
and change in control provisions, as described in more detail
below, which Tesoro provides to help 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.
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. At the end of fiscal year 2010,
Mr. Goffs base salary was $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 until the earliest occurs of two and
one-half years following termination, his death, or if he
becomes covered by a comparable benefit by a subsequent
employer. 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
133
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. At the end of fiscal year 2010, Mr. Parrishs
base salary was $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. 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 stock options or restricted
stock 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 termination and all of his unvested equity awards
will become vested. 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 stock option and restricted stock 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 its 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.
134
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, in accordance with
the terms of 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. Mr. Spendlove will also
receive medical benefits for a period of eighteen months from
the date of his termination and outplacement services for up to
twelve months commencing after the date of his termination.
Management
Stability Agreement With and Severance Benefits of Ralph J.
Grimmer
In the event of a change in control of Tesoro Corporation and
the termination of Mr. Grimmers employment with
Tesoro 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.
135
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 and assumes no exercise of the
underwriters over-allotment option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Percentage of
|
|
|
Common
|
|
Common
|
|
Subordinated
|
|
Subordinated
|
|
Total
|
|
|
Units to be
|
|
Units to be
|
|
Units to be
|
|
Units to be
|
|
Units to be
|
|
|
Beneficially
|
|
Beneficially
|
|
Beneficially
|
|
Beneficially
|
|
Beneficially
|
Name of Beneficial Owner(1)
|
|
Owned
|
|
Owned
|
|
Owned
|
|
Owned
|
|
Owned
|
|
Tesoro Corporation
|
|
|
2,754,891
|
|
|
|
18.1
|
%
|
|
|
15,254,891
|
|
|
|
100.0
|
%
|
|
|
59.0
|
%
|
Gregory J. Goff
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phillip M. Anderson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G. Scott Spendlove
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles S. Parrish
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raymond J. Bromark(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ralph J. Grimmer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (6 persons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unless otherwise indicated, the address for all beneficial
owners in this table is 19100 Ridgewood Parkway,
San Antonio, Texas
78259-1828. |
|
|
|
(2) |
|
Does not include phantom units that we will grant to
Mr. Bromark at the close of this offering pursuant to our
long-term incentive plan valued at $50,000. These phantom units
will vest one year from the date of grant, contingent on
Mr. Bromarks continued service. |
The following table sets forth, as of March 24, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Shares
|
|
|
Total
|
|
|
Total
|
|
|
|
Shares of
|
|
|
Underlying
|
|
|
Shares of
|
|
|
Shares of
|
|
|
|
Common
|
|
|
Options
|
|
|
Common
|
|
|
Common
|
|
|
|
Stock Owned
|
|
|
Exercisable
|
|
|
Stock
|
|
|
Stock
|
|
|
|
Directly or
|
|
|
Within 60
|
|
|
Beneficially
|
|
|
Beneficially
|
|
Name of Beneficial Owner(1)
|
|
Indirectly(2)
|
|
|
Days
|
|
|
Owned
|
|
|
Owned
|
|
|
Gregory J. Goff(3)
|
|
|
94,190
|
|
|
|
49,387
|
|
|
|
143,577
|
|
|
|
|
*
|
Phillip M. Anderson(4)
|
|
|
16,720
|
|
|
|
18,766
|
|
|
|
35,486
|
|
|
|
|
*
|
G. Scott Spendlove
|
|
|
50,188
|
|
|
|
132,099
|
|
|
|
182,287
|
|
|
|
|
*
|
Charles S. Parrish
|
|
|
62,332
|
|
|
|
213,366
|
|
|
|
275,698
|
|
|
|
|
*
|
Raymond J. Bromark
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Ralph J. Grimmer(5)
|
|
|
15,109
|
|
|
|
17,166
|
|
|
|
32,275
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (6 persons)
|
|
|
238,539
|
|
|
|
430,784
|
|
|
|
669,323
|
|
|
|
|
*
|
|
|
|
* |
|
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 20,887 SARs (Stock Appreciation Rights)
granted under the Tesoro Corporation 2006 Long-Term Stock
Appreciation Rights Plan. |
|
(5) |
|
Does not include 39,840 SARs (Stock Appreciation Rights) granted
under the Tesoro Corporation 2006 Long-Term Stock Appreciation
Rights Plan. |
136
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
After this offering, the general partner and its affiliates will
own 2,754,891 common units and 15,254,891 subordinated units
representing a 57.8% limited partner interest in us. In
addition, the general partner will own 622,649 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 |
|
2,754,891 common units less up to 1,875,000
common units in the event the underwriters exercise their option
to purchase additional common units and, in such case our
general partner and its affiliates will receive the net proceeds
of the sale of up to 1,875,000 common units after deducting
underwriting discounts and structuring fee;
|
|
|
|
15,254,891 subordinated units;
|
|
|
|
622,649 general partner units;
|
|
|
|
the incentive distribution rights;
|
|
|
|
$220.0 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
2,754,891 common units and 15,254,891 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
$0.8 million on the 2.0% general partner interest and
$24.3 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 |
137
|
|
|
|
|
the ratio of time spent by those employees on our business and
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. We will also pay Tesoro an
annual corporate services fee, initially in the amount of
$2.5 million, for the provision by Tesoro of certain
centralized corporate services. Please read
Agreements Governing the Transactions Omnibus
Agreement below and Management
Compensation Discussion and Analysis beginning on
page 128. |
|
|
|
In addition, we will pay Tesoro an annual service fee, initially
in the amount of $0.3 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
communications, electricity, software services, 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 142. |
|
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 172. |
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 (which fee is in
|
138
|
|
|
|
|
addition to certain expenses of our general partner and its
affiliates that are reimbursed under our partnership agreement);
|
|
|
|
|
|
our agreement to reimburse Tesoro for all other direct or
allocated costs and expenses incurred by Tesoro on our behalf;
|
|
|
|
Tesoros agreement not to compete with us under certain
circumstances;
|
|
|
|
our right of first offer to acquire certain of Tesoros
logistics assets;
|
|
|
|
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 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
monthly installments, initially in the amount of
$2.5 million (prorated for the first year of services), for
the provision of various centralized corporate services for our
benefit. This fee will be in addition to reimbursement of our
general partner and its affiliates for certain costs and
expenses incurred on our behalf for managing and controlling our
business and operations as required by our partnership
agreement. The agreement provides that the annual corporate
services fee will be adjusted annually, commencing on the second
year following this offering by a percentage equal to the change
in the consumer price index or to reflect any increase in the
cost of providing centralized corporate services to us due to
changes in any law, rule or regulation applicable to us or
Tesoro. 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 159.
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 assets acquired or constructed by Tesoro to replace one of
our assets that no longer provides services to Tesoro due to the
occurrence of a force majeure event under one of our commercial
agreements with Tesoro (notwithstanding any cure period relating
thereto in such agreement);
|
|
|
|
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.
|
139
Right of First Offer. Under the omnibus
agreement, if Tesoro decides to sell, transfer or otherwise
dispose of 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, 2010, approximately 14,100 bpd of refined
products were throughput at this terminal.
|
|
|
|
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, 2010,
approximately 49,800 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
marine vessels. The facility can also receive refined products
and intermediate feedstocks from marine vessels for delivery to
the refinery. 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, 2010, approximately
29,900 bpd of refined products and intermediate feedstocks
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 Anchorage International 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, 2010,
approximately 36,000 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 receives crude oil from marine
tankers and from local production fields via pipeline and truck,
and also delivers refined products from the refinery to marine
vessels. For the year ended December 31, 2010,
approximately 61,600 bpd of crude oil and 20,700 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 supplied by pipeline from
Tesoros Kenai refinery and six refined product storage
tanks with a combined capacity of 211,000 barrels. For the
year ended December 31, 2010, 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 refined products between Tesoros Los
Angeles refinery and Long Beach terminal and to various
|
140
|
|
|
|
|
third party facilities. For the year ended December 31,
2010, approximately 33,100 bpd of crude oil and
9,100 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, 2010, 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
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 marine vessels. For the
year ended December 31, 2010, approximately 30,800 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 terminals, and receives refined and intermediate
products from the Los Angeles refinery for delivery to marine
vessels. For the year ended December 31, 2010,
approximately 98,800 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 for losses incurred in any calendar
year. Tesoro Alaska Company and Tesoro Refining and Marketing
Company will also indemnify us for 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 for losses incurred in any calendar year.
In addition, Tesoro Refining and Marketing Company will
indemnify us for certain costs incurred during the five years
following the closing of this offering, to the extent such costs
exceed agreed thresholds, up to a maximum amount of
$2.5 million, in connection with renewing our current
control services agreement with respect to the central control
room for our High Plains Pipeline system, entering into a new
similar arrangement with another third party or providing
replacement services.
141
Tesoro Alaska Company and Tesoro Refining and Marketing Company
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;
|
|
|
|
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.
In addition, our general partner will indemnify Tesoro Refining
and Marketing Company for any liabilities incurred by Tesoro
Refining and Marketing Company in connection with the transfer
of certain employees covered by existing collective bargaining
agreements from Tesoro Refining and Marketing Company to our
general partner.
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, for five years after the closing of this offering,
for expenses we incur in order to comply with vapor recovery or
combustion and spill containment requirements associated with
the assets contributed to us by Tesoro. We will also be
reimbursed for existing ethanol blending projects at our Burley
and Salt Lake City terminals, the installation of certain vapor
emissions monitoring equipment at our Stockton terminal, and
various projects at our Mandan terminal including upgrades to
additive and blending equipment and the truck rack sprinkler
system at the terminal, as well as for repairs and maintenance
resulting from our first routine inspections occurring after the
closing of this offering on all tankage on our 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.
License of Name and Trademark. Tesoro
will grant us a nontransferable, nonexclusive, royalty free
right and license to use the name Tesoro, and any
other trademarks owned by Tesoro that contain the name
Tesoro, 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 communications,
electricity, software services, 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 $0.3 million (prorated for the first year of
services), for services performed by certain of Tesoros
field-level employees at our Mandan terminal and Salt Lake City
storage facility. We and Tesoro will review this service fee
annually to determine whether an increase or decrease to this
fee is appropriate. If no such adjustment is made, the service
fee shall be automatically adjusted at a rate equal to the
percentage change in the consumer price index.
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. If a force
majeure event prevents a party from performing required
services, either party may suspend, reduce or terminate its
obligations under the agreement with respect to such services.
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
142
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 the service providers reasonable control and could
not have been prevented by the service providers due
diligence. If a force majeure event continues for 12 months
or more, either party may terminate any of the affected services
under the agreement.
Under the agreement, each party will indemnify the other party
from any losses or liabilities incurred by the other party as a
result of the indemnifying partys willful and material
breach of the agreement, or for any third-party claims relating
to the indemnifying partys willful and material breach of
the agreement or gross negligence and willful misconduct in
connection with performance of the services. Neither party is
liable for any consequential, incidental or punitive damages
under the agreement. 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. We may collaterally assign this
agreement solely to secure working capital financing.
Contribution
Agreement
At the closing of this offering, we will enter into a
contribution, conveyance and assignment agreement, which we
refer to as our contribution agreement, with Tesoro, Tesoro
Refining and Marketing Company, Tesoro Alaska Company and our
general partner under which Tesoro, Tesoro Refining and
Marketing Company and Tesoro Alaska Company will contribute all
of our initial assets to us, including our High Plains system
and our terminals. Under our contribution agreement, Tesoro
Refining and Marketing Company has agreed to assign to us the
lease on which our Vancouver, Washington terminal is located,
subject to the consent of the Port of Vancouver. Tesoro Refining
and Marketing Company has granted us a license under the
agreement to enter, access, use and operate the terminal. We
will pay Tesoro Refining and Marketing Company a license fee
equal to $13,000 per month during the term of the license and
will also reimburse Tesoro Refining and Marketing Company for
any actual and reasonable costs incurred by Tesoro Refining and
Marketing Company related to or arising out of our use of the
terminal. Our license will terminate when the Port of Vancouver
consents to Tesoro Refining and Marketing Companys
assignment of the lease to us. Under the agreement, in addition
to any indemnification we or Tesoro Refining and Marketing
Company are entitled to under the omnibus agreement, we will
indemnify Tesoro Refining and Marketing Company for any losses
incurred by Tesoro Refining and Marketing Company by reason of
or arising out of any of our acts or omissions in contravention
of the Port of Vancouver lease.
In the event the Port of Vancouver concludes that the license
for our Vancouver terminal is a violation of the lease and we
are unable to occupy and use the Vancouver Terminal pursuant to
the license, we have agreed with Tesoro Refining and Marketing
Company to enter into an operating agreement pursuant to which
we will operate the Vancouver Terminal on substantially the same
economic terms and conditions as would have been the case had
the license remained in effect or the lease had been assigned to
us.
Commercial
Agreements with Tesoro
Under our various commercial agreements with certain Tesoro
parties (the applicable party or parties, the Tesoro
Party), we will provide various pipeline transportation,
trucking, terminal distribution and storage services to the
Tesoro Party, and the Tesoro Party 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. The Tesoro Partys
obligations under these commercial agreements will not terminate
if Tesoro Corporation no longer controls our general partner.
Our commercial agreements include provisions that permit the
Tesoro Party to suspend, reduce or terminate its obligations
under the applicable agreement if certain events occur. These
events include the Tesoro Party 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
143
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 Refining and Marketing Company under which we will
agree to transport crude oil on our High Plains pipeline system
to Tesoros Mandan refinery. Under the agreement, Tesoro
Refining and Marketing Company 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 segments of our High Plains
pipeline system for the year ended December 31, 2010,
Tesoro Refining and Marketing Company would have paid us
approximately $1.7 million per month under this agreement.
We will charge Tesoro Refining and Marketing Company 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 Refining and
Marketing Company 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 Refining and
Marketing Company an uncommitted pumpover services fee of
approximately $0.15 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 Refining and Marketing Company is obligated
to pre-pay an estimated amount representing Tesoro Refining and
Marketing Companys aggregate estimated committed
transportation fee for that month. The estimated prepayment is
calculated by multiplying Tesoro Refining and Marketing
Companys minimum throughput commitment for such month by
the weighted average committed tariff rate paid by Tesoro
Refining and Marketing Company 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 Refining
and Marketing Company 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 Refining and Marketing Company fails to transport
aggregate volumes from North Dakota origin points equal to its
minimum throughput commitment during any calendar month, then
Tesoro Refining and Marketing Company will pay us a shortfall
payment equal to the volume of the shortfall multiplied by the
weighted average committed tariff rate paid by Tesoro Refining
and Marketing Company for that month. The amount of any
shortfall payment paid by Tesoro Refining and Marketing Company
will be credited against any amounts owed by Tesoro Refining and
Marketing Company 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 Refining and Marketing Company to, or
deduct any applicable shortfall credit from, the actual
aggregate intrastate tariffs owed by Tesoro Refining and
Marketing Company for that month in order to determine the total
intrastate shipment fees owed by Tesoro Refining and Marketing
Company. If total intrastate fees owed by Tesoro Refining and
Marketing Company for that month are greater than the amount
prepaid by Tesoro Refining and Marketing Company for that month,
then Tesoro will pay us the difference. If, however, the total
amount prepaid by Tesoro Refining and Marketing Company for that
month is greater than the total intrastate fees owed by Tesoro
Refining and Marketing Company for the month, then we will
refund Tesoro Refining and Marketing Company the difference. Any
fees incurred by Tesoro Refining and Marketing Company for
interstate shipments, pumpover fees and gathering fees will be
in addition to the intrastate shipment fees and will be paid by
Tesoro Refining and Marketing Company separately.
144
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 Refining and Marketing Company 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, Tesoro Refining and
Marketing Companys 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 we agree to make any capital expenditures at Tesoro Refining
and Marketing Companys request, Tesoro Refining and
Marketing Company will reimburse us for, or we will have the
right in certain circumstances to file for an increased tariff
rate to recover, the actual cost of such capital expenditures.
In addition, if new laws or regulations that affect the services
that we provide to Tesoro Refining and Marketing Company under
this agreement are enacted or promulgated that require us to
make substantial and unanticipated capital expenditures, Tesoro
Refining and Marketing Company will reimburse us for, or we will
have the right to file for an increased tariff rate to cover,
Tesoro Refining and Marketing Companys proportionate share
of the cost of complying with these laws or regulations, after
we have made efforts to mitigate their effect. Tesoro Refining
and Marketing Company will also reimburse us for, or 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 Tesoro
Refining and Marketing Companys behalf for the services we
provide to Tesoro Refining and Marketing Company under the
agreement to the extent permitted by law. We and Tesoro Refining
and Marketing Company will negotiate in good faith to agree on
the level of the increased tariff rate. In addition, under the
agreement, Tesoro Refining and Marketing Company 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.
In order to enable Tesoro Refining and Marketing Company to
transport its minimum throughput commitment each month, we are
obligated to provide Tesoro Refining and Marketing Company with
70% of the available capacity on each of our High Plains
pipeline system segments and to maintain the overall current
capacity of the pipeline system. In addition, if we propose the
construction or acquisition of any new pipeline with a North
Dakota origin point that connects to our pipeline system, the
return to service of any pipeline segment with a North Dakota
origin point that is inactive as of the date of the agreement,
or any expansion or enhancement of capacity on any existing
segment of the pipeline system, then we are required to give
prior written notice to Tesoro Refining and Marketing Company
and Tesoro Refining and Marketing Company will have the option
to reserve up to 70% of the additional capacity provided by such
new or expanded pipeline or segment. If Tesoro Refining and
Marketing Company exercises its option to reserve additional
capacity on the new or expanded pipeline or segment, its minimum
throughput commitment will be increased proportionately. We will
not take any action to subject Tesoro Refining and Marketing
Company to any prorationing or similar reduction of its minimum
throughput commitment under the agreement.
If Tesoro no longer controls our general partner or sells its
Mandan refinery, and in the event that capacity on any segment
of the pipeline system falls below the minimum required levels
and we fail to restore capacity to the minimum required levels,
Tesoro Refining and Marketing Company or its successor has the
right to require us to restore capacity on the applicable
segment at Tesoro Refinery and Marketing Companys or its
successors sole cost.
If we intend to offer any of our storage tanks on the High
Plains pipeline system to third parties for use on a dedicated
storage basis, we must first provide Tesoro Refining and
Marketing Company with written notice of and the general terms
of our intended transaction. Tesoro Refining and Marketing
Company will have a right of first refusal to enter into a
storage contract 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.
145
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 Refining and Marketing Company 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
Refining and Marketing Company will repurchase from us the
difference between the actual losses and the 0.2% allowance at a
price equal to 85% of that calendar months average for
light sweet crude oil, as quoted on the New York Mercantile
Exchange.
Tesoro Refining and Marketing Company 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 Refining and Marketing Company 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 Refining and Marketing Company
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 Refining and Marketing Company 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 Refining and Marketing
Company does not transport any volumes will be based on Tesoro
Refining and Marketing Companys minimum throughput
commitment for that month multiplied by the weighted average
committed tariff rate paid by Tesoro Refining and Marketing
Company during the 12 months prior to Tesoros
announcement of the suspension of refining operations at the
Mandan refinery. Tesoro Refining and Marketing Company may
deduct from such shortfall payment the aggregate amount of any
amounts paid by Tesoro Refining and Marketing Company during
that month for transportation of crude oil on our High Plains
pipeline system.
If a force majeure event occurs, we must provide Tesoro Refining
and Marketing Company 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 Refining and Marketing Company will each
have the right to terminate the agreement with respect to the
affected asset on no less than 12 months prior
written notice to the other party. However, if we receive a
termination notice from Tesoro Refining and Marketing Company
and notify Tesoro Refining and Marketing Company 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 Tesoro
Refining and Marketing Companys 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 Tesoro
Refining and Marketing Companys option. This agreement is
terminable by either party in the event of a material breach of
any provision thereof by the other party that remains uncured
for 15 business days or upon the bankruptcy or insolvency of
such other party. Upon any termination of the agreement, in
certain circumstances Tesoro Refining and Marketing Company will
have a limited right of first refusal to enter into a new
agreement with us on commercial terms that are, in the
aggregate, equal to or more favorable to us than fair market
value terms as would be agreed by similarly-situated parties
negotiating at arms length, so long as such right of first
refusal does not violate any law or regulatory policy then in
effect.
If this agreement is terminated for any reason other than by us
for a default by Tesoro Refining and Marketing Company, or by
Tesoro Refining and Marketing Company for a force majeure event
or suspension of refinery operations at the Mandan refinery, and
we propose to enter into a transportation services agreement
with a third party, we must first provide Tesoro Refining and
Marketing Company with written notice of and the general terms
of our intended transaction. Tesoro Refining and Marketing
Company will have a right of first refusal to enter into a new
transportation services agreement with us on commercial terms
that are no less favorable than the commercial terms offered to
us by such third party.
This agreement may be assigned by us or Tesoro Refining and
Marketing Company only with the other partys prior written
consent, except that we or Tesoro Refining and Marketing Company
may assign this
146
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. We may also
collaterally assign this agreement solely to secure working
capital financing. In addition, we may not assign this agreement
to one of Tesoro Refining and Marketing Companys
competitors.
High
Plains Trucking Transportation Services Agreement
We will enter into a trucking transportation services agreement
with Tesoro Refining and Marketing Company under which we will
coordinate the collection, transportation and delivery of crude
oil acquired by Tesoro Refining and Marketing Company 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 Refining and
Marketing Company with related accounting and data services
under the agreement. For these services, Tesoro Refining and
Marketing Company will be obligated to pay us an initial $2.72
per-barrel
transportation fee. In addition, Tesoro Refining and Marketing
Company 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 Refining and Marketing Company would
have paid us approximately $1.8 million per month under
this agreement.
We will charge Tesoro Refining and Marketing Company separate
uncommitted tank usage fees of approximately $0.15 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 Refining and Marketing Company
will be increased annually by a percentage equal to the change
in the consumer price index. We will also have the right to
adjust the transportation fee to take into account changes in
fuel prices (based on the applicable average monthly price for
diesel fuel as posted by EIAs On-Highway Diesel Prices for
the Rocky Mountain Region), as well as a mileage-based
adjustment to the extent that the average number of miles driven
by trucks we dispatch in connection with providing services
under the agreement increases or decreases in any month by more
than 5.0% over the average miles driven during the immediately
preceding three-month period. However, no adjustment will ever
reduce the transportation fee below $2.72 per barrel.
If Tesoro Refining and Marketing Company 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 Refining and Marketing Company 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
transportation fee. The amount of any shortfall payment paid by
Tesoro Refining and Marketing Company will be credited against
any amounts owed by Tesoro Refining and Marketing Company 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 Tesoro Refining and Marketing
Companys 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
Refining and Marketing Company is at that time paying us to
gather by truck, then Tesoro Refining and Marketing Company will
be entitled to a proportionate reduction in Tesoro Refining and
Marketing Companys minimum throughput commitment to
account for those volumes.
Tesoro Refining and Marketing Company will reimburse us for the
actual cost of any capital expenditures we agree to make at
Tesoro Refining and Marketing Companys request, as well as
all taxes (other than income taxes, gross receipt taxes and
similar taxes) that we incur on Tesoro Refining and Marketing
Companys behalf for the services we provide to Tesoro
Refining and Marketing Company under the agreement. Furthermore,
if new laws or regulations that affect the services that we
provide to Tesoro Refining and Marketing Company 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
147
surcharge to cover Tesoro Refining and Marketing Companys
proportionate share of the cost of complying with these laws or
regulations, after we have made efforts to mitigate their
effect. We and Tesoro Refining and Marketing Company 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
Tesoro Refining and Marketing Companys crude oil through
trucks we dispatch except if such losses are caused by our gross
negligence, willful misconduct or breach of the agreement.
Tesoro Refining and Marketing Company 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 Refining and Marketing Company 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 Refining and Marketing Company
may terminate the agreement on no less than 12 months
prior written notice to us, unless Tesoro Refining and Marketing
Company 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 Refining and Marketing Company 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 Refining
and Marketing Company 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 are prevented from
performing services because of a force majeure, Tesoro Refining
and Marketing Companys obligation to use us to gather,
transport and deliver its minimum volume commitment will be
proportionately reduced to the extent and for the period that we
are prevented from performing services under the agreement.
We will indemnify Tesoro Refining and Marketing Company for any
losses or liabilities (including damage to property and injury
to or death of any person) Tesoro Refining and Marketing Company
incurs that are caused by or result from our acts or omissions
in connection with our ownership and operation of the truck
gathering operation and the services we provide under the
agreement and for breach of the agreement. Tesoro Refining and
Marketing Company will indemnify us for any losses or
liabilities (including damage to property and injury to or death
of any person) we incur that are caused by or result from Tesoro
Refining and Marketing Companys acts or omissions in
connection with Tesoro Refining and Marketing Companys use
of our services and for breach of the agreement. Neither party
will be obligated to indemnify the other party for the other
partys breach of the agreement, gross negligence or
willful misconduct. Neither party is liable for any
consequential, incidental or punitive damages under the
agreement.
This agreement will have an initial term of two years and will
automatically be extended for up to four successive two-year
terms. Either party may terminate the agreement by delivering
written notice to the other party no later than
three months prior to the expiration of any term, provided
that the agreement will not terminate until six months
following expiration of the
three-month
notice period. This agreement is terminable by either party in
the event of a material breach of any provision thereof by the
other party that remains uncured for 15 business days or upon
the bankruptcy or insolvency of such other party. Upon the
termination of the agreement, in certain circumstances Tesoro
Refining and Marketing Company will have a limited right of
first refusal to enter into a new agreement with us on
commercial terms that are, in the aggregate, equal to or more
favorable to us than fair market value terms as would be agreed
by similarly-situated parties negotiating at arms length.
This agreement may be assigned by us or Tesoro Refining and
Marketing Company only with the other partys prior written
consent, except that we or Tesoro Refining and Marketing Company
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. We may also collaterally assign this agreement
148
solely to secure working capital financing. 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 Refining and Marketing Company and Tesoro Alaska Company
(collectively referred to in this Master
Terminalling Services Agreement section as
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 and Tesoro have agreed to assign
a minimum stipulated volume to each terminal (the sum of which
equals 100,000 bpd for our eight terminals), and we will be
obligated to make available to Tesoro sufficient storage and
throughput capacity at each terminal to allow Tesoro to
throughput a stipulated volume of refined products at that
terminal. We will charge throughput fees for each barrel
distributed through our terminals. We will also charge Tesoro
separate fees, ranging from $0.07 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 year ended December 31,
2010, Tesoro would have paid us approximately $2.4 million
per month under this agreement.
The fees we will charge Tesoro will be increased 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. If
any of our equipment at a terminal is removed from service for
reasons other than routine repair or maintenance and Tesoro is
unable to throughput at the terminal a volume of refined
products equal to the stipulated volume for such terminal,
Tesoro will be entitled to reduce its minimum volume commitment
to the extent that it is unable to throughput such volumes, but
only until such equipment is restored to service.
Tesoro will pay (or reimburse us for) all taxes (other than
income taxes, gross receipt taxes and similar taxes) and
regulatory and third party fees that we incur on Tesoros
behalf for the services we provide to Tesoro under the
agreement. In addition, Tesoro will reimburse us for the actual
cost of any capital expenditures we make at Tesoros
request. 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.
If Tesoro no longer controls our general partner or sells a
refinery associated with one of our terminals, and in the event
that capacity at any applicable terminal falls below the minimum
level required to permit Tesoro or its successor to throughput a
volume of refined products equal to the stipulated volume for
that terminal and we fail to restore capacity to the minimum
required level, Tesoro or its successor has the right to require
us to restore capacity at the terminal at Tesoros (or its
successors) sole cost. In such a case, Tesoro will be
permitted to offset the actual cost of the restoration against
any payments due to us from Tesoro under the agreement.
If we intend to offer any of our storage tanks at our terminals
to third parties for use on a dedicated storage basis, we must
first provide Tesoro with written notice of and the general
terms of our intended transaction. Tesoro will have a right of
first refusal to enter into a storage contract with us on
commercial terms that are no less favorable to us than any
commercial terms offered to us by such third party.
149
Under the agreement, we are responsible for refined product
volume losses at all of our terminals caused by our gross
negligence, willful misconduct or breach of the agreement. In
addition, 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
unbranded contract rack price for the applicable commodity for
that month, as posted by the Oil Price Information Service. 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 (except for physical
losses caused by our gross negligence or willful misconduct).
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, 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 reduced or terminated
because of a force majeure or because of unavailability of
equipment for reasons other than routine repair or maintenance,
Tesoro will be entitled to receive a proportionate reduction in
its minimum throughput commitment up to an amount equal to a
stipulated proportionate volume for the affected terminal.
We will indemnify Tesoro for any losses or liabilities
(including damage to property and injury to or death of any
person) Tesoro incurs that are caused by or result from our acts
or omissions in connection with our ownership and operation of
our terminals and the services we provide under the agreement
and for breaches of the agreement. Tesoro will indemnify us for
any losses or liabilities (including damage to property and
injury to or death of any person) we incur that are caused by or
result from Tesoros acts or omissions in connection with
Tesoros use of our services and for breaches of the
agreement. Neither party will be obligated to indemnify the
other party for the other partys breach of the agreement,
gross negligence or willful misconduct. Neither party is liable
for any consequential, incidental or punitive damages under the
agreement.
This agreement will have an initial term of 10 years and
may be renewed for two additional five-year terms at
Tesoros option. This agreement is terminable by either
party in the event of a material breach of any provision thereof
by the other party that remains uncured for 15 business
days or upon the bankruptcy or insolvency of such other party.
Upon the termination of the agreement, Tesoro will have a
limited right of first
150
refusal to enter into a new agreement with us on commercial
terms that are, in the aggregate, equal to or more favorable to
us than fair market value terms as would be agreed by
similarly-situated parties negotiating at arms length.
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. We may
also collaterally assign this agreement solely to secure working
capital financing. 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 Refining and Marketing Company under which
Tesoro Refining and Marketing Company will be obligated to 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
Tesoro Refining and Marketing Companys minimum throughput
commitment and the initial
per-barrel
transportation fee, Tesoro Refining and Marketing Company would
have paid us approximately $0.4 million per month under
this agreement.
If Tesoro Refining and Marketing Company fails to ship an amount
of crude oil and refined products equal to its full minimum
throughput commitment during any calendar month, then Tesoro
Refining and Marketing Company 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
Tesoro Refining and Marketing Company will be credited against
any amounts owed by Tesoro Refining and Marketing Company 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 Refining and Marketing Company
will no longer be permitted to credit any part of the shortfall
payment against any amounts owed by Tesoro Refining and
Marketing Company. Any volumes we transport in excess of
Tesoros minimum throughput commitment will be charged at
the same
per-barrel
rate.
We will increase the $0.25
per-barrel
transportation fee annually by a percentage equal to the change
in the consumer price index. Tesoro Refining and Marketing
Company 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 Refining and
Marketing Company 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, provided that the rates charged under any tariff
will not cause an increase in Tesoro Refining and Marketing
Companys aggregate fees for shipping its minimum
throughput commitment under the agreement. Please read
Business Rate and Other Regulation
beginning on page 113 for information regarding our plans
to request an exemption from FERC regulation for our short-haul
pipelines.
151
We are obligated to maintain the average throughput capacity of
each of our short haul pipelines at no less than the volume of
Tesoro Refining and Marketing Companys minimum throughput
commitment. If Tesoro no longer controls our general partner or
sells its Salt Lake City refinery, and in the event that
capacity on any of our pipelines falls below the minimum
required level and we fail to restore capacity to the minimum
required level, Tesoro Refining and Marketing Company (or its
successor) has the right to require us to restore capacity on
the applicable pipeline at Tesoro Refining and Marketing
Companys (or its successors) sole cost. Tesoro
Refining and Marketing Company will have the exclusive right to
use 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 Tesoro
Refining and Marketing Companys crude oil and refined
products our through our crude oil and refined product
short-haul pipelines except for losses caused by our gross
negligence, willful misconduct or breach of the agreement.
Tesoro Refining and Marketing Company will pay (or we will have
the right to impose a monthly surcharge for) the actual cost of
any capital expenditures we make at Tesoro Refining and
Marketing Companys request, as well as all taxes (other
than income taxes, gross receipt taxes and similar taxes) that
we incur on Tesoro Refining and Marketing Companys behalf
for the services we provide to Tesoro Refining and Marketing
Company under the agreement. If new laws or regulations that
affect the services that we provide to Tesoro Refining and
Marketing Company under this agreement are enacted or
promulgated that require us to make substantial and
unanticipated capital expenditures, then Tesoro Refining and
Marketing Company will pay, or we will have the right to impose
a monthly surcharge to cover, Tesoro Refining and Marketing
Companys 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 Refining and Marketing Company 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 Refining and Marketing Company 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 Refining and Marketing
Company 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 Refining and Marketing Company 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 Refining
and Marketing Company 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 Refining and Marketing Company will each
have the right to terminate the agreement with respect to the
affected asset on no less than 12 months prior
written notice to the other party. However, if we receive a
termination notice from Tesoro Refining and Marketing Company
and notify Tesoro Refining and Marketing Company within
30 days that we reasonably believe in good faith that we
will be able to transport Tesoro Refining and Marketing
Companys minimum throughput commitment within a reasonable
period of time, then Tesoro Refining and Marketing
Companys 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. Any inability of a
third party pipeline connected to our short haul pipelines to
supply or accept crude oil will be deemed a force majeure under
the agreement.
We will indemnify Tesoro Refining and Marketing Company for any
losses or liabilities (including damage to property and injury
to or death of any person) Tesoro Refining and Marketing Company
incurs that are caused by or result from our acts or omissions
in connection with our ownership and operation of our short haul
pipelines and the services we provide under the agreement and
for breaches of the agreement. Tesoro Refining and Marketing
Company will indemnify us for any losses or liabilities
(including damage to property and injury to or death of any
person) we incur that are caused by or result from Tesoro
Refining and Marketing Companys acts or omissions in
connection with Tesoro Refining and Marketing Companys use
of
152
our services or our short haul pipelines and for breaches of
the agreement. Neither party will be obligated to indemnify the
other party for the other partys breach of the agreement,
gross negligence or willful misconduct.
This agreement will have an initial term of 10 years and
may be renewed for two additional five-year terms at Tesoro
Refining and Marketing Companys option. This agreement is
terminable by either party in the event of a material breach of
any provision thereof by the other party that remains uncured
for 15 business days or upon the bankruptcy or insolvency
of such other party. Upon the termination or expiration of the
agreement, Tesoro Refining and Marketing Company will have a
limited right of first refusal to enter into a new agreement
with us on commercial terms that are, in the aggregate, equal to
or more favorable to us than fair market value terms as would be
agreed by similarly-situated parties negotiating at arms
length.
This agreement may be assigned by us or Tesoro only with the
other partys prior written consent, except that we or
Tesoro Refining and Marketing Company may assign this agreement
without the other partys prior written consent in
connection with our sale of all of our short-haul pipelines or
Tesoro Refining and Marketing Companys 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. We may also collaterally assign this agreement solely
to secure working capital financing. In addition, we may not
assign this agreement to a competitor of Tesoro Refining and
Marketing Company.
Salt
Lake City Storage and Transportation Services
Agreement
We will also enter into a storage and transportation services
agreement with Tesoro Refining and Marketing Company under which
Tesoro Refining and Marketing Company will be obligated to 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 Tesoro
Refining and Marketing Companys Salt Lake City refinery
through our four interconnecting pipelines. Tesoro Refining and
Marketing Companys fees under this agreement will be for
the exclusive 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 Refining and Marketing Company fully utilizes all
of its contracted capacity. We will have the right to increase
Tesoro Refining and Marketing Companys
per-barrel
fee annually by a percentage equal to the change in the consumer
price index.
Tesoro Refining and Marketing Companys 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 Refining and
Marketing Company. However, we and Tesoro Refining and Marketing
Company will negotiate an appropriate adjustment to the monthly
fees if at any time Tesoro Refining and Marketing Company
requires the full operating capacity of the tanks at our storage
facility, the full operating capacity of our tanks is not
available to Tesoro Refining and Marketing Company (other than
for any action or inaction on the party of Tesoro Refining and
Marketing Company) and we are unable to accommodate the actual
volumes required to be stored
and/or
transported by Tesoro Refining and Marketing Company. At the end
of the term or as otherwise requested by Tesoro Refining and
Marketing Company, Tesoro Refining and Marketing Company will
also reimburse us for any cleaning, degassing or other
preparation of storage tanks. In addition, Tesoro Refining and
Marketing Company will reimburse us for the actual cost of any
capital expenditures we make at Tesoro Refining and Marketing
Companys request, as well as 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
Refining and Marketing Company under the agreement. Furthermore,
if new laws or regulations that affect the services that we
provide to Tesoro Refining and Marketing Company 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 Tesoro Refining and Marketing Companys
proportionate share of the cost of complying with these laws or
regulations, after we have made efforts to mitigate their
effect. We and Tesoro Refining and Marketing Company will
negotiate in good faith to agree on the level of the monthly
surcharge.
153
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
Tesoro Refining and Marketing Companys crude oil and
refined products at our storage facility or on our
interconnecting pipelines, respectively, except for any losses
caused by our gross negligence, willful misconduct or breach of
this agreement.
Tesoro Refining and Marketing Company 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 Refining and Marketing Company 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 Refining and Marketing
Company 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 Refining and Marketing Company 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 Refining
and Marketing Company 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 Refining and Marketing Company will each
have the right to terminate the agreement with respect to the
affected asset on no less than 12 months prior
written notice to the other party. However, if we receive a
termination notice from Tesoro Refining and Marketing Company
and notify Tesoro Refining and Marketing Company 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 Tesoro
Refining and Marketing Companys 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.
We are obligated to maintain the current operating capacities of
our interconnecting pipelines and storage tanks. If Tesoro no
longer controls our general partner or sells its Salt Lake City
refinery, and in the event that the operating capacity of any of
our interconnecting pipelines or storage tanks falls below the
minimum required level and we fail to restore capacity to the
minimum required level, Tesoro Refining and Marketing Company
(or its successor) has the right to require us to restore
capacity on the applicable interconnecting pipeline or storage
tank at Tesoro Refining and Marketing Companys (or its
successors) sole cost. In addition, if all or part of the
actual operating capacity of any of our storage tanks is
unavailable for Tesoro Refining and Marketing Companys
use, then Tesoro Refining and Marketing Company will be entitled
to receive a reduction in its monthly fees to account for such
reduced operating capacity.
We will indemnify Tesoro Refining and Marketing Company for any
losses or liabilities (including damage to property and injury
to or death of any person) Tesoro Refining and Marketing Company
incurs that are caused by or result from our acts or omissions
in connection with our ownership and operation of our
interconnecting pipelines or storage facility and the services
we provide under the agreement and for breaches of the
agreement. Tesoro Refining and Marketing Company will indemnify
us for any losses or liabilities (including damage to property
and injury to or death of any person) we incur that are caused
by or result from Tesoro Refining and Marketing Companys
acts or omissions in connection with Tesoro Refining and
Marketing Companys use of our services or our
interconnecting pipelines or storage facility and for breaches
of the agreement. Neither party will be obligated to indemnify
the other party for the other partys breach of the
agreement, gross negligence or willful misconduct.
This agreement will have an initial term of 10 years and
may be renewed for two additional five-year terms at Tesoro
Refining and Marketing Companys option. This agreement is
terminable by either party in the event of a material breach of
any provision thereof by the other party that remains uncured
for 15 business days or upon the bankruptcy or insolvency of
such other party. Upon the termination or expiration of the
agreement, in certain circumstances, Tesoro Refining and
Marketing Company will have a limited right of first refusal to
enter into a new agreement with us on commercial terms that are,
in the aggregate, equal to or more
154
favorable to us than fair market value terms as would be agreed
by similarly-situated parties negotiating at arms length.
If this agreement is terminated for any reason other than by us
for a default by Tesoro Refining and Marketing Company, or by
Tesoro Refining and Marketing Company for a force majeure event
or suspension of refinery operations at the Salt Lake City
refinery, and we propose to enter into a storage and
transportation services agreement with a third party, we must
first provide Tesoro Refining and Marketing Company with written
notice of and the general terms of our intended transaction.
Tesoro Refining and Marketing Company will have a right of first
refusal to enter into a new storage and transportation services
agreement with us on commercial terms that are no less favorable
than the commercial terms offered to us by such third party.
This agreement may be assigned by us or Tesoro Refining and
Marketing Company only with the other partys prior written
consent, except that we or Tesoro Refining and Marketing Company
may assign this agreement without the other partys prior
written consent in connection with our sale of our Salt Lake
City storage facility or Tesoro Refining and Marketing
Companys 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. We may
also collaterally assign this agreement solely to secure working
capital financing. However, we may not assign this agreement to
one of Tesoro Refining and Marketing Companys 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.
155
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:
|
|
|
|
|
approved by our conflicts committee, although our general
partner is not obligated to seek such approval;
|
|
|
|
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;
|
|
|
|
on terms no less favorable to us than those generally being
provided to or available from unrelated third parties; or
|
|
|
|
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.
|
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
156
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:
|
|
|
|
|
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;
|
|
|
|
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
|
|
|
|
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.
|
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:
|
|
|
|
|
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;
|
157
|
|
|
|
|
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;
|
|
|
|
the mortgage, pledge, encumbrance, hypothecation or exchange of
any or all of our assets;
|
|
|
|
the negotiation, execution and performance of any contracts,
conveyances or other instruments;
|
|
|
|
the distribution of our cash;
|
|
|
|
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;
|
|
|
|
the maintenance of insurance for our benefit and the benefit of
our partners;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
the indemnification of any person against liabilities and
contingencies to the extent permitted by law;
|
|
|
|
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
|
|
|
|
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.
|
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 166 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:
|
|
|
|
|
the amount and timing of asset purchases and sales;
|
|
|
|
cash expenditures;
|
|
|
|
borrowings;
|
|
|
|
the issuance of additional units; and
|
|
|
|
the creation, reduction or increase of reserves in any quarter.
|
Our general partner determines the amount and timing of many of
our cash expenditures and whether a cash expenditure is
classified as an expansion capital expenditure, which does 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 $30.0 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
158
units. Please read Provisions of our Partnership Agreement
Relating to Cash Distributions beginning on page 61.
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:
|
|
|
|
|
enabling our general partner or its affiliates to receive
distributions on any subordinated units held by them or the
incentive distribution rights; or
|
|
|
|
accelerating the expiration of the subordination period.
|
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 64.
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 137.
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
159
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 174.
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
160
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:
|
|
|
State law fiduciary duty standards |
|
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
present. |
|
Partnership agreement modified standards |
|
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
us or our |
161
|
|
|
|
|
limited partners whatsoever. These standards reduce the
obligations to which our general partner would otherwise be held. |
|
|
|
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
conflicts committee must be: |
|
|
|
on terms no less favorable to us than those
generally being provided to or available from unrelated third
parties; or
|
|
|
|
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).
|
|
|
|
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
which our general partner would otherwise be held. |
|
|
|
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
unlawful. |
|
Rights and remedies of unitholders |
|
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
the limited partners. |
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
162
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 176.
163
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 166.
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:
|
|
|
|
|
surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges;
|
|
|
|
special charges for services requested by a holder of a common
unit; and
|
|
|
|
other similar fees or charges.
|
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:
|
|
|
|
|
represents that the transferee has the capacity, power and
authority to become bound by our partnership agreement;
|
|
|
|
automatically becomes bound by the terms and conditions of, and
is deemed to have executed, our partnership agreement; and
|
|
|
|
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.
|
Our general partner will cause any transfers to be recorded on
our books and records no less frequently than quarterly.
164
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.
165
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:
|
|
|
|
|
with regard to distributions of available cash, please read
Cash Distribution Policy and Restrictions on
Distributions beginning on page 49;
|
|
|
|
|
|
with regard to the transfer of common units, please read
Description of the Common Units Transfer of
Common Units beginning on page 164; and
|
|
|
|
|
|
with regard to allocations of taxable income and taxable loss,
please read Material Federal Income Tax Consequences
beginning on page 179.
|
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:
|
|
|
|
|
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
|
|
|
|
after the subordination period, the approval of a majority of
our common units.
|
|
|
|
|
|
|
Issuance of additional common units or units senior, equal to or
junior in rank to our common units
|
|
No approval rights.
|
|
|
|
Amendment of the partnership agreement
|
|
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 169.
|
166
|
|
|
|
|
|
Merger of our partnership or the sale of all or substantially
all of our assets
|
|
Unit majority. See Merger, Sale or Other
Disposition of Assets on page 171.
|
|
|
|
Dissolution of our partnership
|
|
Unit majority. See Termination and
Dissolution on page 171.
|
|
|
|
Reconstitution of our partnership upon dissolution
|
|
Unit majority. See Termination and
Dissolution on page 171.
|
|
|
|
Withdrawal of the general partner
|
|
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 June 30, 2021 in a manner which
would cause a dissolution of our partnership. See
Withdrawal or Removal of the General
Partner beginning on page 172.
|
|
|
|
Removal of the general partner
|
|
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 172.
|
|
|
|
Transfer of the general partner interest
|
|
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 June 30, 2021. See
Transfer of General Partner Interests on
page 173.
|
|
|
|
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.
|
|
|
|
Transfer of ownership interests in the general partner
|
|
No approval required at any time. See Transfer
of Ownership Interests in General Partner on
page 174.
|
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:
|
|
|
|
|
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 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 the general
partner. This liability would extend to persons who transact
business with us who reasonably
167
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 or the issuance of
partnership securities pursuant to the underwriters option
to purchase additional common
168
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:
|
|
|
|
|
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
|
|
|
|
after the subordination period, by a majority of our common
units.
|
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 in its sole
discretion.
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
59.0% 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;
169
(3) a change that the general partner determines 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) an amendment that the general partner determines is
necessary or appropriate for the authorization or issuance 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 the general partner determines 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 the general partner determines that those
amendments:
(1) do not adversely affect the limited partners (or any
particular class of limited partner as compared to other classes
of limited partners) in any material respect;
(2) are necessary or appropriate 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 appropriate 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 appropriate 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
Any amendment that our general partner determines adversely
affects in any material respect one or more particular classes
of limited partners will require the approval of at least a
majority of the class or classes so affected, but no vote will
be required by any class or classes of limited partners that our
general partner determines are not adversely affected in any
material respect. Any amendment that would have a material
adverse effect on the rights or preferences of any type or class
of limited partners in relation to other classes of limited
partners 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, other than to
remove the general partner or call a meeting, is required to be
approved by the affirmative vote of limited partners whose
170
aggregate outstanding units constitute not less than the voting
requirement sought to be reduced. Any amendment that increases
the voting percentage required to remove the general partner or
call a meeting of unitholders must be approved by the
affirmative vote of limited partners whose aggregate outstanding
units constitute not less than the voting requirement sought to
be increased. For amendments of the type not requiring
unitholder approval, our general partner will not be required to
obtain an opinion of counsel that an amendment will neither
result in a loss of limited liability to the limited partners
nor result in our being treated as a taxable entity for federal
income tax purposes in connection with any of the amendments. No
other amendments to our partnership agreement will become
effective without the approval of holders of at least 90% of the
outstanding units, voting as a single class, unless we first
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.
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. In addition, our
general partner may consummate any merger without the prior
approval of our unitholders if we are the surviving entity in
the transaction, our general partner has received an opinion of
counsel regarding limited liability and tax matters, the
transaction would not result in a material amendment to the
partnership agreement (other than an amendment that the general
partner could adopt without the consent of the limited
partners), each of our units will be an identical unit of our
partnership following the transaction and the partnership
interests to be issued do not exceed 20% of our outstanding
partnership interests (other than the incentive distribution
rights) immediately prior to the transaction.
If conditions specified in the partnership agreement are
satisfied, the general partner may convert us or any of our
subsidiaries into a new limited liability entity or merge us or
any of our subsidiaries into, or convey all of our assets to, a
newly formed entity if the sole purpose of that conversion,
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.
171
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 nor any of its 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).
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 72. 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
June 30, 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 June 30,
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 173 and
Transfer of Incentive Distribution
Rights on page 174.
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 171.
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 59.0% of the
outstanding common units and subordinated units.
172
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:
|
|
|
|
|
the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a
one-for-one
basis;
|
|
|
|
any existing arrearages in payment of the minimum quarterly
distribution on our common units will be extinguished; and
|
|
|
|
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.
|
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:
|
|
|
|
|
an affiliate of the general partner (other than an
individual), or
|
|
|
|
|
|
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 June 30, 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.
|
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.
173
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
unitholder approval.
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. 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:
|
|
|
|
|
the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a
one-for-one
basis;
|
|
|
|
any existing arrearages in payment of the minimum quarterly
distribution on our common units will be extinguished; and
|
|
|
|
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.
|
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 188.
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
174
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.
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 168. 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 167, 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:
|
|
|
|
|
obtain proof of the nationality, citizenship or other related
status of our member (and their owners, to the extent
relevant); and.
|
|
|
|
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.
|
175
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 chargeable to customers by us, then our general
partner may adopt such amendments to our partnership agreement
as it determines necessary or advisable to:
|
|
|
|
|
obtain proof of the U.S. federal income tax status of our
member (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. 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.
|
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 manager, managing member,
officer, director, employee, agent, fiduciary or trustee of any
entity described in (1), (2) or (3) above; or
(5) any person designated by the 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 90 days after the close of each fiscal year,
an annual report containing audited financial statements and a
report on those financial
176
statements by our independent public accountants. Except for
our fourth quarter, we will also furnish or make available
summary financial information within 45 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.
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 our partnership agreement, our certificate of
limited partnership, related amendments, and powers of attorney
under which they have been executed;
(5) information regarding the status of our business and
financial condition, to the extent set forth in our most recent
filings on
Form 10-K,
Form 10-Q
and
Form 8-K; 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 (excluding affiliates who are officers, directors
or employees of the general partner) 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 178.
177
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
2,754,891 common units and 15,254,891 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:
|
|
|
|
|
1% of the total number of the securities outstanding; or
|
|
|
|
the average weekly reported trading volume of the common units
for the four weeks prior to the sale.
|
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 168.
Under our partnership agreement, our general partner and its
affiliates (excluding affiliates who are officers, directors or
employees of the general partner) 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 198
for a description of these
lock-up
provisions.
178
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 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 185); (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 189); 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 186 and Uniformity of
Units beginning on page 190).
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,
179
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 7.0% 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:
|
|
|
|
|
We will be classified as a partnership for federal income tax
purposes; and
|
|
|
|
Each of our operating subsidiaries will be disregarded as an
entity separate from us for federal income tax purposes.
|
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:
|
|
|
|
|
Neither we nor the operating subsidiaries has elected or will
elect to be treated as a corporation;
|
|
|
|
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
|
|
|
|
We believe that these representations have been true in the past
and expect that these representations will continue to be true
in the future.
|
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.
180
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 185.
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 183, 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 185. 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 182.
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
181
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 20.0% 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:
|
|
|
|
|
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
|
|
|
|
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.
|
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 188.
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
182
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:
|
|
|
|
|
interest on indebtedness properly allocable to property held for
investment;
|
|
|
|
our interest expense attributed to portfolio income; and
|
|
|
|
the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
|
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
183
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:
|
|
|
|
|
his relative contributions to us;
|
|
|
|
the interests of all the partners in profits and losses;
|
|
|
|
the interest of all the partners in cash flow; and
|
|
|
|
the rights of all the partners to distributions of capital upon
liquidation.
|
Latham & Watkins LLP is of the opinion that, with the
exception of the issues described in
Section 754 Election beginning on
page 186 and Disposition of Common
Units Allocations Between Transferors and
Transferees on page 189, allocations under our
partnership agreement will be given
184
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:
|
|
|
|
|
any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
|
|
|
|
any cash distributions received by the unitholder as to those
units would be fully taxable; and
|
|
|
|
all of these distributions would appear to be ordinary income.
|
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 188.
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 scheduled to sunset after
December 31, 2012, and, further, 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.
185
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 190. 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 190.
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 190. 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 188.
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
186
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 189.
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 184.
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 190. 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 184 and Disposition of Common
Units Recognition of Gain or Loss beginning on
page 188.
187
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
188
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:
|
|
|
|
|
a short sale;
|
|
|
|
an offsetting notional principal contract; or
|
|
|
|
a futures or forward contract;
|
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.
189
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 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 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 186. 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
190
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 186, 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 188.
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, 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
191
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:
|
|
|
|
|
the name, address and taxpayer identification number of the
beneficial owner and the nominee;
|
|
|
|
whether the beneficial owner is:
|
(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
192
(3) a tax-exempt entity;
|
|
|
|
|
the amount and description of units held, acquired or
transferred for the beneficial owner; and
|
|
|
|
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.
|
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
$100 per failure, up to a maximum of $1,500,000 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:
|
|
|
|
|
for which there is, or was, substantial
authority; or
|
|
|
|
as to which there is a reasonable basis and the pertinent facts
of that position are disclosed on the return.
|
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.
193
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
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 192.
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:
|
|
|
|
|
accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-Related
Penalties on page 193;
|
|
|
|
|
|
for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability; and
|
|
|
|
in the case of a listed transaction, an extended statute of
limitations.
|
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
194
us. Please read Tax Consequences of Unit
Ownership Entity-Level Collections
beginning on page 183. 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.
It is the responsibility of each unitholder to investigate
the legal and tax consequences, under the laws of pertinent
states, localities and foreign jurisdictions, of his investment
in us. Accordingly, each prospective unitholder is urged to
consult his own 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.
195
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:
|
|
|
|
|
whether the investment is prudent under
Section 404(a)(1)(B) of ERISA;
|
|
|
|
whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(l)(C) of
ERISA; and
|
|
|
|
|
|
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 191; and
|
|
|
|
|
|
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.
|
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
196
(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.
197
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.
|
|
|
|
|
|
|
Number of
|
|
Underwriter
|
|
Common Units
|
|
|
Citigroup Global Markets Inc.
|
|
|
|
|
Wells Fargo Securities, LLC
|
|
|
|
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
|
|
|
|
|
Credit Suisse Securities (USA) LLC
|
|
|
|
|
Barclays Capital Inc.
|
|
|
|
|
Deutsche Bank Securities Inc.
|
|
|
|
|
J.P. Morgan Securities LLC
|
|
|
|
|
Raymond James & Associates, Inc.
|
|
|
|
|
RBC Capital Markets, LLC
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,500,000
|
|
|
|
|
|
|
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. After the
common units are released for sale to the public, if all the
common units are not sold at the initial public offering price
following a bona fide effort to do so, 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 1,875,000 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., 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
transaction described above is to be settled by delivery of
common units or such other securities, in cash or otherwise.
198
Citigroup Global Markets Inc., in its sole 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. does 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 have been approved to list our common units on the NYSE under
the symbol TLLP subject to official notice of
issuance. 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.
|
|
|
|
|
|
|
|
|
|
|
Paid by Tesoro Logistics LP
|
|
|
No Exercise
|
|
Full Exercise
|
|
Per common unit
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
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 the partnership,
particularly as it related to this initial public offering and
the structuring of the transactions related thereto.
Additionally, we will pay Tudor, Pickering, Holt & Co.
Securities, Inc. (TPH) an advisory fee of
$2.0 million for services provided in connection with the
formation and structuring of the partnership in a pre-offering
context. Specifically, TPH provided analysis and support in
connection with the determination of which assets of Tesoro
would be appropriate for inclusion in a master limited
partnership such as Tesoro Logistics LP and assisted in other
pre-offering processes. We will pay TPH 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 $2.0 million advisory fee. Furthermore, we have
agreed to reimburse TPH 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, which such expenses
are capped at $75,000.
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.
|
|
|
|
|
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.
|
|
|
|
|
|
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.
|
199
|
|
|
|
|
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.
|
|
|
|
|
|
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.
|
|
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
|
|
Stabilizing transactions involve bids to purchase common units
so long as the stabilizing bids do not exceed a specified
maximum.
|
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, structuring fee and advisory fee, will be
approximately $7.3 million, all of which will be paid by
us. The underwriters have agreed to reimburse us for a portion
of the estimated expenses in an amount equal to 0.25% of the
gross proceeds of the offering.
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 and affiliates of each of the underwriters will be
lenders under our revolving credit facility. Other than the
participation as lenders under our revolving credit facility,
none of the
200
underwriters has provided or will provide financing, investment
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), other than Germany, 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:
|
|
|
|
|
to any legal entity which is a qualified investor as defined in
the Prospectus Directive;
|
|
|
|
|
|
to fewer than 100 or, if the Relevant Member State has
implemented the relevant provision of the 2010 PD Amending
Directive, 150, natural or legal persons (other than qualified
investors as defined in the Prospectus Directive), as permitted
under the Prospectus Directive, subject to obtaining the prior
consent of the relevant Dealer or Dealers nominated by the
Issuer for any such offer; or
|
|
|
|
|
|
in any other circumstances falling within Article 3(2) of
the Prospectus Directive.
|
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 amendments thereto, including the 2010 PD
Amending Directive, to the extent implemented in the Relevant
Member State), and includes any relevant implementing measure in
the Relevant Member State, and includes any relevant
implementing measure in each relevant member state. The
expression 2010 PD Amending Directive means Directive 2010/73/EU.
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.
201
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).
202
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, 2009 and 2010, and for each of
the three years in the period ended December 31, 2010,
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 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 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.
204
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
TESORO LOGISTICS LP
|
|
|
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
TESORO LOGISTICS LP PREDECESSOR
|
|
|
|
|
HISTORICAL COMBINED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-9
|
|
|
|
|
F-10
|
|
|
|
|
F-11
|
|
|
|
|
F-12
|
|
|
|
|
F-13
|
|
|
|
|
F-14
|
|
TESORO LOGISTICS LP
|
|
|
|
|
HISTORICAL BALANCE SHEET
|
|
|
|
|
|
|
|
F-25
|
|
|
|
|
F-26
|
|
|
|
|
F-27
|
|
F-1
TESORO
LOGISTICS LP
Set forth below are the unaudited pro forma combined balance
sheet of Tesoro Logistics LP (the Partnership) as of
December 31, 2010 and the unaudited pro forma combined
statements of operations of the Partnership for the year ended
December 31, 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
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Transaction
|
|
|
Partnership
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
$
|
250,000
|
(a)
|
|
$
|
3,000
|
|
|
|
|
|
|
|
|
50,000
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
(15,625
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
(9,349
|
)(d)
|
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)(e)
|
|
|
|
|
|
|
|
|
|
|
|
(220,026
|
)(f)
|
|
|
|
|
|
|
|
|
|
|
|
(50,000
|
)(g)
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
233
|
|
|
|
(233
|
)(h)
|
|
|
|
|
Affiliate
|
|
|
3,738
|
|
|
|
(3,738
|
)(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
3,971
|
|
|
|
(971
|
)
|
|
|
3,000
|
|
Property, Plant and Equipment, net
|
|
|
131,606
|
|
|
|
|
|
|
|
131,606
|
|
OTHER NON-CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred charges
|
|
|
|
|
|
|
2,000
|
(e)
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
135,577
|
|
|
$
|
1,029
|
|
|
$
|
136,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
1,619
|
|
|
|
(1,619
|
)(h)
|
|
|
|
|
Affiliate
|
|
|
299
|
|
|
|
(299
|
)(h)
|
|
|
|
|
Accrued liabilities
|
|
|
3,238
|
|
|
|
(3,238
|
)(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,156
|
|
|
|
(5,156
|
)
|
|
|
|
|
OTHER NONCURRENT LIABILITIES
|
|
|
1,594
|
|
|
|
(1,594
|
)(h)
|
|
|
|
|
DEBT
|
|
|
|
|
|
|
50,000
|
(b)
|
|
|
50,000
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Division equity
|
|
|
128,827
|
|
|
|
(128,827
|
)(i)
|
|
|
|
|
Common unitholders public
|
|
|
|
|
|
|
250,000
|
(a)
|
|
|
225,026
|
|
|
|
|
|
|
|
|
(15,625
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
(9,349
|
)(d)
|
|
|
|
|
Common unitholders Tesoro
|
|
|
|
|
|
|
417
|
(h)
|
|
|
(21,439
|
)
|
|
|
|
|
|
|
|
11,801
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
(33,657
|
)(f)
|
|
|
|
|
Subordinated unitholders Tesoro
|
|
|
|
|
|
|
2,307
|
(h)
|
|
|
(118,713
|
)
|
|
|
|
|
|
|
|
65,349
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
(186,369
|
)(f)
|
|
|
|
|
General partner
|
|
|
|
|
|
|
55
|
(h)
|
|
|
1,732
|
|
|
|
|
|
|
|
|
51,677
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
(50,000
|
)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
128,827
|
|
|
|
(42,221
|
)
|
|
|
86,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
135,577
|
|
|
$
|
1,029
|
|
|
$
|
136,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma combined financial
statements.
F-3
TESORO
LOGISTICS LP
Year
Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
Predecessor
|
|
|
Transaction
|
|
|
Partnership
|
|
|
|
Historical
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(In thousands, except unit and
|
|
|
|
per unit amounts)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering
|
|
$
|
19,592
|
|
|
$
|
29,974
|
(j)
|
|
$
|
49,566
|
|
Terminalling, transportation and storage
|
|
|
3,708
|
|
|
|
39,880
|
(j)
|
|
|
43,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
23,300
|
|
|
|
69,854
|
|
|
|
93,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense
|
|
|
32,972
|
|
|
|
3,852
|
(k)
|
|
|
36,824
|
|
Depreciation expense
|
|
|
8,006
|
|
|
|
|
|
|
|
8,006
|
|
General and administrative expense
|
|
|
3,198
|
|
|
|
244
|
(l)
|
|
|
3,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
|
44,176
|
|
|
|
4,096
|
|
|
|
48,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(20,876
|
)
|
|
|
65,758
|
|
|
|
44,882
|
|
Interest expense, net
|
|
|
|
|
|
|
2,410
|
(m)
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(20,876
|
)
|
|
$
|
63,348
|
|
|
$
|
42,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General partners interest in net income
|
|
|
|
|
|
|
|
|
|
$
|
850
|
|
Limited partners interest in net income
|
|
|
|
|
|
|
|
|
|
$
|
41,622
|
|
Net income per limited partner unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units
|
|
|
|
|
|
|
|
|
|
$
|
1.36
|
|
Subordinated units
|
|
|
|
|
|
|
|
|
|
$
|
1.36
|
|
Weighted average number of limited partner units outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units (basic and diluted)
|
|
|
|
|
|
|
|
|
|
|
15,254,891
|
|
Subordinated units (basic and diluted)
|
|
|
|
|
|
|
|
|
|
|
15,254,891
|
|
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 December 31, 2010, in the case of the pro
forma balance sheet, and as of January 1, 2010, 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(h) 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 12,500,000
common units to the public, 622,649 general partner units
and the incentive distribution rights to our general partner and
2,754,891 common units and 15,254,891 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 $3.4 million
for the year ended December 31, 2010. 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 $0.9 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 $3.2 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 $250.0 million from the issuance and sale of
12,500,000 common units at an assumed initial public offering
price of $20.00 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 $15.6 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 $7.3 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
$220.0 million in proceeds from the public offering of
common units, in part to reimburse it for certain capital
expenditures.
(g) Reflects an additional cash distribution of
$50.0 million to the general partner funded with a
borrowing under our revolving credit facility.
(h) 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.
(i) Represents the conversion of the adjusted equity of the
Predecessor of $128.8 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:
|
|
|
|
|
$11.8 million for 2,754,891 common units;
|
|
|
|
|
|
$65.3 million for 15,254,891 subordinated
units; and
|
|
|
|
|
|
$51.7 million for the general partner interest.
|
(j) 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.
(k) The pro forma operating and maintenance expenses
primarily reflect $1.4 million for purchased additives
based on historical levels of such purchases that have not
previously been allocated to the Predecessor but will be charged
to the Partnership after the closing of this offering, as well
as $1.1 million for business interruption, property and
pollution liability insurance premiums that the Partnership
expects to incur based on estimates from the Partnerships
insurance broker, $0.8 million for employee-related
expenses which have not been previously recorded in the
historical financial records of the Predecessor, and
$0.3 million for an annual service fee that we will pay
Tesoro under the terms of our operational services agreement.
(l) Reflects higher employee-related expenses of
$0.2 million, for the year ended December 31, 2010
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.
(m) 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.
|
|
Note 3.
|
Pro Forma
Net Income Per Unit
|
The Partnership computes income per unit using the two-class
method. Net income available to common and subordinated
unitholders for purposes of the basic income per unit
computation is allocated between the common and subordinated
unitholders by applying the provisions of the partnership
agreement as if all net
F-6
TESORO
LOGISTICS LP
NOTES TO
UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS (Continued)
income for the period had been distributed as cash. Under the
two-class method, any excess of distributions declared over net
income shall be allocated to the partners based on their
respective sharing of income specified in partnership agreement.
For purposes of pro forma calculation we have assumed that
distributions were declared for each common and subordinated
unit equal to the minimum quarterly distribution for each
quarter during 2010.
Pro forma basic net income per unit is determined by dividing
the pro forma net income available to common and subordinated
unitholders of the Partnership by the number of common and
subordinated units expected to be outstanding at the closing of
the offering. For purposes of this calculation, the number of
common and subordinated units outstanding was assumed to be
15,254,891 units and 15,254,891 units, respectively.
All units were assumed to have been outstanding since
January 1, 2010.
Pursuant to the partnership agreement, the general partner is
entitled to receive certain incentive distributions that, when
applying the provisions of the partnership agreement as if all
net income for the period had been distributed as cash, will
result in less net income allocable to common and subordinated
unitholders provided that the net income exceed certain targets.
The incentive distribution rights are a separate equity interest
and represent participating securities. No cash distributions
would have been declared to the incentive distribution rights
during any of the periods, based upon the assumption that
distributions were declared equal to the minimum quarterly
distribution.
Pro forma basic and diluted net income per unit are the same
because (1) there would be no dilutive impact, applying the
if-converted method, had the subordinated units been converted
to common units at the beginning of the respective reporting
unit as pro forma net income allocated to common and
subordinated unitholders was the same on a per unit basis, and
(2) as there are no other potentially dilutive units
expected to be outstanding at the closing of the offering.
|
|
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, 2009 and 2010, and the related combined
statements of operations, division equity, and cash flows for
each of the three years in the period ended December 31,
2010. 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, 2009 and 2010, and the combined results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2010 in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
San Antonio, Texas
March 11, 2011
F-9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, less allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
14
|
|
|
$
|
233
|
|
|
$
|
233
|
|
Affiliate
|
|
|
3,146
|
|
|
|
3,738
|
|
|
|
3,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
3,160
|
|
|
|
3,971
|
|
|
|
3,971
|
|
Property, Plant and Equipment, net
|
|
|
138,055
|
|
|
|
131,606
|
|
|
|
131,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
141,215
|
|
|
$
|
135,577
|
|
|
$
|
135,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND DIVISION EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
1,834
|
|
|
$
|
1,619
|
|
|
$
|
1,619
|
|
Affiliate
|
|
|
323
|
|
|
|
299
|
|
|
|
299
|
|
Accrued liabilities
|
|
|
2,430
|
|
|
|
3,238
|
|
|
|
3,238
|
|
Distribution Payable to Affiliates
|
|
|
|
|
|
|
|
|
|
|
270,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
4,587
|
|
|
|
5,156
|
|
|
|
275,182
|
|
OTHER NONCURRENT LIABILITIES
|
|
|
912
|
|
|
|
1,594
|
|
|
|
1,594
|
|
COMMITMENTS AND CONTINGENCIES (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVISION EQUITY (DEFICIT)
|
|
|
135,716
|
|
|
|
128,827
|
|
|
|
(141,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Division Equity
|
|
$
|
141,215
|
|
|
$
|
135,577
|
|
|
$
|
135,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering:
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
21,029
|
|
|
$
|
19,297
|
|
|
$
|
19,477
|
|
Third-party
|
|
|
161
|
|
|
|
125
|
|
|
|
115
|
|
Terminalling, transportation and storage:
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party
|
|
|
3,297
|
|
|
|
3,237
|
|
|
|
3,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
24,487
|
|
|
|
22,659
|
|
|
|
23,300
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expense
|
|
|
29,741
|
|
|
|
32,566
|
|
|
|
32,972
|
|
Depreciation expense
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
8,006
|
|
General and administrative expense
|
|
|
2,525
|
|
|
|
3,141
|
|
|
|
3,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
|
38,891
|
|
|
|
44,527
|
|
|
|
44,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(20,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Supplemental pro forma net loss per limited partner unit
|
|
|
|
|
|
|
|
|
|
$
|
(1.67
|
)
|
Units used to calculate supplemental pro forma net loss per
limited partner unit
|
|
|
|
|
|
|
|
|
|
|
12,500,000
|
|
See accompanying notes to combined financial statements.
F-11
|
|
|
|
|
Balance, January 1, 2008
|
|
|
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 Loss2010
|
|
|
(20,876
|
)
|
Contributions
|
|
|
13,987
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
128,827
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,404
|
)
|
|
$
|
(21,868
|
)
|
|
$
|
(20,876
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,625
|
|
|
|
8,820
|
|
|
|
8,006
|
|
Loss on asset disposals
|
|
|
476
|
|
|
|
1,114
|
|
|
|
512
|
|
Changes in current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(28
|
)
|
|
|
68
|
|
|
|
(218
|
)
|
Accounts receivableaffiliates
|
|
|
625
|
|
|
|
|
|
|
|
|
|
Changes in current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
414
|
|
|
|
(16
|
)
|
|
|
223
|
|
Accounts payableaffiliates
|
|
|
|
|
|
|
(323
|
)
|
|
|
(616
|
)
|
Accrued liabilities
|
|
|
202
|
|
|
|
(492
|
)
|
|
|
861
|
|
Other noncurrent liabilities
|
|
|
45
|
|
|
|
373
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(6,045
|
)
|
|
|
(12,324
|
)
|
|
|
(11,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(16,022
|
)
|
|
|
(12,249
|
)
|
|
|
(2,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(16,022
|
)
|
|
|
(12,249
|
)
|
|
|
(2,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent contribution
|
|
|
22,067
|
|
|
|
24,573
|
|
|
|
13,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
22,067
|
|
|
|
24,573
|
|
|
|
13,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures included in accounts payable and accrued
expenses at year end
|
|
$
|
3,700
|
|
|
$
|
685
|
|
|
$
|
194
|
|
See accompanying notes to combined financial statements.
F-13
TESORO
LOGISTICS LP PREDECESSOR
|
|
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 March 11, 2011.
Any material subsequent events that occurred during this time
have been properly recognized or disclosed in our financial
statements.
F-14
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
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 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
F-15
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
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.
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, we did not have any
imbalance liabilities or assets on the combined balance sheet as
imbalances were settled prior to year end. At December 31,
2010, we had an imbalance asset of approximately
$0.2 million included in affiliate receivable on our
combined balance sheet.
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
F-16
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
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
$1.8 million, $2.2 million and $2.2 million for
the years ended December 31, 2008, 2009 and 2010,
respectively. In addition, operating and maintenance expenses in
the combined statements of operations include affiliate costs
totaling $3.7 million, $3.5 million and
$3.1 million for the years ended December 31, 2008,
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.
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
F-17
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
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.
|
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
F-18
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
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
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Operating and maintenance expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
3,683
|
|
|
$
|
3,505
|
|
|
$
|
3,120
|
|
Direct
|
|
|
26,058
|
|
|
|
29,061
|
|
|
|
29,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,741
|
|
|
$
|
32,566
|
|
|
$
|
32,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
1,767
|
|
|
$
|
2,226
|
|
|
$
|
2,229
|
|
Direct
|
|
|
758
|
|
|
|
915
|
|
|
|
969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,525
|
|
|
$
|
3,141
|
|
|
$
|
3,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5.
|
Property,
Plant and Equipment
|
Property, Plant and Equipment, at cost, is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Crude Oil GatheringPipelines
|
|
$
|
94,292
|
|
|
$
|
94,482
|
|
Terminalling, Transportation and Storage:
|
|
|
|
|
|
|
|
|
Terminals
|
|
|
79,103
|
|
|
|
79,304
|
|
Salt Lake City storage facility
|
|
|
8,563
|
|
|
|
8,563
|
|
Salt Lake City pipelines
|
|
|
10,486
|
|
|
|
11,021
|
|
|
|
|
|
|
|
|
|
|
Total Terminalling, Transportation and Storage
|
|
|
98,152
|
|
|
|
98,888
|
|
|
|
|
|
|
|
|
|
|
Total Property, Plant and Equipment
|
|
|
192,444
|
|
|
|
193,370
|
|
Accumulated Depreciation
|
|
|
(54,389
|
)
|
|
|
(61,764
|
)
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
$
|
138,055
|
|
|
$
|
131,606
|
|
|
|
|
|
|
|
|
|
|
F-19
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
Note 6.
|
Accrued
Liabilities
|
Accrued liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Employee costsaffiliate
|
|
$
|
285
|
|
|
$
|
895
|
|
Accrued vacation
|
|
|
513
|
|
|
|
519
|
|
Property tax
|
|
|
571
|
|
|
|
607
|
|
Capital expenditures
|
|
|
217
|
|
|
|
164
|
|
Environmental liabilities
|
|
|
434
|
|
|
|
526
|
|
Other
|
|
|
410
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
2,430
|
|
|
$
|
3,238
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7.
|
Other
Noncurrent Liabilities
|
Other noncurrent liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Environmental remediation
|
|
$
|
869
|
|
|
$
|
1,553
|
|
Asset retirement obligations
|
|
|
43
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Total other noncurrent liabilities
|
|
$
|
912
|
|
|
$
|
1,594
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $(0.1) million,
$0.2 million and $0.3 million for the years ended
December 31, 2008, 2009 and 2010, respectively. All
stock-based compensation expense is included in our general and
administrative expense.
|
|
Note 9.
|
Retirement
and Pension Benefit Plans
|
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, 2008, 2009 and 2010
was $1.0 million, $1.3 million and $0.4 million,
respectively. In addition, employees supporting our operations
participate in an employee thrift 401(k) plan. Our share of such
costs
F-20
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
for each of the years ended December 31, 2008, 2009 and
2010, was $0.4 million. 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 2008, 2009 and 2010, one affiliated customer, Tesoro Refining
and Marketing Company, accounted for approximately 86%, 85% and
84%, 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 $1.8 million, $1.9 million and
$2.5 million for the years ended December 31, 2008,
2009 and 2010, respectively.
Our minimum annual lease payments as of December 31, 2010,
for operating leases having initial or remaining noncancellable
lease terms in excess of one year were (in thousands):
|
|
|
|
|
2011
|
|
|
1,770
|
|
2012
|
|
|
1,496
|
|
2013
|
|
|
1,222
|
|
2014
|
|
|
759
|
|
2015
|
|
|
215
|
|
Thereafter
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,612
|
|
|
|
|
|
|
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, 2009 and 2010 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Balance, January 1
|
|
$
|
1,316
|
|
|
$
|
1,303
|
|
Additions
|
|
|
800
|
|
|
|
1,015
|
|
Expenditures
|
|
|
(813
|
)
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
1,303
|
|
|
$
|
2,079
|
|
|
|
|
|
|
|
|
|
|
|
|
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
F-21
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
include environmental remediation obligations related to site
restorations. Changes in asset retirement obligations for the
years ended December 31, 2009 and 2010 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Balance, January 1
|
|
$
|
67
|
|
|
$
|
43
|
|
Accretion expense
|
|
|
6
|
|
|
|
(2
|
)
|
Changes in amount of estimated cash flows
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
43
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
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, 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-22
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
|
|
$
|
19,477
|
|
|
$
|
|
|
|
$
|
19,477
|
|
Third-party
|
|
|
115
|
|
|
|
3,708
|
|
|
|
3,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
|
19,592
|
|
|
|
3,708
|
|
|
|
23,300
|
|
Operating and maintenance expense
|
|
|
(19,684
|
)
|
|
|
(13,288
|
)
|
|
|
(32,972
|
)
|
Depreciation expense
|
|
|
(3,097
|
)
|
|
|
(4,909
|
)
|
|
|
(8,006
|
)
|
Allocated general and administrative expense
|
|
|
(563
|
)
|
|
|
(406
|
)
|
|
|
(969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating loss
|
|
|
(3,752
|
)
|
|
|
(14,895
|
)
|
|
|
(18,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
(2,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
$
|
(20,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual-based capital expenditures by reportable segment were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil gathering
|
|
$
|
945
|
|
|
$
|
92
|
|
|
$
|
271
|
|
Terminalling, transportation and storage
|
|
|
17,716
|
|
|
|
9,142
|
|
|
|
1,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures
|
|
$
|
18,661
|
|
|
$
|
9,234
|
|
|
$
|
2,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
TESORO
LOGISTICS LP PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Total assets by reportable segment were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Crude oil gathering
|
|
$
|
71,207
|
|
|
$
|
68,902
|
|
Terminalling, transportation and storage
|
|
|
70,008
|
|
|
|
66,675
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
141,215
|
|
|
$
|
135,577
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14.
|
Supplemental
Pro Forma Information (Unaudited)
|
Unaudited supplemental pro forma balance sheet and net loss per
unit have been presented in accordance with SEC Staff Accounting
Bulletin Topic 1.B.3. The supplemental pro forma balance
sheet gives effect to the distribution of approximately
$270.0 million to a subsidiary of Tesoro to be paid upon
completion of the initial public offering. The distribution is
comprised of $220.0 million from the proceeds of the
initial public offering of common units and $50.0 million
to be funded with a planned borrowing under a revolving credit
facility. The Predecessor had a net loss for the year ended
December 31, 2010. Accordingly, the Predecessor is deemed
to have used $270.0 million of net proceeds to pay the
distribution, which is evidenced by a distribution payable to
affiliate reflected in the supplemental pro forma balance sheet.
Supplemental pro forma net loss per limited partner assumes
additional common units were issued to give effect to the
distribution described above. The number of units deemed for
accounting purposes to have been sold in this offering in order
to pay the distribution described above is 14,900,000. This
number was calculated assuming an initial public offering price
of $20.00 per unit (the midpoint of the range set forth on the
cover page of this prospectus) after deducting underwriting
discounts and estimated offering expenses, and would result in a
net loss of $(1.40) per unit. Because 14,900,000 exceeds
the 12,500,000 common units to be sold to the public in
this offering, pro forma units were limited to the number of
units to be issued to the public in this offering, resulting in
a net loss of $(1.67) per unit.
F-24
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-25
|
|
|
|
|
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-26
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-27
|
|
|
|
|
|
|
|
|
ARTICLE I
DEFINITIONS
|
|
Section 1.1
|
|
|
Definitions
|
|
|
A-6
|
|
|
Section 1.2
|
|
|
Construction
|
|
|
A-23
|
|
|
ARTICLE II
ORGANIZATION
|
|
Section 2.1
|
|
|
Formation
|
|
|
A-23
|
|
|
Section 2.2
|
|
|
Name
|
|
|
A-23
|
|
|
Section 2.3
|
|
|
Registered Office; Registered Agent; Principal Office; Other
Offices
|
|
|
A-23
|
|
|
Section 2.4
|
|
|
Purpose and Business
|
|
|
A-24
|
|
|
Section 2.5
|
|
|
Powers
|
|
|
A-24
|
|
|
Section 2.6
|
|
|
Term
|
|
|
A-24
|
|
|
Section 2.7
|
|
|
Title to Partnership Assets
|
|
|
A-24
|
|
|
ARTICLE III
RIGHTS OF LIMITED PARTNERS
|
|
Section 3.1
|
|
|
Limitation of Liability
|
|
|
A-25
|
|
|
Section 3.2
|
|
|
Management of Business
|
|
|
A-25
|
|
|
Section 3.3
|
|
|
Outside Activities of the Limited Partners
|
|
|
A-25
|
|
|
Section 3.4
|
|
|
Rights of Limited Partners
|
|
|
A-25
|
|
|
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP
INTERESTS; REDEMPTION OF PARTNERSHIP INTERESTS
|
|
Section 4.1
|
|
|
Certificates
|
|
|
A-26
|
|
|
Section 4.2
|
|
|
Mutilated, Destroyed, Lost or Stolen Certificates
|
|
|
A-26
|
|
|
Section 4.3
|
|
|
Record Holders
|
|
|
A-27
|
|
|
Section 4.4
|
|
|
Transfer Generally
|
|
|
A-27
|
|
|
Section 4.5
|
|
|
Registration and Transfer of Limited Partner Interests
|
|
|
A-28
|
|
|
Section 4.6
|
|
|
Transfer of the General Partners General Partner Interest
|
|
|
A-28
|
|
|
Section 4.7
|
|
|
Transfer of Incentive Distribution Rights
|
|
|
A-29
|
|
|
Section 4.8
|
|
|
Restrictions on Transfers
|
|
|
A-29
|
|
|
Section 4.9
|
|
|
Eligibility Certificates; Ineligible Holders
|
|
|
A-30
|
|
|
Section 4.10
|
|
|
Redemption of Partnership Interests of Ineligible Holders
|
|
|
A-31
|
|
A-2
|
|
|
|
|
|
|
|
|
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
|
|
Section 5.1
|
|
|
Organizational Contributions
|
|
|
A-32
|
|
|
Section 5.2
|
|
|
Contributions by the General Partner
|
|
|
A-32
|
|
|
Section 5.3
|
|
|
Contributions by Limited Partners
|
|
|
A-33
|
|
|
Section 5.4
|
|
|
Interest and Withdrawal
|
|
|
A-33
|
|
|
Section 5.5
|
|
|
Capital Accounts
|
|
|
A-33
|
|
|
Section 5.6
|
|
|
Issuances of Additional Partnership Securities
|
|
|
A-36
|
|
|
Section 5.7
|
|
|
Conversion of Subordinated Units
|
|
|
A-36
|
|
|
Section 5.8
|
|
|
Limited Preemptive Right
|
|
|
A-37
|
|
|
Section 5.9
|
|
|
Splits and Combinations
|
|
|
A-37
|
|
|
Section 5.10
|
|
|
Fully Paid and Non-Assessable Nature of Limited Partner Interests
|
|
|
A-37
|
|
|
Section 5.11
|
|
|
Issuance of Common Units in Connection with Reset of Incentive
Distribution Rights
|
|
|
A-37
|
|
|
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
|
|
Section 6.1
|
|
|
Allocations for Capital Account Purposes
|
|
|
A-39
|
|
|
Section 6.2
|
|
|
Allocations for Tax Purposes
|
|
|
A-46
|
|
|
Section 6.3
|
|
|
Requirement and Characterization of Distributions; Distributions
to Record Holders
|
|
|
A-47
|
|
|
Section 6.4
|
|
|
Distributions of Available Cash from Operating Surplus
|
|
|
A-48
|
|
|
Section 6.5
|
|
|
Distributions of Available Cash from Capital Surplus
|
|
|
A-49
|
|
|
Section 6.6
|
|
|
Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels
|
|
|
A-49
|
|
|
Section 6.7
|
|
|
Special Provisions Relating to the Holders of Subordinated Units
|
|
|
A-50
|
|
|
Section 6.8
|
|
|
Special Provisions Relating to the Holders of Incentive
Distribution Rights
|
|
|
A-50
|
|
|
Section 6.9
|
|
|
Entity-Level Taxation
|
|
|
A-50
|
|
|
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
|
|
Section 7.1
|
|
|
Management
|
|
|
A-51
|
|
|
Section 7.2
|
|
|
Certificate of Limited Partnership
|
|
|
A-53
|
|
|
Section 7.3
|
|
|
Restrictions on the General Partners Authority
|
|
|
A-53
|
|
|
Section 7.4
|
|
|
Reimbursement of the General Partner
|
|
|
A-53
|
|
|
Section 7.5
|
|
|
Outside Activities
|
|
|
A-54
|
|
|
Section 7.6
|
|
|
Loans from the General Partner; Loans or Contributions from the
Partnership or Group Members
|
|
|
A-55
|
|
|
Section 7.7
|
|
|
Indemnification
|
|
|
A-55
|
|
|
Section 7.8
|
|
|
Liability of Indemnitees
|
|
|
A-57
|
|
|
Section 7.9
|
|
|
Resolution of Conflicts of Interest; Standards of Conduct and
Modification of Duties
|
|
|
A-57
|
|
|
Section 7.10
|
|
|
Other Matters Concerning the General Partner
|
|
|
A-59
|
|
|
Section 7.11
|
|
|
Purchase or Sale of Partnership Securities
|
|
|
A-59
|
|
|
Section 7.12
|
|
|
Registration Rights of the General Partner and its Affiliates
|
|
|
A-59
|
|
|
Section 7.13
|
|
|
Reliance by Third Parties
|
|
|
A-61
|
|
A-3
|
|
|
|
|
|
|
|
|
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
|
|
Section 8.1
|
|
|
Records and Accounting
|
|
|
A-61
|
|
|
Section 8.2
|
|
|
Fiscal Year
|
|
|
A-62
|
|
|
Section 8.3
|
|
|
Reports
|
|
|
A-62
|
|
|
ARTICLE IX
TAX MATTERS
|
|
Section 9.1
|
|
|
Tax Returns and Information
|
|
|
A-62
|
|
|
Section 9.2
|
|
|
Tax Elections
|
|
|
A-62
|
|
|
Section 9.3
|
|
|
Tax Controversies
|
|
|
A-63
|
|
|
Section 9.4
|
|
|
Withholding
|
|
|
A-63
|
|
|
ARTICLE X
ADMISSION OF PARTNERS
|
|
Section 10.1
|
|
|
Admission of Limited Partners
|
|
|
A-63
|
|
|
Section 10.2
|
|
|
Admission of Successor General Partner
|
|
|
A-64
|
|
|
Section 10.3
|
|
|
Amendment of Agreement and Certificate of Limited Partnership
|
|
|
A-64
|
|
|
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
|
|
Section 11.1
|
|
|
Withdrawal of the General Partner
|
|
|
A-64
|
|
|
Section 11.2
|
|
|
Removal of the General Partner
|
|
|
A-66
|
|
|
Section 11.3
|
|
|
Interest of Departing General Partner and Successor General
Partner
|
|
|
A-66
|
|
|
Section 11.4
|
|
|
Termination of Subordination Period, Conversion of Subordinated
Units and Extinguishment of Cumulative Common Unit Arrearages
|
|
|
A-67
|
|
|
Section 11.5
|
|
|
Withdrawal of Limited Partners
|
|
|
A-67
|
|
|
ARTICLE XII
DISSOLUTION AND LIQUIDATION
|
|
Section 12.1
|
|
|
Dissolution
|
|
|
A-68
|
|
|
Section 12.2
|
|
|
Continuation of the Business of the Partnership After Dissolution
|
|
|
A-68
|
|
|
Section 12.3
|
|
|
Liquidator
|
|
|
A-69
|
|
|
Section 12.4
|
|
|
Liquidation
|
|
|
A-69
|
|
|
Section 12.5
|
|
|
Cancellation of Certificate of Limited Partnership
|
|
|
A-70
|
|
|
Section 12.6
|
|
|
Return of Contributions
|
|
|
A-70
|
|
|
Section 12.7
|
|
|
Waiver of Partition
|
|
|
A-70
|
|
|
Section 12.8
|
|
|
Capital Account Restoration
|
|
|
A-70
|
|
A-4
|
|
|
|
|
|
|
|
|
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
|
|
Section 13.1
|
|
|
Amendments to be Adopted Solely by the General Partner
|
|
|
A-70
|
|
|
Section 13.2
|
|
|
Amendment Procedures
|
|
|
A-71
|
|
|
Section 13.3
|
|
|
Amendment Requirements
|
|
|
A-71
|
|
|
Section 13.4
|
|
|
Special Meetings
|
|
|
A-72
|
|
|
Section 13.5
|
|
|
Notice of a Meeting
|
|
|
A-72
|
|
|
Section 13.6
|
|
|
Record Date
|
|
|
A-73
|
|
|
Section 13.7
|
|
|
Adjournment
|
|
|
A-73
|
|
|
Section 13.8
|
|
|
Waiver of Notice; Approval of Meeting
|
|
|
A-73
|
|
|
Section 13.9
|
|
|
Quorum and Voting
|
|
|
A-73
|
|
|
Section 13.10
|
|
|
Conduct of a Meeting
|
|
|
A-74
|
|
|
Section 13.11
|
|
|
Action Without a Meeting
|
|
|
A-74
|
|
|
Section 13.12
|
|
|
Right to Vote and Related Matters
|
|
|
A-74
|
|
|
ARTICLE XIV
MERGER, CONSOLIDATION OR CONVERSION
|
|
Section 14.1
|
|
|
Authority
|
|
|
A-75
|
|
|
Section 14.2
|
|
|
Procedure for Merger, Consolidation or Conversion
|
|
|
A-75
|
|
|
Section 14.3
|
|
|
Approval by Limited Partners
|
|
|
A-76
|
|
|
Section 14.4
|
|
|
Certificate of Merger or Articles of Conversion
|
|
|
A-77
|
|
|
Section 14.5
|
|
|
Effect of Merger, Consolidation or Conversion
|
|
|
A-77
|
|
|
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
|
|
Section 15.1
|
|
|
Right to Acquire Limited Partner Interests
|
|
|
A-78
|
|
|
ARTICLE XVI
GENERAL PROVISIONS
|
|
Section 16.1
|
|
|
Addresses and Notices; Written Communications
|
|
|
A-80
|
|
|
Section 16.2
|
|
|
Further Action
|
|
|
A-80
|
|
|
Section 16.3
|
|
|
Binding Effect
|
|
|
A-80
|
|
|
Section 16.4
|
|
|
Integration
|
|
|
A-80
|
|
|
Section 16.5
|
|
|
Creditors
|
|
|
A-80
|
|
|
Section 16.6
|
|
|
Waiver
|
|
|
A-80
|
|
|
Section 16.7
|
|
|
Third-Party Beneficiaries
|
|
|
A-81
|
|
|
Section 16.8
|
|
|
Counterparts
|
|
|
A-81
|
|
|
Section 16.9
|
|
|
Applicable Law
|
|
|
A-81
|
|
|
Section 16.10
|
|
|
Invalidity of Provisions
|
|
|
A-82
|
|
|
Section 16.11
|
|
|
Consent of Partners
|
|
|
A-82
|
|
|
Section 16.12
|
|
|
Facsimile and Email Signatures
|
|
|
A-82
|
|
A-5
FIRST
AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF TESORO LOGISTICS LP
THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF TESORO LOGISTICS LP dated as
of ,
2011, is entered into by and between Tesoro Logistics GP, LLC, a
Delaware limited liability company, as the General Partner,
Tesoro Corporation, a Delaware corporation, as the
Organizational Limited Partner, Tesoro Alaska Company, a
Delaware corporation, and Tesoro Refining and Marketing Company,
a Delaware corporation, together with any other Persons who
become Partners in the Partnership or parties hereto as provided
herein. In consideration of the covenants, conditions and
agreements contained herein, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions.
The following definitions shall be for all purposes, unless
otherwise clearly indicated to the contrary, applied to the
terms used in this Agreement.
Acquisition means any transaction in which
any Group Member acquires (through an asset acquisition, merger,
stock acquisition or other form of investment) control over all
or a portion of the assets, properties or business of another
Person for the purpose of increasing over the long-term the
operating capacity or operating income of the Partnership Group
from the operating capacity or operating income of the
Partnership Group existing immediately prior to such
transaction. For purposes of this definition,
long-term generally refers to a period of not less
than twelve months.
Additional Book Basis means the portion of
any remaining Carrying Value of an Adjusted Property that is
attributable to positive adjustments made to such Carrying Value
as a result of
Book-Up
Events. For purposes of determining the extent that Carrying
Value constitutes Additional Book Basis:
(a) Any negative adjustment made to the Carrying Value of
an Adjusted Property as a result of either a Book-Down Event or
a Book-Up
Event shall first be deemed to offset or decrease that portion
of the Carrying Value of such Adjusted Property that is
attributable to any prior positive adjustments made thereto
pursuant to a
Book-Up
Event or Book-Down Event; and
(b) If Carrying Value that constitutes Additional Book
Basis is reduced as a result of a Book-Down Event and the
Carrying Value of other property is increased as a result of
such Book-Down Event, an allocable portion of any such increase
in Carrying Value shall be treated as Additional Book Basis;
provided, that the amount treated as Additional Book
Basis pursuant hereto as a result of such Book-Down Event shall
not exceed the amount by which the Aggregate Remaining Net
Positive Adjustments after such Book-Down Event exceeds the
remaining Additional Book Basis attributable to all of the
Partnerships Adjusted Property after such Book-Down Event
(determined without regard to the application of this
clause (b) to such Book-Down Event).
Additional Book Basis Derivative Items means
any Book Basis Derivative Items that are computed with reference
to Additional Book Basis. To the extent that the Additional Book
Basis attributable to all of the Partnerships Adjusted
Property as of the beginning of any taxable period exceeds the
Aggregate Remaining Net Positive Adjustments as of the beginning
of such period (the Excess Additional Book
Basis), the Additional Book Basis Derivative Items for
such period shall be reduced by the amount that bears the same
ratio to the amount of Additional Book Basis Derivative Items
determined without regard to this sentence as the Excess
Additional Book Basis bears to the Additional Book Basis as of
the beginning of such period. With respect to a Disposed of
Adjusted Property, the Additional Book Basis Derivative items
shall be the amount of Additional Book Basis taken into account
in computing gain or loss from the disposition of such Disposed
of Adjusted Property.
A-6
Adjusted Capital Account means the Capital
Account maintained for each Partner as of the end of each
taxable period of the Partnership, (a) increased by any
amounts that such Partner is obligated to restore under the
standards set by Treasury Regulation
Section 1.704-1(b)(2)(ii)(c)
(or is deemed obligated to restore under Treasury Regulation
Sections 1.704-2(g)
and 1.704-2(i)(5)) and (b) decreased by (i) the amount
of all losses and deductions that, as of the end of such taxable
period, are reasonably expected to be allocated to such Partner
in subsequent taxable periods under Sections 704(e)(2) and
706(d) of the Code and Treasury Regulation
Section 1.751-1(b)(2)(ii),
and (ii) the amount of all distributions that, as of the
end of such taxable period, are reasonably expected to be made
to such Partner in subsequent taxable periods in accordance with
the terms of this Agreement or otherwise to the extent they
exceed offsetting increases to such Partners Capital
Account that are reasonably expected to occur during (or prior
to) the taxable period in which such distributions are
reasonably expected to be made (other than increases as a result
of a minimum gain chargeback pursuant to Section 6.1(d)(i)
or 6.1(d)(ii)). The foregoing definition of Adjusted Capital
Account is intended to comply with the provisions of Treasury
Regulation
Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith. The
Adjusted Capital Account of a Partner in respect of
any Partnership Interest shall be the amount that such Adjusted
Capital Account would be if such Partnership Interest were the
only interest in the Partnership held by such Partner from and
after the date on which such Partnership Interest was first
issued.
Adjusted Operating Surplus means, with
respect to any period, (a) Operating Surplus generated with
respect to such period (b) less (i) the amount of any
net increase in Working Capital Borrowings (or the
Partnerships proportionate share of any net increase in
Working Capital Borrowings in the case of Subsidiaries that are
not wholly owned) with respect to such period and (ii) the
amount of any net decrease in cash reserves (or the
Partnerships proportionate share of any net decrease in
cash reserves in the case of Subsidiaries that are not wholly
owned) for Operating Expenditures with respect to such period
not relating to an Operating Expenditure made with respect to
such period, and (c) plus (i) the amount of any net
decrease in Working Capital Borrowings (or the
Partnerships proportionate share of any net decrease in
Working Capital Borrowings in the case of Subsidiaries that are
not wholly owned) with respect to such period, (ii) the
amount of any net decrease made in subsequent periods in 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 clause (b)(ii) above and (iii) the amount
of any net increase in cash reserves (or the Partnerships
proportionate share of any net increase in cash reserves in the
case of Subsidiaries that are not wholly owned) for Operating
Expenditures with respect to such period required by any debt
instrument for the repayment of principal, interest or premium.
Adjusted Operating Surplus does not include that portion of
Operating Surplus included in clause (a)(i) of the definition of
Operating Surplus.
Adjusted Property means any property the
Carrying Value of which has been adjusted pursuant to
Section 5.5(d).
Affiliate means, with respect to any Person,
any other Person that directly or indirectly through one or more
intermediaries controls, is controlled by or is under common
control with, the Person in question. As used herein, the term
control means the possession, direct or indirect, of
the power to direct or cause the direction of the management and
policies of a Person, whether through ownership of voting
securities, by contract or otherwise.
Aggregate Remaining Net Positive Adjustments
means, as of the end of any taxable period, the sum of the
Remaining Net Positive Adjustments of all the Partners.
Aggregate Quantity of IDR Reset Common Units
has the meaning assigned to such term in Section 5.11(a).
Agreed Allocation means any allocation, other
than a Required Allocation, of an item of income, gain, loss or
deduction pursuant to the provisions of Section 6.1,
including a Curative Allocation (if appropriate to the context
in which the term Agreed Allocation is used).
Agreed Value of any Contributed Property
means the fair market value of such property or other
consideration at the time of contribution and in the case of an
Adjusted Property, the fair market value of such
A-7
Adjusted Property on the date of the revaluation event as
described in Section 5.5(d), in both cases as determined by
the General Partner. The General Partner shall use such method
as it determines to be appropriate to allocate the aggregate
Agreed Value of Contributed Properties contributed to the
Partnership in a single or integrated transaction among each
separate property on a basis proportional to the fair market
value of each Contributed Property.
Agreement means this First Amended and
Restated Agreement of Limited Partnership of Tesoro Logistics
LP, as it may be amended, supplemented or restated from time to
time.
Associate means, when used to indicate a
relationship with any Person, (a) any corporation or
organization of which such Person is a director, officer,
manager, member, general partner or managing member or is,
directly or indirectly, the owner of 20% or more of any class of
voting stock or other voting interest, (b) any trust or
other estate in which such Person has at least a 20% beneficial
interest or as to which such Person serves as trustee or in a
similar fiduciary capacity, and (c) any relative or spouse
of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
Available Cash means, with respect to any
Quarter ending prior to the Liquidation Date:
(a) the sum of (i) all cash and cash equivalents of
the Partnership Group (or the Partnerships proportionate
share of cash and cash equivalents in the case of Subsidiaries
that are not wholly owned) on hand at the end of such Quarter,
and (ii) if the General Partner so determines, all or any
portion of additional cash and cash equivalents of the
Partnership Group (or the Partnerships proportionate share
of cash and cash equivalents in the case of Subsidiaries that
are not wholly owned) on hand on the date of determination of
Available Cash with respect to such Quarter resulting from
Working Capital Borrowings made subsequent to the end of such
Quarter, less
(b) the amount of any cash reserves established by the
General Partner (or the Partnerships proportionate share
of cash reserves in the case of Subsidiaries that are not wholly
owned) to (i) provide for the proper conduct of the
business of the Partnership Group (including reserves for future
capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such Quarter,
(ii) comply with applicable law or any loan agreement,
security agreement, mortgage, debt instrument or other agreement
or obligation to which any Group Member is a party or by which
it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or
Section 6.5 in respect of any one or more of the next four
Quarters; provided, however, that the General Partner may
not establish cash reserves pursuant to subclause (iii)
above if the effect of such reserves would be that the
Partnership is unable to distribute the Minimum Quarterly
Distribution on all Common Units, plus any Cumulative Common
Unit Arrearage on all Common Units, with respect to such
Quarter; and, provided further, that disbursements made
by a Group Member or cash reserves established, increased or
reduced after the end of such Quarter but on or before the date
of determination of Available Cash with respect to such Quarter
shall be deemed to have been made, established, increased or
reduced, for purposes of determining Available Cash, within such
Quarter if the General Partner so determines.
Notwithstanding the foregoing, Available Cash
with respect to the Quarter in which the Liquidation Date occurs
and any subsequent Quarter shall equal zero.
Board of Directors means, with respect to the
General Partner, its board of directors or board of managers, if
the General Partner is a corporation or limited liability
company, or the board of directors or board of managers of the
general partner of the General Partner, if the General Partner
is a limited partnership, as applicable.
Book Basis Derivative Items means any item of
income, deduction, gain or loss that is computed with reference
to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an
Adjusted Property).
Book-Down Event means an event that triggers
a negative adjustment to the Capital Accounts of the Partners
pursuant to Section 5.5(d).
A-8
Book-Tax Disparity means with respect to any
item of Contributed Property or Adjusted Property, as of the
date of any determination, the difference between the Carrying
Value of such Contributed Property or Adjusted Property and the
adjusted basis thereof for federal income tax purposes as of
such date. A Partners share of the Partnerships
Book-Tax Disparities in all of its Contributed Property and
Adjusted Property will be reflected by the difference between
such Partners Capital Account balance as maintained
pursuant to Section 5.5 and the hypothetical balance of
such Partners Capital Account computed as if it had been
maintained strictly in accordance with federal income tax
accounting principles.
Book-Up
Event means an event that triggers a positive
adjustment to the Capital Accounts of the Partners pursuant to
Section 5.5(d).
Business Day means Monday through Friday of
each week, except that a legal holiday recognized as such by the
government of the United States of America or the State of Texas
shall not be regarded as a Business Day.
Capital Account means the capital account
maintained for a Partner pursuant to Section 5.5. The
Capital Account of a Partner in respect of any
Partnership Interest shall be the amount that such Capital
Account would be if such Partnership Interest were the only
interest in the Partnership held by such Partner from and after
the date on which such Partnership Interest was first issued.
Capital Contribution means any cash, cash
equivalents or the Net Agreed Value of Contributed Property that
a Partner contributes to the Partnership or that is contributed
or deemed contributed to the Partnership on behalf of a Partner
(including, in the case of an underwritten offering of Units,
the amount of any underwriting discounts or commissions).
Capital Improvement means any
(a) addition or improvement to the capital assets owned by
any Group Member, (b) acquisition of existing, or the
construction of new or the improvement or replacement of
existing, capital assets (including pipelines, terminals,
tankage, tanker trucks, docks, truck racks and other storage,
distribution or transportation facilities and related or similar
midstream or logistics assets) or (c) capital contribution
by a Group Member to a Person that is not a Subsidiary in which
a Group Member has an equity interest, or after such capital
contribution will have an equity interest, to fund such Group
Members pro rata share of the cost of the addition or
improvement to, the acquisition of existing, the construction of
new or the improvement or replacement of existing capital assets
(including pipelines, terminals, tankage, tanker trucks, docks,
truck racks and other storage, distribution or transportation
facilities and related or similar midstream or logistics assets)
by such Person, in each case if such addition, improvement,
replacement, acquisition or construction is made to increase
over the long-term the operating capacity or operating income of
the Partnership Group, in the case of clauses (a) and (b),
or such Person, in the case of clause (c), from the operating
capacity or operating income of the Partnership Group or such
Person, as the case may be, existing immediately prior to such
addition, improvement, replacement, acquisition or construction.
For purposes of this definition, long-term generally
refers to a period of not less than twelve months.
Capital Surplus has the meaning assigned to
such term in Section 6.3(a).
Carrying Value means (a) with respect to
a Contributed Property or Adjusted Property, the Agreed Value of
such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the
Partners Capital Accounts in respect of such property and
(b) with respect to any other Partnership property, the
adjusted basis of such property for federal income tax purposes,
all as of the time of determination; provided that the Carrying
Value of any property shall be adjusted from time to time in
accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to
reflect changes, additions or other adjustments to the Carrying
Value for dispositions and acquisitions of Partnership
properties, as deemed appropriate by the General Partner.
Cause means a court of competent jurisdiction
has entered a final, non-appealable judgment finding the General
Partner liable for actual fraud or willful misconduct in its
capacity as a general partner of the Partnership.
A-9
Certificate means (a) a certificate
(i) substantially in the form of Exhibit A to this
Agreement, (ii) issued in global form in accordance with
the rules and regulations of the Depositary or (iii) in
such other form as may be adopted by the General Partner, issued
by the Partnership evidencing ownership of one or more Common
Units or (b) a certificate, in such form as may be adopted
by the General Partner, issued by the Partnership evidencing
ownership of one or more other Partnership Securities.
Certificate of Limited Partnership means the
Certificate of Limited Partnership of the Partnership filed with
the Secretary of State of the State of Delaware as referenced in
Section 7.2, as such Certificate of Limited Partnership may
be amended, supplemented or restated from time to time.
Citizenship Certification means a properly
completed certificate in such form as may be specified by the
General Partner by which a Limited Partner certifies that he
(and if he is a nominee holding for the account of another
Person, that to the best of his knowledge such other Person) is
an Eligible Holder.
Citizenship Eligibility Trigger is defined in
Section 4.9(a)(ii).
claim (as used in Section 7.12(c)) has
the meaning assigned to such term in Section 7.12(c).
Closing Date means the first date on which
Common Units are sold by the Partnership to the Underwriters
pursuant to the provisions of the Underwriting Agreement.
Closing Price has the meaning assigned to
such term in Section 15.1(a).
Code means the Internal Revenue Code of 1986,
as amended and in effect from time to time. Any reference herein
to a specific section or sections of the Code shall be deemed to
include a reference to any corresponding provision of any
successor law.
Combined Interest has the meaning assigned to
such term in Section 11.3(a).
Commences Commercial Service means the date
upon which a Capital Improvement is first put into commercial
service by a Group Member following completion of construction
development and testing, as applicable.
Commission means the United States Securities
and Exchange Commission.
Common Unit means a Partnership Security
representing a fractional part of the Partnership Interests of
all Limited Partners, and having the rights and obligations
specified with respect to Common Units in this Agreement. The
term Common Unit does not include a Subordinated
Unit prior to its conversion into a Common Unit pursuant to the
terms hereof.
Common Unit Arrearage means, with respect to
any Common Unit, whenever issued, as to any Quarter within the
Subordination Period, the excess, if any, of (a) the
Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available
Cash distributed with respect to a Common Unit in respect of
such Quarter pursuant to Section 6.4(a)(i).
Conflicts Committee means a committee of the
Board of Directors of the General Partner composed of one or
more directors, each of whom (a) is not an officer or
employee of the General Partner, (b) is not an officer,
director or employee of any Affiliate of the General Partner
(other than Group Members), (c) is not a holder of any
ownership interest in the General Partner or its Affiliates or
the Partnership Group other than Common Units and other awards
that are granted to such director under the LTIP and
(d) meets the independence standards required of directors
who serve on an audit committee of a board of directors
established by the Securities Exchange Act and the rules and
regulations of the Commission thereunder and by the National
Securities Exchange on which the Common Units are listed or
admitted to trading.
Contributed Property means each property or
other asset, in such form as may be permitted by the Delaware
Act, but excluding cash, contributed to the Partnership. Once
the Carrying Value of a Contributed Property is adjusted
pursuant to Section 5.5(d), such property or other assets
shall no longer constitute a Contributed Property, but shall be
deemed an Adjusted Property.
A-10
Contribution Agreement means that certain
Contribution, Conveyance and Assumption Agreement, dated as
of ,
2011, among the Partnership, the General Partner, Tesoro, Tesoro
Alaska, Tesoro R&M and Tesoro High Plains, together with
the additional conveyance documents and instruments contemplated
or referenced thereunder, as such may be amended, supplemented
or restated from time to time.
Cumulative Common Unit Arrearage means, with
respect to any Common Unit, whenever issued, and as of the end
of any Quarter, the excess, if any, of (a) the sum
resulting from adding together the Common Unit Arrearages as to
an Initial Common Unit for each of the Quarters within the
Subordination Period ending on or before the last day of such
Quarter over (b) the sum of any distributions theretofore
made pursuant to Section 6.4(a)(ii) and the second sentence
of Section 6.5 with respect to an Initial Common Unit
(including any distributions to be made in respect of the last
of such Quarters).
Curative Allocation means any allocation of
an item of income, gain, deduction, loss or credit pursuant to
the provisions of Section 6.1(d)(xi).
Current Market Price has the meaning assigned
to such term in Section 15.1(a).
Curtailment Fees means (A) (i) any
Shortfall Payments (as defined therein) attributable to
Section 14(b) of that certain Transportation Services
Agreement (High Plains Pipeline System),
dated ,
2011, by and between Tesoro High Plains and Tesoro R&M;
(ii) any Curtailment Fees (as defined therein) attributable
to Section 30(b) of that certain Master Terminalling
Services Agreement,
dated ,
2011, by and among Tesoro R&M, Tesoro Alaska and the
Operating Company; (iii) any Shortfall Payments (as defined
therein) attributable to Section 14(b) of that certain
Transportation Services Agreement (SLC Short Haul Pipelines),
dated ,
2011, by and between the Operating Company and Tesoro R&M;
(iv) any payments attributable to Section 21(b) of
that certain Salt Lake City Storage and Transportation Services
Agreement,
dated ,
2011, by and between Tesoro R&M and the Operating Company;
and (v) any Shortfall Payments (as defined therein)
attributable to Section 16(b) of that certain Trucking
Transportation Services Agreement,
dated ,
2011, by and between the Operating Company and Tesoro R&M,
in each case as such agreements may be amended, supplemented or
restated from time to time, and (B) any similar fees that
would be paid by Tesoro or its Affiliates under commercial
contracts upon the suspension or reduction of operations of
Tesoro or its Affiliates.
Delaware Act means the Delaware Revised
Uniform Limited Partnership Act, 6 Del C.
Section 17-101,
et seq., as amended, supplemented or restated from time to time,
and any successor to such statute.
Departing General Partner means a former
general partner from and after the effective date of any
withdrawal or removal of such former general partner pursuant to
Section 11.1 or Section 11.2.
Depositary means, with respect to any Units
issued in global form, The Depository Trust Company and its
successors and permitted assigns.
Disposed of Adjusted Property is defined in
Section 6.1(d)(xii)(B).
Economic Risk of Loss has the meaning set
forth in Treasury
Regulation Section 1.752-2(a).
Eligibility Certificate is defined in
Section 4.9(b).
Eligible Holder means a Limited Partner whose
(a) federal income tax status would not, in the
determination of the General Partner, have the material adverse
effect described in Section 4.9(a)(i) or
(b) nationality, citizenship or other related status would
not, in the determination of the General Partner, create a
substantial risk of cancellation or forfeiture as described in
Section 4.9(a)(ii).
Estimated Incremental Quarterly Tax Amount
has the meaning assigned to such term in Section 6.9.
Event of Withdrawal has the meaning assigned
to such term in Section 11.1(a).
Excess Additional Book Basis is defined in
the definition of Additional Book Basis Derivative
Items.
Excess Distribution is defined in
Section 6.1(d)(iii)(A).
Excess Distribution Unit is defined in
Section 6.1(d)(iii)(A).
A-11
Expansion Capital Expenditures means cash
expenditures for Acquisitions or Capital Improvements. Expansion
Capital Expenditures shall include interest (and related fees)
on debt incurred to finance the construction or development of a
Capital Improvement and paid during the period beginning on the
date that a Group Member enters into a binding commitment to
commence the construction or development of such Capital
Improvement and ending on the earlier to occur of the date that
such Capital Improvement Commences Commercial Service and the
date that such Capital Improvement is abandoned or disposed of.
Debt incurred to fund such construction or development period
interest payments (including periodic net payments under related
interest rate swap agreements) paid during such period or to
fund distributions on equity issued (including incremental
Incentive Distributions related thereto) to fund the
construction or development of a Capital Improvement as
described in clause (a)(iv) of the definition of Operating
Surplus shall also be deemed to be debt incurred to finance the
construction or development of a Capital Improvement. Where cash
expenditures are made in part for Expansion Capital Expenditures
and in part for other purposes, the General Partner shall
determine the allocation between the amounts paid for each.
Final Subordinated Units has the meaning
assigned to such term in Section 6.1(d)(x)(A).
First Liquidation Target Amount has the
meaning assigned to such term in Section 6.1(c)(i)(D).
First Target Distribution means $0.338125 per
Unit per Quarter (or, with respect to the period commencing on
the Closing Date and ending on June 30, 2011, it means the
product of $0.338125 multiplied by a fraction of which the
numerator is the number of days in such period, and of which the
denominator is 91), subject to adjustment in accordance with
Sections 5.11, 6.6 and 6.9.
Fully Diluted Weighted Average Basis means,
when calculating the number of Outstanding Units for any period,
a basis that includes (a) the weighted average number of
Outstanding Units plus (b) all Partnership Securities and
options, rights, warrants, phantom units and appreciation rights
relating to an equity interest in the Partnership (i) that
are convertible into or exercisable or exchangeable for Units or
for which Units are issuable, in each case that are senior to or
pari passu with the Subordinated Units, (ii) whose
conversion, exercise or exchange price is less than the Current
Market Price on the date of such calculation, (iii) that
may be converted into or exercised or exchanged for such Units
prior to or during the Quarter immediately following the end of
the period for which the calculation is being made without the
satisfaction of any contingency beyond the control of the holder
other than the payment of consideration and the compliance with
administrative mechanics applicable to such conversion, exercise
or exchange and (iv) that were not converted into or
exercised or exchanged for such Units during the period for
which the calculation is being made; provided, however,
that for purposes of determining the number of Outstanding Units
on a Fully Diluted Weighted Average Basis when calculating
whether the Subordination Period has ended or Subordinated Units
are entitled to convert into Common Units pursuant to
Section 5.7, such Partnership Securities, options, rights,
warrants and appreciation rights shall be deemed to have been
Outstanding Units only for the four Quarters that comprise the
last four Quarters of the measurement period; provided,
further, that if consideration will be paid to any Group
Member in connection with such conversion, exercise or exchange,
the number of Units to be included in such calculation shall be
that number equal to the difference between (x) the number
of Units issuable upon such conversion, exercise or exchange and
(y) the number of Units that such consideration would
purchase at the Current Market Price.
General Partner means Tesoro Logistics GP,
LLC, a Delaware limited liability company, and its successors
and permitted assigns that are admitted to the Partnership as
general partner of the Partnership, in its capacity as general
partner of the Partnership (except as the context otherwise
requires).
General Partner Interest means the ownership
interest of the General Partner in the Partnership (in its
capacity as a general partner without reference to any Limited
Partner Interest held by it), which is evidenced by General
Partner Units, and includes any and all benefits to which the
General Partner is entitled as provided in this Agreement,
together with all obligations of the General Partner to comply
with the terms and provisions of this Agreement.
General Partner Unit means a fractional part
of the General Partner Interest having the rights and
obligations specified with respect to the General Partner
Interest. A General Partner Unit is not a Unit.
A-12
Gross Liability Value means, with respect to
any Liability of the Partnership described in Treasury
Regulation Section 1.752-7(b)(3)(i),
the amount of cash that a willing assignor would pay to a
willing assignee to assume such Liability in an
arms-length transaction.
Group means a Person that with or through any
of its Affiliates or Associates has any contract, arrangement,
understanding or relationship for the purpose of acquiring,
holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent
solicitation made to 10 or more Persons), exercising investment
power or disposing of any Partnership Interests with any other
Person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, Partnership Interests.
Group Member means a member of the
Partnership Group.
Group Member Agreement means the partnership
agreement of any Group Member, other than the Partnership, that
is a limited or general partnership, the limited liability
company agreement of any Group Member that is a limited
liability company, the certificate of incorporation and bylaws
or similar organizational documents of any Group Member that is
a corporation, the joint venture agreement or similar governing
document of any Group Member that is a joint venture and the
governing or organizational or similar documents of any other
Group Member that is a Person other than a limited or general
partnership, limited liability company, corporation or joint
venture, as such may be amended, supplemented or restated from
time to time.
Hedge Contract means any exchange, swap,
forward, cap, floor, collar, option or other similar agreement
or arrangement entered into for the purpose of reducing the
exposure of the Partnership Group to fluctuations in interest
rates or the price of hydrocarbons, other than for speculative
purposes.
Holder as used in Section 7.12, has the
meaning assigned to such term in Section 7.12(a).
IDR Reset Common Units has the meaning
assigned to such term in Section 5.11(a).
IDR Reset Election has the meaning assigned
to such term in Section 5.11(a).
Incentive Distribution Right means a
non-voting Limited Partner Interest issued to the General
Partner, which Limited Partner Interest will confer upon the
holder thereof only the rights and obligations specifically
provided in this Agreement with respect to Incentive
Distribution Rights (and no other rights otherwise available to
or other obligations of a holder of a Partnership Interest).
Notwithstanding anything in this Agreement to the contrary, the
holder of an Incentive Distribution Right shall not be entitled
to vote such Incentive Distribution Right on any Partnership
matter except as may otherwise be required by law.
Incentive Distributions means any amount of
cash distributed to the holders of the Incentive Distribution
Rights pursuant to Sections 6.4(a)(v), (vi) and
(vii) and 6.4(b)(iii), (iv) and (v).
Incremental Income Taxes has the meaning
assigned to such term in Section 6.9.
Indemnified Persons has the meaning assigned
to such term in Section 7.12(c).
Indemnitee means (a) the General
Partner, (b) any Departing General Partner, (c) any
Person who is or was an Affiliate of the General Partner or any
Departing General Partner, (d) any Person who is or was a
manager, managing member, director, officer, employee, agent,
fiduciary or trustee of any Group Member, the General Partner or
any Departing General Partner or any Affiliate of any Group
Member, the General Partner or any Departing General Partner,
(e) any Person who is or was serving at the request of the
General Partner or any Departing General Partner or any
Affiliate of the General Partner or any Departing General
Partner as a manager, managing member, director, officer,
employee, agent, fiduciary or trustee of another Person owing a
fiduciary duty to any Group Member; provided that a
Person shall not be an Indemnitee by reason of providing, on a
fee-for-services basis, trustee, fiduciary or custodial
services, and (f) any Person the General Partner designates
as an Indemnitee for purposes of this Agreement.
Ineligible Holder is defined in
Section 4.9(c).
Initial Common Units means the Common Units
sold in the Initial Offering.
A-13
Initial Limited Partners means the
Organizational Limited Partner, the General Partner (with
respect to the Incentive Distribution Rights received by it
pursuant to Section 5.2) and the Underwriters upon the
issuance by the Partnership of Common Units as described in
Section 5.3(a) in connection with the Initial Offering.
Initial Offering means the initial offering
and sale of Common Units to the public, as described in the
Registration Statement.
Initial Unit Price means (a) with
respect to the Common Units and the Subordinated Units, the
initial public offering price per Common Unit at which the
Common Units were first offered to the public for sale as set
forth on the cover page of the prospectus included as part of
the Registration Statement and first issued at or after the time
the Registration Statement first became effective or
(b) with respect to any other class or series of Units, the
price per Unit at which such class or series of Units is
initially sold by the Partnership, as determined by the General
Partner, in each case adjusted as the General Partner determines
to be appropriate to give effect to any distribution,
subdivision or combination of Units.
Interim Capital Transactions means the
following transactions if they occur prior to the Liquidation
Date: (a) borrowings, refinancings or refundings of
indebtedness (other than Working Capital Borrowings and other
than for items purchased on open account in the ordinary course
of business) by any Group Member and sales of debt securities of
any Group Member; (b) issuances of equity interests of any
Group Member (including the Common Units sold to the
Underwriters pursuant to the exercise of the Over-Allotment
Option); and (c) sales or other voluntary or involuntary
dispositions of any assets of any Group Member other than
(i) sales or other dispositions of inventory, accounts
receivable and other assets in the ordinary course of business
and (ii) sales or other dispositions of assets as part of
normal retirements or replacements.
Liability means any liability or obligation
of any nature, whether accrued, contingent or otherwise.
Limited Partner means, unless the context
otherwise requires, the Organizational Limited Partner prior to
its withdrawal from the Partnership, each Initial Limited
Partner, each additional Person that becomes a Limited Partner
pursuant to the terms of this Agreement and any Departing
General Partner upon the change of its status from General
Partner to Limited Partner pursuant to Section 11.3, in
each case, in such Persons capacity as a limited partner
of the Partnership; provided, however, that when
the term Limited Partner is used herein in the
context of any vote or other approval, including
Articles XIII and XIV, such term shall not, solely for such
purpose, include any holder of an Incentive Distribution Right
(solely with respect to its Incentive Distribution Rights and
not with respect to any other Limited Partner Interest held by
such Person) except as may otherwise be required by law.
Limited Partner Interest means the ownership
interest of a Limited Partner in the Partnership, which may be
evidenced by Common Units, Subordinated Units, Incentive
Distribution Rights or other Partnership Securities or a
combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner is entitled as
provided in this Agreement, together with all obligations of
such Limited Partner to comply with the terms and provisions of
this Agreement; provided, however, that when the term
Limited Partner Interest is used herein in the
context of any vote or other approval, including
Articles XIII and XIV, such term shall not, solely for such
purpose, include any Incentive Distribution Right except as may
otherwise be required by law.
Liquidation Date means (a) in the case
of an event giving rise to the dissolution of the Partnership of
the type described in clauses (a) and (b) of the first
sentence of Section 12.2, the date on which the applicable
time period during which the holders of Outstanding Units have
the right to elect to continue the business of the Partnership
has expired without such an election being made and (b) in
the case of any other event giving rise to the dissolution of
the Partnership, the date on which such event occurs.
Liquidator means one or more Persons selected
by the General Partner to perform the functions described in
Section 12.4 as liquidating trustee of the Partnership
within the meaning of the Delaware Act.
Merger Agreement has the meaning assigned to
such term in Section 14.1.
A-14
Minimum Quarterly Distribution means $0.3375
per Unit per Quarter (or with respect to the period commencing
on the Closing Date and ending on June 30, 2011, it means
the product of $0.3375 multiplied by a fraction of which the
numerator is the number of days in such period and of which the
denominator is 91), subject to adjustment in accordance with
Sections 5.11, 6.6 and 6.9.
National Securities Exchange means an
exchange registered with the Commission under Section 6(a)
of the Securities Exchange Act (or any successor to such
Section) and any other securities exchange (whether or not
registered with the Commission under Section 6(a) (or
successor to such Section) of the Securities Exchange Act) that
the General Partner shall designate as a National Securities
Exchange for purposes of this Agreement.
Net Agreed Value means, (a) in the case
of any Contributed Property, the Agreed Value of such property
or other consideration reduced by any Liabilities either assumed
by the Partnership upon such contribution or to which such
property or other consideration is subject when contributed and
(b) in the case of any property distributed to a Partner by
the Partnership, the Partnerships Carrying Value of such
property (as adjusted pursuant to Section 5.5(d)(ii)) at
the time such property is distributed, reduced by any Liability
either assumed by such Partner upon such distribution or to
which such property is subject at the time of distribution, in
either case as determined and required by the Treasury
Regulations promulgated under Section 704(b) of the Code.
Net Income means, for any taxable period, the
excess, if any, of the Partnerships items of income and
gain (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable period over the Partnerships items of loss
and deduction (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable period. The items included in the calculation of
Net Income shall be determined in accordance with
Section 5.5(b) and shall not include any items specially
allocated under Section 6.1(d); provided, that the
determination of the items that have been specially allocated
under Section 6.1(d) shall be made without regard to any
reversal of such items under Section 6.1(d)(xii).
Net Loss means, for any taxable period, the
excess, if any, of the Partnerships items of loss and
deduction (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable period over the Partnerships items of income
and gain (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable period. The items included in the calculation of
Net Loss shall be determined in accordance with
Section 5.5(b) and shall not include any items specially
allocated under Section 6.1(d); provided, that the
determination of the items that have been specially allocated
under Section 6.1(d) shall be made without regard to any
reversal of such items under Section 6.1(d)(xii).
Net Positive Adjustments means, with respect
to any Partner, the excess, if any, of the total positive
adjustments over the total negative adjustments made to the
Capital Account of such Partner pursuant to
Book-Up
Events and Book-Down Events.
Net Termination Gain means, for any taxable
period, the sum, if positive, of all items of income, gain, loss
or deduction (determined in accordance with Section 5.5(b))
that are (a) recognized (i) after the Liquidation Date
or (ii) upon the sale, exchange or other disposition of all
or substantially all of the assets of the Partnership Group,
taken as a whole, in a single transaction or a series of related
transactions (excluding any disposition to a member of the
Partnership Group), or (b) deemed recognized by the
Partnership pursuant to Section 5.5(d); provided,
however, the items included in the determination of Net
Termination Gain shall not include any items of income, gain or
loss specially allocated under Section 6.1(d).
Net Termination Loss means, for any taxable
period, the sum, if negative, of all items of income, gain, loss
or deduction (determined in accordance with Section 5.5(b))
that are (a) recognized (i) after the Liquidation Date
or (ii) upon the sale, exchange or other disposition of all
or substantially all of the assets of the Partnership Group,
taken as a whole, in a single transaction or a series of related
transactions (excluding any disposition to a member of the
Partnership Group), or (b) deemed recognized by the
Partnership pursuant
A-15
to Section 5.5(b); provided, however, items included
in the determination of Net Termination Loss shall not include
any items of income, gain or loss specially allocated under
Section 6.1(d).
Non-citizen Assignee means a Person whom the
General Partner has determined does not constitute an Eligible
Holder and as to whose Partnership Interest the General Partner
has become the substituted limited partner, pursuant to
Section 4.9.
Nonrecourse Built-in Gain means with respect
to any Contributed Properties or Adjusted Properties that are
subject to a mortgage or pledge securing a Nonrecourse
Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to Sections 6.2(b) if
such properties were disposed of in a taxable transaction in
full satisfaction of such liabilities and for no other
consideration.
Nonrecourse Deductions means any and all
items of loss, deduction or expenditure (including any
expenditure described in Section 705(a)(2)(B) of the Code)
that, in accordance with the principles of Treasury
Regulation Section 1.704-2(b),
are attributable to a Nonrecourse Liability.
Nonrecourse Liability has the meaning set
forth in Treasury
Regulation Section 1.752-1(a)(2).
Notice of Election to Purchase has the
meaning assigned to such term in Section 15.1(b).
Omnibus Agreement means that certain Omnibus
Agreement, dated as of , 2011, among Tesoro, Tesoro R&M,
Tesoro Companies, Inc., a Delaware corporation, Tesoro Alaska,
the General Partner and the Partnership, as such agreement may
be amended, supplemented or restated from time to time.
Operating Company means Tesoro Logistics
Operations, LLC, a Delaware limited liability company, and any
successors thereto.
Operating Expenditures means all Partnership
Group cash expenditures (or the Partnerships proportionate
share of expenditures in the case of Subsidiaries that are not
wholly owned), including taxes, compensation of employees and
directors of the General Partner, reimbursement of expenses of
the General Partner, debt service payments, repayment of Working
Capital Borrowings, payments made in the ordinary course of
business under any Hedge Contracts (provided that (i) with
respect to amounts paid in connection with the initial purchase
of a Hedge Contract, such amounts shall be amortized over the
life of such Hedge Contract and (ii) payments made in
connection with the termination of any Hedge Contract prior to
the expiration of its scheduled settlement or termination date
shall be included in equal quarterly installments over the
remaining scheduled life of such Hedge Contract), subject to the
following:
(a) repayments of Working Capital Borrowings deducted from
Operating Surplus pursuant to clause (b)(iii) of the definition
of Operating Surplus shall not constitute Operating Expenditures
when actually repaid;
(b) payments (including prepayments and prepayment
penalties) of principal of and premium on indebtedness other
than Working Capital Borrowings shall not constitute Operating
Expenditures; and
(c) Operating Expenditures shall not include
(i) Expansion Capital Expenditures, (ii) payment of
transaction expenses (including taxes) relating to Interim
Capital Transactions, (iii) distributions to Partners
(including any distributions made pursuant to
Section 6.4(a)), (iv) repurchases of Partnership
Interests, other than repurchases of Partnership Interests by
the Partnership to satisfy obligations under employee benefit
plans or reimbursement of expenses of the General Partner for
purchases of Partnership Interests by the General Partner to
satisfy obligations under employee benefit plans, or
(v) any other payments made in connection with the Initial
Offering that are described under Use of Proceeds in
the Registration Statement.
Operating Surplus means, with respect to any
period ending prior to the Liquidation Date, on a cumulative
basis and without duplication,
(a) the sum of (i) $30 million, (ii) all
cash receipts of the Partnership Group (or the
Partnerships proportionate share of cash receipts in the
case of Subsidiaries that are not wholly owned) for the period
beginning on the Closing Date and ending on the last day of such
period, but excluding cash receipts
A-16
from Interim Capital Transactions and the termination of Hedge
Contracts (provided that cash receipts from the termination of a
Hedge Contract prior to its scheduled settlement or termination
date shall be included in Operating Surplus in equal quarterly
installments over the remaining scheduled life of such Hedge
Contract), (iii) all cash receipts of the Partnership Group
(or the Partnerships proportionate share of cash receipts
in the case of Subsidiaries that are not wholly owned) after the
end of such period but on or before the date of determination of
Operating Surplus with respect to such period resulting from
Working Capital Borrowings and (iv) the amount of cash
distributions paid (including incremental Incentive
Distributions) on equity issued, other than equity issued on the
Closing Date or the Option Closing Date, to finance all or a
portion of the construction or development of a Capital
Improvement and paid in respect of the period beginning on the
date that the Group Member enters into a binding commitment to
commence the construction or development of such Capital
Improvement and ending on the earlier to occur of the date such
Capital Improvement Commences Commercial Service and the date
that it is abandoned or disposed of (equity issued, other than
equity issued on the Closing Date or the Option Closing Date, to
fund interest payments on debt incurred or distributions on
equity issued, in each case during the period described above in
this clause (iv), to finance the construction or development of
a Capital Improvement shall also be deemed to be equity issued
to finance the construction or development of such Capital
Improvement for purposes of this clause (iv)), less
(b) the sum of (i) Operating Expenditures for the
period beginning on the Closing Date and ending on the last day
of such period, (ii) the amount of cash reserves (or the
Partnerships proportionate share of cash reserves in the
case of Subsidiaries that are not wholly owned) established by
the General Partner to provide funds for future Operating
Expenditures, and (iii) all Working Capital Borrowings not
repaid within twelve months after having been incurred, or
repaid within such
12-month
period with the proceeds of additional Working Capital
Borrowings; provided, however, that disbursements made
(including contributions to a Group Member or disbursements on
behalf of a Group Member) or cash reserves established,
increased or reduced after the end of such period but on or
before the date of determination of Available Cash with respect
to such period shall be deemed to have been made, established,
increased or reduced, for purposes of determining Operating
Surplus, within such period if the General Partner so determines.
Notwithstanding the foregoing, Operating
Surplus with respect to the Quarter in which the
Liquidation Date occurs and any subsequent Quarter shall equal
zero.
Operational Services Agreement means that
certain Operational Services Agreement, dated as
of ,
2011, among Tesoro, the Partnership, Tesoro Companies Inc.,
Tesoro R&M, Tesoro Alaska, Tesoro High Plains Pipeline
Company LLC, Tesoro Logistics Operations LLC and the General
Partner as such agreement may be amended, supplemented or
restated from time to time.
Opinion of Counsel means a written opinion of
counsel (who may be regular counsel to the Partnership or the
General Partner or any of its Affiliates) acceptable to the
General Partner.
Option Closing Date means the date or dates
on which any Common Units are sold by the Partnership to the
Underwriters upon exercise of the Over-Allotment Option.
Organizational Limited Partner means Tesoro
in its capacity as the organizational limited partner of the
Partnership pursuant to this Agreement.
Outstanding means, with respect to
Partnership Securities, all Partnership Securities that are
issued by the Partnership and reflected as outstanding on the
Partnerships books and records as of the date of
determination; provided, however, that if at any time any
Person or Group (other than the General Partner or its
Affiliates) beneficially owns 20% or more of the Outstanding
Partnership Securities of any class then Outstanding, all
Partnership Securities owned by such Person or Group shall not
be entitled to be voted on any matter and shall not be
considered to be Outstanding when sending notices of a meeting
of Limited Partners to vote on any matter (unless otherwise
required by law), calculating required votes, determining the
presence of a quorum or for other similar purposes under this
Agreement, except that Partnership Securities so owned shall be
considered to be Outstanding for purposes of
Section 11.1(b)(iv) (such Partnership Securities shall not,
A-17
however, be treated as a separate class of Partnership
Securities for purposes of this Agreement or the Delaware Act);
provided, further, that the foregoing limitation shall
not apply to (i) any Person or Group who acquired 20% or
more of the Outstanding Partnership Securities of any class then
Outstanding directly from the General Partner or its Affiliates
(other than the Partnership), (ii) any Person or Group who
acquired 20% or more of the Outstanding Partnership Securities
of any class then Outstanding directly or indirectly from a
Person or Group described in clause (i) provided that, upon
or prior to such acquisition, the General Partner shall have
notified such Person or Group in writing that such limitation
shall not apply, or (iii) any Person or Group who acquired
20% or more of any Partnership Securities issued by the
Partnership with the prior approval of the Board of Directors of
the General Partner.
Over-Allotment Option means the
over-allotment option granted to the Underwriters by the
Partnership pursuant to the Underwriting Agreement.
Partner Nonrecourse Debt has the meaning set
forth in Treasury
Regulation Section 1.704-2(b)(4).
Partner Nonrecourse Debt Minimum Gain has the
meaning set forth in Treasury
Regulation Section 1.704-2(i)(2).
Partner Nonrecourse Deductions means any and
all items of loss, deduction or expenditure (including any
expenditure described in Section 705(a)(2)(B) of the Code)
that, in accordance with the principles of Treasury
Regulation Section 1.704-2(i),
are attributable to a Partner Nonrecourse Debt.
Partners means the General Partner and the
Limited Partners.
Partnership means Tesoro Logistics LP, a
Delaware limited partnership.
Partnership Group means the Partnership and
its Subsidiaries treated as a single consolidated entity.
Partnership Interest means an interest in the
Partnership, which shall include the General Partner Interest
and Limited Partner Interests.
Partnership Minimum Gain means that amount
determined in accordance with the principles of Treasury
Regulation Sections 1.704-2(b)(2)
and
1.704-2(d).
Partnership Security means any class or
series of equity interest in the Partnership (but excluding any
options, rights, warrants and appreciation rights relating to an
equity interest in the Partnership), including Common Units,
Subordinated Units, General Partner Units and Incentive
Distribution Rights.
Per Unit Capital Amount means, as of any date
of determination, the Capital Account, stated on a per Unit
basis, underlying any Unit held by a Person other than the
General Partner or any Affiliate of the General Partner who
holds Units.
Percentage Interest means as of any date of
determination (a) as to the General Partner with respect to
General Partner Units and as to any Unitholder with respect to
Units, as the case may be, the product obtained by multiplying
(i) 100% less the percentage applicable to clause (b)
below by (ii) the quotient obtained by dividing
(A) the number of General Partner Units held by the General
Partner or the number of Units held by such Unitholder, as the
case may be, by (B) the total number of Outstanding Units
and General Partner Units, and (b) as to the holders of
other Partnership Securities issued by the Partnership in
accordance with Section 5.6, the percentage established as
a part of such issuance. The Percentage Interest with respect to
an Incentive Distribution Right shall at all times be zero.
Person means an individual or a corporation,
firm, limited liability company, partnership, joint venture,
trust, unincorporated organization, association, government
agency or political subdivision thereof or other entity.
Plan of Conversion has the meaning assigned
to such term in Section 14.1.
Pro Rata means (a) when used with
respect to Units or any class thereof, apportioned equally among
all designated Units in accordance with their relative
Percentage Interests, (b) when used with respect to
Partners or Record Holders, apportioned among all Partners or
Record Holders in accordance with their
A-18
relative Percentage Interests and (c) when used with
respect to holders of Incentive Distribution Rights, apportioned
equally among all holders of Incentive Distribution Rights in
accordance with the relative number or percentage of Incentive
Distribution Rights held by each such holder.
Purchase Date means the date determined by
the General Partner as the date for purchase of all Outstanding
Limited Partner Interests of a certain class (other than Limited
Partner Interests owned by the General Partner and its
Affiliates) pursuant to Article XV.
Quarter means, unless the context requires
otherwise, a fiscal quarter of the Partnership, or, with respect
to the fiscal quarter of the Partnership which includes the
Closing Date, the portion of such fiscal quarter after the
Closing Date.
Rate Eligibility Trigger is defined in
Section 4.9(a)(i).
Recapture Income means any gain recognized by
the Partnership (computed without regard to any adjustment
required by Section 734 or Section 743 of the Code)
upon the disposition of any property or asset of the
Partnership, which gain is characterized as ordinary income
because it represents the recapture of deductions previously
taken with respect to such property or asset.
Record Date means the date established by the
General Partner or otherwise in accordance with this Agreement
for determining (a) the identity of the Record Holders
entitled to notice of, or to vote at, any meeting of Limited
Partners or entitled to vote by ballot or give approval of
Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited
Partners or (b) the identity of Record Holders entitled to
receive any report or distribution or to participate in any
offer.
Record Holder means (a) with respect to
Partnership Securities of any class for which a Transfer Agent
has been appointed, the Person in whose name a Partnership
Security of such class is registered on the books of the
Transfer Agent as of the opening of business on a particular
Business Day or (b) with respect to other classes of
Partnership Securities, the Person in whose name any such other
Partnership Security is registered on the books that the General
Partner has caused to be kept as of the opening of business on
such Business Day.
Redeemable Interests means any Partnership
Interests for which a redemption notice has been given, and has
not been withdrawn, pursuant to Section 4.10.
Registration Statement means the Registration
Statement on
Form S-1
(File
No. 333-171525)
as it has been or as it may be amended or supplemented from time
to time, filed by the Partnership with the Commission under the
Securities Act to register the offering and sale of the Common
Units in the Initial Offering.
Remaining Net Positive Adjustments means as
of the end of any taxable period, (i) with respect to the
Unitholders holding Common Units or Subordinated Units, the
excess of (a) the Net Positive Adjustments of the
Unitholders holding Common Units or Subordinated Units as of the
end of such period over (b) the sum of those Partners
Share of Additional Book Basis Derivative Items for each prior
taxable period, (ii) with respect to the General Partner
(as holder of the General Partner Units), the excess of
(a) the Net Positive Adjustments of the General Partner as
of the end of such period over (b) the sum of the General
Partners Share of Additional Book Basis Derivative Items
with respect to the General Partner Units for each prior taxable
period, and (iii) with respect to the holders of Incentive
Distribution Rights, the excess of (a) the Net Positive
Adjustments of the holders of Incentive Distribution Rights as
of the end of such period over (b) the sum of the Share of
Additional Book Basis Derivative Items of the holders of the
Incentive Distribution Rights for each prior taxable period.
Required Allocations means any allocation of
an item of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), Section 6.1(d)(ii),
Section 6.1(d)(iv), Section 6.1(d)(v),
Section 6.1(d)(vi), Section 6.1(d)(vii) or
Section 6.1(d)(ix).
Reset MQD has the meaning assigned to such
term in Section 5.11(e).
Reset Notice has the meaning assigned to such
term in Section 5.11(b).
A-19
Retained Converted Subordinated Unit has the
meaning assigned to such term in Section 5.5(c)(ii).
Second Liquidation Target Amount has the
meaning assigned to such term in Section 6.1(c)(i)(E).
Second Target Distribution means $0.421875
per Unit per Quarter (or, with respect to the period commencing
on the Closing Date and ending on June 30, 2011, it means
the product of $0.421875 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of
which the denominator is 91), subject to adjustment in
accordance with Section 5.11, Section 6.6 and
Section 6.9.
Securities Act means the Securities Act of
1933, as amended, supplemented or restated from time to time and
any successor to such statute.
Securities Exchange Act means the Securities
Exchange Act of 1934, as amended, supplemented or restated from
time to time and any successor to such statute.
Share of Additional Book Basis Derivative
Items means in connection with any allocation of
Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Unitholders holding Common Units or
Subordinated Units, the amount that bears the same ratio to such
Additional Book Basis Derivative Items as the Unitholders
Remaining Net Positive Adjustments as of the end of such taxable
period bears to the Aggregate Remaining Net Positive Adjustments
as of that time, (ii) with respect to the General Partner
(as holder of the General Partner Units), the amount that bears
the same ratio to such Additional Book Basis Derivative Items as
the General Partners Remaining Net Positive Adjustments as
of the end of such taxable period bears to the Aggregate
Remaining Net Positive Adjustment as of that time, and
(iii) with respect to the Partners holding Incentive
Distribution Rights, the amount that bears the same ratio to
such Additional Book Basis Derivative Items as the Remaining Net
Positive Adjustments of the Partners holding the Incentive
Distribution Rights as of the end of such taxable period bears
to the Aggregate Remaining Net Positive Adjustments as of that
time.
Special Approval means approval by a majority
of the members of the Conflicts Committee acting in good faith.
Subordinated Unit means a Partnership
Security representing a fractional part of the Partnership
Interests of all Limited Partners and having the rights and
obligations specified with respect to Subordinated Units in this
Agreement. The term Subordinated Unit does not
include a Common Unit. A Subordinated Unit that is convertible
into a Common Unit shall not constitute a Common Unit until such
conversion occurs.
Subordination Period means the period
commencing on the Closing Date and expiring on the first to
occur of the following dates:
(a) the first Business Day following the distribution of
Available Cash to Partners pursuant to Section 6.3(a) in
respect of any Quarter beginning with the Quarter ending
June 30, 2014 in respect of which (i)
(A) distributions of Available Cash from Operating Surplus
on each of the Outstanding Common Units, Subordinated Units and
General Partner Units and any other Outstanding Units that are
senior or equal in right of distribution to the Subordinated
Units, in each case with respect to each of the three
consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are
senior or equal in right of distribution to the Subordinated
Units, in each case in respect of such periods and (B) the
Adjusted Operating Surplus for each of the three consecutive,
non-overlapping four-Quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units
and any other Units that are senior or equal in right of
distribution to the Subordinated Units, in each case that were
Outstanding during such periods on a Fully Diluted Weighted
Average Basis, plus the related distributions on the General
Partner Interest and (ii) there are no Cumulative Common
Unit Arrearages; provided, however, that in the case of
this paragraph (a), the Subordination Period will not terminate
unless the Conflicts Committee, or the Board of Directors, based
on the recommendation of the Conflicts Committee, reasonably
expects that the tests set forth in subclauses (i)(A) and
(i)(B) of this paragraph (a) will be met with respect to
the four-Quarter period
A-20
immediately succeeding the period referred to in this
paragraph (a), in each case, without regard to any
Curtailment Fees expected to be received during such period.
(b) the first Business Day following the distribution of
Available Cash to Partners pursuant to Section 6.3(a) in
respect of any Quarter beginning with the Quarter ending
June 30, 2012 in respect of which (i)
(A) distributions of Available Cash from Operating Surplus
on each of the Outstanding Common Units and Subordinated Units
and any other Outstanding Units that are senior or equal in
right of distribution to the Subordinated Units, in each case
with respect to the four-Quarter period immediately preceding
such date equaled or exceeded 150% of the Minimum Quarterly
Distribution on all of the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are
senior or equal in right of distribution to the Subordinated
Units, in each case in respect of such period, and (B) the
Adjusted Operating Surplus for the four-Quarter period
immediately preceding such date equaled or exceeded 150% of the
sum of the Minimum Quarterly Distribution on all of the Common
Units and Subordinated Units and any other Units that are senior
or equal in right of distribution to the Subordinated Units, in
each case that were Outstanding during such period on a Fully
Diluted Weighted Average Basis, plus the related distributions
on the General Partner Interests and the corresponding Incentive
Distributions and (ii) there are no Cumulative Common Unit
Arrearages; provided, however, that in the case of this
paragraph (b), the Subordination Period will not terminate
unless the Conflicts Committee, or the Board of Directors, based
on the recommendation of the Conflicts Committee, reasonably
expects that the tests set forth in subclauses (i)(A) and
(i)(B) of this paragraph (b) will be met with respect to
the four-Quarter period immediately succeeding the last period
referred to in this paragraph, in each case, without regard to
any Curtailment Fees expected to be received during such
four-Quarter period.
(c) the date on which the General Partner is removed in a
manner described in Section 11.4.
Subsidiary means, with respect to any Person,
(a) a corporation of which more than 50% of the voting
power of shares entitled (without regard to the occurrence of
any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or
indirectly, at the date of determination, by such Person, by one
or more Subsidiaries of such Person or a combination thereof,
(b) a partnership (whether general or limited) in which
such Person or a Subsidiary of such Person is, at the date of
determination, a general or limited partner of such partnership,
but only if more than 50% of the partnership interests of such
partnership (considering all of the partnership interests of the
partnership as a single class) is owned, directly or indirectly,
at the date of determination, by such Person, by one or more
Subsidiaries of such Person, or a combination thereof, or
(c) any other Person (other than a corporation or a
partnership) in which such Person, one or more Subsidiaries of
such Person, or a combination thereof, directly or indirectly,
at the date of determination, has (i) at least a majority
ownership interest or (ii) the power to elect or direct the
election of a majority of the directors or other governing body
of such Person.
Surviving Business Entity has the meaning
assigned to such term in Section 14.2(b).
Target Distributions means, collectively, the
First Target Distribution, Second Target Distribution and Third
Target Distribution.
Taxation Certification means a properly
completed certificate in such form as may be specified by the
General Partner by which a Limited Partner certifies that he
(and if he is a nominee holding for the account of another
Person, that to the best of his knowledge such other Person) is
an Eligible Holder.
Tesoro means Tesoro Corporation, a Delaware
corporation.
Tesoro Alaska means Tesoro Alaska Company, a
Delaware corporation.
Tesoro High Plains means Tesoro High Plains
Pipeline Company LLC, a Delaware limited liability company.
Tesoro R&M means Tesoro Refining and
Marketing Company, a Delaware corporation.
A-21
Third Target Distribution means $0.506250 per
Unit per Quarter (or, with respect to the period commencing on
the Closing Date and ending on June 30, 2011, it means the
product of $0. 506250 multiplied by a fraction of which the
numerator is equal to the number of days in such period and of
which the denominator is 91), subject to adjustment in
accordance with Sections 5.11, 6.6 and 6.9.
Trading Day has the meaning assigned to such
term in Section 15.1(a).
Transaction Documents has the meaning
assigned to such term in Section 7.1(b).
transfer has the meaning assigned to such
term in Section 4.4(a).
Transfer Agent means such bank, trust company
or other Person (including the General Partner or one of its
Affiliates) as may be appointed from time to time by the General
Partner to act as registrar and transfer agent for any class of
Partnership Securities; provided, that if no Transfer
Agent is specifically designated for any class of Partnership
Securities, the General Partner shall act in such capacity.
Underwriter means each Person named as an
underwriter in Schedule I to the Underwriting Agreement who
purchases Common Units pursuant thereto.
Underwriting Agreement means that certain
Underwriting Agreement dated as
of ,
2011 among the Underwriters, Tesoro, the Partnership, the
General Partner, Tesoro R&M and Tesoro Alaska Company
providing for the purchase of Common Units by the Underwriters.
Unit means a Partnership Security that is
designated as a Unit and shall include Common Units
and Subordinated Units but shall not include (i) General
Partner Units (or the General Partner Interest represented
thereby) or (ii) Incentive Distribution Rights.
Unit Majority means (i) during the
Subordination Period, at least a majority of the Outstanding
Common Units (excluding Common Units owned by the General
Partner and its Affiliates), voting as a class, and at least a
majority of the Outstanding Subordinated Units, voting as a
class, and (ii) after the end of the Subordination Period,
at least a majority of the Outstanding Common Units.
Unitholders means the holders of Units.
Unpaid MQD has the meaning assigned to such
term in Section 6.1(c)(i)(B).
Unrealized Gain attributable to any item of
Partnership property means, as of any date of determination, the
excess, if any, of (a) the fair market value of such
property as of such date (as determined under
Section 5.5(d)) over (b) the Carrying Value of such
property as of such date (prior to any adjustment to be made
pursuant to Section 5.5(d) as of such date).
Unrealized Loss attributable to any item of
Partnership property means, as of any date of determination, the
excess, if any, of (a) the Carrying Value of such property
as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair
market value of such property as of such date (as determined
under Section 5.5(d)).
Unrecovered Initial Unit Price means at any
time, with respect to a Unit, the Initial Unit Price less the
sum of all distributions constituting Capital Surplus
theretofore made in respect of an Initial Common Unit and any
distributions of cash (or the Net Agreed Value of any
distributions in kind) in connection with the dissolution and
liquidation of the Partnership theretofore made in respect of an
Initial Common Unit, adjusted as the General Partner determines
to be appropriate to give effect to any distribution,
subdivision or combination of such Units.
Unrestricted Person means (a) each
Indemnitee, (b) each Partner, (c) each Person who is
or was a member, partner, director, officer, employee or agent
of any Group Member, a General Partner or any Departing General
Partner or any Affiliate of any Group Member, a General Partner
or any Departing General Partner and (d) any Person the
General Partner designates as an Unrestricted Person
for purposes of this Agreement.
A-22
U.S. GAAP means United States generally
accepted accounting principles, as in effect from time to time,
consistently applied.
Withdrawal Opinion of Counsel has the meaning
assigned to such term in Section 11.1(b).
Working Capital Borrowings means borrowings
incurred pursuant to a credit facility, commercial paper
facility or similar financing arrangement that are used solely
for working capital purposes or to pay distributions to the
Partners; provided that when such borrowings are incurred
it is the intent of the borrower to repay such borrowings within
12 months from the date of such borrowings other than from
additional Working Capital Borrowings.
Section 1.2 Construction.
Unless the context requires otherwise: (a) any pronoun used
in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns,
pronouns and verbs shall include the plural and vice versa;
(b) references to Articles and Sections refer to Articles
and Sections of this Agreement; (c) the terms
include, includes, including
or words of like import shall be deemed to be followed by the
words without limitation; and (d) the terms
hereof, herein or hereunder
refer to this Agreement as a whole and not to any particular
provision of this Agreement. The table of contents and headings
contained in this Agreement are for reference purposes only, and
shall not affect in any way the meaning or interpretation of
this Agreement.
ARTICLE II
ORGANIZATION
Section 2.1 Formation.
The General Partner and the Organizational Limited Partner have
previously formed the Partnership as a limited partnership
pursuant to the provisions of the Delaware Act and hereby amend
and restate the original Agreement of Limited Partnership of
Tesoro Logistics LP in its entirety. This amendment and
restatement shall become effective on the date of this
Agreement. Except as expressly provided to the contrary in this
Agreement, the rights, duties (including fiduciary duties),
liabilities and obligations of the Partners and the
administration, dissolution and termination of the Partnership
shall be governed by the Delaware Act. All Partnership Interests
shall constitute personal property of the owner thereof for all
purposes.
Section 2.2 Name.
The name of the Partnership shall be Tesoro Logistics
LP. Subject to applicable law, the Partnerships
business may be conducted under any other name or names as
determined by the General Partner, including the name of the
General Partner. The words Limited Partnership,
L.P., Ltd. or similar words or letters
shall be included in the Partnerships name where necessary
for the purpose of complying with the laws of any jurisdiction
that so requires. The General Partner may change the name of the
Partnership at any time and from time to time and shall notify
the Limited Partners of such change in the next regular
communication to the Limited Partners.
Section 2.3 Registered
Office; Registered Agent; Principal Office; Other Offices.
Unless and until changed by the General Partner, the registered
office of the Partnership in the State of Delaware shall be
located at 2711 Centerville Road, Suite 400,
Wilmington, New Castle County, Delaware 19801, and the
registered agent for service of process on the Partnership in
the State of Delaware at such registered office shall be
Corporation Service Company. The principal office of the
Partnership shall be located at 19100 Ridgeway Parkway,
San Antonio, Texas 78259, or such other place as the
General Partner may from time to time designate by notice to the
Limited Partners. The Partnership may maintain offices at such
other place or places within or outside the State of Delaware as
the General Partner determines to be necessary or appropriate.
The address of the General Partner shall be 19100 Ridgeway
Parkway, San Antonio,
A-23
Texas 78259, or such other place as the General Partner may from
time to time designate by notice to the Limited Partners.
Section 2.4 Purpose
and Business.
The purpose and nature of the business to be conducted by the
Partnership shall be to (a) engage directly in, or enter
into or form, hold and dispose of any corporation, partnership,
joint venture, limited liability company or other arrangement to
engage indirectly in, any business activity that is approved by
the General Partner and that lawfully may be conducted by a
limited partnership organized pursuant to the Delaware Act and,
in connection therewith, to exercise all of the rights and
powers conferred upon the Partnership pursuant to the agreements
relating to such business activity, and (b) do anything
necessary or appropriate to the foregoing, including the making
of capital contributions or loans to a Group Member;
provided, however, that the General Partner shall not
cause the Partnership to engage, directly or indirectly, in any
business activity that the General Partner determines would
cause the Partnership to be treated as an association taxable as
a corporation or otherwise taxable as an entity for federal
income tax purposes. To the fullest extent permitted by law, the
General Partner shall have no duty or obligation to propose or
approve the conduct by the Partnership of any business and may
decline to so propose or approve free of any fiduciary duty or
obligation whatsoever to the Partnership or any Limited Partner
and, in declining to so propose or approve, shall not be
required to act in good faith or pursuant to any other standard
imposed by this Agreement, any Group Member Agreement, any other
agreement contemplated hereby or under the Delaware Act or any
other law, rule or regulation or at equity.
Section 2.5 Powers.
The Partnership shall be empowered to do any and all acts and
things necessary or appropriate for the furtherance and
accomplishment of the purposes and business described in
Section 2.4 and for the protection and benefit of the
Partnership.
Section 2.6 Term.
The term of the Partnership commenced upon the filing of the
Certificate of Limited Partnership in accordance with the
Delaware Act and shall continue in existence until the
dissolution of the Partnership in accordance with the provisions
of Article XII. The existence of the Partnership as a
separate legal entity shall continue until the cancellation of
the Certificate of Limited Partnership as provided in the
Delaware Act.
Section 2.7 Title
to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and
whether tangible or intangible, shall be deemed to be owned by
the Partnership as an entity, and no Partner, individually or
collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all
of the Partnership assets may be held in the name of the
Partnership, the General Partner, one or more of its Affiliates
or one or more nominees, as the General Partner may determine.
The General Partner hereby declares and warrants that any
Partnership assets for which record title is held in the name of
the General Partner or one or more of its Affiliates or one or
more nominees shall be held by the General Partner or such
Affiliate or nominee for the use and benefit of the Partnership
in accordance with the provisions of this Agreement;
provided, however, that the General Partner shall use
reasonable efforts to cause record title to such assets (other
than those assets in respect of which the General Partner
determines that the expense and difficulty of conveyancing makes
transfer of record title to the Partnership impracticable) to be
vested in the Partnership or one or more of the
Partnerships designated Affiliates as soon as reasonably
practicable; provided, further, that, prior to the
withdrawal or removal of the General Partner or as soon
thereafter as practicable, the General Partner shall use
reasonable efforts to effect the transfer of record title to the
Partnership and, prior to any such transfer, will provide for
the use of such assets in a manner satisfactory to the General
Partner. All Partnership assets shall be recorded as the
property of the Partnership in its books and records,
irrespective of the name in which record title to such
Partnership assets is held.
A-24
ARTICLE III
RIGHTS OF
LIMITED PARTNERS
Section 3.1 Limitation
of Liability.
The Limited Partners shall have no liability under this
Agreement except as expressly provided in this Agreement or the
Delaware Act.
Section 3.2 Management
of Business.
No Limited Partner, in its capacity as such, shall participate
in the operation, management or control (within the meaning of
the Delaware Act) of the Partnerships business, transact
any business in the Partnerships name or have the power to
sign documents for or otherwise bind the Partnership. Any action
taken by any Affiliate of the General Partner or any officer,
director, employee, manager, member, general partner, agent or
trustee of the General Partner or any of its Affiliates, or any
officer, director, employee, manager, member, general partner,
agent or trustee of a Group Member, in its capacity as such,
shall not be deemed to be participating in the control of the
business of the Partnership by a limited partner of the
Partnership (within the meaning of
Section 17-303(a)
of the Delaware Act) and shall not affect, impair or eliminate
the limitations on the liability of the Limited Partners under
this Agreement.
Section 3.3 Outside
Activities of the Limited Partners.
Subject to the provisions of Section 7.5, which shall
continue to be applicable to the Persons referred to therein,
regardless of whether such Persons shall also be Limited
Partners, any Limited Partner shall be entitled to and may have
business interests and engage in business activities in addition
to those relating to the Partnership, including business
interests and activities in direct competition with the
Partnership Group. Neither the Partnership nor any of the other
Partners shall have any rights by virtue of this Agreement in
any business ventures of any Limited Partner.
Section 3.4 Rights
of Limited Partners.
(a) In addition to other rights provided by this Agreement
or by applicable law (other than
Section 17-305
of the Delaware Act, which is restricted to the extent set forth
below), and except as limited by Section 3.4(b), each
Limited Partner shall have the right, for a purpose reasonably
related to such Limited Partners interest as a Limited
Partner in the Partnership, upon reasonable written demand
stating the purpose of such demand, and at such Limited
Partners own expense:
(i) to obtain true and full information regarding the
status of the business and financial condition of the
Partnership; provided, however, that the requirements of
this Section 3.4(a)(i) shall be satisfied by furnishing to
a Limited Partner upon its demand pursuant to this
Section 3.4(a)(i) either (A) the Partnerships
most recent filings with the Commission on
Form 10-K
and any subsequent filings on
Form 10-Q
and 8-K or
(B) if the Partnership is no longer subject to the
reporting requirements of the Exchange Act, the information
specified in, and meeting the requirements of,
Rule 144A(d)(4) under the Securities Act;
(ii) promptly after its becoming available, to obtain a
copy of the Partnerships federal, state and local income
tax returns for each year;
(iii) to obtain a current list of the name and last known
business, residence or mailing address of each Partner;
(iv) to obtain a copy of this Agreement and the Certificate
of Limited Partnership and all amendments thereto, together with
copies of the executed copies of all powers of attorney pursuant
to which this Agreement, the Certificate of Limited Partnership
and all amendments thereto have been executed;
A-25
(v) to obtain true and full information regarding the
amount of cash and a description and statement of the Net Agreed
Value of any other Capital Contribution by each Partner and that
each Partner has agreed to contribute in the future, and the
date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs
of the Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the
Limited Partners, for such period of time as the General Partner
deems reasonable, (i) any information that the General
Partner reasonably believes to be in the nature of trade secrets
or (ii) other information the disclosure of which the
General Partner in good faith believes (A) is not in the
best interests of the Partnership Group, (B) could damage
the Partnership Group or its business or (C) that any Group
Member is required by law or by agreement with any third party
to keep confidential (other than agreements with Affiliates of
the Partnership the primary purpose of which is to circumvent
the obligations set forth in this Section 3.4).
ARTICLE IV
CERTIFICATES;
RECORD HOLDERS; TRANSFER OF PARTNERSHIP
INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
Section 4.1 Certificates.
Notwithstanding anything to the contrary in this Agreement,
unless the General Partner shall determine otherwise in respect
of some or all of any or all classes of Partnership Interests,
Partnership Interests shall not be evidenced by physical
certificates. Certificates that may be issued, if any, shall be
executed on behalf of the Partnership by the Chairman of the
Board, Chief Executive Officer, President, Chief Financial
Officer or any Vice President and the Secretary, any Assistant
Secretary, or other authorized officer or director of the
General Partner. If a Transfer Agent has been appointed for a
class of Partnership Interests, no Certificate for such class of
Partnership Interests shall be valid for any purpose until it
has been countersigned by the Transfer Agent; provided,
however, that, if the General Partner elects to cause the
Partnership to issue Partnership Interests of such class in
global form, the Certificate shall be valid upon receipt of a
certificate from the Transfer Agent certifying that the
Partnership Interests have been duly registered in accordance
with the directions of the Partnership. Subject to the
requirements of Section 6.7(b) and Section 6.7(c), if
Common Units are evidenced by Certificates, on or after the date
on which Subordinated Units are converted into Common Units
pursuant to the terms of Section 5.7, the Record Holders of
such Subordinated Units (i) if the Subordinated Units are
evidenced by Certificates, may exchange such Certificates for
Certificates evidencing Common Units, or (ii) if the
Subordinated Units are not evidenced by Certificates, shall be
issued Certificates evidencing Common Units. With respect to any
Units outstanding prior to the effectiveness of this Agreement
that are represented by physical certificates, the General
Partner may determine that such Units will no longer be
represented by physical certificates and may, upon written
notice to the holders of such Units and subject to applicable
law, take whatever actions it deems necessary or appropriate to
cause such Units to be registered in book entry or global form
and may cause such physical certificates to be cancelled or
deemed cancelled.
Section 4.2 Mutilated,
Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the
Transfer Agent, the appropriate officers of the General Partner
on behalf of the Partnership shall execute, and the Transfer
Agent shall countersign and deliver in exchange therefor, a new
Certificate evidencing the same number and type of Partnership
Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on
behalf of the Partnership shall execute and deliver, and the
Transfer Agent shall countersign, a new Certificate in place of
any Certificate previously issued, if the Record Holder of the
Certificate:
(i) makes proof by affidavit, in form and substance
satisfactory to the General Partner, that a previously issued
Certificate has been lost, destroyed or stolen;
A-26
(ii) requests the issuance of a new Certificate before the
General Partner has notice that the Certificate has been
acquired by a purchaser for value in good faith and without
notice of an adverse claim;
(iii) if requested by the General Partner, delivers to the
General Partner a bond, in form and substance satisfactory to
the General Partner, with surety or sureties and with fixed or
open penalty as the General Partner may direct to indemnify the
Partnership, the Partners, the General Partner and the Transfer
Agent against any claim that may be made on account of the
alleged loss, destruction or theft of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by
the General Partner.
If a Limited Partner fails to notify the General Partner within
a reasonable period of time after such Limited Partner has
notice of the loss, destruction or theft of a Certificate, and a
transfer of the Limited Partner Interests represented by the
Certificate is registered before the Partnership, the General
Partner or the Transfer Agent receives such notification, to the
fullest extent permitted by law, the Limited Partner shall be
precluded from making any claim against the Partnership, the
General Partner or the Transfer Agent for such transfer or for a
new Certificate.
(c) As a condition to the issuance of any new Certificate
under this Section 4.2, the General Partner may require the
payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the
Transfer Agent) reasonably connected therewith.
Section 4.3 Record
Holders.
The Partnership shall be entitled to recognize the Record Holder
as the Partner with respect to any Partnership Interest and,
accordingly, shall not be bound to recognize any equitable or
other claim to, or interest in, such Partnership Interest on the
part of any other Person, regardless of whether the Partnership
shall have actual or other notice thereof, except as otherwise
provided by law or any applicable rule, regulation, guideline or
requirement of any National Securities Exchange on which such
Partnership Interests are listed or admitted to trading. Without
limiting the foregoing, when a Person (such as a broker, dealer,
bank, trust company or clearing corporation or an agent of any
of the foregoing) is acting as nominee, agent or in some other
representative capacity for another Person in acquiring
and/or
holding Partnership Interests, as between the Partnership on the
one hand, and such other Persons on the other, such
representative Person shall be (a) the Record Holder of
such Partnership Interest and (b) bound by this Agreement
and shall have the rights and obligations of a Partner hereunder
as, and to the extent, provided herein.
Section 4.4 Transfer
Generally.
(a) The term transfer, when used in this
Agreement with respect to a Partnership Interest, shall be
deemed to refer to a transaction (i) by which the General
Partner assigns its General Partner Units to another Person and
includes a sale, assignment, gift, pledge, encumbrance,
hypothecation, mortgage, exchange or any other disposition by
law or otherwise or (ii) by which the holder of a Limited
Partner Interest assigns such Limited Partner Interest to
another Person who is or becomes a Limited Partner, and includes
a sale, assignment, gift, exchange or any other disposition by
law or otherwise, excluding a pledge, encumbrance, hypothecation
or mortgage but including any transfer upon foreclosure of any
pledge, encumbrance, hypothecation or mortgage.
(b) No Partnership Interest shall be transferred, in whole
or in part, except in accordance with the terms and conditions
set forth in this Article IV. Any transfer or purported
transfer of a Partnership Interest not made in accordance with
this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed
to prevent a disposition by any stockholder, member, partner or
other owner of the General Partner or any Limited Partner of any
or all of the shares of stock, membership interests, partnership
interests or other ownership interests in the General Partner or
Limited Partner and the term transfer shall not mean
any such disposition.
A-27
Section 4.5 Registration
and Transfer of Limited Partner Interests.
(a) The General Partner shall keep or cause to be kept on
behalf of the Partnership a register in which, subject to such
reasonable regulations as it may prescribe and subject to the
provisions of Section 4.5(b), the Partnership will provide
for the registration and transfer of Limited Partner Interests.
The Partnership shall not recognize transfers of Certificates
evidencing Limited Partner Interests unless such transfers are
effected in the manner described in this Section 4.5.
(b) The General Partner shall not recognize any transfer of
Limited Partner Interests evidenced by Certificates until the
Certificates evidencing such Limited Partner Interests are
surrendered for registration of transfer. No charge shall be
imposed by the General Partner for such transfer;
provided, that as a condition to the issuance of any new
Certificate under this Section 4.5, the General Partner may
require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed with respect
thereto. Upon surrender of a Certificate for registration of
transfer of any Limited Partner Interests evidenced by a
Certificate, and subject to the provisions of this
Section 4.5(b), the appropriate officers of the General
Partner on behalf of the Partnership shall execute and deliver,
and in the case of Certificates evidencing Limited Partner
Interests for which a Transfer Agent has been appointed, the
Transfer Agent shall countersign and deliver, in the name of the
holder or the designated transferee or transferees, as required
pursuant to the holders instructions, one or more new
Certificates evidencing the same aggregate number and type of
Limited Partner Interests as was evidenced by the Certificate so
surrendered.
(c) Upon the receipt of proper transfer instructions from
the registered owner of uncertificated Common Units, such
uncertificated Common Units shall be cancelled, issuance of new
equivalent uncertificated Common Units or Certificates shall be
made to the holder of Common Units entitled thereto and the
transaction shall be recorded upon the Partnerships
register.
(d) By acceptance of the transfer of any Limited Partner
Interests in accordance with this Section 4.5 and except as
provided in Section 4.9, each transferee of a Limited
Partner Interest (including any nominee holder or an agent or
representative acquiring such Limited Partner Interests for the
account of another Person) (i) shall be admitted to the
Partnership as a Limited Partner with respect to the Limited
Partner Interests so transferred to such Person when any such
transfer or admission is reflected in the books and records of
the Partnership and such Limited Partner becomes the Record
Holder of the Limited Partner Interests so transferred,
(ii) shall become bound, and shall be deemed to have agreed
to be bound, by the terms of this Agreement,
(iii) represents that the transferee has the capacity,
power and authority to enter into this Agreement and
(iv) makes the consents, acknowledgements and waivers
contained in this Agreement, all with or without execution of
this Agreement by such Person. The transfer of any Limited
Partner Interests and the admission of any new Limited Partner
shall not constitute an amendment to this Agreement.
(e) Subject to (i) the foregoing provisions of this
Section 4.5, (ii) Section 4.3,
(iii) Section 4.8, (iv) with respect to any class
or series of Limited Partner Interests, the provisions of any
statement of designations or an amendment to this Agreement
establishing such class or series, (v) any contractual
provisions binding on any Limited Partner and
(vi) provisions of applicable law including the Securities
Act, Limited Partner Interests shall be freely transferable.
(f) The General Partner and its Affiliates shall have the
right at any time to transfer their Subordinated Units and
Common Units (whether issued upon conversion of the Subordinated
Units or otherwise) to one or more Persons.
Section 4.6 Transfer
of the General Partners General Partner Interest.
(a) Subject to Section 4.6(c) below, prior to
June 30, 2021 the General Partner shall not transfer all or
any part of its General Partner Interest (represented by General
Partner Units) to a Person unless such transfer (i) has
been approved by the prior written consent or vote of the
holders of at least a majority of the Outstanding Common Units
(excluding Common Units held by the General Partner and its
Affiliates) or (ii) is of all, but not less than all, of
its General Partner Interest to (A) an Affiliate of the
General Partner (other than an individual) or (B) another
Person (other than an individual) in connection with the merger
or consolidation
A-28
of the General Partner with or into such other Person or the
transfer by the General Partner of all or substantially all of
its assets to such other Person.
(b) Subject to Section 4.6(c) below, on or after
June 30, 2021 the General Partner may transfer all or any
part of its General Partner Interest without Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no
transfer by the General Partner of all or any part of its
General Partner Interest to another Person shall be permitted
unless (i) the transferee agrees to assume the rights and
duties of the General Partner under this Agreement and to be
bound by the provisions of this Agreement, (ii) the
Partnership receives an Opinion of Counsel that such transfer
would not result in the loss of limited liability of any Limited
Partner under the Delaware Act or cause the Partnership to be
treated as an association taxable as a corporation or otherwise
to be taxed as an entity for federal income tax purposes (to the
extent not already so treated or taxed) and (iii) such
transferee also agrees to purchase all (or the appropriate
portion thereof, if applicable) of the partnership or membership
interest of the General Partner as the general partner or
managing member, if any, of each other Group Member. In the case
of a transfer pursuant to and in compliance with this
Section 4.6, the transferee or successor (as the case may
be) shall, subject to compliance with the terms of
Section 10.2, be admitted to the Partnership as the General
Partner effective immediately prior to the transfer of the
General Partner Interest, and the business of the Partnership
shall continue without dissolution.
Section 4.7 Transfer
of Incentive Distribution Rights.
The General Partner or any other holder of Incentive
Distribution Rights may transfer any or all of its Incentive
Distribution Rights without Unitholder approval.
Section 4.8 Restrictions
on Transfers.
(a) Except as provided in Section 4.8(d),
notwithstanding the other provisions of this Article IV, no
transfer of any Partnership Interests shall be made if such
transfer would (i) violate the then applicable federal or
state securities laws or rules and regulations of the
Commission, any state securities commission or any other
governmental authority with jurisdiction over such transfer,
(ii) terminate the existence or qualification of the
Partnership under the laws of the jurisdiction of its formation,
or (iii) cause the Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not
already so treated or taxed).
(b) The General Partner may impose restrictions on the
transfer of Partnership Interests if it receives an Opinion of
Counsel that such restrictions are necessary to (i) avoid a
significant risk of the Partnership becoming taxable as a
corporation or otherwise becoming taxable as an entity for
federal income tax purposes or (ii) preserve the uniformity
of the Limited Partner Interests (or any class or classes
thereof). The General Partner may impose such restrictions by
amending this Agreement; provided, however, that any
amendment that would result in the delisting or suspension of
trading of any class of Limited Partner Interests on the
principal National Securities Exchange on which such class of
Limited Partner Interests is then listed or admitted to trading
must be approved, prior to such amendment being effected, by the
holders of at least a majority of the Outstanding Limited
Partner Interests of such class.
(c) The transfer of a Subordinated Unit that has converted
into a Common Unit shall be subject to the restrictions imposed
by Section 6.7(b) and Section 6.7(c).
(d) Nothing contained in this Article IV, or elsewhere
in this Agreement, shall preclude the settlement of any
transactions involving Partnership Interests entered into
through the facilities of any National Securities Exchange on
which such Partnership Interests are listed or admitted to
trading.
(e) Each certificate evidencing Partnership Interests shall
bear a conspicuous legend in substantially the following form:
THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF
TESORO LOGISTICS LP THAT THIS SECURITY MAY NOT BE SOLD, OFFERED,
RESOLD, PLEDGED
A-29
OR OTHERWISE TRANSFERRED IF SUCH TRANSFER WOULD (A) VIOLATE
THE THEN APPLICABLE FEDERAL OR STATE SECURITIES LAWS OR
RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE
COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER
GOVERNMENTAL AUTHORITY WITH JURISDICTION OVER SUCH TRANSFER,
(B) TERMINATE THE EXISTENCE OR QUALIFICATION OF TESORO
LOGISTICS LP UNDER THE LAWS OF THE STATE OF DELAWARE, OR
(C) CAUSE TESORO LOGISTICS LP TO BE TREATED AS AN
ASSOCIATION TAXABLE AS A CORPORATION OR OTHERWISE TO BE TAXED AS
AN ENTITY FOR FEDERAL INCOME TAX PURPOSES (TO THE EXTENT NOT
ALREADY SO TREATED OR TAXED). TESORO LOGISTICS GP, LLC, THE
GENERAL PARTNER OF TESORO LOGISTICS LP, MAY IMPOSE ADDITIONAL
RESTRICTIONS ON THE TRANSFER OF THIS SECURITY IF IT RECEIVES AN
OPINION OF COUNSEL THAT SUCH RESTRICTIONS ARE NECESSARY TO AVOID
A SIGNIFICANT RISK OF TESORO LOGISTICS LP BECOMING TAXABLE AS A
CORPORATION OR OTHERWISE BECOMING TAXABLE AS AN ENTITY FOR
FEDERAL INCOME TAX PURPOSES. THE RESTRICTIONS SET FORTH ABOVE
SHALL NOT PRECLUDE THE SETTLEMENT OF ANY TRANSACTIONS INVOLVING
THIS SECURITY ENTERED INTO THROUGH THE FACILITIES OF ANY
NATIONAL SECURITIES EXCHANGE ON WHICH THIS SECURITY IS LISTED OR
ADMITTED TO TRADING.
Section 4.9 Eligibility
Certificates; Ineligible Holders.
(a) If at any time the General Partner determines, with the
advice of counsel, that
(i) the Partnerships status other than as an
association taxable as a corporation for U.S. federal
income tax purposes or the failure of the Partnership otherwise
to be subject to an entity-level tax for U.S. federal,
state or local income tax purposes, coupled with the tax status
(or lack of proof of the federal income tax status) of one or
more Limited Partners, has or will reasonably likely have a
material adverse effect on the maximum applicable rate that can
be charged to customers by Subsidiaries of the Partnership (a
Rate Eligibility Trigger); or
(ii) any Group Member is subject to any federal, state or
local law or regulation that would create a substantial risk of
cancellation or forfeiture of any property in which the Group
Member has an interest based on the nationality, citizenship or
other related status of a Limited Partner (a
Citizenship Eligibility Trigger);
then, the General Partner may adopt such amendments to this
Agreement as it determines to be necessary or advisable to
(x) in the case of a Rate Eligibility Trigger, obtain such
proof of the federal income tax status of the Limited Partners
and, to the extent relevant, their beneficial owners, as the
General Partner determines to be necessary or advisable to
establish those Limited Partners whose federal income tax status
does not or would not have a material adverse effect on the
maximum applicable rate that can be charged to customers by
Subsidiaries of the Partnership or (y) in the case of a
Citizenship Eligibility Trigger, obtain such proof of the
nationality, citizenship or other related status (or, if the
General Partner is a nominee holding for the account of another
Person, the nationality, citizenship or other related status of
such Person) of the Limited Partner as the General Partner
determines to be necessary or advisable to establish and those
Limited Partners whose status as a Limited Partner does not or
would not subject any Group Member to a significant risk of
cancellation or forfeiture of any of its properties or interests
therein.
(b) Such amendments may include provisions requiring all
Limited Partners to certify as to their (and their beneficial
owners) status as Eligible Holders upon demand and on a
regular basis, as determined by the General Partner, and may
require transferees of Units to so certify prior to being
admitted to the Partnership as a Limited Partner (any such
required certificate, an Eligibility
Certificate).
(c) Such amendments may provide that with respect to any
Limited Partner (and its beneficial owners) who fails to furnish
to the General Partner within a reasonable period requested an
Eligibility Certificate and any other information, or if upon
receipt of such Eligibility Certificate or other requested
information the General Partner determines that a Limited
Partner is not an Eligible Holder (such a Limited Partner an
A-30
Ineligible Holder), the Limited Partner
Interests owned by such Limited Partner shall be subject to
redemption in accordance with the provisions of
Section 4.10. In addition, the General Partner shall be
substituted for any Limited Partner that is an Ineligible Holder
as the Limited Partner in respect of the Ineligible
Holders Limited Partner Interests.
(d) The General Partner shall, in exercising voting rights
in respect of Limited Partner Interests held by it on behalf of
Ineligible Holders, distribute the votes in the same ratios as
the votes of Limited Partners (including the General Partner and
its Affiliates) in respect of Limited Partner Interests other
than those of Ineligible Holders are cast, either for, against
or abstaining as to the matter.
(e) Upon dissolution of the Partnership, an Ineligible
Holder shall have no right to receive a distribution in kind
pursuant to Section 12.4 but shall be entitled to the cash
equivalent thereof, and the Partnership shall provide cash in
exchange for an assignment of the Ineligible Holders share
of any distribution in kind. Such payment and assignment shall
be treated for Partnership purposes as a purchase by the
Partnership from the Ineligible Holder of its Limited Partner
Interest (representing the right to receive its share of such
distribution in kind).
(f) At any time after a holder can and does certify that it
has become an Eligible Holder, an Ineligible Holder may, upon
application to the General Partner, request that with respect to
any Limited Partner Interests of such Ineligible Holder not
redeemed pursuant to Section 4.10, such Ineligible Holder
upon approval of the General Partner, shall no longer constitute
an Ineligible Holder and the General Partner shall cease to be
deemed to be the Limited Partner in respect of such Limited
Partner Interests.
Section 4.10 Redemption
of Partnership Interests of Ineligible Holders.
(a) If at any time a Limited Partner fails to furnish an
Eligibility Certificate or any other information requested
within a reasonable period of time specified in amendments
adopted pursuant to Section 4.9, or if upon receipt of such
Eligibility Certificate or other information the General Partner
determines, with the advice of counsel, that a Limited Partner
is an Ineligible Holder, the Partnership may, unless the Limited
Partner establishes to the satisfaction of the General Partner
that such Limited Partner is not an Ineligible Holder or has
transferred his Limited Partner Interests to a Person who is an
Eligible Holder and who furnishes an Eligibility Certificate to
the General Partner prior to the date fixed for redemption as
provided below, redeem the Limited Partner Interest of such
Limited Partner as follows:
(i) The General Partner shall, not later than the
30th day before the date fixed for redemption, give notice
of redemption to the Limited Partner, at his last address
designated on the records of the Partnership or the Transfer
Agent, by registered or certified mail, postage prepaid. The
notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Interests, the date fixed
for redemption, the place of payment, that payment of the
redemption price will be made upon redemption of the Redeemable
Interests (or, if later in the case of Redeemable Interests
evidenced by Certificates, upon surrender of the Certificate
evidencing the Redeemable Interests) and that on and after the
date fixed for redemption no further allocations or
distributions to which the Limited Partner would otherwise be
entitled in respect of the Redeemable Interests will accrue or
be made.
(ii) The aggregate redemption price for Redeemable
Interests shall be an amount equal to the Current Market Price
(the date of determination of which shall be the date fixed for
redemption) of Limited Partner Interests of the class to be so
redeemed multiplied by the number of Limited Partner Interests
of each such class included among the Redeemable Interests. The
redemption price shall be paid, as determined by the General
Partner, in cash or by delivery of a promissory note of the
Partnership in the principal amount of the redemption price,
bearing interest at the rate of 5% annually and payable in three
equal annual installments of principal together with accrued
interest, commencing one year after the redemption date.
(iii) The Limited Partner or his duly authorized
representative shall be entitled to receive the payment for the
Redeemable Interests at the place of payment specified in the
notice of redemption on the redemption date (or, if later in the
case of Redeemable Interests evidenced by Certificates, upon
A-31
surrender by or on behalf of the Limited Partner or Transferee
at the place specified in the notice of redemption, of the
Certificate evidencing the Redeemable Interests, duly endorsed
in blank or accompanied by an assignment duly executed in blank).
(iv) After the redemption date, Redeemable Interests shall
no longer constitute issued and Outstanding Limited Partner
Interests.
(b) The provisions of this Section 4.10 shall also be
applicable to Limited Partner Interests held by a Limited
Partner as nominee of a Person determined to be other than an
Eligible Holder.
(c) Nothing in this Section 4.10 shall prevent the
recipient of a notice of redemption from transferring his
Limited Partner Interest before the redemption date if such
transfer is otherwise permitted under this Agreement. Upon
receipt of notice of such a transfer, the General Partner shall
withdraw the notice of redemption, provided the
transferee of such Limited Partner Interest certifies to the
satisfaction of the General Partner that he is an Eligible
Holder. If the transferee fails to make such certification, such
redemption shall be effected from the transferee on the original
redemption date.
ARTICLE V
CAPITAL
CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 Organizational
Contributions.
In connection with the formation of the Partnership under the
Delaware Act, the General Partner made an initial Capital
Contribution to the Partnership in the amount of $20.00, for a
2% General Partner Interest in the Partnership and has been
admitted as the General Partner of the Partnership, and the
Organizational Limited Partner made an initial Capital
Contribution to the Partnership in the amount of $980.00 for a
98% Limited Partner Interest in the Partnership and has been
admitted as a Limited Partner of the Partnership.
On ,
2011, pursuant to the Contribution Agreement, the interest of
the Organizational Limited Partner was partially redeemed in
exchange for the return of the initial Capital Contribution of
the Organizational Limited Partner. Ninety-eight percent of any
interest or other profit that may have resulted from the
investment or other use of such initial Capital Contributions
shall be allocated and distributed to the Organizational Limited
Partner, and the balance thereof shall be allocated and
distributed to the General Partner.
Section 5.2 Contributions
by the General Partner.
(a) On the Closing Date and pursuant to the Contribution
Agreement, the General Partner contributed to the Partnership,
as a Capital Contribution, the HP Interest (as defined in the
Contribution Agreement), in exchange for (i) 622,649
General Partner Units representing a continuation of its
2% General Partner Interest, subject to all of the rights,
privileges and duties of the General Partner under this
Agreement and (ii) the Incentive Distribution Rights.
(b) Upon the issuance of any additional Limited Partner
Interests by the Partnership (other than (i) the Common
Units issued pursuant to the Over-Allotment Option,
(ii) the Common Units and Subordinated Units issued
pursuant to Section 5.3(a), (iii) any Common Units
issued pursuant to Section 5.11 and (iv) any Common
Units issued upon the conversion of any Partnership Securities),
the General Partner may, in exchange for a proportionate number
of General Partner Units with rights to allocations and
distributions that correspond to those applicable to such
additional Limited Partner Interests, make additional Capital
Contributions in an amount equal to the product obtained by
multiplying (A) the quotient determined by dividing
(x) the General Partners Percentage Interest
immediately prior to the issuance of such additional Limited
Partner Interests by the Partnership by (y) 100 less the
General Partners Percentage Interest immediately prior to
the issuance of such additional Limited Partner Interests by the
Partnership times (B) the amount contributed to the
Partnership by the Limited Partners in exchange for such
additional Limited Partner Interests. Except as set forth in
Article XII, the General Partner shall not be obligated to
make any additional Capital Contributions to the Partnership.
A-32
Section 5.3 Contributions
by Limited Partners.
(a) On the Closing Date, pursuant to and as described in
the Contribution Agreement: (i) Tesoro contributed to the
Partnership, as a Capital Contribution, the Tesoro HP Interest
(as defined in the Contribution Agreement) in exchange
for
Common Units
and
Subordinated Units; (ii) Tesoro R&M contributed to the
Partnership, as a Capital Contribution, the Operating Company
Interest (as defined in the Contribution Agreement) in exchange
for
Common Units and Subordinated Units; and (iii) Tesoro
Alaska contributed to the Partnership, as a Capital
Contribution, the TAL Interest (as defined in the Contribution
Agreement) in exchange
for
Common Units and Subordinated Units.
(b) On the Closing Date and pursuant to the Underwriting
Agreement, each Underwriter contributed cash to the Partnership
in exchange for the issuance by the Partnership of Common Units
to each Underwriter, all as set forth in the Underwriting
Agreement.
(c) Upon the exercise, if any, of the Over-Allotment
Option, each Underwriter shall contribute cash to the
Partnership on the Option Closing Date in exchange for the
issuance by the Partnership of Common Units to each Underwriter,
all as set forth in the Underwriting Agreement.
(d) No Limited Partner Interests will be issued or issuable
as of or at the Closing Date other than (i) the Common
Units and Subordinated Units issued to Tesoro, Tesoro R&M
and Tesoro Alaska pursuant to subparagraph (a) hereof,
(ii) the Common Units issued to the Underwriters as
described in subparagraphs (b) and (c) hereof and
(iii) the Incentive Distribution Rights issued to the
General Partner.
(e) No Limited Partner will be required to make any
additional Capital Contribution to the Partnership pursuant to
this Agreement.
Section 5.4 Interest
and Withdrawal.
No interest shall be paid by the Partnership on Capital
Contributions. No Partner shall be entitled to the withdrawal or
return of its Capital Contribution, except to the extent, if
any, that distributions made pursuant to this Agreement or upon
termination of the Partnership may be considered as such by law
and then only to the extent provided for in this Agreement.
Except to the extent expressly provided in this Agreement, no
Partner shall have priority over any other Partner either as to
the return of Capital Contributions or as to profits, losses or
distributions. Any such return shall be a compromise to which
all Partners agree within the meaning of
Section 17-502(b)
of the Delaware Act.
Section 5.5 Capital
Accounts.
(a) The Partnership shall maintain for each Partner (or a
beneficial owner of Partnership Interests held by a nominee in
any case in which the nominee has furnished the identity of such
owner to the Partnership in accordance with Section 6031(c)
of the Code or any other method acceptable to the General
Partner) owning a Partnership Interest a separate Capital
Account with respect to such Partnership Interest in accordance
with the rules of Treasury
Regulation Section 1.704-1(b)(2)(iv).
The initial Capital Account balance attributable to the General
Partner Units issued to the General Partner pursuant to
Section 5.2(a) shall equal the Net Agreed Value of the
Capital Contribution specified in Section 5.2(a), which
shall be deemed to equal the product of the number of General
Partner Units issued to the General Partner pursuant to
Section 5.2(a) and the Initial Unit Price for each Common
Unit (and the initial Capital Account balance attributable to
each General Partner Unit shall equal the Initial Unit Price for
each Common Unit). The initial Capital Account balance
attributable to the Common Units and Subordinated Units issued
to each of Tesoro, Tesoro R&M and Tesoro Alaska,
respectively, pursuant to Section 5.3(a) shall equal the
respective Net Agreed Value of the Capital Contributions
specified in Section 5.3(a), which shall be deemed to equal
the product of the number of Common Units and Subordinated Units
issued to each of Tesoro, Tesoro R&M and Tesoro Alaska,
respectively, pursuant to Section 5.3(a) and the Initial
Unit Price for each such Common Unit and Subordinated Unit (and
the initial Capital Account balance attributable to each such
Common Unit and Subordinated Unit shall equal its Initial Unit
Price). The initial Capital Account balance attributable to the
Common Units issued to the Underwriters pursuant to
Section 5.3(b) shall equal the product of the number of
A-33
Common Units so issued to the Underwriters and the Initial Unit
Price for each such Common Unit (and the initial Capital Account
balance attributable to each such Common Unit shall equal its
Initial Unit Price). The initial Capital Account attributable to
the Incentive Distribution Rights shall be zero. Thereafter, the
Capital Account shall in respect of each such Partnership
Interest be increased by (i) the amount of all Capital
Contributions made to the Partnership with respect to such
Partnership Interest and (ii) all items of Partnership
income and gain (including income and gain exempt from tax)
computed in accordance with Section 5.5(b) and allocated
with respect to such Partnership Interest pursuant to
Section 6.1, and decreased by (x) the amount of cash
or Net Agreed Value of all actual and deemed distributions of
cash or property made with respect to such Partnership Interest
and (y) all items of Partnership deduction and loss
computed in accordance with Section 5.5(b) and allocated
with respect to such Partnership Interest pursuant to
Section 6.1.
(b) For purposes of computing the amount of any item of
income, gain, loss or deduction that is to be allocated pursuant
to Article VI and is to be reflected in the Partners
Capital Accounts, the determination, recognition and
classification of any such item shall be the same as its
determination, recognition and classification for federal income
tax purposes (including any method of depreciation, cost
recovery or amortization used for that purpose),
provided, that:
(i) Solely for purposes of this Section 5.5, the
Partnership shall be treated as owning directly its
proportionate share (as determined by the General Partner based
upon the provisions of the applicable Group Member Agreement or
governing, organizational or similar documents) of all property
owned by (x) any other Group Member that is classified as a
partnership for federal income tax purposes and (y) any
other partnership, limited liability company, unincorporated
business or other entity classified as a partnership for federal
income tax purposes of which a Group Member is, directly or
indirectly, a partner, member or other equity holder.
(ii) All fees and other expenses incurred by the
Partnership to promote the sale of (or to sell) a Partnership
Interest that can neither be deducted nor amortized under
Section 709 of the Code, if any, shall, for purposes of
Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall
be allocated among the Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation
Section 1.704-1(b)(2)(iv)(m),
the computation of all items of income, gain, loss and deduction
shall be made without regard to any election under
Section 754 of the Code that may be made by the
Partnership. To the extent an adjustment to the adjusted tax
basis of any Partnership asset pursuant to Section 734(b)
or 743(b) of the Code is required, pursuant to Treasury
Regulation Section 1.704- 1(b)(2)(iv)(m), to be taken into
account in determining Capital Accounts, the amount of such
adjustment in the Capital Accounts shall be treated as an item
of gain or loss.
(iv) Any income, gain or loss attributable to the taxable
disposition of any Partnership property shall be determined as
if the adjusted basis of such property as of such date of
disposition were equal in amount to the Partnerships
Carrying Value with respect to such property as of such date.
(v) An item of income of the Partnership that is described
in Section 705(a)(1)(B) of the Code (with respect to items
of income that are exempt from tax) shall be treated as an item
of income for the purpose of this Section 5.5(b), and an
item of expense of the Partnership that is described in
Section 705(a)(2)(B) of the Code (with respect to
expenditures that are not deductible and not chargeable to
capital accounts), shall be treated as an item of deduction for
the purpose of this Section 5.5(b).
(vi) In accordance with the requirements of
Section 704(b) of the Code, any deductions for
depreciation, cost recovery or amortization attributable to any
Contributed Property shall be determined as if the adjusted
basis of such property on the date it was acquired by the
Partnership were equal to the Agreed Value of such property.
Upon an adjustment pursuant to Section 5.5(d) to the
Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further
deductions for such depreciation, cost recovery or amortization
attributable to such property shall be determined under the
rules prescribed by Treasury
Regulation Section 1.704-3(d)(2)
as if the adjusted basis of such property were equal to the
Carrying Value of such property immediately following such
adjustment.
A-34
(vii) The Gross Liability Value of each Liability of the
Partnership described in Treasury Regulation Section
1.752-7(b)(3)(i) shall be adjusted at such times as provided in
this Agreement for an adjustment to Carrying Values. The amount
of any such adjustment shall be treated for purposes hereof as
an item of loss (if the adjustment increases the Carrying Value
of such Liability of the Partnership) or an item of gain (if the
adjustment decreases the Carrying Value of such Liability of the
Partnership).
(c) (i) A transferee of a Partnership Interest shall
succeed to a pro rata portion of the Capital Account of the
transferor relating to the Partnership Interest so transferred.
(ii) Subject to Section 6.7(c), immediately prior to
the transfer of a Subordinated Unit or of a Subordinated Unit
that has converted into a Common Unit pursuant to
Section 5.7 by a holder thereof (other than a transfer to
an Affiliate unless the General Partner elects to have this
subparagraph 5.5(c)(ii) apply), the Capital Account maintained
for such Person with respect to its Subordinated Units or
converted Subordinated Units will (A) first, be allocated
to the Subordinated Units or converted Subordinated Units to be
transferred in an amount equal to the product of (x) the
number of such Subordinated Units or converted Subordinated
Units to be transferred and (y) the Per Unit Capital Amount
for a Common Unit, and (B) second, any remaining balance in
such Capital Account will be retained by the transferor,
regardless of whether it has retained any Subordinated Units or
converted Subordinated Units (Retained Converted
Subordinated Units). Following any such allocation,
the transferors Capital Account, if any, maintained with
respect to the retained Subordinated Units or Retained Converted
Subordinated Units, if any, will have a balance equal to the
amount allocated under clause (B) hereinabove, and the
transferees Capital Account established with respect to
the transferred Subordinated Units or converted Subordinated
Units will have a balance equal to the amount allocated under
clause (A) hereinabove.
(d) (i) In accordance with Treasury
Regulation Section 1.704-
1(b)(2)(iv)(f), on an issuance of additional Partnership
Interests for cash or Contributed Property, the issuance of
Partnership Interests as consideration for the provision of
services, or the conversion of the General Partners
Combined Interest to Common Units pursuant to
Section 11.3(b), the Capital Account of each Partner and
the Carrying Value of each Partnership property immediately
prior to such issuance shall be adjusted upward or downward to
reflect any Unrealized Gain or Unrealized Loss attributable to
such Partnership property, and any such Unrealized Gain or
Unrealized Loss shall be treated, for purposes of maintaining
Capital Accounts, as if it had been recognized on an actual sale
of each such property for an amount equal to its fair market
value immediately prior to such issuance and had been allocated
among the Partners at such time pursuant to Section 6.1(c)
and Section 6.1(d) in the same manner as any item of gain
or loss actually recognized following an event giving rise to
the dissolution of the Partnership would have been allocated;
provided, however, that in the event of an issuance of
Partnership Interests for a de minimis amount of cash or
Contributed Property, or in the event of an issuance of a de
minimis amount of Partnership Interests as consideration for the
provision of services, the General Partner may determine that
such adjustments are unnecessary for the proper administration
of the Partnership. In determining such Unrealized Gain or
Unrealized Loss, the aggregate fair market value of all
Partnership property (including cash or cash equivalents)
immediately prior to the issuance of additional Partnership
Interests shall be determined by the General Partner using such
method of valuation as it may adopt. In making its determination
of the fair market values of individual properties, the General
Partner may determine that it is appropriate to first determine
an aggregate value for the Partnership, derived from the current
trading price of the Common Units, and taking fully into account
the fair market value of the Partnership Interests of all
Partners at such time, and then allocate such aggregate value
among the individual properties of the Partnership (in such
manner as it determines appropriate).
(ii) In accordance with Treasury
Regulation Section 1.704-
1(b)(2)(iv)(f), immediately prior to any actual or deemed
distribution to a Partner of any Partnership property(other than
a distribution of cash that is not in redemption or retirement
of a Partnership Interest), the Capital Accounts of all Partners
and the Carrying Value of all Partnership property shall be
adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, and
any such Unrealized Gain or Unrealized Loss shall be treated,
for purposes of maintaining Capital Accounts, as if it had been
recognized on an actual sale of each such property immediately
prior to such distribution for an amount
A-35
equal to its fair market value, and had been allocated among the
Partners, at such time, pursuant to Section 6.1(c)and
Section 6.1(d) in the same manner as any item of gain or
loss actually recognized following an event giving rise to the
dissolution of the Partnership would have been allocated. In
determining such Unrealized Gain or Unrealized Loss the
aggregate fair market value of all Partnership property
(including cash or cash equivalents) immediately prior to a
distribution shall (A) in the case of an actual
distribution that is not made pursuant to Section 12.4 or
in the case of a deemed distribution, be determined in the same
manner as that provided in Section 5.5(d)(i) or (B) in
the case of a liquidating distribution pursuant to
Section 12.4, be determined by the Liquidator using such
method of valuation as it may adopt.
Section 5.6 Issuances
of Additional Partnership Securities.
(a) The Partnership may issue additional Partnership
Securities and options, rights, warrants and appreciation rights
relating to the Partnership Securities for any Partnership
purpose at any time and from time to time to such Persons for
such consideration and on such terms and conditions as the
General Partner shall determine, all without the approval of any
Limited Partners.
(b) Each additional Partnership Security authorized to be
issued by the Partnership pursuant to Section 5.6(a) may be
issued in one or more classes, or one or more series of any such
classes, with such designations, preferences, rights, powers and
duties (which may be senior to existing classes and series of
Partnership Securities), as shall be fixed by the General
Partner, including (i) the right to share in Partnership
profits and losses or items thereof; (ii) the right to
share in Partnership distributions; (iii) the rights upon
dissolution and liquidation of the Partnership;
(iv) whether, and the terms and conditions upon which, the
Partnership may or shall be required to redeem the Partnership
Security; (v) whether such Partnership Security is issued
with the privilege of conversion or exchange and, if so, the
terms and conditions of such conversion or exchange;
(vi) the terms and conditions upon which each Partnership
Security will be issued, evidenced by certificates and assigned
or transferred; (vii) the method for determining the
Percentage Interest as to such Partnership Security; and
(viii) the right, if any, of each such Partnership Security
to vote on Partnership matters, including matters relating to
the relative rights, preferences and privileges of such
Partnership Security.
(c) The General Partner shall take all actions that it
determines to be necessary or appropriate in connection with
(i) each issuance of Partnership Securities and options,
rights, warrants and appreciation rights relating to Partnership
Securities pursuant to this Section 5.6, (ii) the
conversion of the General Partner Interest (represented by
General Partner Units) or any Incentive Distribution Rights into
Units pursuant to the terms of this Agreement,
(iii) reflecting admission of such additional Limited
Partners in the books and records of the Partnership as the
Record Holders of such Limited Partner Interests and
(iv) all additional issuances of Partnership Securities.
The General Partner shall determine the relative rights, powers
and duties of the holders of the Units or other Partnership
Securities being so issued. The General Partner shall do all
things necessary to comply with the Delaware Act and is
authorized and directed to do all things that it determines to
be necessary or appropriate in connection with any future
issuance of Partnership Securities or in connection with the
conversion of the General Partner Interest or any Incentive
Distribution Rights into Units pursuant to the terms of this
Agreement, including compliance with any statute, rule,
regulation or guideline of any federal, state or other
governmental agency or any National Securities Exchange on which
the Units or other Partnership Securities are listed or admitted
to trading.
(d) No fractional Units shall be issued by the Partnership.
Section 5.7 Conversion
of Subordinated Units.
(a) All of the Subordinated Units shall convert into Common
Units on a one-for-one basis on the expiration of the
Subordination Period.
(b) A Subordinated Unit that has converted into a Common
Unit shall be subject to the provisions of Section 6.7.
A-36
Section 5.8 Limited
Preemptive Right.
Except as provided in this Section 5.8 and in
Section 5.2 and Section 5.11, no Person shall have any
preemptive, preferential or other similar right with respect to
the issuance of any Partnership Security, whether unissued, held
in the treasury or hereafter created. The General Partner shall
have the right, which it may from time to time assign in whole
or in part to any of its Affiliates, to purchase Partnership
Securities from the Partnership whenever, and on the same terms
that, the Partnership issues Partnership Securities to Persons
other than the General Partner and its Affiliates, to the extent
necessary to maintain the Percentage Interests of the General
Partner and its Affiliates equal to that which existed
immediately prior to the issuance of such Partnership Securities.
Section 5.9 Splits
and Combinations.
(a) Subject to Section 5.9(d), Section 6.6 and
Section 6.9 (dealing with adjustments of distribution
levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a
subdivision or combination of Partnership Securities so long as,
after any such event, each Partner shall have the same
Percentage Interest in the Partnership as before such event, and
any amounts calculated on a per Unit basis (including any Common
Unit Arrearage or Cumulative Common Unit Arrearage) or stated as
a number of Units are proportionately adjusted.
(b) Whenever such a distribution, subdivision or
combination of Partnership Securities is declared, the General
Partner shall select a Record Date as of which the distribution,
subdivision or combination shall be effective and shall send
notice thereof at least 20 days prior to such Record Date
to each Record Holder as of a date not less than 10 days
prior to the date of such notice. The General Partner also may
cause a firm of independent public accountants selected by it to
calculate the number of Partnership Securities to be held by
each Record Holder after giving effect to such distribution,
subdivision or combination. The General Partner shall be
entitled to rely on any certificate provided by such firm as
conclusive evidence of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision
or combination, the Partnership may issue Certificates or
uncertificated Partnership Securities to the Record Holders of
Partnership Securities as of the applicable Record Date
representing the new number of Partnership Securities held by
such Record Holders, or the General Partner may adopt such other
procedures that it determines to be necessary or appropriate to
reflect such changes. If any such combination results in a
smaller total number of Partnership Securities Outstanding, the
Partnership shall require, as a condition to the delivery to a
Record Holder of such new Certificate, the surrender of any
Certificate held by such Record Holder immediately prior to such
Record Date.
(d) The Partnership shall not issue fractional Units upon
any distribution, subdivision or combination of Units. If a
distribution, subdivision or combination of Units would result
in the issuance of fractional Units but for the provisions of
Section 5.6(d) and this Section 5.9(d), each
fractional Unit shall be rounded to the nearest whole Unit (with
fractional Units equal to or greater than a 0.5 Unit being
rounded to the next higher Unit).
Section 5.10 Fully
Paid and Non-Assessable Nature of Limited Partner Interests.
All Limited Partner Interests issued pursuant to, and in
accordance with the requirements of, this Article V shall
be fully paid and non-assessable Limited Partner Interests in
the Partnership, except as such non-assessability may be
affected by
Sections 17-607
or 17-804 of
the Delaware Act.
Section 5.11 Issuance
of Common Units in Connection with Reset of Incentive
Distribution Rights.
(a) Subject to the provisions of this Section 5.11,
the holder of the Incentive Distribution Rights (or, if there is
more than one holder of the Incentive Distribution Rights, the
holders of a majority in interest of the Incentive Distribution
Rights) shall have the right, at any time when there are no
Subordinated Units outstanding and the Partnership has made a
distribution pursuant to Section 6.4(b)(v) for each of the
four most
A-37
recently completed Quarters and the amount of each such
distribution did not exceed Adjusted Operating Surplus for such
Quarter, to make an election (the IDR Reset
Election) to cause the Minimum Quarterly Distribution
and the Target Distributions to be reset in accordance with the
provisions of Section 5.11(e) and, in connection therewith,
the holder or holders of the Incentive Distribution Rights will
become entitled to receive their respective proportionate share
of a number of Common Units (the IDR Reset Common
Units) derived by dividing (i) the average amount
of cash distributions made by the Partnership for the two full
Quarters immediately preceding the giving of the Reset Notice
(as defined in Section 5.11(b)) in respect of the Incentive
Distribution Rights by (ii) the average of the cash
distributions made by the Partnership in respect of each Common
Unit for the two full Quarters immediately preceding the giving
of the Reset Notice (the number of Common Units determined by
such quotient is referred to herein as the Aggregate
Quantity of IDR Reset Common Units). If at the time of
any IDR Reset Election the General Partner and its Affiliates
are not the holders of a majority interest of the Incentive
Distribution Rights, then the IDR Reset Election shall be
subject to the prior written concurrence of the General Partner
that the conditions described in the immediately preceding
sentence have been satisfied. Upon the issuance of such IDR
Reset Common Units, the Partnership will issue to the General
Partner that number of additional General Partner Units equal to
the product of (x) the quotient obtained by dividing
(A) the Percentage Interest of the General Partner
immediately prior to such issuance by (B) a percentage
equal to 100% less such Percentage Interest by (y) the
number of such IDR Reset Common Units, and the General Partner
shall not be obligated to make any additional Capital
Contribution to the Partnership in exchange for such issuance.
The making of the IDR Reset Election in the manner specified in
this Section 5.11 shall cause the Minimum Quarterly
Distribution and the Target Distributions to be reset in
accordance with the provisions of Section 5.11(e) and, in
connection therewith, the holder or holders of the Incentive
Distribution Rights will become entitled to receive Common Units
and the General Partner will become entitled to receive General
Partner Units on the basis specified above, without any further
approval required by the General Partner or the Unitholders
other than as set forth in this Section 5.11(a), at the
time specified in Section 5.11(c) unless the IDR Reset
Election is rescinded pursuant to Section 5.11(d).
(b) To exercise the right specified in
Section 5.11(a), the holder of the Incentive Distribution
Rights (or, if there is more than one holder of the Incentive
Distribution Rights, the holders of a majority in interest of
the Incentive Distribution Rights) shall deliver a written
notice (the Reset Notice) to the Partnership.
Within 10 Business Days after the receipt by the Partnership of
such Reset Notice, the Partnership shall deliver a written
notice to the holder or holders of the Incentive Distribution
Rights of the Partnerships determination of the aggregate
number of Common Units that each holder of Incentive
Distribution Rights will be entitled to receive.
(c) The holder or holders of the Incentive Distribution
Rights will be entitled to receive the Aggregate Quantity of IDR
Reset Common Units and the General Partner will be entitled to
receive the related additional General Partner Units on the
fifteenth Business Day after receipt by the Partnership of the
Reset Notice; provided, however, that the issuance of
Common Units to the holder or holders of the Incentive
Distribution Rights shall not occur prior to the approval of the
listing or admission for trading of such Common Units by the
principal National Securities Exchange upon which the Common
Units are then listed or admitted for trading if any such
approval is required pursuant to the rules and regulations of
such National Securities Exchange.
(d) If the principal National Securities Exchange upon
which the Common Units are then traded has not approved the
listing or admission for trading of the Common Units to be
issued pursuant to this Section 5.11 on or before the
30th calendar day following the Partnerships receipt
of the Reset Notice and such approval is required by the rules
and regulations of such National Securities Exchange, then the
holder of the Incentive Distribution Rights (or, if there is
more than one holder of the Incentive Distribution Rights, the
holders of a majority in interest of the Incentive Distribution
Rights) shall have the right to either rescind the IDR Reset
Election or elect to receive other Partnership Securities having
such terms as the General Partner may approve, with the approval
of the Conflicts Committee, that will provide (i) the same
economic value, in the aggregate, as the Aggregate Quantity of
IDR Reset Common Units would have had at the time of the
Partnerships receipt of the Reset Notice, as determined by
the General Partner, and (ii) for the subsequent conversion
of
A-38
such Partnership Securities into Common Units within not more
than 12 months following the Partnerships receipt of
the Reset Notice upon the satisfaction of one or more conditions
that are reasonably acceptable to the holder of the Incentive
Distribution Rights (or, if there is more than one holder of the
Incentive Distribution Rights, the holders of a majority in
interest of the Incentive Distribution Rights).
(e) The Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target
Distribution shall be adjusted at the time of the issuance of
Common Units or other Partnership Securities pursuant to this
Section 5.11 such that (i) the Minimum Quarterly
Distribution shall be reset to equal the average cash
distribution amount per Common Unit for the two Quarters
immediately prior to the Partnerships receipt of the Reset
Notice (the Reset MQD), (ii) the First
Target Distribution shall be reset to equal 115% of the Reset
MQD, (iii) the Second Target Distribution shall be reset to
equal to 125% of the Reset MQD and (iv) the Third Target
Distribution shall be reset to equal 150% of the Reset MQD.
(f) Upon the issuance of IDR Reset Common Units pursuant to
Section 5.11(a), the Capital Account maintained with
respect to the Incentive Distribution Rights will
(i) first, be allocated to IDR Reset Common Units in an
amount equal to the product of (A) the Aggregate Quantity
of IDR Reset Common Units and (B) the Per Unit Capital
Amount for an Initial Common Unit, and (ii) second, as to
any remaining balance in such Capital Account, will be retained
by the holder of the Incentive Distribution Rights. If there is
not sufficient capital associated with the Incentive
Distribution Rights to allocate the full Per Unit Capital Amount
for an Initial Common Unit to the IDR Reset Common Units in
accordance with clause (i) of this Section 5.11(f),
the IDR Reset Common Units shall be subject to
Sections 6.1(d)(x)(B) and (C).
ARTICLE VI
ALLOCATIONS
AND DISTRIBUTIONS
Section 6.1 Allocations
for Capital Account Purposes.
For purposes of maintaining the Capital Accounts and in
determining the rights of the Partners among themselves, the
Partnerships items of income, gain, loss and deduction
(computed in accordance with Section 5.5(b)) for each
taxable period shall be allocated among the Partners as provided
herein below.
(a) Net Income. After giving effect to
the special allocations set forth in Section 6.1(d), Net
Income for each taxable period and all items of income, gain,
loss and deduction taken into account in computing Net Income
for such taxable period shall be allocated as follows:
(i) First, to the General Partner until the aggregate of
the Net Income allocated to the General Partner pursuant to this
Section 6.1(a)(i) and the Net Termination Gain allocated to
the General Partner pursuant to Section 6.1(c)(i)(A) or
Section 6.1(c)(iv)(A) for the current and all previous taxable
periods is equal to the aggregate of the Net Loss allocated to
the General Partner pursuant to Section 6.1(b)(ii) for all
previous taxable periods and the Net Termination Loss allocated
to the General Partner pursuant to Section 6.1(c)(ii)(D) or
Section 6.1(c)(iii)(B) for the current and all previous
taxable periods; and
(ii) The balance, if any, (x) to the General Partner
in accordance with its Percentage Interest, and (y) to all
Unitholders, Pro Rata, a percentage equal to 100% less the
percentage applicable to subclause (x).
(b) Net Loss. After giving effect to the
special allocations set forth in Section 6.1(d), Net Loss
for each taxable period and all items of income, gain, loss and
deduction taken into account in computing Net Loss for such
taxable period shall be allocated as follows:
(i) First, to the General Partner and the Unitholders, Pro
Rata; provided, that Net Losses shall not be allocated pursuant
to this Section 6.1(b)(i) to the extent that such
allocation would cause any Unitholder to have a deficit balance
in its Adjusted Capital Account at the end of such taxable
period (or increase any existing deficit balance in its Adjusted
Capital Account); and
(ii) The balance, if any, 100% to the General Partner.
A-39
(c) Net Termination Gains and
Losses. After giving effect to the special
allocations set forth in Section 6.1(d), Net Termination
Gain or Net Termination Loss (including a pro rata part of each
item of income, gain, loss and deduction taken into account in
computing Net Termination Gain or Net Termination Loss) for such
taxable period shall be allocated in the manner set forth in
this Section 6.1(c). All allocations under this
Section 6.1(c) shall be made after Capital Account balances
have been adjusted by all other allocations provided under this
Section 6.1 and after all distributions of Available Cash
provided under Section 6.4 and Section 6.5 have been
made; provided, however, that solely for purposes of this
Section 6.1(c), Capital Accounts shall not be adjusted for
distributions made pursuant to Section 12.4.
(i) Except as provided in Section 6.1(c)(iv), Net
Termination Gain (including a pro rata part of each item of
income, gain, loss, and deduction taken into account in
computing Net Termination Gain) shall be allocated:
(A) First, to the General Partner until the aggregate of
the Net Termination Gain allocated to the General Partner
pursuant to this Section 6.1(c)(i)(A) or
Section 6.1(c)(iv)(A) and the Net Income allocated to the
General Partner pursuant to Section 6.1(a)(i) for the
current and all previous taxable periods is equal to the
aggregate of the Net Loss allocated to the General Partner
pursuant to Section 6.1(b)(ii) for all previous taxable
periods and the Net Termination Loss allocated to the General
Partner pursuant to Section 6.1(c)(ii)(D) or
Section 6.1(c)(iii)(B) for all previous taxable periods;
(B) Second, (x) to the General Partner in accordance
with its Percentage Interest and (y) to all Unitholders
holding Common Units, Pro Rata, a percentage equal to 100% less
the General Partners Percentage Interest, until the
Capital Account in respect of each Common Unit then Outstanding
is equal to the sum of (1) its Unrecovered Initial Unit
Price, (2) the Minimum Quarterly Distribution for the
Quarter during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(i) or
Section 6.4(b)(i) with respect to such Common Unit for such
Quarter (the amount determined pursuant to this clause (2)
is hereinafter defined as the Unpaid MQD) and
(3) any then existing Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or
is deemed to be recognized) prior to the conversion of the last
Outstanding Subordinated Unit into a Common Unit, (x) to
the General Partner in accordance with its Percentage Interest
and (y) to all Unitholders holding Subordinated Units, Pro
Rata, a percentage equal to 100% less the General Partners
Percentage Interest, until the Capital Account in respect of
each Subordinated Unit then Outstanding equals the sum of
(1) its Unrecovered Initial Unit Price, determined for the
taxable period (or portion thereof) to which this allocation of
gain relates, and (2) the Minimum Quarterly Distribution
for the Quarter during which the Liquidation Date occurs,
reduced by any distribution pursuant to Section 6.4(a)(iii) with
respect to such Subordinated Unit for such Quarter;
(D) Fourth, 100% to the General Partner and all
Unitholders, Pro Rata, until the Capital Account in respect of
each Common Unit then Outstanding is equal to the sum of
(1) its Unrecovered Initial Unit Price, (2) the Unpaid
MQD, (3) any then existing Cumulative Common Unit
Arrearage, and (4) the excess of (aa) the First Target
Distribution less the Minimum Quarterly Distribution for each
Quarter of the Partnerships existence over (bb) the
cumulative per Unit amount of any distributions of Available
Cash that is deemed to be Operating Surplus made pursuant to
Section 6.4(a)(iv) and Section 6.4(b)(ii) (the sum of
(1), (2), (3) and (4) is hereinafter referred to as the
First Liquidation Target Amount);
(E) Fifth, (x) to the General Partner in accordance
with its Percentage Interest, (y) 13% to the holders of the
Incentive Distribution Rights, Pro Rata, and (z) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclauses (x) and
(y) of this clause (E), until the Capital Account in
respect of each Common Unit then Outstanding is equal to the sum
of (1) the First Liquidation Target Amount, and
(2) the excess of (aa) the Second Target Distribution less
the First Target Distribution for each Quarter of the
Partnerships existence over (bb) the cumulative per Unit
amount of any distributions of Available Cash that is deemed to
be
A-40
Operating Surplus made pursuant to Section 6.4(a)(v) and
Section 6.4(b)(iii) (the sum of (1) and (2) is
hereinafter referred to as the Second Liquidation
Target Amount);
(F) Sixth, (x) to the General Partner in accordance
with its Percentage Interest, (y) 23% to the holders of the
Incentive Distribution Rights, Pro Rata, and (z) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclauses (x) and (y) of
this clause (F), until the Capital Account in respect of
each Common Unit then Outstanding is equal to the sum of
(1) the Second Liquidation Target Amount, and (2) the
excess of (aa) the Third Target Distribution less the Second
Target Distribution for each Quarter of the Partnerships
existence over (bb) the cumulative per Unit amount of any
distributions of Available Cash that is deemed to be Operating
Surplus made pursuant to Section 6.4(a)(vi) and
Section 6.4(b)(iv); and
(G) Finally, (x) to the General Partner in accordance
with its Percentage Interest, (y) 48% to the holders of the
Incentive Distribution Rights, Pro Rata, and (z) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclauses (x) and (y) of
this clause (G).
(ii) Except as otherwise provided by
Section 6.1(c)(iii), Net Termination Loss (including a pro
rata part of each item of income, gain, loss, and deduction
taken into account in computing Net Termination Loss) shall be
allocated:
(A) First, if Subordinated Units remain Outstanding,
(x) to the General Partner in accordance with its
Percentage Interest and (y) to all Unitholders holding
Subordinated Units, Pro Rata, a percentage equal to 100% less
the General Partners Percentage Interest, until the
Capital Account in respect of each Subordinated Unit then
Outstanding has been reduced to zero;
(B) Second, (x) to the General Partner in accordance
with its Percentage Interest and (y) to all Unitholders
holding Common Units, Pro Rata, a percentage equal to 100% less
the General Partners Percentage Interest, until the
Capital Account in respect of each Common Unit then Outstanding
has been reduced to zero;
(C) Third, to the General Partner and the Unitholders, Pro
Rata; provided that Net Termination Loss shall not be allocated
pursuant to this Section 6.1(c)(ii)(C) to the extent such
allocation would cause any Unitholder to have a deficit balance
in its Adjusted Capital Account (or increase any existing
deficit in its Adjusted Capital Account); and
(D) Fourth, the balance, if any, 100% to the General
Partner.
(iii) Any Net Termination Loss deemed recognized pursuant
to Section 5.5(d) prior to the Liquidation Date shall be
allocated:
(A) First, to the General Partner and the Unitholders, Pro
Rata; provided that Net Termination Loss shall not be allocated
pursuant to this Section 6.1(c)(iii)(A) to the extent such
allocation would cause any Unitholder to have a deficit balance
in its Adjusted Capital Account at the end of such taxable
period (or increase any existing deficit in its Adjusted Capital
Account); and
(B) The balance, if any, to the General Partner.
(iv) If a Net Termination Loss has been allocated pursuant
to Section 6.1(c)(iii), subsequent Net Termination Gain
deemed recognized pursuant to Section 5.5(d) prior to the
Liquidation Date shall be allocated:
(A) First, to the General Partner until the aggregate Net
Termination Gain allocated to the General Partner pursuant to
this Section 6.1(c)(iv)(A) is equal to the aggregate Net
Termination Loss previously allocated pursuant to
Section 6.1(c)(iii)(B);
(B) Second, to the General Partner and the Unitholders, Pro
Rata, until the aggregate Net Termination Gain allocated
pursuant to this Section 6.1(c)(iv)(B) is equal to the
aggregate Net Termination Loss previously allocated pursuant to
Section 6.1(c)(iii)(A); and
A-41
(C) The balance, if any, pursuant to the provisions of
Section 6.1(c)(i).
(d) Special Allocations. Notwithstanding
any other provision of this Section 6.1, the following
special allocations shall be made for such taxable period:
(i) Partnership Minimum Gain
Chargeback. Notwithstanding any other provision
of this Section 6.1, if there is a net decrease in
Partnership Minimum Gain during any Partnership taxable period,
each Partner shall be allocated items of Partnership income and
gain for such period (and, if necessary, subsequent periods) in
the manner and amounts provided in Treasury
Regulation Sections 1.704-
2(f)(6),
1.704-2(g)(2)
and
1.704-2(j)(2)(i),
or any successor provision. For purposes of this
Section 6.1(d), each Partners Adjusted Capital
Account balance shall be determined, and the allocation of
income or gain required hereunder shall be effected, prior to
the application of any other allocations pursuant to this
Section 6.1(d) with respect to such taxable period (other
than an allocation pursuant to Section 6.1(d)(vi) and
Section 6.1(d)(vii)). This Section 6.1(d)(i) is
intended to comply with the Partnership Minimum Gain chargeback
requirement in Treasury Regulation Section 1.704-2(f) and
shall be interpreted consistently therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum
Gain. Notwithstanding the other provisions of this
Section 6.1 (other than Section 6.1(d)(i)), except as
provided in Treasury Regulation
Section 1.704-2(i)(4),
if there is a net decrease in Partner Nonrecourse Debt Minimum
Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning
of such taxable period shall be allocated items of Partnership
income and gain for such period (and, if necessary, subsequent
periods) in the manner and amounts provided in Treasury
Regulation
Sections 1.704-2(i)(4)
and
1.704-2(j)(2)(ii),
or any successor provisions. For purposes of this
Section 6.1(d), each Partners Adjusted Capital
Account balance shall be determined, and the allocation of
income or gain required hereunder shall be effected, prior to
the application of any other allocations pursuant to this
Section 6.1(d) and other than an allocation pursuant to
Section 6.1(d)(i), Section 6.1(d)(vi) and
Section 6.1(d)(vii) with respect to such taxable period.
This Section 6.1(d)(ii) is intended to comply with the
chargeback of items of income and gain requirement in Treasury
Regulation
Section 1.704-2(i)(4)
and shall be interpreted consistently therewith.
(iii) Priority Allocations.
(A) If the amount of cash or the Net Agreed Value of any
property distributed (except cash or property distributed
pursuant to Section 12.4) with respect to a Unit exceeds
the amount of cash or the Net Agreed Value of property
distributed with respect to another Unit (the amount of the
excess, an Excess Distribution and the Unit with
respect to which the greater distribution is paid, an
Excess Distribution Unit), then (1) there shall
be allocated gross income and gain to each Unitholder receiving
an Excess Distribution with respect to the Excess Distribution
Unit until the aggregate amount of such items allocated with
respect to such Excess Distribution Unit pursuant to this
Section 6.1(d)(iii)(A) for the current taxable period and
all previous taxable periods is equal to the amount of the
Excess Distribution; and (2) the General Partner shall be
allocated gross income and gain with respect to each such Excess
Distribution in an amount equal to the product obtained by
multiplying (aa) the quotient determined by dividing
(x) the General Partners Percentage Interest at the
time when the Excess Distribution occurs by (y) a
percentage equal to 100% less the General Partners
Percentage Interest at the time when the Excess Distribution
occurs, times (bb) the total amount allocated in
clause (1) above with respect to such Excess Distribution.
(B) After the application of Section 6.1(d)(iii)(A),
all or any portion of the remaining items of Partnership gross
income or gain for the taxable period, if any, shall be
allocated (1) to the holders of Incentive Distribution
Rights, Pro Rata, until the aggregate amount of such items
allocated to the holders of Incentive Distribution Rights
pursuant to this Section 6.1(d)(iii)(B) for the current
taxable period and all previous taxable periods is equal to the
cumulative amount of all Incentive Distributions made to the
holders of Incentive Distribution Rights from the Closing Date
to a date 45 days after the end of the current taxable
period; and (2) to the General Partner an amount equal to
the product of (aa) an amount equal to the quotient determined
by dividing (x) the General
A-42
Partners Percentage Interest by (y) the sum of 100
less the General Partners Percentage Interest times (bb)
the sum of the amounts allocated in clause (1) above.
(iv) Qualified Income Offset. In the event any
Partner unexpectedly receives any adjustments, allocations or
distributions described in Treasury Regulation
Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5),
or
1.704-1(b)(2)(ii)(d)(6),
items of Partnership gross income and gain shall be specially
allocated to such Partner in an amount and manner sufficient to
eliminate, to the extent required by the Treasury Regulations
promulgated under Section 704(b) of the Code, the deficit
balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as
possible; provided, that an allocation pursuant to this
Section 6.1(d)(iv) shall be made only if and to the extent
that such Partner would have a deficit balance in its Adjusted
Capital Account as adjusted after all other allocations provided
for in this Section 6.1 have been tentatively made as if
this Section 6.1(d)(iv) were not in this Agreement.
(v) Gross Income Allocation. In the event
any Partner has a deficit balance in its Capital Account at the
end of any taxable period in excess of the sum of (A) the
amount such Partner is required to restore pursuant to the
provisions of this Agreement and (B) the amount such
Partner is deemed obligated to restore pursuant to Treasury
Regulation
Sections 1.704-2(g)
and
1.704-2(i)(5),
such Partner shall be specially allocated items of Partnership
gross income and gain in the amount of such excess as quickly as
possible; provided, that an allocation pursuant to this
Section 6.1(d)(v) shall be made only if and to the extent
that such Partner would have a deficit balance in its Capital
Account as adjusted after all other allocations provided for in
this Section 6.1 have been tentatively made as if Section
6.1(d)(iv) and this Section 6.1(d)(v) were not in this
Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions
for any taxable period shall be allocated to the Partners Pro
Rata. If the General Partner determines that the
Partnerships Nonrecourse Deductions should be allocated in
a different ratio to satisfy the safe harbor requirements of the
Treasury Regulations promulgated under Section 704(b) of
the Code, the General Partner is authorized, upon notice to the
other Partners, to revise the prescribed ratio to the
numerically closest ratio that does satisfy such requirements.
(vii) Partner Nonrecourse Deductions. Partner
Nonrecourse Deductions for any taxable period shall be allocated
100% to the Partner that bears the Economic Risk of Loss with
respect to the Partner Nonrecourse Debt to which such Partner
Nonrecourse Deductions are attributable in accordance with
Treasury Regulation
Section 1.704-2(i).
If more than one Partner bears the Economic Risk of Loss with
respect to a Partner Nonrecourse Debt, such Partner Nonrecourse
Deductions attributable thereto shall be allocated between or
among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of
Treasury Regulation
Section 1.752-3(a)(3),
the Partners agree that Nonrecourse Liabilities of the
Partnership in excess of the sum of (A) the amount of
Partnership Minimum Gain and (B) the total amount of
Nonrecourse Built-in Gain shall be allocated among the Partners
Pro Rata.
(ix) Code Section 754 Adjustments. To the
extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Section 734(b) or 743(b) of
the Code is required, pursuant to Treasury Regulation
Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the
amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such
basis), and such item of gain or loss shall be specially
allocated to the Partners in a manner consistent with the manner
in which their Capital Accounts are required to be adjusted
pursuant to such Section of the Treasury Regulations.
(x) Economic Uniformity; Changes in Law.
(A) At the election of the General Partner with respect to
any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after
taking into account allocations pursuant to
Section 6.1(d)(iii), shall be allocated 100% to each
Partner holding Subordinated Units
A-43
that are Outstanding as of the termination of the Subordination
Period (Final Subordinated Units) in the
proportion of the number of Final Subordinated Units held by
such Partner to the total number of Final Subordinated Units
then Outstanding, until each such Partner has been allocated an
amount of gross income or gain that increases the Capital
Account maintained with respect to such Final Subordinated Units
to an amount that after taking into account the other
allocations of income, gain, loss and deduction to be made with
respect to such taxable period will equal the product of
(A) the number of Final Subordinated Units held by such
Partner and (B) the Per Unit Capital Amount for a Common
Unit. The purpose of this allocation is to establish uniformity
between the Capital Accounts underlying Final Subordinated Units
and the Capital Accounts underlying Common Units held by Persons
other than the General Partner and its Affiliates immediately
prior to the conversion of such Final Subordinated Units into
Common Units. This allocation method for establishing such
economic uniformity will be available to the General Partner
only if the method for allocating the Capital Account maintained
with respect to the Subordinated Units between the transferred
and retained Subordinated Units pursuant to
Section 5.5(c)(ii) does not otherwise provide such economic
uniformity to the Final Subordinated Units.
(B) With respect to an event triggering an adjustment to
the Carrying Value of Partnership property pursuant to
Section 5.5(d) during any taxable period of the Partnership
ending upon, or after, the issuance of IDR Reset Common Units
pursuant to Section 5.11, after the application of
Section 6.1(d)(x)(A), any Unrealized Gains and Unrealized
Losses shall be allocated among the Partners in a manner that to
the nearest extent possible results in the Capital Accounts
maintained with respect to such IDR Reset Common Units issued
pursuant to Section 5.11 equaling the product of
(A) the Aggregate Quantity of IDR Reset Common Units and
(B) the Per Unit Capital Amount for an Initial Common Unit.
(C) With respect to any taxable period during which an IDR
Reset Common Unit is transferred to any Person who is not an
Affiliate of the transferor, all or a portion of the remaining
items of Partnership gross income or gain for such taxable
period shall be allocated 100% to the transferor Partner of such
transferred IDR Reset Common Unit until such transferor Partner
has been allocated an amount of gross income or gain that
increases the Capital Account maintained with respect to such
transferred IDR Reset Common Unit to an amount equal to the Per
Unit Capital Amount for an Initial Common Unit.
(D) For the proper administration of the Partnership and
for the preservation of uniformity of the Limited Partner
Interests (or any class or classes thereof), the General Partner
shall (i) adopt such conventions as it deems appropriate in
determining the amount of depreciation, amortization and cost
recovery deductions; (ii) make special allocations of
income, gain, loss, deduction, Unrealized Gain or Unrealized
Loss; and (iii) amend the provisions of this Agreement as
appropriate (x) to reflect the proposal or promulgation of
Treasury Regulations under Section 704(b) or
Section 704(c) of the Code or (y) otherwise to
preserve or achieve uniformity of the Limited Partner Interests
(or any class or classes thereof). The General Partner may adopt
such conventions, make such allocations and make such amendments
to this Agreement as provided in this Section 6.1(d)(x)(D)
only if such conventions, allocations or amendments would not
have a material adverse effect on the Partners, the holders of
any class or classes of Limited Partner Interests issued and
Outstanding or the Partnership, and if such allocations are
consistent with the principles of Section 704 of the Code.
(xi) Curative Allocation.
(A) Notwithstanding any other provision of this
Section 6.1, other than the Required Allocations, the
Required Allocations shall be taken into account in making the
Agreed Allocations so that, to the extent possible, the net
amount of items of gross income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations
and the Agreed Allocations, together, shall be equal to the net
amount of such items that would have been allocated to each such
Partner under the Agreed Allocations had the Required
Allocations and the related Curative Allocation not
A-44
otherwise been provided in this Section 6.1.
Notwithstanding the preceding sentence, Required Allocations
relating to (1) Nonrecourse Deductions shall not be taken
into account except to the extent that there has been a decrease
in Partnership Minimum Gain and (2) Partner Nonrecourse
Deductions shall not be taken into account except to the extent
that there has been a decrease in Partner Nonrecourse Debt
Minimum Gain. In exercising its discretion under this
Section 6.1(d)(xi)(A), the General Partner may take into
account future Required Allocations that, although not yet made,
are likely to offset other Required Allocations previously made.
Allocations pursuant to this Section 6.1(d)(xi)(A) shall
only be made with respect to Required Allocations to the extent
the General Partner determines that such allocations will
otherwise be inconsistent with the economic agreement among the
Partners. Further, allocations pursuant to this
Section 6.1(d)(xi)(A) shall be deferred with respect to
allocations pursuant to clauses (1) and (2) hereof to
the extent the General Partner determines that such allocations
are likely to be offset by subsequent Required Allocations.
(B) The General Partner shall, with respect to each taxable
period, (1) apply the provisions of
Section 6.1(d)(xi)(A) in whatever order is most likely to
minimize the economic distortions that might otherwise result
from the Required Allocations, and (2) divide all
allocations pursuant to Section 6.1(d)(xi)(A) among the
Partners in a manner that is likely to minimize such economic
distortions.
(xii) Corrective and Other Allocations. In the event
of any allocation of Additional Book Basis Derivative Items or
any Book-Down Event or any recognition of a Net Termination
Loss, the following rules shall apply:
(A) Except as provided in Section 6.1(d)(xii)(B), in
the case of any allocation of Additional Book Basis Derivative
Items (other than an allocation of Unrealized Gain or Unrealized
Loss under Section 5.5(d) hereof), the General Partner
shall allocate such Additional Book Basis Derivative Items to
(1) the holders of Incentive Distribution Rights and the
General Partner to the same extent that the Unrealized Gain or
Unrealized Loss giving rise to such Additional Book Basis
Derivative Items was allocated to them pursuant to
Section 5.5(d) and (2) all Unitholders, Pro Rata, to
the extent that the Unrealized Gain or Unrealized Loss giving
rise to such Additional Book Basis Derivative Items was
allocated to any Unitholders pursuant to Section 5.5(d).
(B) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 5.5(d) hereof or an
allocation of Net Termination Gain or Net Termination Loss
pursuant to Section 6.1(c) hereof) as a result of a sale or
other taxable disposition of any Partnership asset that is an
Adjusted Property (Disposed of Adjusted Property),
the General Partner shall allocate (1) additional items of
gross income and gain (aa) away from the holders of Incentive
Distribution Rights and (bb) to the Unitholders, or
(2) additional items of deduction and loss (aa) away from
the Unitholders and (bb) to the holders of Incentive
Distribution Rights, to the extent that the Additional Book
Basis Derivative Items allocated to the Unitholders exceed their
Share of Additional Book Basis Derivative Items with respect to
such Disposed of Adjusted Property. Any allocation made pursuant
to this Section 6.1(d)(xii)(B) shall be made after all of
the other Agreed Allocations have been made as if this
Section 6.1(d)(xii) were not in this Agreement and, to the
extent necessary, shall require the reallocation of items that
have been allocated pursuant to such other Agreed Allocations.
(C) In the case of any negative adjustments to the Capital
Accounts of the Partners resulting from a Book-Down Event or
from the recognition of a Net Termination Loss, such negative
adjustment (1) shall first be allocated, to the extent of
the Aggregate Remaining Net Positive Adjustments, in such a
manner, as determined by the General Partner, that to the extent
possible the aggregate Capital Accounts of the Partners will
equal the amount that would have been the Capital Account
balances of the Partners if no prior
Book-Up
Events had occurred, and (2) any negative adjustment in
excess of the Aggregate Remaining Net Positive Adjustments shall
be allocated pursuant to Section 6.1(c) hereof.
A-45
(D) For purposes of this Section 6.1(d)(xii), the
Unitholders shall be treated as being allocated Additional Book
Basis Derivative Items to the extent that such Additional Book
Basis Derivative Items have reduced the amount of income that
would otherwise have been allocated to the Unitholders under
this Agreement. In making the allocations required under this
Section 6.1(d)(xii), the General Partner may apply whatever
conventions or other methodology it determines will satisfy the
purpose of this Section 6.1(d)(xii). Without limiting the
foregoing, if an Adjusted Property is contributed by the
Partnership to another entity classified as a partnership for
federal income tax purposes (the lower tier
partnership), the General Partner may make allocations
similar to those described in Sections 6.1(d)(xii)(A)-(C)
to the extent the General Partner determines such allocations
are necessary to account for the Partnerships allocable
share of income, gain, loss and deduction of the lower tier
partnership that relate to the contributed Adjusted Property in
a manner that is consistent with the purpose of this
Section 6.1(d)(xii).
(xiii) Special Curative Allocation in Event of
Liquidation Prior to End of Subordination Period.
Notwithstanding any other provision of this Section 6.1
(other than the Required Allocations), if the Liquidation Date
occurs prior to the conversion of the last Outstanding
Subordinated Unit, then items of income, gain, loss and
deduction for the taxable period that includes the Liquidation
Date (and, if necessary, items arising in previous taxable
periods to the extent the General Partner determines such items
may be so allocated), shall be specially allocated among the
Partners in the manner determined appropriate by the General
Partner so as to cause, to the maximum extent possible, the
Capital Account in respect of each Common Unit to equal the
amount such Capital Account would have been if all prior
allocations of Net Termination Gain and Net Termination Loss had
been made pursuant to Section 6.1(c)(i) or
Section 6.1(c)(ii), as applicable.
Section 6.2 Allocations
for Tax Purposes.
(a) Except as otherwise provided herein, for federal income
tax purposes, each item of income, gain, loss and deduction
shall be allocated among the Partners in the same manner as its
correlative item of book income, gain, loss or
deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities
attributable to a Contributed Property or Adjusted Property,
items of income, gain, loss, depreciation, amortization and cost
recovery deductions shall be allocated for federal income tax
purposes among the Partners in the manner provided under
Section 704(c) of the Code, and the Treasury Regulations
promulgated under Section 704(b) and 704(c) of the Code, as
determined appropriate by the General Partner (taking into
account the General Partners discretion under
Section 6.1(d)(x)(D)); provided, that the General Partner
shall apply the principles of Treasury Regulation
Section 1.704-3(d)
in all events.
(c) The General Partner may determine to depreciate or
amortize the portion of an adjustment under Section 743(b)
of the Code attributable to unrealized appreciation in any
Adjusted Property (to the extent of the unamortized Book-Tax
Disparity) using a predetermined rate derived from the
depreciation or amortization method and useful life applied to
the unamortized Book-Tax Disparity of such property, despite any
inconsistency of such approach with Treasury Regulation
Section 1.167(c)-l(a)(6)
or any successor regulations thereto. If the General Partner
determines that such reporting position cannot reasonably be
taken, the General Partner may adopt depreciation and
amortization conventions under which all purchasers acquiring
Limited Partner Interests in the same month would receive
depreciation and amortization deductions, based upon the same
applicable rate as if they had purchased a direct interest in
the Partnerships property. If the General Partner chooses
not to utilize such aggregate method, the General Partner may
use any other depreciation and amortization conventions to
preserve the uniformity of the intrinsic tax characteristics of
any Limited Partner Interests, so long as such conventions would
not have a material adverse effect on the Limited Partners or
the Record Holders of any class or classes of Limited Partner
Interests.
(d) In accordance with Treasury Regulation
Sections 1.1245-1(e)
and 1.1250-1(f), any gain allocated to the Partners upon the
sale or other taxable disposition of any Partnership asset
shall, to the extent possible, after taking into account other
required allocations of gain pursuant to this Section 6.2,
be characterized as
A-46
Recapture Income in the same proportions and to the same extent
as such Partners (or their predecessors in interest) have been
allocated any deductions directly or indirectly giving rise to
the treatment of such gains as Recapture Income.
(e) All items of income, gain, loss, deduction and credit
recognized by the Partnership for federal income tax purposes
and allocated to the Partners in accordance with the provisions
hereof shall be determined without regard to any election under
Section 754 of the Code that may be made by the
Partnership; provided, however, that such allocations,
once made, shall be adjusted (in the manner determined by the
General Partner) to take into account those adjustments
permitted or required by Sections 734 and 743 of the Code.
(f) Each item of Partnership income, gain, loss and
deduction, for federal income tax purposes, shall be determined
for each taxable period and prorated on a monthly basis and
shall be allocated to the Partners as of the opening of the
National Securities Exchange on which the Partnership Interests
are listed or admitted to trading on the first Business Day of
each month; provided, however, such items for the period
beginning on the Closing Date and ending on the last day of the
month in which the last Option Closing Date or the expiration of
the Over-Allotment Option occurs shall be allocated to the
Partners as of the opening of the National Securities Exchange
on which the Partnership Interests are listed or admitted to
trading on the first Business Day of the next succeeding month;
and provided, further, that gain or loss on a sale or
other disposition of any assets of the Partnership or any other
extraordinary item of income or loss realized and recognized
other than in the ordinary course of business, as determined by
the General Partner, shall be allocated to the Partners as of
the opening of the National Securities Exchange on which the
Partnership Interests are listed or admitted to trading on the
first Business Day of the month in which such gain or loss is
recognized for federal income tax purposes. The General Partner
may revise, alter or otherwise modify such methods of allocation
to the extent permitted or required by Section 706 of the
Code and the regulations or rulings promulgated thereunder.
(g) Allocations that would otherwise be made to a Limited
Partner under the provisions of this Article VI shall
instead be made to the beneficial owner of Limited Partner
Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other
method determined by the General Partner.
Section 6.3 Requirement
and Characterization of Distributions; Distributions to Record
Holders.
(a) Within 45 days following the end of each Quarter
commencing with the Quarter ending on June 30, 2011, an
amount equal to 100% of Available Cash with respect to such
Quarter shall be distributed in accordance with this
Article VI by the Partnership to the Partners as of the
Record Date selected by the General Partner. The Record Date for
the first distribution of Available Cash shall not be prior to
the final closing of the Over-Allotment Option. All amounts of
Available Cash distributed by the Partnership on any date from
any source shall be deemed to be Operating Surplus until the sum
of all amounts of Available Cash theretofore distributed by the
Partnership to the Partners pursuant to Section 6.4 equals
the Operating Surplus from the Closing Date through the close of
the immediately preceding Quarter. Any remaining amounts of
Available Cash distributed by the Partnership on such date
shall, except as otherwise provided in Section 6.5, be
deemed to be Capital Surplus. Notwithstanding
any provision to the contrary contained in this Agreement, the
Partnership shall not make a distribution to any Partner on
account of its interest in the Partnership if such distribution
would violate the Delaware Act or any other applicable law.
Notwithstanding any other provision of this Agreement, all
distributions required to be made under this Agreement shall be
made subject to
Sections 17-607
and 17-804
of the Delaware Act.
(b) Notwithstanding Section 6.3(a), in the event of
the dissolution and liquidation of the Partnership, all cash
received during or after the Quarter in which the Liquidation
Date occurs shall be applied and distributed solely in
accordance with, and subject to the terms and conditions of,
Section 12.4.
(c) The General Partner may treat taxes paid by the
Partnership on behalf of, or amounts withheld with respect to,
all or less than all of the Partners, as a distribution of
Available Cash to such Partners, as determined appropriate under
the circumstances by the General Partner.
A-47
(d) Each distribution in respect of a Partnership Interest
shall be paid by the Partnership, directly or through the
Transfer Agent or through any other Person or agent, only to the
Record Holder of such Partnership Interest as of the Record Date
set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnerships liability in
respect of such payment, regardless of any claim of any Person
who may have an interest in such payment by reason of an
assignment or otherwise.
Section 6.4 Distributions
of Available Cash from Operating Surplus.
(a) During Subordination
Period. Available Cash with respect to any
Quarter within the Subordination Period that is deemed to be
Operating Surplus pursuant to the provisions of Section 6.3
or 6.5 shall be distributed as follows, except as otherwise
required in respect of additional Partnership Securities issued
pursuant to Section 5.6(b):
(i) First, (x) to the General Partner in accordance
with its Percentage Interest and (y) to the Unitholders
holding Common Units, Pro Rata, a percentage equal to 100% less
the General Partners Percentage Interest, until there has
been distributed in respect of each Common Unit then Outstanding
an amount equal to the Minimum Quarterly Distribution for such
Quarter;
(ii) Second, (x) to the General Partner in accordance
with its Percentage Interest and (y) to the Unitholders
holding Common Units, Pro Rata, a percentage equal to 100% less
the General Partners Percentage Interest, until there has
been distributed in respect of each Common Unit then Outstanding
an amount equal to the Cumulative Common Unit Arrearage existing
with respect to such Quarter;
(iii) Third, (x) to the General Partner in accordance
with its Percentage Interest and (y) to the Unitholders
holding Subordinated Units, Pro Rata, a percentage equal to 100%
less the General Partners Percentage Interest, until there
has been distributed in respect of each Subordinated Unit then
Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(iv) Fourth, to the General Partner and all Unitholders,
Pro Rata, until there has been distributed in respect of each
Unit then Outstanding an amount equal to the excess of the First
Target Distribution over the Minimum Quarterly Distribution for
such Quarter;
(v) Fifth, (A) to the General Partner in accordance
with its Percentage Interest, (B) 13% to the holders of the
Incentive Distribution Rights, Pro Rata, and (C) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclauses (A) and (B) of
this clause (v), until there has been distributed in
respect of each Unit then Outstanding an amount equal to the
excess of the Second Target Distribution over the First Target
Distribution for such Quarter;
(vi) Sixth, (A) to the General Partner in accordance
with its Percentage Interest, (B) 23% to the holders of the
Incentive Distribution Rights, Pro Rata, and (C) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclauses (A) and (B) of
this clause (vi), until there has been distributed in
respect of each Unit then Outstanding an amount equal to the
excess of the Third Target Distribution over the Second Target
Distribution for such Quarter; and
(vii) Thereafter, (A) to the General Partner in
accordance with its Percentage Interest, (B) 48% to the
holders of the Incentive Distribution Rights, Pro Rata, and
(C) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (A) and (B) of this clause (vii);
provided, however, if the Minimum Quarterly Distribution,
the First Target Distribution, the Second Target Distribution
and the Third Target Distribution have been reduced to zero
pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating
Surplus with respect to any Quarter will be made solely in
accordance with Section 6.4(a)(vii).
(b) After Subordination Period. Available
Cash with respect to any Quarter after the Subordination Period
that is deemed to be Operating Surplus pursuant to the
provisions of Section 6.3 or Section 6.5 shall be
A-48
distributed as follows, except as otherwise required in respect
of additional Partnership Securities issued pursuant to
Section 5.6(b):
(i) First, to the General Partner and all Unitholders, Pro
Rata, until there has been distributed in respect of each Unit
then Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(ii) Second, to the General Partner and all Unitholders,
Pro Rata, until there has been distributed in respect of each
Unit then Outstanding an amount equal to the excess of the First
Target Distribution over the Minimum Quarterly Distribution for
such Quarter;
(iii) Third, (A) to the General Partner in accordance
with its Percentage Interest, (B) 13% to the holders of the
Incentive Distribution Rights, Pro Rata, and (C) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclauses (A) and (B) of
this clause (iii), until there has been distributed in
respect of each Unit then Outstanding an amount equal to the
excess of the Second Target Distribution over the First Target
Distribution for such Quarter;
(iv) Fourth, (A) to the General Partner in accordance
with its Percentage Interest, (B) 23% to the holders of the
Incentive Distribution Rights, Pro Rata, and (C) to all
Unitholders, Pro Rata, a percentage equal to 100% less the sum
of the percentages applicable to subclauses (A) and
(B) of this clause (iv), until there has been distributed
in respect of each Unit then Outstanding an amount equal to the
excess of the Third Target Distribution over the Second Target
Distribution for such Quarter; and
(v) Thereafter, (A) to the General Partner in
accordance with its Percentage Interest, (B) 48% to the
holders of the Incentive Distribution Rights, Pro Rata, and
(C) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (A) and (B) of this clause (v);
provided, however, if the Minimum Quarterly Distribution,
the First Target Distribution, the Second Target Distribution
and the Third Target Distribution have been reduced to zero
pursuant to the second sentence of Section 6.6(a), the
distribution of Available Cash that is deemed to be Operating
Surplus with respect to any Quarter will be made solely in
accordance with Section 6.4(b)(v).
Section 6.5 Distributions
of Available Cash from Capital Surplus.
Available Cash that is deemed to be Capital Surplus pursuant to
the provisions of Section 6.3(a) shall be distributed,
unless the provisions of Section 6.3 require otherwise, to
the General Partner and the Unitholders, Pro Rata, until a
hypothetical holder of a Common Unit acquired on the Closing
Date has received with respect to such Common Unit, during the
period since the Closing Date through such date, distributions
of Available Cash that are deemed to be Capital Surplus in an
aggregate amount equal to the Initial Unit Price. Available Cash
that is deemed to be Capital Surplus shall then be distributed
(A) to the General Partner in accordance with its
Percentage Interest and (B) to all Unitholders holding
Common Units, Pro Rata, a percentage equal to 100% less the
General Partners Percentage Interest, until there has been
distributed in respect of each Common Unit then Outstanding an
amount equal to the Cumulative Common Unit Arrearage.
Thereafter, all Available Cash shall be distributed as if it
were Operating Surplus and shall be distributed in accordance
with Section 6.4.
Section 6.6 Adjustment
of Minimum Quarterly Distribution and Target Distribution
Levels.
(a) The Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution, Third Target
Distribution, Common Unit Arrearages and Cumulative Common Unit
Arrearages shall be proportionately adjusted in the event of any
distribution, combination or subdivision (whether effected by a
distribution payable in Units or otherwise) of Units or other
Partnership Securities in accordance with Section 5.9. In
the event of a distribution of Available Cash that is deemed to
be from Capital Surplus, the then applicable Minimum Quarterly
Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted
proportionately downward to equal the product obtained by
multiplying the otherwise applicable Minimum Quarterly
Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be,
by a fraction of which the numerator is the
A-49
Unrecovered Initial Unit Price of the Common Units immediately
after giving effect to such distribution and of which the
denominator is the Unrecovered Initial Unit Price of the Common
Units immediately prior to giving effect to such distribution.
(b) The Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target
Distribution, shall also be subject to adjustment pursuant to
Section 5.11 and Section 6.9.
Section 6.7 Special
Provisions Relating to the Holders of Subordinated Units.
(a) Except with respect to the right to vote on or approve
matters requiring the vote or approval of a percentage of the
holders of Outstanding Common Units and the right to participate
in allocations of income, gain, loss and deduction and
distributions made with respect to Common Units, the holder of a
Subordinated Unit shall have all of the rights and obligations
of a Unitholder holding Common Units hereunder; provided,
however, that immediately upon the conversion of
Subordinated Units into Common Units pursuant to
Section 5.7, the Unitholder holding a Subordinated Unit
shall possess all of the rights and obligations of a Unitholder
holding Common Units hereunder with respect to such converted
Subordinated Units, including the right to vote as a Common
Unitholder and the right to participate in allocations of
income, gain, loss and deduction and distributions made with
respect to Common Units; provided, however, that such
converted Subordinated Units shall remain subject to the
provisions of Sections 5.5(c)(ii), 6.1(d)(x)(A), 6.7(b)
and 6.7(c).
(b) A Unitholder shall not be permitted to transfer a
Subordinated Unit or a Subordinated Unit that has converted into
a Common Unit pursuant to Section 5.7 (other than a
transfer to an Affiliate) if the remaining balance in the
transferring Unitholders Capital Account with respect to
the retained Subordinated Units or Retained Converted
Subordinated Units would be negative after giving effect to the
allocation under Section 5.5(c)(ii)(B).
(c) The holder of a Common Unit that has resulted from the
conversion of a Subordinated Unit pursuant to Section 5.7
shall not be issued a Common Unit Certificate pursuant to
Section 4.1 (if the Common Units are represented by
Certificates) and shall not be permitted to transfer such Common
Unit to a Person that is not an Affiliate of the holder until
such time as the General Partner determines, based on advice of
counsel, that each such Common Unit should have, as a
substantive matter, like intrinsic economic and federal income
tax characteristics, in all material respects, to the intrinsic
economic and federal income tax characteristics of an Initial
Common Unit. In connection with the condition imposed by this
Section 6.7(c), the General Partner may take whatever steps
are required to provide economic uniformity to such Common Units
in preparation for a transfer of such Common Units, including
the application of Sections 5.5(c)(ii) and 6.1(d)(x);
provided, however, that no such steps may be taken that
would have a material adverse effect on the Unitholders holding
Common Units.
Section 6.8 Special
Provisions Relating to the Holders of Incentive Distribution
Rights.
Notwithstanding anything to the contrary set forth in this
Agreement, the holders of the Incentive Distribution Rights
(a) shall (i) possess the rights and obligations
provided in this Agreement with respect to a Limited Partner
pursuant to Article III and Article VII and
(ii) have a Capital Account as a Partner pursuant to
Section 5.5 and all other provisions related thereto and
(b) shall not (i) be entitled to vote on any matters
requiring the approval or vote of the holders of Outstanding
Units, except as provided by law, (ii) be entitled to any
distributions other than as provided in Sections 6.4(a)(v),
(vi) and (vii), Sections 6.4(b)(iii), (iv) and (v),
and Section 12.4 or (iii) be allocated items of
income, gain, loss or deduction other than as specified in this
Article VI.
Section 6.9 Entity-Level Taxation.
If legislation is enacted or the official interpretation of
existing legislation is modified by a governmental authority,
which after giving effect to such enactment or modification,
results in a Group Member becoming subject to federal, state or
local or
non-U.S. income
or withholding taxes in excess of the amount of such taxes due
from the Group Member prior to such enactment or modification
(including, for the avoidance of doubt, any increase in the rate
of such taxation applicable to the Group Member), then the
General Partner
A-50
may, at its option, reduce the Minimum Quarterly Distribution,
First Target Distribution, Second Target Distribution and Third
Target Distribution by the amount of income or withholding taxes
that are payable by reason of any such new legislation or
interpretation (the Incremental Income
Taxes), or any portion thereof selected by the General
Partner, in the manner provided in this Section 6.9. If the
General Partner elects to reduce the Minimum Quarterly
Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution for any Quarter with
respect to all or a portion of any Incremental Income Taxes, the
General Partner shall estimate for such Quarter the Partnership
Groups aggregate liability (the Estimated
Incremental Quarterly Tax Amount) for all (or the
relevant portion of) such Incremental Income Taxes; provided
that any difference between such estimate and the actual
liability for Incremental Income Taxes (or the relevant portion
thereof) for such Quarter may, to the extent determined by the
General Partner, be taken into account in determining the
Estimated Incremental Quarterly Tax Amount with respect to each
Quarter in which any such difference can be determined. For each
such Quarter, the Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target
Distribution, shall be the product obtained by multiplying
(a) the amounts therefor that are set out herein prior to
the application of this Section 6.9 times (b) the
quotient obtained by dividing (i) Available Cash with
respect to such Quarter by (ii) the sum of Available Cash
with respect to such Quarter and the Estimated Incremental
Quarterly Tax Amount for such Quarter, as determined by the
General Partner. For purposes of the foregoing, Available Cash
with respect to a Quarter will be deemed reduced by the
Estimated Incremental Quarterly Tax Amount for that Quarter.
ARTICLE VII
MANAGEMENT
AND OPERATION OF BUSINESS
Section 7.1 Management.
(a) The General Partner shall conduct, direct and manage
all activities of the Partnership. Except as otherwise expressly
provided in this Agreement, all management powers over the
business and affairs of the Partnership shall be exclusively
vested in the General Partner, and no Limited Partner shall have
any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted
a general partner of a limited partnership under applicable law
or that are granted to the General Partner under any other
provision of this Agreement, the General Partner, subject to
Section 7.3, shall have full power and authority to do all
things and on such terms as it determines to be necessary or
appropriate to conduct the business of the Partnership, to
exercise all powers set forth in Section 2.5 and to
effectuate the purposes set forth in Section 2.4, including
the following:
(i) 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 Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or
rendering of periodic or other reports to governmental or other
agencies having jurisdiction over the business or assets of the
Partnership;
(iii) the acquisition, disposition, mortgage, pledge,
encumbrance, hypothecation or exchange of any or all of the
assets of the Partnership or the merger or other combination of
the Partnership with or into another Person (the matters
described in this clause (iii) being subject, however, to
any prior approval that may be required by Section 7.3 and
Article XIV);
(iv) the use of the assets of the Partnership (including
cash on hand) for any purpose consistent with the terms of this
Agreement, including the financing of the conduct of the
operations of the Partnership Group; subject to
Section 7.6(a), the lending of funds to other Persons
(including other Group Members); the repayment or guarantee of
obligations of any Group Member; and the making of capital
contributions to any Group Member;
A-51
(v) the negotiation, execution and performance of any
contracts, conveyances or other instruments (including
instruments that limit the liability of the Partnership under
contractual arrangements to all or particular assets of the
Partnership, with the other party to the contract to have no
recourse against the General Partner or its assets other than
its interest in the Partnership, even if the same results in the
terms of the transaction being less favorable to the Partnership
than would otherwise be the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including
employees having titles such as president,
vice president, secretary and
treasurer) and agents, internal and outside
attorneys, accountants, consultants and contractors and the
determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of insurance for the benefit of the
Partnership Group, the Partners and Indemnitees;
(ix) the formation of, or acquisition of an interest in,
and the contribution of property and the making of loans to, any
further limited or general partnerships, joint ventures,
corporations, limited liability companies or other entities or
relationships (including the acquisition of interests in, and
the contributions of property to, any Group Member from time to
time) subject to the restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and
obligations of the Partnership, including the bringing and
defending of actions at law or in equity and otherwise engaging
in the conduct of litigation, arbitration or mediation and the
incurring of legal expense and the settlement of claims and
litigation;
(xi) the indemnification of any Person against liabilities
and contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any
National Securities Exchange and the delisting of some or all of
the Limited Partner Interests from, or requesting that trading
be suspended on, any such exchange (subject to any prior
approval that may be required under Section 4.8);
(xiii) the purchase, sale or other acquisition or
disposition of Partnership Securities, or the issuance of
options, rights, warrants, appreciation rights and tracking and
phantom interests relating to Partnership Securities;
(xiv) the undertaking of any action in connection with the
Partnerships participation in any Group Member; and
(xv) the entering into of agreements with any of its
Affiliates to render services to a Group Member or to itself in
the discharge of its duties as General Partner of the
Partnership.
(b) Notwithstanding any other provision of this Agreement,
any Group Member Agreement, the Delaware Act or any applicable
law, rule or regulation, each of the Partners and each other
Person who may acquire an interest in Partnership Securities
hereby (i) approves, ratifies and confirms the execution,
delivery and performance by the parties thereto of this
Agreement and the Group Member Agreement of each other Group
Member, the Underwriting Agreement, the Omnibus Agreement, the
Contribution Agreement, the Operational Services Agreement, and
the other agreements described in or filed as exhibits to the
Registration Statement that are related to the transactions
contemplated by the Registration Statement (collectively, the
Transaction Documents)(in each case other
than this Agreement, without giving effect to any amendments,
supplements or restatements thereof entered into after the date
such Person becomes bound by the provisions of this Agreement);
(ii) agrees that the General Partner (on its own or on
behalf of the Partnership) is authorized to execute, deliver and
perform the agreements referred to in clause (i) of this
sentence and the other agreements, acts, transactions and
matters described in or contemplated by the Registration
Statement on behalf of the Partnership without any further act,
approval or vote of the Partners or the other Persons who may
acquire an interest in Partnership Securities; and
(iii) agrees that the execution, delivery or performance by
the General Partner, any Group Member or any Affiliate of any of
them of this Agreement or any
A-52
agreement authorized or permitted under this Agreement
(including the exercise by the General Partner or any Affiliate
of the General Partner of the rights accorded pursuant to
Article XV) shall not constitute a breach by the General
Partner of any duty that the General Partner may owe the
Partnership or the Limited Partners or any other Persons under
this Agreement (or any other agreements) or of any duty existing
at law, in equity or otherwise.
Section 7.2 Certificate
of Limited Partnership.
The General Partner has caused the Certificate of Limited
Partnership to be filed with the Secretary of State of the State
of Delaware as required by the Delaware Act. The General Partner
shall use all reasonable efforts to cause to be filed such other
certificates or documents that the General Partner determines to
be necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a
partnership in which the limited partners have limited
liability) in the State of Delaware or any other state in which
the Partnership may elect to do business or own property. To the
extent the General Partner determines such action to be
necessary or appropriate, the General Partner shall file
amendments to and restatements of the Certificate of Limited
Partnership and do all things to maintain the Partnership as a
limited partnership (or a partnership or other entity in which
the limited partners have limited liability) under the laws of
the State of Delaware or of any other state in which the
Partnership may elect to do business or own property. Subject to
the terms of Section 3.4(a), the General Partner shall not
be required, before or after filing, to deliver or mail a copy
of the Certificate of Limited Partnership, any qualification
document or any amendment thereto to any Limited Partner.
Section 7.3 Restrictions
on the General Partners Authority.
Except as provided in Article XII and Article XIV, the
General Partner may not sell, exchange or otherwise dispose of
all or substantially all of the assets of the Partnership Group,
taken as a whole, in a single transaction or a series of related
transactions (including by way of merger, consolidation, other
combination or sale of ownership interests of the
Partnerships Subsidiaries) without the approval of holders
of a Unit Majority; provided, however, that this
provision shall not preclude or limit the General Partners
ability to mortgage, pledge, hypothecate or grant a security
interest in all or substantially all of the assets of the
Partnership Group and shall not apply to any forced sale of any
or all of the assets of the Partnership Group pursuant to the
foreclosure of, or other realization upon, any such encumbrance.
Section 7.4 Reimbursement
of the General Partner.
(a) Except as provided in this Section 7.4 and
elsewhere in this Agreement, the General Partner shall not be
compensated for its services as a general partner or managing
member of any Group Member.
(b) Subject to the Omnibus Agreement, the General Partner
shall be reimbursed on a monthly basis, or such other basis as
the General Partner may determine, for (i) all direct and
indirect expenses it incurs or payments it makes on behalf of
the Partnership Group (including salary, bonus, incentive
compensation and other amounts paid to any Person, including
Affiliates of the General Partner to perform services for the
Partnership Group or for the General Partner in the discharge of
its duties to the Partnership Group), and (ii) all other
expenses allocable to the Partnership Group or otherwise
incurred by the General Partner in connection with managing and
operating the Partnership Groups business and affairs
(including expenses allocated to the General Partner by its
Affiliates). The General Partner shall determine the expenses
that are allocable to the Partnership Group. Reimbursements
pursuant to this Section 7.4 shall be in addition to any
reimbursement to the General Partner as a result of
indemnification pursuant to Section 7.7.
(c) The General Partner, without the approval of the
Limited Partners (who shall have no right to vote in respect
thereof), may propose and adopt on behalf of the Partnership
employee benefit plans, employee programs and employee practices
(including plans, programs and practices involving the issuance
of Partnership Securities or options to purchase or rights,
warrants or appreciation rights or phantom or tracking interests
relating to Partnership Securities), or cause the Partnership to
issue Partnership Securities in connection with, or pursuant to,
any employee benefit plan, employee program or employee practice
A-53
maintained or sponsored by the General Partner or any of its
Affiliates in each case for the benefit of employees and
directors of the General Partner or any of its Affiliates, in
respect of services performed, directly or indirectly, for the
benefit of the Partnership Group. The Partnership agrees to
issue and sell to the General Partner or any of its Affiliates
any Partnership Securities that the General Partner or such
Affiliates are obligated to provide to any employees and
directors pursuant to any such employee benefit plans, employee
programs or employee practices. Expenses incurred by the General
Partner in connection with any such plans, programs and
practices (including the net cost to the General Partner or such
Affiliates of Partnership Securities purchased by the General
Partner or such Affiliates from the Partnership to fulfill
options or awards under such plans, programs and practices)
shall be reimbursed in accordance with Section 7.4(b). Any
and all obligations of the General Partner under any employee
benefit plans, employee programs or employee practices adopted
by the General Partner as permitted by this Section 7.4(c)
shall constitute obligations of the General Partner hereunder
and shall be assumed by any successor General Partner approved
pursuant to Section 11.1 or Section 11.2 or the
transferee of or successor to all of the General Partners
General Partner Interest (represented by General Partner Units)
pursuant to Section 4.6.
(d) The General Partner and its Affiliates may charge any
member of the Partnership Group a management fee to the extent
necessary to allow the Partnership Group to reduce the amount of
any state franchise or income tax or any tax based upon the
revenues or gross margin of any member of the Partnership Group
if the tax benefit produced by the payment of such management
fee or fees exceeds the amount of such fee or fees.
Section 7.5 Outside
Activities.
(a) The General Partner, for so long as it is the General
Partner of the Partnership (i) agrees that its sole
business will be to act as a general partner or managing member,
as the case may be, of the Partnership and any other partnership
or limited liability company of which the Partnership is,
directly or indirectly, a partner or member and to undertake
activities that are ancillary or related thereto (including
being a Limited Partner in the Partnership) and (ii) shall
not engage in any business or activity or incur any debts or
liabilities except in connection with or incidental to
(A) its performance as general partner or managing member,
if any, of one or more Group Members or as described in or
contemplated by the Registration Statement, (B) the
acquiring, owning or disposing of debt securities or equity
interests in any Group Member, (C) the guarantee of, and
mortgage, pledge, or encumbrance of any or all of its assets in
connection with, any indebtedness of any Affiliate of the
General Partner or (D) subject to the limitations contained
in the Omnibus Agreement, the performance of its obligations
under the Omnibus Agreement.
(b) Except as provided in the Omnibus Agreement, each
Unrestricted Person (other than the General Partner) shall have
the right to engage in businesses of every type and description
and other activities for profit and to engage in and possess an
interest in other business ventures of any and every type or
description, whether in businesses engaged in or anticipated to
be engaged in by any Group Member, independently or with others,
including business interests and activities in direct
competition with the business and activities of any Group
Member, and none of the same shall constitute a breach of this
Agreement or any duty otherwise existing at law, in equity or
otherwise, to any Group Member or any Partner. None of any Group
Member, any Limited Partner or any other Person shall have any
rights by virtue of this Agreement, any Group Member Agreement,
or the partnership relationship established hereby in any
business ventures of any Unrestricted Person.
(c) Subject to the terms of Sections 7.5(a) and (b),
but otherwise notwithstanding anything to the contrary in this
Agreement, (i) the engaging in competitive activities by
any Unrestricted Person (other than the General Partner) in
accordance with the provisions of this Section 7.5 is
hereby approved by the Partnership and all Partners,
(ii) it shall be deemed not to be a breach of any fiduciary
duty or any other obligation of any type whatsoever of the
General Partner or any other Unrestricted Person for the
Unrestricted Persons (other than the General Partner) to engage
in such business interests and activities in preference to or to
the exclusion of the Partnership and (iii) the Unrestricted
Persons shall have no obligation hereunder or as a result of any
duty otherwise existing at law, in equity or otherwise, to
present business opportunities to the Partnership.
Notwithstanding anything to the contrary in this Agreement, the
doctrine of corporate opportunity,
A-54
or any analogous doctrine, shall not apply to any Unrestricted
Person (including the General Partner). Except as provided in
the Omnibus Agreement, no Unrestricted Person (including the
General Partner) who acquires knowledge of a potential
transaction, agreement, arrangement or other matter that may be
an opportunity for the Partnership, shall have any duty to
communicate or offer such opportunity to the Partnership, and
such Unrestricted Person (including the General Partner) shall
not be liable to the Partnership, to any Limited Partner or any
other Person bound by this Agreement for breach of any fiduciary
or other duty by reason of the fact that such Unrestricted
Person (including the General Partner) pursues or acquires for
itself, directs such opportunity to another Person or does not
communicate such opportunity or information to the Partnership;
provided such Unrestricted Person does not engage in such
business or activity as a result of or using confidential or
proprietary information provided by or on behalf of the
Partnership to such Unrestricted Person.
(d) The General Partner and each of its Affiliates may
acquire Units or other Partnership Interests in addition to
those acquired on the Closing Date and, except as otherwise
provided in this Agreement, shall be entitled to exercise, at
their option, all rights relating to all Units
and/or other
Partnership Interests acquired by them. The term
Affiliates when used in this Section 7.5(d)
with respect to the General Partner shall not include any Group
Member.
|
|
Section 7.6
|
Loans
from the General Partner; Loans or Contributions from the
Partnership or Group Members.
|
(a) The General Partner or any of its Affiliates may lend
to any Group Member, and any Group Member may borrow from the
General Partner or any of its Affiliates, funds needed or
desired by the Group Member for such periods of time and in such
amounts as the General Partner may determine; provided,
however, that in any such case the lending party may not
charge the borrowing party interest at a rate greater than the
rate that would be charged the borrowing party or impose terms
less favorable to the borrowing party than would be charged or
imposed on the borrowing party by unrelated lenders on
comparable loans made on an arms-length basis (without
reference to the lending partys financial abilities or
guarantees), all as determined by the General Partner. The
borrowing party shall reimburse the lending party for any costs
(other than any additional interest costs) incurred by the
lending party in connection with the borrowing of such funds.
For purposes of this Section 7.6(a) and
Section 7.6(b), the term Group Member shall
include any Affiliate of a Group Member that is controlled by
the Group Member.
(b) The Partnership may lend or contribute to any Group
Member, and any Group Member may borrow from the Partnership,
funds on terms and conditions determined by the General Partner.
No Group Member may lend funds to the General Partner or any of
its Affiliates (other than another Group Member).
(c) No borrowing by any Group Member or the approval
thereof by the General Partner shall be deemed to constitute a
breach of any duty, expressed or implied, of the General Partner
or its Affiliates to the Partnership or the Limited Partners
existing hereunder, or existing at law, in equity or otherwise
by reason of the fact that the purpose or effect of such
borrowing is directly or indirectly to (i) enable
distributions to the General Partner or its Affiliates
(including in their capacities as Limited Partners) to exceed
the General Partners Percentage Interest of the total
amount distributed to all partners or (ii) hasten the
expiration of the Subordination Period or the conversion of any
Subordinated Units into Common Units.
Section 7.7 Indemnification.
(a) To the fullest extent permitted by law but subject to
the limitations expressly provided in this Agreement, all
Indemnitees shall be indemnified and held harmless by the
Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including
legal fees and expenses), judgments, fines, penalties, interest,
settlements or other amounts arising from any and all
threatened, pending or completed claims, demands, actions, suits
or proceedings, whether civil, criminal, administrative or
investigative, and whether formal or informal and including
appeals, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of
its status as an Indemnitee and acting (or refraining to act) in
such capacity on behalf of or for the benefit of the
Partnership; provided, that
A-55
the Indemnitee shall not be indemnified and held harmless
pursuant to this Agreement if there has been a final and
non-appealable judgment entered by a court of competent
jurisdiction determining that, in respect of the matter for
which the Indemnitee is seeking indemnification pursuant to this
Agreement, the Indemnitee acted in bad faith or engaged in
fraud, willful misconduct or, in the case of a criminal matter,
acted with knowledge that the Indemnitees conduct was
unlawful; provided, further, no indemnification pursuant to this
Section 7.7 shall be available to any Affiliate of the
General Partner (other than a Group Member), or to any other
Indemnitee, with respect to any such Affiliates
obligations pursuant to the Transaction Documents. Any
indemnification pursuant to this Section 7.7 shall be made
only out of the assets of the Partnership, it being agreed that
the General Partner shall not be personally liable for such
indemnification and shall have no obligation to contribute or
loan any monies or property to the Partnership to enable it to
effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses
(including legal fees and expenses) incurred by an Indemnitee
who is indemnified pursuant to Section 7.7(a) in defending
any claim, demand, action, suit or proceeding shall, from time
to time, be advanced by the Partnership prior to a final and
non-appealable judgment entered by a court of competent
jurisdiction determining that, in respect of the matter for
which the Indemnitee is seeking indemnification pursuant to this
Section 7.7, the Indemnitee is not entitled to be
indemnified upon receipt by the Partnership of any undertaking
by or on behalf of the Indemnitee to repay such amount if it
shall be ultimately determined that the Indemnitee is not
entitled to be indemnified as authorized by this
Section 7.7.
(c) The indemnification provided by this Section 7.7
shall be in addition to any other rights to which an Indemnitee
may be entitled under any agreement, pursuant to any vote of the
holders of Outstanding Limited Partner Interests, as a matter of
law, in equity or otherwise, both as to actions in the
Indemnitees capacity as an Indemnitee and as to actions in
any other capacity (including any capacity under the
Underwriting Agreement), and shall continue as to an Indemnitee
who has ceased to serve in such capacity and shall inure to the
benefit of the heirs, successors, assigns and administrators of
the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse
the General Partner or its Affiliates for the cost of)
insurance, on behalf of the General Partner, its Affiliates and
such other Persons as the General Partner shall determine,
against any liability that may be asserted against, or expense
that may be incurred by, such Person in connection with the
Partnerships activities or such Persons activities
on behalf of the Partnership, regardless of whether the
Partnership would have the power to indemnify such Person
against such liability under the provisions of this Agreement.
(e) For purposes of this Section 7.7, the Partnership
shall be deemed to have requested an Indemnitee to serve as
fiduciary of an employee benefit plan whenever the performance
by it of its duties to the Partnership also imposes duties on,
or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed
on an Indemnitee with respect to an employee benefit plan
pursuant to applicable law shall constitute fines
within the meaning of Section 7.7(a); and action taken or
omitted by it with respect to any employee benefit plan in the
performance of its duties for a purpose reasonably believed by
it to be in the best interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose
that is in the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited
Partners to personal liability by reason of the indemnification
provisions set forth in this Agreement.
(g) An Indemnitee shall not be denied indemnification in
whole or in part under this Section 7.7 because the
Indemnitee had an interest in the transaction with respect to
which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the
benefit of the Indemnitees and their heirs, successors, assigns,
executors and administrators and shall not be deemed to create
any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this
Section 7.7 or any provision hereof shall in any manner
terminate, reduce or impair the right of any past, present or
future Indemnitee to be indemnified by the
A-56
Partnership, nor the obligations of the Partnership to indemnify
any such Indemnitee under and in accordance with the provisions
of this Section 7.7 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of
when such claims may arise or be asserted.
Section 7.8 Liability
of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in
this Agreement, no Indemnitee shall be liable for monetary
damages to the Partnership, the Limited Partners, or any other
Persons who have acquired interests in the Partnership
Securities, for losses sustained or liabilities incurred as a
result of any act or omission of an Indemnitee unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that, in respect of the
matter in question, the Indemnitee acted in bad faith or engaged
in fraud, willful misconduct or, in the case of a criminal
matter, acted with knowledge that the Indemnitees conduct
was criminal.
(b) Subject to its obligations and duties as General
Partner set forth in Section 7.1(a), the General Partner
may exercise any of the powers granted to it by this Agreement
and perform any of the duties imposed upon it hereunder either
directly or by or through its agents, and the General Partner
shall not be responsible for any misconduct or negligence on the
part of any such agent appointed by the General Partner in good
faith.
(c) To the extent that, at law or in equity, an Indemnitee
has duties (including fiduciary duties) and liabilities relating
thereto to the Partnership or to the Partners, the General
Partner and any other Indemnitee acting in connection with the
Partnerships business or affairs shall not be liable to
the Partnership or to any Partner for its good faith reliance on
the provisions of this Agreement.
(d) Any amendment, modification or repeal of this
Section 7.8 or any provision hereof shall be prospective
only and shall not in any way affect the limitations on the
liability of the Indemnitees under this Section 7.8 as in
effect immediately prior to such amendment, modification or
repeal with respect to claims arising from or relating to
matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise
or be asserted.
Section 7.9 Resolution
of Conflicts of Interest; Standards of Conduct and Modification
of Duties.
(a) Unless otherwise expressly provided in this Agreement
or any Group Member Agreement, whenever a potential conflict of
interest exists or arises between the General Partner or any of
its Affiliates, on the one hand, and the Partnership, any Group
Member or any Partner, on the other, any resolution or course of
action by the General Partner or its Affiliates in respect of
such conflict of interest shall be permitted and deemed approved
by all Partners, and shall not constitute a breach of this
Agreement, of any Group Member Agreement, of any agreement
contemplated herein or therein, or of any duty stated or implied
by law or equity, if the resolution or course of action in
respect of such conflict of interest is (i) approved by
Special Approval, (ii) approved by the vote of a majority
of the Outstanding Common Units (excluding Common Units owned by
the General Partner and its Affiliates), (iii) on terms no
less favorable to the Partnership than those generally being
provided to or available from unrelated third parties or
(iv) fair and reasonable to the Partnership, taking into
account the totality of the relationships between the parties
involved (including other transactions that may be particularly
favorable or advantageous to the Partnership). The General
Partner shall be authorized but not required in connection with
its resolution of such conflict of interest to seek Special
Approval or Unitholder approval of such resolution, and the
General Partner may also adopt a resolution or course of action
that has not received Special Approval or Unitholder approval.
If Special Approval is sought, then it shall be presumed that,
in making its decision, the Conflicts Committee acted in good
faith, and if neither Special Approval nor Unitholder approval
is sought and the Board of Directors of the General Partner
determines that the resolution or course of action taken with
respect to a conflict of interest satisfies either of the
standards set forth in clauses (iii) or (iv) above, then it
shall be presumed that, in making its decision, the Board of
Directors of the General Partner acted in good faith, and in
either case, in any proceeding brought by any Limited Partner or
by or on behalf of such Limited Partner or any other Limited
Partner or the Partnership challenging such approval, the Person
bringing or prosecuting such proceeding shall have the burden of
A-57
overcoming such presumption. Notwithstanding anything to the
contrary in this Agreement or any duty otherwise existing at law
or equity, the existence of the conflicts of interest described
in the Registration Statement are hereby approved by all
Partners and shall not constitute a breach of this Agreement.
(b) Whenever the General Partner or the Board of Directors,
or any committee thereof (including the Conflicts Committee),
makes a determination or takes or declines to take any other
action, or any Affiliate of the General Partner causes the
General Partner to do so, in its capacity as the general partner
of the Partnership as opposed to in its individual capacity,
whether under this Agreement, any Group Member Agreement or any
other agreement contemplated hereby or otherwise, then, unless
another express standard is provided for in this Agreement, the
General Partner, the Board of Directors or such committee or
such Affiliates causing the General Partner to do so, shall make
such determination or take or decline to take such other action
in good faith and shall not be subject to any other or different
standards (including fiduciary standards) imposed by this
Agreement, any Group Member Agreement, any other agreement
contemplated hereby or under the Delaware Act or any other law,
rule or regulation or at equity. In order for a determination or
other action to be in good faith for purposes of
this Agreement, the Person or Persons making such determination
or taking or declining to take such other action must believe
that the determination or other action is in, or not opposed to,
the best interests of the Partnership Group.
(c) Whenever the General Partner makes a determination or
takes or declines to take any other action, or any of its
Affiliates causes it to do so, in its individual capacity as
opposed to in its capacity as the general partner of the
Partnership, whether under this Agreement, any Group Member
Agreement or any other agreement contemplated hereby or
otherwise, then the General Partner, or such Affiliates causing
it to do so, are entitled, to the fullest extent permitted by
law, to make such determination or to take or decline to take
such other action free of any fiduciary duty or obligation
whatsoever to the Partnership, any Limited Partner, and the
General Partner, or such Affiliates causing it to do so, shall
not, to the fullest extent permitted by law, be required to act
in good faith or pursuant to any other standard imposed by this
Agreement, any Group Member Agreement, any other agreement
contemplated hereby or under the Delaware Act or any other law,
rule or regulation or at equity. By way of illustration and not
of limitation, whenever the phrase, at the option of the
General Partner, or some variation of that phrase, is used
in this Agreement, it indicates that the General Partner is
acting in its individual capacity. For the avoidance of doubt,
whenever the General Partner votes or transfers its Partnership
Interests, or refrains from voting or transferring its
Partnership Interests, it shall be acting in its individual
capacity.
(d) The General Partners organizational documents may
provide that determinations to take or decline to take any
action in its individual, rather than representative, capacity
may or shall be determined by its members, if the General
Partner is a limited liability company, stockholders, if the
General Partner is a corporation, or the members or stockholders
of the General Partners general partner, if the General
Partner is a partnership.
(e) Notwithstanding anything to the contrary in this
Agreement, the General Partner and its Affiliates shall have no
duty or obligation, express or implied, to (i) sell or
otherwise dispose of any asset of the Partnership Group other
than in the ordinary course of business or (ii) permit any
Group Member to use any facilities or assets of the General
Partner and its Affiliates, except as may be provided in
contracts entered into from time to time specifically dealing
with such use. Any determination by the General Partner or any
of its Affiliates to enter into such contracts shall be at its
option.
(f) Except as expressly set forth in this Agreement or
required by the Delaware Act, neither the General Partner nor
any other Indemnitee shall have any duties or liabilities,
including fiduciary duties, to the Partnership or any Limited
Partner and the provisions of this Agreement, to the extent that
they restrict, eliminate or otherwise modify the duties and
liabilities, including fiduciary duties, of the General Partner
or any other Indemnitee otherwise existing at law or in equity,
are agreed by the Partners to replace such other duties and
liabilities of the General Partner or such other Indemnitee.
(g) The Unitholders hereby authorize the General Partner,
on behalf of the Partnership as a partner or member of a Group
Member, to approve actions by the general partner or managing
member of such Group Member similar to those actions permitted
to be taken by the General Partner pursuant to this
Section 7.9.
A-58
Section 7.10 Other
Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in
acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice,
request, consent, order, bond, debenture or other paper or
document believed by it to be genuine and to have been signed or
presented by the proper party or parties.
(b) The General Partner may consult with legal counsel,
accountants, appraisers, management consultants, investment
bankers and other consultants and advisers selected by it, and
any act taken or omitted to be taken in reliance upon the advice
or opinion (including an Opinion of Counsel) of such Persons as
to matters that the General Partner reasonably believes to be
within such Persons professional or expert competence
shall be conclusively presumed to have been done or omitted in
good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of
any of its powers or obligations hereunder, to act through any
of its duly authorized officers, a duly appointed attorney or
attorneys-in-fact or the duly authorized officers of the
Partnership or any Group Member.
Section 7.11 Purchase
or Sale of Partnership Securities.
The General Partner may cause the Partnership to purchase or
otherwise acquire Partnership Securities; provided that,
except as permitted pursuant to Section 4.10, the General
Partner may not cause any Group Member to purchase Subordinated
Units during the Subordination Period. As long as Partnership
Securities are held by any Group Member, such Partnership
Securities shall not be considered Outstanding for any purpose,
except as otherwise provided herein. The General Partner or any
Affiliate of the General Partner may also purchase or otherwise
acquire and sell or otherwise dispose of Partnership Securities
for its own account, subject to the provisions of
Articles IV and X.
Section 7.12 Registration
Rights of the General Partner and its Affiliates.
(a) If (i) the General Partner or any Affiliate of the
General Partner (including for purposes of this
Section 7.12, any Person that is an Affiliate of the
General Partner at the date hereof notwithstanding that it may
later cease to be an Affiliate of the General Partner, but
excluding individual Affiliates who are officers, directors or
employees of the General Partner or any of its Affiliates) holds
Partnership Securities that it desires to sell and
(ii) Rule 144 of the Securities Act (or any successor
rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of
Partnership Securities (the Holder) to
dispose of the number of Partnership Securities it desires to
sell at the time it desires to do so without registration under
the Securities Act, then at the option and upon the request of
the Holder, the Partnership shall file with the Commission as
promptly as practicable after receiving such request, and use
commercially reasonable efforts to cause to become effective and
remain effective for a period of not less than six months
following its effective date or such shorter period as shall
terminate when all Partnership Securities covered by such
registration statement have been sold, a registration statement
under the Securities Act registering the offering and sale of
the number of Partnership Securities specified by the Holder;
provided, however, that the Partnership shall not be required to
effect more than three registrations pursuant to this
Section 7.12(a); and provided further, however, that
if the Conflicts Committee determines in good faith that the
requested registration would be materially detrimental to the
Partnership and its Partners because such registration would
(x) materially interfere with a significant acquisition,
reorganization or other similar transaction involving the
Partnership, (y) require premature disclosure of material
information that the Partnership has a bona fide business
purpose for preserving as confidential or (z) render the
Partnership unable to comply with requirements under applicable
securities laws, then the Partnership shall have the right to
postpone such requested registration for a period of not more
than six months after receipt of the Holders request, such
right pursuant to this Section 7.12(a) not to be utilized
more than once in any twelve-month period. In connection with
any registration pursuant to the first sentence of this
Section 7.12(a), the Partnership shall (i) promptly
prepare and file (A) such documents as may be necessary to
register or qualify the securities subject to such registration
under the securities laws of such states as the Holder shall
reasonably
A-59
request; provided, however, that no such qualification
shall be required in any jurisdiction where, as a result
thereof, the Partnership would become subject to general service
of process or to taxation or qualification to do business as a
foreign corporation or partnership doing business in such
jurisdiction solely as a result of such registration, and
(B) such documents as may be necessary to apply for listing
or to list the Partnership Securities subject to such
registration on such National Securities Exchange as the Holder
shall reasonably request, and (ii) do any and all other
acts and things that may be necessary or appropriate to enable
the Holder to consummate a public sale of such Partnership
Securities in such states. Except as set forth in
Section 7.12(d), all costs and expenses of any such
registration and offering (other than the underwriting discounts
and commissions) shall be paid by the Partnership, without
reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a
registration statement under the Securities Act for an offering
of Partnership Securities for cash (other than an offering
relating solely to an employee benefit plan), the Partnership
shall use all commercially reasonable efforts to include such
number or amount of Partnership Securities held by any Holder in
such registration statement as the Holder shall request;
provided, that the Partnership is not required to make
any effort or take any action to so include the Partnership
Securities of the Holder once the registration statement is
declared effective by the Commission or otherwise becomes
effective, including any registration statement providing for
the offering from time to time of Partnership Securities
pursuant to Rule 415 of the Securities Act. If the proposed
offering pursuant to this Section 7.12(b) shall be an
underwritten offering, then, in the event that the managing
underwriter or managing underwriters of such offering advise the
Partnership and the Holder in writing that in their opinion the
inclusion of all or some of the Holders Partnership
Securities would adversely and materially affect the timing or
success of the offering, the Partnership shall include in such
offering only that number or amount, if any, of Partnership
Securities held by the Holder that, in the opinion of the
managing underwriter or managing underwriters, will not so
adversely and materially affect the offering. Except as set
forth in Section 7.12(c), all costs and expenses of any
such registration and offering (other than the underwriting
discounts and commissions) shall be paid by the Partnership,
without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any
registration referred to in this Section 7.12, the
Partnership shall provide indemnification, representations,
covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters.
Further, in addition to and not in limitation of the
Partnerships obligation under Section 7.7, the
Partnership shall, to the fullest extent permitted by law,
indemnify and hold harmless the Holder, its officers, directors
and each Person who controls the Holder (within the meaning of
the Securities Act) and any agent thereof (collectively,
Indemnified Persons) from and against any and
all losses, claims, damages, liabilities, joint or several,
expenses (including legal fees and expenses), judgments, fines,
penalties, interest, settlements or other amounts arising from
any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in
which any Indemnified Person may be involved, or is threatened
to be involved, as a party or otherwise, under the Securities
Act or otherwise (hereinafter referred to in this
Section 7.12(c) as a claim and in the
plural as claims) based upon, arising out of
or resulting from any untrue statement or alleged untrue
statement of any material fact contained in any registration
statement under which any Partnership Securities were registered
under the Securities Act or any state securities or Blue Sky
laws, in any preliminary prospectus (if used prior to the
effective date of such registration statement), or in any
summary or final prospectus or any free writing prospectus or in
any amendment or supplement thereto (if used during the period
the Partnership is required to keep the registration statement
current), or arising out of, based upon or resulting from the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements made therein not misleading; provided,
however, that the Partnership shall not be liable to any
Indemnified Person to the extent that any such claim arises out
of, is based upon or results from an untrue statement or alleged
untrue statement or omission or alleged omission made in such
registration statement, such preliminary, summary or final
prospectus or any free writing prospectus or such amendment or
supplement, in reliance upon and in conformity with written
information furnished to the Partnership by or on behalf of such
Indemnified Person specifically for use in the preparation
thereof.
(d) The provisions of Section 7.12(a) and
Section 7.12(b) shall continue to be applicable with
respect to the General Partner (and any of the General
Partners Affiliates) after it ceases to be a general
partner of the
A-60
Partnership, during a period of two years subsequent to the
effective date of such cessation and for so long thereafter as
is required for the Holder to sell all of the Partnership
Securities with respect to which it has requested during such
two-year period inclusion in a registration statement otherwise
filed or that a registration statement be filed; provided,
however, that the Partnership shall not be required to file
successive registration statements covering the same Partnership
Securities for which registration was demanded during such
two-year period. The provisions of Section 7.12(c) shall
continue in effect thereafter.
(e) The rights to cause the Partnership to register
Partnership Securities pursuant to this Section 7.12 may be
assigned (but only with all related obligations) by a Holder to
a transferee or assignee of such Partnership Securities,
provided (i) the Partnership is, within a reasonable time
after such transfer, furnished with written notice of the name
and address of such transferee or assignee and the Partnership
Securities with respect to which such registration rights are
being assigned; and (ii) such transferee or assignee agrees
in writing to be bound by and subject to the terms set forth in
this Section 7.12.
(f) Any request to register Partnership Securities pursuant
to this Section 7.12 shall (i) specify the Partnership
Securities intended to be offered and sold by the Person making
the request, (ii) express such Persons present intent
to offer such Partnership Securities for distribution,
(iii) describe the nature or method of the proposed offer
and sale of Partnership Securities, and (iv) contain the
undertaking of such Person to provide all such information and
materials and take all action as may be required in order to
permit the Partnership to comply with all applicable
requirements in connection with the registration of such
Partnership Securities.
Section 7.13 Reliance
by Third Parties.
Notwithstanding anything to the contrary in this Agreement, any
Person dealing with the Partnership shall be entitled to assume
that the General Partner and any officer of the General Partner
authorized by the General Partner to act on behalf of and in the
name of the Partnership has full power and authority to
encumber, sell or otherwise use in any manner any and all assets
of the Partnership and to enter into any authorized contracts on
behalf of the Partnership, and such Person shall be entitled to
deal with the General Partner or any such officer as if it were
the Partnerships sole party in interest, both legally and
beneficially. Each Limited Partner hereby waives, to the fullest
extent permitted by law, any and all defenses or other remedies
that may be available against such Person to contest, negate or
disaffirm any action of the General Partner or any such officer
in connection with any such dealing. In no event shall any
Person dealing with the General Partner or any such officer or
its representatives be obligated to ascertain that the terms of
this Agreement have been complied with or to inquire into the
necessity or expedience of any act or action of the General
Partner or any such officer or its representatives. Each and
every certificate, document or other instrument executed on
behalf of the Partnership by the General Partner or its
representatives shall be conclusive evidence in favor of any and
every Person relying thereon or claiming thereunder that
(a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full
force and effect, (b) the Person executing and delivering
such certificate, document or instrument was duly authorized and
empowered to do so for and on behalf of the Partnership and
(c) such certificate, document or instrument was duly
executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership.
ARTICLE VIII
BOOKS,
RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records
and Accounting.
The General Partner shall keep or cause to be kept at the
principal office of the Partnership appropriate books and
records with respect to the Partnerships business,
including all books and records necessary to provide to the
Limited Partners any information required to be provided
pursuant to Section 3.4(a). Any books and records
maintained by or on behalf of the Partnership in the regular
course of its business, including the record of the Record
Holders of Units or other Partnership Securities, books of
account and records of Partnership proceedings, may be kept on,
or be in the form of, computer disks, hard drives, punch cards,
A-61
magnetic tape, photographs, micrographics or any other
information storage device; provided, that the books and
records so maintained are convertible into clearly legible
written form within a reasonable period of time. The books of
the Partnership shall be maintained, for financial reporting
purposes, on an accrual basis in accordance with U.S. GAAP.
The Partnership shall not be required to keep books maintained
on a cash basis and the General Partner shall be permitted to
calculate cash-based measures, including Operating Surplus and
Adjusted Operating Surplus, by making such adjustments to its
accrual basis books to account for non-cash items and other
adjustments as the General Partner determines to be necessary or
appropriate.
Section 8.2 Fiscal
Year.
The fiscal year of the Partnership shall be a fiscal year ending
December 31.
Section 8.3 Reports.
(a) As soon as practicable, but in no event later than
90 days after the close of each fiscal year of the
Partnership, the General Partner shall cause to be mailed or
made available, by any reasonable means (including posting on or
accessible through the Partnerships or the SECs
website) to each Record Holder of a Unit as of a date selected
by the General Partner, an annual report containing financial
statements of the Partnership for such fiscal year of the
Partnership, presented in accordance with U.S. GAAP,
including a balance sheet and statements of operations,
Partnership equity and cash flows, such statements to be audited
by a firm of independent public accountants selected by the
General Partner.
(b) As soon as practicable, but in no event later than
45 days after the close of each Quarter except the last
Quarter of each fiscal year, the General Partner shall cause to
be mailed or made available, by any reasonable means (including
posting on or accessible through the Partnerships or the
SECs website) to each Record Holder of a Unit, as of a
date selected by the General Partner, a report containing
unaudited financial statements of the Partnership and such other
information as may be required by applicable law, regulation or
rule of any National Securities Exchange on which the Units are
listed or admitted to trading, or as the General Partner
determines to be necessary or appropriate.
ARTICLE IX
TAX
MATTERS
Section 9.1 Tax
Returns and Information.
The Partnership shall timely file all returns of the Partnership
that are required for federal, state and local income tax
purposes on the basis of the accrual method and the taxable
period or year that it is required by law to adopt, from time to
time, as determined by the General Partner. In the event the
Partnership is required to use a taxable period other than a
year ending on December 31, the General Partner shall use
reasonable efforts to change the taxable period of the
Partnership to a year ending on December 31. The tax
information reasonably required by Record Holders for federal
and state income tax reporting purposes with respect to a
taxable period shall be furnished to them within 90 days of
the close of the calendar year in which the Partnerships
taxable period ends. The classification, realization and
recognition of income, gain, losses and deductions and other
items shall be on the accrual method of accounting for federal
income tax purposes.
Section 9.2 Tax
Elections.
(a) The Partnership shall make the election under
Section 754 of the Code in accordance with applicable
regulations thereunder, subject to the reservation of the right
to seek to revoke any such election upon the General
Partners determination that such revocation is in the best
interests of the Limited Partners. Notwithstanding any other
provision herein contained, for the purposes of computing the
adjustments under Section 743(b) of the Code, the General
Partner shall be authorized (but not required) to adopt a
convention whereby the price paid by a transferee of a Limited
Partner Interest will be deemed to be the lowest quoted closing
price of the Limited Partner Interests on any National
Securities Exchange on which such Limited
A-62
Partner Interests are listed or admitted to trading during the
calendar month in which such transfer is deemed to occur
pursuant to Section 6.2(f) without regard to the actual
price paid by such transferee.
(b) Except as otherwise provided herein, the General
Partner shall determine whether the Partnership should make any
other elections permitted by the Code.
Section 9.3 Tax
Controversies.
Subject to the provisions hereof, the General Partner is
designated as the Tax Matters Partner (as defined in the Code)
and is authorized and required to represent the Partnership (at
the Partnerships expense) in connection with all
examinations of the Partnerships affairs by tax
authorities, including resulting administrative and judicial
proceedings, and to expend Partnership funds for professional
services and costs associated therewith. Each Partner agrees to
cooperate with the General Partner and to do or refrain from
doing any or all things reasonably required by the General
Partner to conduct such proceedings.
Section 9.4 Withholding.
Notwithstanding any other provision of this Agreement, the
General Partner is authorized to take any action that may be
required to cause the Partnership and other Group Members to
comply with any withholding requirements established under the
Code or any other federal, state or local law including pursuant
to Sections 1441, 1442, 1445 and 1446 of the Code, or
established under any foreign law. To the extent that the
Partnership is required or elects to withhold and pay over to
any taxing authority any amount resulting from the allocation or
distribution of income to any Partner (including by reason of
Section 1446 of the Code), the General Partner may treat
the amount withheld as a distribution of cash pursuant to
Section 6.3 or Section 12.4(c) in the amount of such
withholding from such Partner.
ARTICLE X
ADMISSION
OF PARTNERS
Section 10.1 Admission
of Limited Partners.
(a) Upon the issuance by the Partnership of Common Units,
Subordinated Units and Incentive Distribution Rights to the
General Partner, Tesoro, Tesoro R&M, Tesoro Alaska and the
Underwriters as described in Article V, such parties shall,
by acceptance of such Partnership Interests, and upon being
reflected in the books and records of the Partnership as the
Record Holders of such Partnership Interests, be admitted to the
Partnership as Initial Limited Partners in respect of the Common
Units, Subordinated Units or Incentive Distribution Rights
issued to them and be bound by this Agreement, all with or
without execution of this Agreement.
(b) By acceptance of the transfer of any Limited Partner
Interests in accordance with Article IV or the acceptance
of any Limited Partner Interests issued pursuant to
Article V or pursuant to a merger or consolidation pursuant
to Article XIV, and except as provided in Section 4.9,
each transferee of, or other such Person acquiring, a Limited
Partner Interest (including any nominee holder or an agent or
representative acquiring such Limited Partner Interests for the
account of another Person) (i) shall be admitted to the
Partnership as a Limited Partner with respect to the Limited
Partner Interests so transferred or issued to such Person when
any such transfer, issuance or admission is reflected in the
books and records of the Partnership and such Limited Partner
becomes the Record Holder of the Limited Partner Interests so
transferred, (ii) shall become bound, and shall be deemed
to have agreed to be bound, by the terms of this Agreement,
(iii) represents that the transferee has the capacity,
power and authority to enter into this Agreement, and
(iv) makes any consents, acknowledgements or waivers
contained in this Agreement, all with or without execution of
this Agreement by such Person. The transfer of any Limited
Partner Interests and the admission of any new Limited Partner
shall not constitute an amendment to this Agreement. A Person
may become a Limited Partner or Record Holder of a Limited
Partner Interest without the consent or approval of any of the
Partners. A Person may not become a Limited Partner without
acquiring a Limited Partner Interest and until
A-63
such Person is reflected in the books and records of the
Partnership as the Record Holder of such Limited Partner
Interest. The rights and obligations of a Person who is an
Ineligible Holder shall be determined in accordance with
Section 4.9.
(c) The name and mailing address of each Limited Partner
shall be listed on the books and records of the Partnership
maintained for such purpose by the Partnership or the Transfer
Agent. The General Partner shall update the books and records of
the Partnership from time to time as necessary to reflect
accurately the information therein (or shall cause the Transfer
Agent to do so, as applicable). A Limited Partner Interest may
be represented by a Certificate, as provided in Section 4.1.
(d) Any transfer of a Limited Partner Interest shall not
entitle the transferee to share in the profits and losses, to
receive distributions, to receive allocations of income, gain,
loss, deduction or credit or any similar item or to any other
rights to which the transferor was entitled until the transferee
becomes a Limited Partner pursuant to Section 10.1(b).
Section 10.2 Admission
of Successor General Partner.
A successor General Partner approved pursuant to
Section 11.1 or Section 11.2 or the transferee of or
successor to all of the General Partner Interest (represented by
General Partner Units) pursuant to Section 4.6 who is
proposed to be admitted as a successor General Partner shall be
admitted to the Partnership as the General Partner, effective
immediately prior to the withdrawal or removal of the
predecessor or transferring General Partner, pursuant to
Section 11.1 or 11.2 or the transfer of the General Partner
Interest (represented by General Partner Units) pursuant to
Section 4.6, provided, however, that no such
successor shall be admitted to the Partnership until compliance
with the terms of Section 4.6 has occurred and such
successor has executed and delivered such other documents or
instruments as may be required to effect such admission. Any
such successor is hereby authorized to and shall, subject to the
terms hereof, carry on the business of the members of the
Partnership Group without dissolution.
Section 10.3 Amendment
of Agreement and Certificate of Limited Partnership.
To effect the admission to the Partnership of any Partner, the
General Partner shall take all steps necessary or appropriate
under the Delaware Act to amend the records of the Partnership
to reflect such admission and, if necessary, to prepare as soon
as practicable an amendment to this Agreement and, if required
by law, the General Partner shall prepare and file an amendment
to the Certificate of Limited Partnership.
ARTICLE XI
WITHDRAWAL
OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal
of the General Partner.
(a) The General Partner shall be deemed to have withdrawn
from the Partnership upon the occurrence of any one of the
following events (each such event herein referred to as an
Event of Withdrawal);
(i) The General Partner voluntarily withdraws from the
Partnership by giving written notice to the other Partners;
(ii) The General Partner transfers all of its rights as
General Partner pursuant to Section 4.6;
(iii) The General Partner is removed pursuant to
Section 11.2;
(iv) The General Partner (A) makes a general
assignment for the benefit of creditors; (B) files a
voluntary bankruptcy petition for relief under Chapter 7 of
the United States Bankruptcy Code; (C) files a petition or
answer seeking for itself a liquidation, dissolution or similar
relief (but not a reorganization) under any law; (D) files
an answer or other pleading admitting or failing to contest the
material allegations of a petition filed against the General
Partner in a proceeding of the type described in clauses
A-64
(A)-(C) of this Section 11.1(a)(iv); or (E) seeks,
consents to or acquiesces in the appointment of a trustee (but
not a
debtor-
in-possession),
receiver or liquidator of the General Partner or of all or any
substantial part of its properties;
(v) A final and non-appealable order of relief under
Chapter 7 of the United States Bankruptcy Code is entered
by a court with appropriate jurisdiction pursuant to a voluntary
or involuntary petition by or against the General
Partner; or
(vi) (A) if the General Partner is a corporation, a
certificate of dissolution or its equivalent is filed for the
General Partner, or 90 days expire after the date of notice
to the General Partner of revocation of its charter without a
reinstatement of its charter, under the laws of its state of
incorporation; (B) if the General Partner is a partnership
or a limited liability company, the dissolution and commencement
of winding up of the General Partner; (C) if the General
Partner is acting in such capacity by virtue of being a trustee
of a trust, the termination of the trust; (D) if the
General Partner is a natural person, his death or adjudication
of incompetency; and (E) otherwise upon the termination of
the General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv),
(v) or (vi)(A), (B), (C) or (E) occurs, the
withdrawing General Partner shall give notice to the Limited
Partners within 30 days after such occurrence. The Partners
hereby agree that only the Events of Withdrawal described in
this Section 11.1 shall result in the withdrawal of the
General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership
upon the occurrence of an Event of Withdrawal shall not
constitute a breach of this Agreement under the following
circumstances: (i) at any time during the period beginning
on the Closing Date and ending at 12:00 midnight, Central Time,
on June 30, 2021 the General Partner voluntarily withdraws
by giving at least 90 days advance notice of its
intention to withdraw to the Limited Partners; provided,
that prior to the effective date of such withdrawal, the
withdrawal is approved by Unitholders holding at least a
majority of the Outstanding Common Units (excluding Common Units
held by the General Partner and its Affiliates) and the General
Partner delivers to the Partnership an Opinion of Counsel
(Withdrawal Opinion of Counsel) that such
withdrawal (following the selection of the successor General
Partner) would not result in the loss of the limited liability
under the Delaware Act of any Limited Partner or cause any Group
Member to be treated as an association taxable as a corporation
or otherwise to be taxed as an entity for federal income tax
purposes (to the extent not already so treated or taxed);
(ii) at any time after 12:00 midnight, Central Time, on
June 30, 2021 the General Partner voluntarily withdraws by
giving at least 90 days advance notice to the
Unitholders, such withdrawal to take effect on the date
specified in such notice; (iii) at any time that the
General Partner ceases to be the General Partner pursuant to
Section 11.1(a)(ii) or is removed pursuant to
Section 11.2; or (iv) notwithstanding clause (i)
of this sentence, at any time that the General Partner
voluntarily withdraws by giving at least 90 days
advance notice of its intention to withdraw to the Limited
Partners, such withdrawal to take effect on the date specified
in the notice, if at the time such notice is given one Person
and its Affiliates (other than the General Partner and its
Affiliates) own beneficially or of record or control at least
50% of the Outstanding Units. The withdrawal of the General
Partner from the Partnership upon the occurrence of an Event of
Withdrawal shall also constitute the withdrawal of the General
Partner as general partner or managing member, if any, to the
extent applicable, of the other Group Members. If the General
Partner gives a notice of withdrawal pursuant to
Section 11.1(a)(i), the holders of a Unit Majority, may,
prior to the effective date of such withdrawal, elect a
successor General Partner. The Person so elected as successor
General Partner shall automatically become the successor general
partner or managing member, to the extent applicable, of the
other Group Members of which the General Partner is a general
partner or a managing member. If, prior to the effective date of
the General Partners withdrawal, a successor is not
selected by the Unitholders as provided herein or the
Partnership does not receive a Withdrawal Opinion of Counsel,
the Partnership shall be dissolved in accordance with
Section 12.1 unless the business of the Partnership is
continued pursuant to Section 12.2. Any successor General
Partner elected in accordance with the terms of this
Section 11.1 shall be subject to the provisions of
Section 10.3.
A-65
Section 11.2 Removal
of the General Partner.
The General Partner may be removed if such removal is approved
by the Unitholders holding at least
66 2/3%
of the Outstanding Units (including Units held by the General
Partner and its Affiliates) voting as a single class. Any such
action by such holders for removal of the General Partner must
also provide for the election of a successor General Partner by
the Unitholders holding a majority of the outstanding Common
Units voting as a class and Unitholders holding a majority of
the outstanding Subordinated Units (if any Subordinated Units
are then Outstanding) voting as a class (including, in each
case, Units held by the General Partner and its Affiliates).
Such removal shall be effective immediately following the
admission of a successor General Partner pursuant to
Section 10.2. The removal of the General Partner shall also
automatically constitute the removal of the General Partner as
general partner or managing member, to the extent applicable, of
the other Group Members of which the General Partner is a
general partner or a managing member. If a Person is elected as
a successor General Partner in accordance with the terms of this
Section 11.2, such Person shall, upon admission pursuant to
Section 10.2, automatically become a successor general
partner or managing member, to the extent applicable, of the
other Group Members of which the General Partner is a general
partner or a managing member. The right of the holders of
Outstanding Units to remove the General Partner shall not exist
or be exercised unless the Partnership has received an opinion
opining as to the matters covered by a Withdrawal Opinion of
Counsel. Any successor General Partner elected in accordance
with the terms of this Section 11.2 shall be subject to the
provisions of Section 10.2.
Section 11.3 Interest
of Departing General Partner and Successor General Partner.
(a) In the event of (i) withdrawal of the General
Partner under circumstances where such withdrawal does not
violate this Agreement or (ii) removal of the General
Partner by the holders of Outstanding Units under circumstances
where Cause does not exist, if the successor General Partner is
elected in accordance with the terms of Section 11.1 or
Section 11.2, the Departing General Partner shall have the
option, exercisable prior to the effective date of the
withdrawal or removal of such Departing General Partner, to
require its successor to purchase its General Partner Interest
(represented by General Partner Units) and its general partner
interest (or equivalent interest), if any, in the other Group
Members and all of its or its Affiliates Incentive
Distribution Rights (collectively, the Combined
Interest) in exchange for an amount in cash equal to
the fair market value of such Combined Interest, such amount to
be determined and payable as of the effective date of its
withdrawal or removal. If the General Partner is removed by the
Unitholders under circumstances where Cause exists or if the
General Partner withdraws under circumstances where such
withdrawal violates this Agreement, and if a successor General
Partner is elected in accordance with the terms of
Section 11.1 or Section 11.2 (or if the business of
the Partnership is continued pursuant to Section 12.2 and
the successor General Partner is not the former General
Partner), such successor shall have the option, exercisable
prior to the effective date of the withdrawal or removal of such
Departing General Partner (or, in the event the business of the
Partnership is continued, prior to the date the business of the
Partnership is continued), to purchase the Combined Interest for
such fair market value of such Combined Interest. In either
event, the Departing General Partner shall be entitled to
receive all reimbursements due such Departing General Partner
pursuant to Section 7.4, including any employee-related
liabilities (including severance liabilities), incurred in
connection with the termination of any employees employed by the
Departing General Partner or its Affiliates (other than any
Group Member) for the benefit of the Partnership or the other
Group Members.
For purposes of this Section 11.3(a), the fair market value
of the Combined Interest shall be determined by agreement
between the Departing General Partner and its successor or,
failing agreement within 30 days after the effective date
of such Departing General Partners withdrawal or removal,
by an independent investment banking firm or other independent
expert selected by the Departing General Partner and its
successor, which, in turn, may rely on other experts, and the
determination of which shall be conclusive as to such matter. If
such parties cannot agree upon one independent investment
banking firm or other independent expert within 45 days
after the effective date of such withdrawal or removal, then the
Departing General Partner shall designate an independent
investment banking firm or other independent expert, the
Departing General Partners successor shall designate an
independent investment banking firm or other independent
A-66
expert, and such firms or experts shall mutually select a third
independent investment banking firm or independent expert, which
third independent investment banking firm or other independent
expert shall determine the fair market value of the Combined
Interest. In making its determination, such third independent
investment banking firm or other independent expert may consider
the then current trading price of Units on any National
Securities Exchange on which Units are then listed or admitted
to trading, the value of the Partnerships assets, the
rights and obligations of the Departing General Partner, the
value of the Incentive Distribution Rights and the General
Partner Interest (represented by General Partner Units) and
other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner
set forth in Section 11.3(a), the Departing General Partner
(or its transferee) shall become a Limited Partner and its
Combined Interest shall be converted into Common Units pursuant
to a valuation made by an investment banking firm or other
independent expert selected pursuant to Section 11.3(a),
without reduction in such Partnership Interest (but subject to
proportionate dilution by reason of the admission of its
successor). Any successor General Partner shall indemnify the
Departing General Partner (or its transferee) as to all debts
and liabilities of the Partnership arising on or after the date
on which the Departing General Partner (or its transferee)
becomes a Limited Partner. For purposes of this Agreement,
conversion of the Combined Interest of the Departing General
Partner to Common Units will be characterized as if the
Departing General Partner (or its transferee) contributed its
Combined Interest to the Partnership in exchange for the newly
issued Common Units.
(c) If a successor General Partner is elected in accordance
with the terms of Section 11.1 or Section 11.2 (or if
the business of the Partnership is continued pursuant to
Section 12.2 and the successor General Partner is not the
former General Partner) and the option described in
Section 11.3(a) is not exercised by the party entitled to
do so, the successor General Partner shall, at the effective
date of its admission to the Partnership, contribute to the
Partnership cash in the amount equal to the product of
(x) the quotient obtained by dividing (A) the
Percentage Interest of the General Partner Interest of the
Departing General Partner by (B) a percentage equal to 100%
less the Percentage Interest of the General Partner Interest of
the Departing General Partner and (y) the Net Agreed Value
of the Partnerships assets on such date. In such event,
such successor General Partner shall, subject to the following
sentence, be entitled to its Percentage Interest of all
Partnership allocations and distributions to which the Departing
General Partner was entitled. In addition, the successor General
Partner shall cause this Agreement to be amended to reflect
that, from and after the date of such successor General
Partners admission, the successor General Partners
interest in all Partnership distributions and allocations shall
be its Percentage Interest.
|
|
Section 11.4
|
Termination
of Subordination Period, Conversion of Subordinated Units and
Extinguishment of Cumulative Common Unit Arrearages.
|
Notwithstanding any provision of this Agreement, if the General
Partner is removed as general partner of the Partnership under
circumstances where Cause does not exist and Units held by the
General Partner and its Affiliates are not voted in favor of
such removal, (i) the Subordination Period will end and all
Outstanding Subordinated Units will immediately and
automatically convert into Common Units on a one-for-one basis,
(ii) all Cumulative Common Unit Arrearages on the Common
Units will be extinguished and (iii) the General Partner
will have the right to convert its General Partner Interest
(represented by General Partner Units) and its Incentive
Distribution Rights into Common Units or to receive cash in
exchange therefor in accordance with Section 11.3.
Section 11.5 Withdrawal
of Limited Partners.
No Limited Partner shall have any right to withdraw from the
Partnership; provided, however, that when a
transferee of a Limited Partners Limited Partner Interest
becomes a Record Holder of the Limited Partner Interest so
transferred, such transferring Limited Partner shall cease to be
a Limited Partner with respect to the Limited Partner Interest
so transferred.
A-67
ARTICLE XII
DISSOLUTION
AND LIQUIDATION
Section 12.1 Dissolution.
The Partnership shall not be dissolved by the admission of
additional Limited Partners or by the admission of a successor
General Partner in accordance with the terms of this Agreement.
Upon the removal or withdrawal of the General Partner, if a
successor General Partner is elected pursuant to
Section 11.1 or Section 11.2, the Partnership shall
not be dissolved and such successor General Partner shall
continue the business of the Partnership. The Partnership shall
dissolve, and (subject to Section 12.2) its affairs shall
be wound up, upon:
(a) an Event of Withdrawal of the General Partner as
provided in Section 11.1(a) (other than
Section 11.1(a)(ii)), unless a successor is elected and an
Opinion of Counsel is received as provided in
Section 11.1(b) or 11.2 and such successor is admitted to
the Partnership pursuant to Section 10.2;
(b) an election to dissolve the Partnership by the General
Partner that is approved by the holders of a Unit Majority;
(c) the entry of a decree of judicial dissolution of the
Partnership pursuant to the provisions of the Delaware
Act; or
(d) at any time there are no Limited Partners, unless the
Partnership is continued without dissolution in accordance with
the Delaware Act.
Section 12.2 Continuation
of the Business of the Partnership After Dissolution.
Upon (a) dissolution of the Partnership following an Event
of Withdrawal caused by the withdrawal or removal of the General
Partner as provided in Section 11.1(a)(i) or (iii) and
the failure of the Partners to select a successor to such
Departing General Partner pursuant to Section 11.1 or
Section 11.2, then within 90 days thereafter, or
(b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in
Section 11.1(a)(iv), (v) or (vi), then, to the maximum
extent permitted by law, within 180 days thereafter, the
holders of a Unit Majority may elect to continue the business of
the Partnership on the same terms and conditions set forth in
this Agreement by appointing as a successor General Partner a
Person approved by the holders of a Unit Majority. Unless such
an election is made within the applicable time period as set
forth above, the Partnership shall conduct only activities
necessary to wind up its affairs. If such an election is so
made, then:
(i) the Partnership shall continue without dissolution
unless earlier dissolved in accordance with this
Article XII;
(ii) if the successor General Partner is not the former
General Partner, then the interest of the former General Partner
shall be treated in the manner provided in
Section 11.3; and
(iii) the successor General Partner shall be admitted to
the Partnership as General Partner, effective as of the Event of
Withdrawal, by agreeing in writing to be bound by this Agreement;
provided, that the right of the holders of a Unit
Majority to approve a successor General Partner and to continue
the business of the Partnership shall not exist and may not be
exercised unless the Partnership has received an Opinion of
Counsel that (x) the exercise of the right would not result
in the loss of limited liability of any Limited Partner under
the Delaware Act and (y) neither the Partnership nor any
Group Member 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 such right to continue
(to the extent not already so treated or taxed).
A-68
Section 12.3 Liquidator.
Upon dissolution of the Partnership, unless the business of the
Partnership is continued pursuant to Section 12.2, the
General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner)
shall be entitled to receive such compensation for its services
as may be approved by holders of at least a majority of the
Outstanding Common Units and Subordinated Units voting as a
single class. The Liquidator (if other than the General Partner)
shall agree not to resign at any time without 15 days
prior notice and may be removed at any time, with or without
cause, by notice of removal approved by holders of at least a
majority of the Outstanding Common Units and Subordinated Units
voting as a single class. Upon dissolution, removal or
resignation of the Liquidator, a successor and substitute
Liquidator (who shall have and succeed to all rights, powers and
duties of the original Liquidator) shall within 30 days
thereafter be approved by holders of at least a majority of the
Outstanding Common Units and Subordinated Units voting as a
single class. The right to approve a successor or substitute
Liquidator in the manner provided herein shall be deemed to
refer also to any such successor or substitute Liquidator
approved in the manner herein provided. Except as expressly
provided in this Article XII, the Liquidator approved in
the manner provided herein shall have and may exercise, without
further authorization or consent of any of the parties hereto,
all of the powers conferred upon the General Partner under the
terms of this Agreement (but subject to all of the applicable
limitations, contractual and otherwise, upon the exercise of
such powers, other than the limitation on sale set forth in
Section 7.3) necessary or appropriate to carry out the
duties and functions of the Liquidator hereunder for and during
the period of time required to complete the winding up and
liquidation of the Partnership as provided for herein.
Section 12.4 Liquidation.
The Liquidator shall proceed to dispose of the assets of the
Partnership, discharge its liabilities, and otherwise wind up
its affairs in such manner and over such period as determined by
the Liquidator, subject to
Section 17-804
of the Delaware Act and the following:
(a) The assets may be disposed of by public or private sale
or by distribution in kind to one or more Partners on such terms
as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the
property shall be deemed for purposes of Section 12.4(c) to
have received cash equal to its fair market value; and
contemporaneously therewith, appropriate cash distributions must
be made to the other Partners. The Liquidator may defer
liquidation or distribution of the Partnerships assets for
a reasonable time if it determines that an immediate sale or
distribution of all or some of the Partnerships assets
would be impractical or would cause undue loss to the Partners.
The Liquidator may distribute the Partnerships assets, in
whole or in part, in kind if it determines that a sale would be
impractical or would cause undue loss to the Partners.
(b) Liabilities of the Partnership include amounts owed to
the Liquidator as compensation for serving in such capacity
(subject to the terms of Section 12.3) and amounts to
Partners otherwise than in respect of their distribution rights
under Article VI. With respect to any liability that is
contingent, conditional or unmatured or is otherwise not yet due
and payable, the Liquidator shall either settle such claim for
such amount as it thinks appropriate or establish a reserve of
cash or other assets to provide for its payment. When paid, any
unused portion of the reserve shall be distributed as additional
liquidation proceeds.
(c) All property and all cash in excess of that required to
discharge liabilities as provided in Section 12.4(b) shall
be distributed to the Partners in accordance with, and to the
extent of, the positive balances in their respective Capital
Accounts, as determined after taking into account all Capital
Account adjustments (other than those made by reason of
distributions pursuant to this Section 12.4(c)) for the
taxable period of the Partnership during which the liquidation
of the Partnership occurs (with such date of occurrence being
determined pursuant to Treasury Regulation
Section 1.704-
1(b)(2)(ii)(g)), and such distribution shall be made by the end
of such taxable period (or, if later, within 90 days after
said date of such occurrence).
A-69
Section 12.5 Cancellation
of Certificate of Limited Partnership.
Upon the completion of the distribution of Partnership cash and
property as provided in Section 12.4 in connection with the
liquidation of the Partnership, the Certificate of Limited
Partnership and all qualifications of the Partnership as a
foreign limited partnership in jurisdictions other than the
State of Delaware shall be canceled and such other actions as
may be necessary to terminate the Partnership shall be taken.
Section 12.6 Return
of Contributions.
The General Partner shall not be personally liable for, and
shall have no obligation to contribute or loan any monies or
property to the Partnership to enable it to effectuate, the
return of the Capital Contributions of the Limited Partners or
Unitholders, or any portion thereof, it being expressly
understood that any such return shall be made solely from
Partnership assets.
Section 12.7 Waiver
of Partition.
To the maximum extent permitted by law, each Partner hereby
waives any right to partition of the Partnership property.
Section 12.8 Capital
Account Restoration.
No Limited Partner shall have any obligation to restore any
negative balance in its Capital Account upon liquidation of the
Partnership. The General Partner shall be obligated to restore
any negative balance in its Capital Account upon liquidation of
its interest in the Partnership by the end of the taxable year
of the Partnership during which such liquidation occurs, or, if
later, within 90 days after the date of such liquidation.
ARTICLE XIII
AMENDMENT
OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1 Amendments
to be Adopted Solely by the General Partner.
Each Partner agrees that the General Partner, without the
approval of any Partner, may amend any provision of this
Agreement and execute, swear to, acknowledge, deliver, file and
record whatever documents may be required in connection
therewith, to reflect:
(a) a change in the name of the Partnership, the location
of the principal place of business of the Partnership, the
registered agent of the Partnership or the registered office of
the Partnership;
(b) admission, substitution, withdrawal or removal of
Partners in accordance with this Agreement;
(c) a change that the General Partner determines to be
necessary or appropriate to qualify or continue the
qualification of the Partnership 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 the Group Members
will not be treated as associations taxable as corporations or
otherwise taxed as entities for federal income tax purposes;
(d) a change that the General Partner determines,
(i) does not adversely affect the Limited Partners
(including any particular class of Partnership Interests as
compared to other classes of Partnership Interests) in any
material respect, (ii) to be necessary or appropriate to
(A) 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 (including the
Delaware Act) or (B) facilitate the trading of the Units
(including the division of any class or classes of Outstanding
Units into different classes to facilitate uniformity of tax
consequences within such classes of Units) or comply with any
rule, regulation, guideline or requirement of any National
Securities Exchange on which the Units are or will be listed or
admitted to trading, (iii) to be necessary or appropriate
in connection with action taken by the General Partner pursuant
to Section 5.9 or (iv) is required to effect the
intent expressed in the Registration Statement or the intent of
the provisions of this Agreement or is otherwise contemplated by
this Agreement;
A-70
(e) a change in the fiscal year or taxable year of the
Partnership and any other changes that the General Partner
determines to be necessary or appropriate as a result of a
change in the fiscal year or taxable year of the Partnership
including, if the General Partner shall so determine, a change
in the definition of Quarter and the dates on which
distributions are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of
Counsel, to prevent the Partnership, or the General Partner or
its directors, officers, trustees or agents from in any manner
being subjected to the provisions of the Investment Company Act
of 1940, as amended, the Investment Advisers Act of 1940, as
amended, or plan asset regulations adopted under the
Employee Retirement Income Security Act of 1974, as amended,
regardless of whether such are substantially similar to plan
asset regulations currently applied or proposed by the United
States Department of Labor;
(g) an amendment that the General Partner determines to be
necessary or appropriate in connection with the authorization or
issuance of any class or series of Partnership Securities
pursuant to Section 5.6;
(h) any amendment expressly permitted in this Agreement to
be made by the General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by
a Merger Agreement approved in accordance with Section 14.3;
(j) an amendment that the General Partner determines to be
necessary or appropriate to reflect and account for the
formation by the Partnership of, or investment by the
Partnership in, any corporation, partnership, joint venture,
limited liability company or other entity, in connection with
the conduct by the Partnership of activities permitted by the
terms of Section 2.4;
(k) a merger, conveyance or conversion pursuant to
Section 14.3(d); or
(l) any other amendments substantially similar to the
foregoing.
Section 13.2 Amendment
Procedures.
Amendments to this Agreement may be proposed only by the General
Partner. To the fullest extent permitted by law, the General
Partner shall have no duty or obligation to propose or approve
any amendment to this Agreement and may decline to do so in its
sole discretion, and, in declining to propose or approve an
amendment to this Agreement, to the fullest extent permitted by
law shall not be required to act in good faith or pursuant to
any other standard imposed by this Agreement, any Group Member
Agreement, any other agreement contemplated hereby or under the
Delaware Act or any other law, rule or regulation or at equity.
An amendment to this Agreement shall be effective upon its
approval by the General Partner and, except as otherwise
provided by Section 13.1 or Section 13.3, the holders
of a Unit Majority, unless a greater or different percentage of
Outstanding Units is required under this Agreement or by
Delaware law. Each proposed amendment that requires the approval
of the holders of a specified percentage of Outstanding Units
shall be set forth in a writing that contains the text of the
proposed amendment. If such an amendment is proposed, the
General Partner shall seek the written approval of the requisite
percentage of Outstanding Units or call a meeting of the
Unitholders to consider and vote on such proposed amendment. The
General Partner shall notify all Record Holders upon final
adoption of any amendments. The General Partner shall be deemed
to have notified all Record Holders as required by this
Section 13.2 if it has either (i) filed such amendment
with the Commission via its Electronic Data Gathering, Analysis
and Retrieval system and such amendment is publicly available on
such system or (ii) made such amendment available on any
publicly available website maintained by the Partnership.
Section 13.3 Amendment
Requirements.
(a) Notwithstanding the provisions of Section 13.1 and
Section 13.2, no provision of this Agreement that
establishes a percentage of Outstanding Units (including Units
deemed owned by the General Partner) required to take any action
shall be amended, altered, changed, repealed or rescinded in any
respect that would have the effect of (i) in the case of
any provision of this Agreement other than Section 11.2 or
Section 13.4,
A-71
reducing such percentage or (ii) in the case of
Section 11.2 or Section 13.4, increasing such
percentages, unless such amendment is approved by the written
consent or the affirmative vote of holders of Outstanding Units
whose aggregate Outstanding Units constitute (x) in the
case of a reduction as described in subclause (a)(i)
hereof, not less than the voting requirement sought to be
reduced, (y) in the case of an increase in the percentage
in Section 11.2, not less than 90% of the Outstanding
Units, or (z) in the case of an increase in the percentage
in Section 13.4, not less than a majority of the
Outstanding Units.
(b) Notwithstanding the provisions of Section 13.1 and
Section 13.2, no amendment to this Agreement may
(i) enlarge the obligations of any Limited Partner without
its consent, unless such shall be deemed to have occurred as a
result of an amendment approved pursuant to Section 13.3(c)
or (ii) 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 to, the General
Partner or any of its Affiliates without its consent, which
consent may be given or withheld at its option.
(c) Except as provided in Section 14.3, and without
limitation of the General Partners authority to adopt
amendments to this Agreement without the approval of any
Partners as contemplated in Section 13.1, any amendment
that would have a material adverse effect on the rights or
preferences of any class of Partnership Interests in relation to
other classes of Partnership Interests must be approved by the
holders of not less than a majority of the Outstanding
Partnership Interests of the class affected.
(d) Notwithstanding any other provision of this Agreement,
except for amendments pursuant to Section 13.1 and except
as otherwise provided by Section 14.3(b), no amendments
shall become effective without the approval of the holders of at
least 90% of the Outstanding Units voting as a single class
unless the Partnership obtains an Opinion of Counsel to the
effect that such amendment will not affect the limited liability
of any Limited Partner under applicable partnership law of the
state under whose laws the Partnership is organized.
(e) Except as provided in Section 13.1, this
Section 13.3 shall only be amended with the approval of the
holders of at least 90% of the Outstanding Units.
Section 13.4 Special
Meetings.
All acts of Limited Partners to be taken pursuant to this
Agreement shall be taken in the manner provided in this
Article XIII. Special meetings of the Limited Partners may
be called by the General Partner or by Limited Partners owning
20% or more of the Outstanding Units of the class or classes for
which a meeting is proposed. Limited Partners shall call a
special meeting by delivering to the General Partner one or more
requests in writing stating that the signing Limited Partners
wish to call a special meeting and indicating the general or
specific purposes for which the special meeting is to be called.
Within 60 days after receipt of such a call from Limited
Partners or within such greater time as may be reasonably
necessary for the Partnership to comply with any statutes,
rules, regulations, listing agreements or similar requirements
governing the holding of a meeting or the solicitation of
proxies for use at such a meeting, the General Partner shall
send a notice of the meeting to the Limited Partners either
directly or indirectly through the Transfer Agent. A meeting
shall be held at a time and place determined by the General
Partner on a date not less than 10 days nor more than
60 days after the time notice of the meeting is given as
provided in Section 16.1. Limited Partners shall not vote
on matters that would cause the Limited Partners to be deemed to
be taking part in the management and control of the business and
affairs of the Partnership so as to jeopardize the Limited
Partners limited liability under the Delaware Act or the
law of any other state in which the Partnership is qualified to
do business.
Section 13.5 Notice
of a Meeting.
Notice of a meeting called pursuant to Section 13.4 shall
be given to the Record Holders of the class or classes of Units
for which a meeting is proposed in writing by mail or other
means of written communication in accordance with
Section 16.1. The notice shall be deemed to have been given
at the time when deposited in the mail or sent by other means of
written communication.
A-72
Section 13.6 Record
Date.
For purposes of determining the Limited Partners entitled to
notice of or to vote at a meeting of the Limited Partners or to
give approvals without a meeting as provided in
Section 13.11 the General Partner may set a Record Date,
which shall not be less than 10 nor more than 60 days
before (a) the date of the meeting (unless such requirement
conflicts with any rule, regulation, guideline or requirement of
any National Securities Exchange on which the Units are listed
or admitted to trading or U.S. federal securities laws, in
which case the rule, regulation, guideline or requirement of
such National Securities Exchange or U.S. federal
securities laws shall govern) or (b) in the event that
approvals are sought without a meeting, the date by which
Limited Partners are requested in writing by the General Partner
to give such approvals. If the General Partner does not set a
Record Date, then (a) the Record Date for determining the
Limited Partners entitled to notice of or to vote at a meeting
of the Limited Partners shall be the close of business on the
day next preceding the day on which notice is given, and
(b) the Record Date for determining the Limited Partners
entitled to give approvals without a meeting shall be the date
the first written approval is deposited with the Partnership in
care of the General Partner in accordance with
Section 13.11.
Section 13.7 Adjournment.
When a meeting is adjourned to another time or place, notice
need not be given of the adjourned meeting and a new Record Date
need not be fixed, if the time and place thereof are announced
at the meeting at which the adjournment is taken, unless such
adjournment shall be for more than 45 days. At the
adjourned meeting, the Partnership may transact any business
which might have been transacted at the original meeting. If the
adjournment is for more than 45 days or if a new Record
Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this
Article XIII.
Section 13.8 Waiver
of Notice; Approval of Meeting.
The transactions of any meeting of Limited Partners, however
called and noticed, and whenever held, shall be as valid as if
it had occurred at a meeting duly held after regular call and
notice, if a quorum is present either in person or by proxy.
Attendance of a Limited Partner at a meeting shall constitute a
waiver of notice of the meeting, except when the Limited Partner
attends the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened; and
except that attendance at a meeting is not a waiver of any right
to disapprove the consideration of matters required to be
included in the notice of the meeting, but not so included, if
the disapproval is expressly made at the meeting.
Section 13.9 Quorum
and Voting.
The holders of a majority of the Outstanding Units of the class
or classes for which a meeting has been called (including
Outstanding Units deemed owned by the General Partner)
represented in person or by proxy shall constitute a quorum at a
meeting of Limited Partners of such class or classes unless any
such action by the Limited Partners requires approval by holders
of a greater percentage of such Units, in which case the quorum
shall be such greater percentage. At any meeting of the Limited
Partners duly called and held in accordance with this Agreement
at which a quorum is present, the act of Limited Partners
holding Outstanding Units that in the aggregate represent a
majority of the Outstanding Units entitled to vote and be
present in person or by proxy at such meeting shall be deemed to
constitute the act of all Limited Partners, unless a greater or
different percentage is required with respect to such action
under the provisions of this Agreement, in which case the act of
the Limited Partners holding Outstanding Units that in the
aggregate represent at least such greater or different
percentage shall be required. The Limited Partners present at a
duly called or held meeting at which a quorum is present may
continue to transact business until adjournment, notwithstanding
the withdrawal of enough Limited Partners to leave less than a
quorum, if any action taken (other than adjournment) is approved
by the required percentage of Outstanding Units specified in
this Agreement (including Outstanding Units deemed owned by the
General Partner). In the absence of a quorum any meeting of
Limited Partners may be adjourned from time to time by the
affirmative vote of holders of at least a majority of the
Outstanding Units entitled to vote at such meeting (including
Outstanding Units deemed
A-73
owned by the General Partner) that are represented at such
meeting either in person or by proxy, but no other business may
be transacted, except as provided in Section 13.7.
Section 13.10 Conduct
of a Meeting.
The General Partner shall have full power and authority
concerning the manner of conducting any meeting of the Limited
Partners or solicitation of approvals in writing, including the
determination of Persons entitled to vote, the existence of a
quorum, the satisfaction of the requirements of
Section 13.4, the conduct of voting, the validity and
effect of any proxies and the determination of any
controversies, votes or challenges arising in connection with or
during the meeting or voting. The General Partner shall
designate a Person to serve as chairman of any meeting and shall
further designate a Person to take the minutes of any meeting.
All minutes shall be kept with the records of the Partnership
maintained by the General Partner. The General Partner may make
such other regulations consistent with applicable law and this
Agreement as it may deem advisable concerning the conduct of any
meeting of the Limited Partners or solicitation of approvals in
writing, including regulations in regard to the appointment of
proxies, the appointment and duties of inspectors of votes and
approvals, the submission and examination of proxies and other
evidence of the right to vote, and the revocation of approvals
in writing.
Section 13.11 Action
Without a Meeting.
If authorized by the General Partner, any action that may be
taken at a meeting of the Limited Partners may be taken without
a meeting if an approval in writing setting forth the action so
taken is signed by Limited Partners owning not less than the
minimum percentage of the Outstanding Units (including Units
deemed owned by the General Partner) that would be necessary to
authorize or take such action at a meeting at which all the
Limited Partners were present and voted (unless such provision
conflicts with any rule, regulation, guideline or requirement of
any National Securities Exchange on which the Units are listed
or admitted to trading, in which case the rule, regulation,
guideline or requirement of such National Securities Exchange
shall govern). Prompt notice of the taking of action without a
meeting shall be given to the Limited Partners who have not
approved in writing. The General Partner may specify that any
written ballot submitted to Limited Partners for the purpose of
taking any action without a meeting shall be returned to the
Partnership within the time period, which shall be not less than
20 days, specified by the General Partner. If a ballot
returned to the Partnership does not vote all of the Units held
by the Limited Partners, the Partnership shall be deemed to have
failed to receive a ballot for the Units that were not voted. If
approval of the taking of any action by the Limited Partners is
solicited by any Person other than by or on behalf of the
General Partner, the written approvals shall have no force and
effect unless and until (a) they are deposited with the
Partnership in care of the General Partner, (b) approvals
sufficient to take the action proposed are dated as of a date
not more than 90 days prior to the date sufficient
approvals are deposited with the Partnership and (c) an
Opinion of Counsel is delivered to the General Partner to the
effect that the exercise of such right and the action proposed
to be taken with respect to any particular matter (i) will
not cause the Limited Partners to be deemed to be taking part in
the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners
limited liability, and (ii) is otherwise permissible under
the state statutes then governing the rights, duties and
liabilities of the Partnership and the Partners.
Section 13.12 Right
to Vote and Related Matters.
(a) Only those Record Holders of the Outstanding Units on
the Record Date set pursuant to Section 13.6 (and also
subject to the limitations contained in the definition of
Outstanding) shall be entitled to notice of, and to
vote at, a meeting of Limited Partners or to act with respect to
matters as to which the holders of the Outstanding Units have
the right to vote or to act. All references in this Agreement to
votes of, or other acts that may be taken by, the Outstanding
Units shall be deemed to be references to the votes or acts of
the Record Holders of such Outstanding Units.
(b) With respect to Units that are held for a Persons
account by another Person (such as a broker, dealer, bank, trust
company or clearing corporation, or an agent of any of the
foregoing), in whose name such Units are registered, such other
Person shall, in exercising the voting rights in respect of such
Units on any matter,
A-74
and unless the arrangement between such Persons provides
otherwise, vote such Units in favor of, and at the direction of,
the Person who is the beneficial owner, and the Partnership
shall be entitled to assume it is so acting without further
inquiry. The provisions of this Section 13.12(b) (as well
as all other provisions of this Agreement) are subject to the
provisions of Section 4.3.
ARTICLE XIV
MERGER,
CONSOLIDATION OR CONVERSION
Section 14.1 Authority.
The Partnership may merge or consolidate with or into one or
more corporations, limited liability companies, statutory trusts
or associations, real estate investment trusts, common law
trusts or unincorporated businesses, including a partnership
(whether general or limited (including a limited liability
partnership)) or convert into any such entity, whether such
entity is formed under the laws of the State of Delaware or any
other state of the United States of America, pursuant to a
written plan of merger or consolidation (Merger
Agreement) or a written plan of conversion
(Plan of Conversion), as the case may be, in
accordance with this Article XIV.
Section 14.2 Procedure
for Merger, Consolidation or Conversion.
(a) Merger, consolidation or conversion of the Partnership
pursuant to this Article XIV requires the prior consent of
the General Partner, provided, however, that, to the
fullest extent permitted by law, the General Partner shall have
no duty or obligation to consent to any merger, consolidation or
conversion of the Partnership and may decline to do so free of
any fiduciary duty or obligation whatsoever to the Partnership,
any Limited Partner and, in declining to consent to a merger,
consolidation or conversion, shall not be required to act in
good faith or pursuant to any other standard imposed by this
Agreement, any other agreement contemplated hereby or under the
Act or any other law, rule or regulation or at equity.
(b) If the General Partner shall determine to consent to
the merger or consolidation, the General Partner shall approve
the Merger Agreement, which shall set forth:
(i) name and state of domicile of each of the business
entities proposing to merge or consolidate;
(ii) the name and state of domicile of the business entity
that is to survive the proposed merger or consolidation (the
Surviving Business Entity);
(iii) the terms and conditions of the proposed merger or
consolidation;
(iv) the manner and basis of exchanging or converting the
equity securities of each constituent business entity for, or
into, cash, property or interests, rights, securities or
obligations of the Surviving Business Entity; and (i) if
any general or limited partner interests, securities or rights
of any constituent business entity are not to be exchanged or
converted solely for, or into, cash, property or general or
limited partner interests, rights, securities or obligations of
the Surviving Business Entity, the cash, property or interests,
rights, securities or obligations of any general or limited
partnership, corporation, trust, limited liability company,
unincorporated business or other entity (other than the
Surviving Business Entity) which the holders of such general or
limited partner interests, securities or rights are to receive
in exchange for, or upon conversion of their interests,
securities or rights, and (ii) in the case of securities
represented by certificates, upon the surrender of such
certificates, which cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving
Business Entity or any general or limited partnership,
corporation, trust, limited liability company, unincorporated
business or other entity (other than the Surviving Business
Entity), or evidences thereof, are to be delivered;
(v) a statement of any changes in the constituent documents
or the adoption of new constituent documents (the articles or
certificate of incorporation, articles of trust, declaration of
trust, certificate or agreement of limited partnership,
operating agreement or other similar charter or governing
document) of the Surviving Business Entity to be effected by
such merger or consolidation;
A-75
(vi) the effective time of the merger, which may be the
date of the filing of the certificate of merger pursuant to
Section 14.4 or a later date specified in or determinable
in accordance with the Merger Agreement (provided, that
if the effective time of the merger is to be later than the date
of the filing of such certificate of merger, the effective time
shall be fixed at a date or time certain at or prior to the time
of the filing of such certificate of merger and stated
therein); and
(vii) such other provisions with respect to the proposed
merger or consolidation that the General Partner determines to
be necessary or appropriate.
(c) If the General Partner shall determine to consent to
the conversion, the General Partner shall approve the Plan of
Conversion, which shall set forth:
(i) the name of the converting entity and the converted
entity;
(ii) a statement that the Partnership is continuing its
existence in the organizational form of the converted entity;
(iii) a statement as to the type of entity that the
converted entity is to be and the state or country under the
laws of which the converted entity is to be incorporated, formed
or organized;
(iv) the manner and basis of exchanging or converting the
equity securities of each constituent business entity for, or
into, cash, property or interests, rights, securities or
obligations of the converted entity;
(v) in an attachment or exhibit, the certificate of limited
partnership of the Partnership; and
(vi) in an attachment or exhibit, the certificate of
limited partnership, articles of incorporation, or other
organizational documents of the converted entity;
(vii) the effective time of the conversion, which may be
the date of the filing of the articles of conversion or a later
date specified in or determinable in accordance with the Plan of
Conversion (provided, that if the effective time of the
conversion is to be later than the date of the filing of such
articles of conversion, the effective time shall be fixed at a
date or time certain at or prior to the time of the filing of
such articles of conversion and stated therein); and
(viii) such other provisions with respect to the proposed
conversion that the General Partner determines to be necessary
or appropriate.
Section 14.3 Approval
by Limited Partners.
(a) Except as provided in Section 14.3(d), the General
Partner, upon its approval of the Merger Agreement or the Plan
of Conversion, as the case may be, shall direct that the Merger
Agreement or the Plan of Conversion, as applicable, be submitted
to a vote of Limited Partners, whether at a special meeting or
by written consent, in either case in accordance with the
requirements of Article XIII. A copy or a summary of the
Merger Agreement or the Plan of Conversion, as the case may be,
shall be included in or enclosed with the notice of a special
meeting or the written consent.
(b) Except as provided in Section 14.3(d) and
Section 14.3(e), the Merger Agreement or Plan of
Conversion, as the case may be, shall be approved upon receiving
the affirmative vote or consent of the holders of a Unit
Majority unless the Merger Agreement or Plan of Conversion, as
the case may be, effects an amendment to any provision of this
Agreement that, if contained in an amendment to this Agreement
adopted pursuant to Article XIII, would require for its approval
the vote or consent of a greater percentage of the Outstanding
Units or of any class of Limited Partners, in which case such
greater percentage vote or consent shall be required for
approval of the Merger Agreement or the Plan of Conversion, as
the case may be.
(c) Except as provided in Section 14.3(d) and
Section 14.3(e), after such approval by vote or consent of
the Limited Partners, and at any time prior to the filing of the
certificate of merger or articles of conversion pursuant to
Section 14.4, the merger, consolidation or conversion may
be abandoned pursuant to provisions therefor, if any, set forth
in the Merger Agreement or Plan of Conversion, as the case
may be.
A-76
(d) Notwithstanding anything else contained in this
Article XIV or in this Agreement, the General Partner is
permitted, without Limited Partner approval, to convert the
Partnership or any Group Member into a new limited liability
entity, to merge the Partnership or any Group Member into, or
convey all of the Partnerships assets to, another limited
liability entity that shall be newly formed and shall have no
assets, liabilities or operations at the time of such
conversion, merger or conveyance other than those it receives
from the Partnership or other Group Member if (i) the
General Partner has received an Opinion of Counsel that the
conversion, merger or conveyance, as the case may be, would not
result in the loss of the limited liability of any Limited
Partner as compared to its limited liability under the Delaware
Act or cause the Partnership to be treated as an association
taxable as a corporation or otherwise to be taxed as an entity
for federal income tax purposes (to the extent not previously
treated as such), (ii) the sole purpose of such conversion,
merger, or conveyance is to effect a mere change in the legal
form of the Partnership into another limited liability entity
and (iii) the General Partner determines that the governing
instruments of the new entity provide the Limited Partners and
the General Partner with substantially the same rights and
obligations as are herein contained.
(e) Additionally, notwithstanding anything else contained
in this Article XIV or in this Agreement, the General
Partner is permitted, without Limited Partner approval, to merge
or consolidate the Partnership with or into another entity if
(A) the General Partner has received an Opinion of Counsel
that the merger or consolidation, as the case may be, would not
result in the loss of the limited liability of any Limited
Partner as compared to its limited liability under the Delaware
Act or cause the Partnership to be treated as an association
taxable as a corporation or otherwise to be taxed as an entity
for federal income tax purposes (to the extent not previously
treated as such), (B) the merger or consolidation would not
result in an amendment to this Agreement, other than any
amendments that could be adopted pursuant to Section 13.1,
(C) the Partnership is the Surviving Business Entity in
such merger or consolidation, (D) each Unit outstanding
immediately prior to the effective date of the merger or
consolidation is to be an identical Unit of the Partnership
after the effective date of the merger or consolidation, and
(E) the number of Partnership Securities to be issued by
the Partnership in such merger or consolidation does not exceed
20% of the Partnership Securities (other than Incentive
Distribution Rights) Outstanding immediately prior to the
effective date of such merger or consolidation.
(f) Pursuant to
Section 17-211(g)
of the Delaware Act, an agreement of merger or consolidation
approved in accordance with this Article XIV may
(a) effect any amendment to this Agreement or
(b) effect the adoption of a new partnership agreement for
the Partnership if it is the Surviving Business Entity. Any such
amendment or adoption made pursuant to this Section 14.3
shall be effective at the effective time or date of the merger
or consolidation.
Section 14.4 Certificate
of Merger or Articles of Conversion.
Upon the required approval by the General Partner and the
Unitholders of a Merger Agreement or the Plan of Conversion, as
the case may be, a certificate of merger or certificate of
conversion, as applicable, shall be executed and filed with the
Secretary of State of the State of Delaware in conformity with
the requirements of the Delaware Act.
Section 14.5 Effect
of Merger, Consolidation or Conversion.
(a) At the effective time of the merger:
(i) all of the rights, privileges and powers of each of the
business entities that has merged or consolidated, and all
property, real, personal and mixed, and all debts due to any of
those business entities and all other things and causes of
action belonging to each of those business entities, shall be
vested in the Surviving Business Entity and after the merger or
consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business
entity;
(ii) the title to any real property vested by deed or
otherwise in any of those constituent business entities shall
not revert and is not in any way impaired because of the merger
or consolidation;
A-77
(iii) all rights of creditors and all liens on or security
interests in property of any of those constituent business
entities shall be preserved unimpaired; and
(iv) all debts, liabilities and duties of those constituent
business entities shall attach to the Surviving Business Entity
and may be enforced against it to the same extent as if the
debts, liabilities and duties had been incurred or contracted
by it.
(b) At the effective time of the conversion:
(i) the Partnership shall continue to exist, without
interruption, but in the organizational form of the converted
entity rather than in its prior organizational form;
(ii) all rights, title, and interests to all real estate
and other property owned by the Partnership shall continue to be
owned by the converted entity in its new organizational form
without reversion or impairment, without further act or deed,
and without any transfer or assignment having occurred, but
subject to any existing liens or other encumbrances thereon;
(iii) all liabilities and obligations of the Partnership
shall continue to be liabilities and obligations of the
converted entity in its new organizational form without
impairment or diminution by reason of the conversion;
(iv) all rights of creditors or other parties with respect
to or against the prior interest holders or other owners of the
Partnership in their capacities as such in existence as of the
effective time of the conversion will continue in existence as
to those liabilities and obligations and may be pursued by such
creditors and obligees as if the conversion did not occur;
(v) a proceeding pending by or against the Partnership or
by or against any of Partners in their capacities as such may be
continued by or against the converted entity in its new
organizational form and by or against the prior partners without
any need for substitution of parties; and
(vi) the Partnership Units that are to be converted into
partnership interests, shares, evidences of ownership, or other
securities in the converted entity as provided in the plan of
conversion shall be so converted, and Partners shall be entitled
only to the rights provided in the Plan of Conversion.
ARTICLE XV
RIGHT TO
ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1 Right
to Acquire Limited Partner Interests.
(a) Notwithstanding any other provision of this Agreement,
if at any time the General Partner and its Affiliates hold more
than 75% of the total Limited Partner Interests of any class
then Outstanding, the General Partner shall then have the right,
which right it may assign and transfer in whole or in part to
the Partnership or any Affiliate of the General Partner,
exercisable at its option, to purchase all, but not less than
all, of such Limited Partner Interests of such class then
Outstanding held by Persons other than the General Partner and
its Affiliates, at the greater of (x) the Current Market
Price as of the date three days prior to the date that the
notice described in Section 15.1(b) is mailed and
(y) the highest price paid by the General Partner or any of
its Affiliates for any such Limited Partner Interest of such
class purchased during the
90-day
period preceding the date that the notice described in
Section 15.1(b) is mailed. As used in this Agreement,
(i) Current Market Price as of any date
of any class of Limited Partner Interests means the average of
the daily Closing Prices (as hereinafter defined) per Limited
Partner Interest of such class for the 20 consecutive Trading
Days (as hereinafter defined) immediately prior to such date;
(ii) Closing Price for any day means the
last sale price on such day, regular way, or in case no such
sale takes place on such day, the average of the closing bid and
asked prices on such day, regular way, as reported in the
principal consolidated transaction reporting system with respect
to securities listed on the principal National Securities
Exchange (other than the Nasdaq Stock Market) on which such
Limited Partner Interests are listed or admitted to trading or,
if such Limited Partner Interests of such class are not listed
or admitted to trading on any National Securities Exchange
(other than
A-78
the Nasdaq Stock Market), the last quoted price on such day or,
if not so quoted, the average of the high bid and low asked
prices on such day in the over-the-counter market, as reported
by the Nasdaq Stock Market or such other system then in use, or,
if on any such day such Limited Partner Interests of such class
are not quoted by any such organization, the average of the
closing bid and asked prices on such day as furnished by a
professional market maker making a market in such Limited
Partner Interests of such class selected by the General Partner,
or if on any such day no market maker is making a market in such
Limited Partner Interests of such class, the fair value of such
Limited Partner Interests on such day as determined by the
General Partner; and (iii) Trading Day
means a day on which the principal National Securities Exchange
on which such Limited Partner Interests of any class are listed
or admitted for trading is open for the transaction of business
or, if Limited Partner Interests of a class are not listed or
admitted for trading on any National Securities Exchange, a day
on which banking institutions in New York City generally are
open.
(b) If the General Partner, any Affiliate of the General
Partner or the Partnership elects to exercise the right to
purchase Limited Partner Interests granted pursuant to
Section 15.1(a), the General Partner shall deliver to the
Transfer Agent notice of such election to purchase (the
Notice of Election to Purchase) and shall
cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of Limited Partner
Interests of such class (as of a Record Date selected by the
General Partner) at least 10, but not more than 60, days prior
to the Purchase Date. Such Notice of Election to Purchase shall
also be published for a period of at least three consecutive
days in at least two daily newspapers of general circulation
printed in the English language and published in the Borough of
Manhattan, New York. The Notice of Election to Purchase shall
specify the Purchase Date and the price (determined in
accordance with Section 15.1(a)) at which Limited Partner
Interests will be purchased and state that the General Partner,
its Affiliate or the Partnership, as the case may be, elects to
purchase such Limited Partner Interests, upon surrender of
Certificates representing such Limited Partner Interests in
exchange for payment, at such office or offices of the Transfer
Agent as the Transfer Agent may specify, or as may be required
by any National Securities Exchange on which such Limited
Partner Interests are listed. Any such Notice of Election to
Purchase mailed to a Record Holder of Limited Partner Interests
at his address as reflected in the records of the Transfer Agent
shall be conclusively presumed to have been given regardless of
whether the owner receives such notice. On or prior to the
Purchase Date, the General Partner, its Affiliate or the
Partnership, as the case may be, shall deposit with the Transfer
Agent cash in an amount sufficient to pay the aggregate purchase
price of all of such Limited Partner Interests to be purchased
in accordance with this Section 15.1. If the Notice of
Election to Purchase shall have been duly given as aforesaid at
least 10 days prior to the Purchase Date, and if on or
prior to the Purchase Date the deposit described in the
preceding sentence has been made for the benefit of the holders
of Limited Partner Interests subject to purchase as provided
herein, then from and after the Purchase Date, notwithstanding
that any Certificate shall not have been surrendered for
purchase, all rights of the holders of such Limited Partner
Interests (including any rights pursuant to Article IV,
Article V, Article VI, and Article XII) shall
thereupon cease, except the right to receive the purchase price
(determined in accordance with Section 15.1(a)) for Limited
Partner Interests therefor, without interest, upon surrender to
the Transfer Agent of the Certificates representing such Limited
Partner Interests, and such Limited Partner Interests shall
thereupon be deemed to be transferred to the General Partner,
its Affiliate or the Partnership, as the case may be, on the
record books of the Transfer Agent and the Partnership, and the
General Partner or any Affiliate of the General Partner, or the
Partnership, as the case may be, shall be deemed to be the owner
of all such Limited Partner Interests from and after the
Purchase Date and shall have all rights as the owner of such
Limited Partner Interests (including all rights as owner of such
Limited Partner Interests pursuant to Article IV,
Article V, Article VI and Article XII).
(c) At any time from and after the Purchase Date, a holder
of an Outstanding Limited Partner Interest subject to purchase
as provided in this Section 15.1 may surrender his
Certificate evidencing such Limited Partner Interest to the
Transfer Agent in exchange for payment of the amount described
in Section 15.1(a), therefor, without interest thereon.
A-79
ARTICLE XVI
GENERAL
PROVISIONS
Section 16.1 Addresses
and Notices; Written Communications.
(a) Any notice, demand, request, report or proxy materials
required or permitted to be given or made to a Partner under
this Agreement shall be in writing and shall be deemed given or
made when delivered in person or when sent by first
class United States mail or by other means of written
communication to the Partner at the address described below. Any
notice, payment or report to be given or made to a Partner
hereunder shall be deemed conclusively to have been given or
made, and the obligation to give such notice or report or to
make such payment shall be deemed conclusively to have been
fully satisfied, upon sending of such notice, payment or report
to the Record Holder of such Partnership Securities at his
address as shown on the records of the Transfer Agent or as
otherwise shown on the records of the Partnership, regardless of
any claim of any Person who may have an interest in such
Partnership Securities by reason of any assignment or otherwise.
An affidavit or certificate of making of any notice, payment or
report in accordance with the provisions of this
Section 16.1 executed by the General Partner, the Transfer
Agent or the mailing organization shall be prima facie evidence
of the giving or making of such notice, payment or report. If
any notice, payment or report addressed to a Record Holder at
the address of such Record Holder appearing on the books and
records of the Transfer Agent or the Partnership is returned by
the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver it, such
notice, payment or report and any subsequent notices, payments
and reports shall be deemed to have been duly given or made
without further mailing (until such time as such Record Holder
or another Person notifies the Transfer Agent or the Partnership
of a change in his address) if they are available for the
Partner at the principal office of the Partnership for a period
of one year from the date of the giving or making of such
notice, payment or report to the other Partners. Any notice to
the Partnership shall be deemed given if received by the General
Partner at the principal office of the Partnership designated
pursuant to Section 2.3. The General Partner may rely and
shall be protected in relying on any notice or other document
from a Partner or other Person if believed by it to be genuine.
(b) The terms in writing, written
communications, written notice and words of
similar import shall be deemed satisfied under this Agreement by
use of
e-mail and
other forms of electronic communication.
Section 16.2 Further
Action.
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be
necessary or appropriate to achieve the purposes of this
Agreement.
Section 16.3 Binding
Effect.
This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their heirs, executors, administrators,
successors, legal representatives and permitted assigns.
Section 16.4 Integration.
This Agreement constitutes the entire agreement among the
parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements and understandings pertaining
thereto.
Section 16.5 Creditors.
None of the provisions of this Agreement shall be for the
benefit of, or shall be enforceable by, any creditor of the
Partnership.
Section 16.6 Waiver.
No failure by any party to insist upon the strict performance of
any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof
shall constitute waiver of any such breach of any other
covenant, duty, agreement or condition.
A-80
Section 16.7 Third-Party
Beneficiaries.
Each Partner agrees that (a) any Indemnitee shall be
entitled to assert rights and remedies hereunder as a
third-party beneficiary hereto with respect to those provisions
of this Agreement affording a right, benefit or privilege to
such Indemnitee and (b) any Unrestricted Person shall be
entitled to assert rights and remedies hereunder as a
third-party beneficiary hereto with respect to those provisions
of this Agreement affording a right, benefit or privilege to
such Unrestricted Person.
Section 16.8 Counterparts.
This Agreement may be executed in counterparts, all of which
together shall constitute an agreement binding on all the
parties hereto, notwithstanding that all such parties are not
signatories to the original or the same counterpart. Each party
shall become bound by this Agreement immediately upon affixing
its signature hereto or, in the case of a Person acquiring a
Limited Partner Interest, pursuant to Section 10.1(a) or
(b) without execution hereof.
Section 16.9 Applicable
Law.
(a) This Agreement shall be construed in accordance with
and governed by the laws of the State of Delaware, without
regard to the principles of conflicts of law.
(b) Each of the Partners and each Person holding any
beneficial interest in the Partnership (whether through a
broker, dealer, bank, trust company or clearing corporation or
an agent of any of the foregoing or otherwise):
(i) irrevocably agrees that any claims, suits, actions or
proceedings (A) arising out of or relating in any way to
this Agreement (including any claims, suits or actions to
interpret, apply or enforce the provisions of this Agreement or
the duties, obligations or liabilities among Partners or of
Partners to the Partnership, or the rights or powers of, or
restrictions on, the Partners or the Partnership),
(B) brought in a derivative manner on behalf of the
Partnership, (C) asserting a claim of breach of a fiduciary
duty owed by any director, officer, or other employee of the
Partnership or the General Partner, or owed by the General
Partner, to the Partnership or the Partners, (D) asserting
a claim arising pursuant to any provision of the Delaware Act or
(E) asserting a claim governed by the internal affairs
doctrine shall be exclusively brought in the Court of Chancery
of the State of Delaware, in each case regardless of whether
such claims, suits, actions or proceedings sound in contract,
tort, fraud or otherwise, are based on common law, statutory,
equitable, legal or other grounds, or are derivative or direct
claims;
(ii) irrevocably submits to the exclusive jurisdiction of
the Court of Chancery of the State of Delaware in connection
with any such claim, suit, action or proceeding;
(iii) agrees not to, and waives any right to, assert in any
such claim, suit, action or proceeding that (A) it is not
personally subject to the jurisdiction of the Court of Chancery
of the State of Delaware or of any other court to which
proceedings in the Court of Chancery of the State of Delaware
may be appealed, (B) such claim, suit, action or proceeding
is brought in an inconvenient forum, or (C) the venue of
such claim, suit, action or proceeding is improper;
(iv) expressly waives any requirement for the posting of a
bond by a party bringing such claim, suit, action or
proceeding; and
(v) consents to process being served in any such claim,
suit, action or proceeding by mailing, certified mail, return
receipt requested, a copy thereof to such party at the address
in effect for notices hereunder, and agrees that such services
shall constitute good and sufficient service of process and
notice thereof; provided, nothing in clause (v)
hereof shall affect or limit any right to serve process in any
other manner permitted by law.
A-81
Section 16.10 Invalidity
of Provisions.
If any provision or part of a provision of this Agreement is or
becomes for any reason, invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the
remaining provisions
and/or parts
thereof contained herein shall not be affected thereby and this
Agreement shall, to the fullest extent permitted by law, be
reformed and construed as if such invalid, illegal or
unenforceable provision, or part of a provision, had never been
contained herein, and such provisions
and/or part
shall be reformed so that it would be valid, legal and
enforceable to the maximum extent possible.
Section 16.11 Consent
of Partners
Each Partner hereby expressly consents and agrees that, whenever
in this Agreement it is specified that an action may be taken
upon the affirmative vote or consent of less than all of the
Partners, such action may be so taken upon the concurrence of
less than all of the Partners and each Partner shall be bound by
the results of such action.
Section 16.12 Facsimile
and Email Signatures.
The use of facsimile signatures and signatures delivered by
email in portable document format (.pdf) affixed in the name and
on behalf of the transfer agent and registrar of the Partnership
on certificates representing Common Units is expressly permitted
by this Agreement.
[REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK.]
A-82
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
GENERAL PARTNER:
TESORO LOGISTICS GP, LLC
[Name]
[Title]
ORGANIZATIONAL LIMITED PARTNER:
TESORO CORPORATION
[Name]
[Title]
LIMITED PARTNERS:
TESORO ALASKA COMPANY
[Name]
[Title]
TESORO REFINING AND MARKETING COMPANY
[Name]
[Title]
A-83
EXHIBIT A
to the First Amended and Restated
Agreement of Limited Partnership of
Tesoro Logistics LP
Certificate Evidencing Common Units
Representing Limited Partner Interests in
Tesoro Logistics LP
In accordance with Section 4.1 of the First Amended and
Restated Agreement of Limited Partnership of Tesoro Logistics
LP, as amended, supplemented or restated from time to time (the
Partnership Agreement), Tesoro Logistics LP,
a Delaware limited partnership (the
Partnership), hereby certifies that (the
Holder) is the registered owner of Common
Units representing limited partner interests in the Partnership
(the Common Units) transferable on the books
of the Partnership, in person or by duly authorized attorney,
upon surrender of this Certificate properly endorsed. The
rights, preferences and limitations of the Common Units are set
forth in, and this Certificate and the Common Units represented
hereby are issued and shall in all respects be subject to the
terms and provisions of, the Partnership Agreement. Copies of
the Partnership Agreement are on file at, and will be furnished
without charge on delivery of written request to the Partnership
at, the principal office of the Partnership located at 19100
Ridgewood Parkway, San Antonio, Texas 78259. Capitalized
terms used herein but not defined shall have the meanings given
them in the Partnership Agreement.
THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF
TESORO LOGISTICS LP THAT THIS SECURITY MAY NOT BE SOLD, OFFERED,
RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IF SUCH TRANSFER WOULD
(A) VIOLATE THE THEN APPLICABLE FEDERAL OR STATE SECURITIES
LAWS OR RULES AND REGULATIONS OF THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY
OTHER GOVERNMENTAL AUTHORITY WITH JURISDICTION OVER SUCH
TRANSFER, (B) TERMINATE THE EXISTENCE OR QUALIFICATION OF
TESORO LOGISTICS LP UNDER THE LAWS OF THE STATE OF DELAWARE, OR
(C) CAUSE TESORO LOGISTICS LP TO BE TREATED AS AN
ASSOCIATION TAXABLE AS A CORPORATION OR OTHERWISE TO BE TAXED AS
AN ENTITY FOR FEDERAL INCOME TAX PURPOSES (TO THE EXTENT NOT
ALREADY SO TREATED OR TAXED). TESORO LOGISTICS GP, LLC, THE
GENERAL PARTNER OF TESORO LOGISTICS LP, MAY IMPOSE ADDITIONAL
RESTRICTIONS ON THE TRANSFER OF THIS SECURITY IF IT RECEIVES AN
OPINION OF COUNSEL THAT SUCH RESTRICTIONS ARE NECESSARY TO AVOID
A SIGNIFICANT RISK OF TESORO LOGISTICS LP BECOMING TAXABLE AS A
CORPORATION OR OTHERWISE BECOMING TAXABLE AS AN ENTITY FOR
FEDERAL INCOME TAX PURPOSES. THE RESTRICTIONS SET FORTH ABOVE
SHALL NOT PRECLUDE THE SETTLEMENT OF ANY TRANSACTIONS INVOLVING
THIS SECURITY ENTERED INTO THROUGH THE FACILITIES OF ANY
NATIONAL SECURITIES EXCHANGE ON WHICH THIS SECURITY IS LISTED OR
ADMITTED TO TRADING.
The Holder, by accepting this Certificate, is deemed to have
(i) requested admission as, and agreed to become, a Limited
Partner and to have agreed to comply with and be bound by and to
have executed the Partnership Agreement, (ii) represented
and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney
provided for in the Partnership Agreement and (iv) made the
waivers and given the consents and approvals contained in the
Partnership Agreement.
A-84
This Certificate shall not be valid for any purpose unless it
has been countersigned and registered by the Transfer Agent and
Registrar.
|
|
|
Dated:
|
|
Tesoro Logistics LP
By: Tesoro Logistics GP, LLC
By: Chief Executive Officer
|
|
|
|
Countersigned and Registered by:
[ ] as Transfer Agent and Registrar
|
|
|
A-85
[Reverse of
Certificate]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the
face of this Certificate, shall be construed as follows
according to applicable laws or regulations:
|
|
|
TEN COM as tenants in common
|
|
UNIF GIFT/TRANSFERS MIN ACT
|
|
|
|
TEN ENT as tenants by the entireties
|
|
Custodian
|
|
|
(Cust) (Minor)
|
|
|
|
JT TEN as joint tenants with right of survivorship
and not as tenants in common
|
|
under Uniform Gifts/Transfers to CD Minors Act (State)
|
Additional abbreviations, though not in the above list, may also
be used.
A-86
ASSIGNMENT
OF COMMON UNITS OF
TESORO LOGISTICS LP
FOR VALUE RECEIVED,
hereby assigns, conveys, sells and transfers unto
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Please
print or typewrite name and address of assignee)
|
|
(Please
insert Social Security or other identifying number of assignee)
|
Common Units representing limited partner interests evidenced by
this Certificate, subject to the Partnership Agreement, and does
hereby irrevocably constitute and appoint
as its attorney-in-fact with full power of substitution to
transfer the same on the books of Tesoro Logistics LP.
|
|
|
|
|
Date:
|
|
NOTE:
|
|
The signature to any endorsement hereon must correspond with the
name as written upon the face of this Certificate in every
particular, without alteration, enlargement or change.
|
|
|
|
|
|
|
|
|
|
(Signature)
|
|
|
|
|
|
|
|
|
|
(Signature)
|
|
|
|
|
|
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C.
RULE 17Ad-15
|
|
|
|
|
No transfer of the Common Units evidenced hereby will be
registered on the books of the Partnership, unless the
Certificate evidencing the Common Units to be transferred is
surrendered for registration or transfer.
A-87
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
RBC Capital Markets
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
|
|
$
|
35,048
|
|
FINRA filing fee
|
|
|
30,688
|
|
NYSE listing fee
|
|
|
156,032
|
|
Advisory fee
|
|
|
2,020,000
|
|
Printing and engraving expenses
|
|
|
725,000
|
|
Fees and expenses of legal counsel
|
|
|
5,173,596
|
|
Accounting fees and expenses
|
|
|
1,015,000
|
|
Transfer agent and registrar fees
|
|
|
4,800
|
|
Miscellaneous
|
|
|
189,167
|
|
|
|
|
|
|
Total
|
|
$
|
9,349,331
|
|
|
|
|
|
|
|
|
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 8 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 Tesoro Logistics LP 2011 Long-Term Incentive Plan
|
|
10
|
.4*
|
|
|
|
Form of Omnibus Agreement
|
|
10
|
.5*
|
|
|
|
Form of Operational Services Agreement
|
|
10
|
.6*
|
|
|
|
Form of Transportation Services Agreement (High Plains Pipeline
System)
|
|
10
|
.7*
|
|
|
|
Form of Trucking Transportation Services Agreement
|
|
10
|
.8*
|
|
|
|
Form of Master Terminalling Services Agreement
|
|
10
|
.9*
|
|
|
|
Form of Transportation Services Agreement (SLC Short Haul
Pipelines)
|
|
10
|
.10*
|
|
|
|
Form of Salt Lake City Storage and Transportation Services
Agreement
|
|
10
|
.11*
|
|
|
|
Employment Agreement of Gregory J. Goff
|
|
10
|
.12*
|
|
|
|
Employment Agreement of Charles S. Parrish
|
|
10
|
.13*
|
|
|
|
Management Stability Agreement of Phillip M. Anderson
|
|
10
|
.14*
|
|
|
|
Management Stability Agreement of G. Scott Spendlove
|
|
10
|
.15*
|
|
|
|
Management Stability Agreement of Ralph J. Grimmer
|
|
10
|
.16*#
|
|
|
|
Tesoro Logistics LP 2011 Non-Employee Director Compensation
Program
|
|
10
|
.17*#
|
|
|
|
Form of Tesoro Logistics LP 2011 Long-Term Incentive Plan
Phantom Unit Award (Employee time-vesting award)
|
|
10
|
.18*#
|
|
|
|
Form of Tesoro Logistics LP 2011 Long-Term Incentive Plan
Phantom Unit Award (Non-employee director award)
|
|
21
|
.1*
|
|
|
|
List of Subsidiaries of Tesoro Logistics LP
|
|
23
|
.1
|
|
|
|
Consent of Ernst & Young LLP
|
|
23
|
.2*
|
|
|
|
Consent of Latham & Watkins, LLP (contained in
Exhibit 5.1)
|
|
23
|
.3
|
|
|
|
Consent of Latham & Watkins, LLP (contained in
Exhibit 8.1)
|
|
24
|
.1*
|
|
|
|
Powers of Attorney (contained on the signature page to this
Registration Statement)
|
|
|
|
* |
|
Previously filed. |
|
# |
|
Compensatory plan or arrangement |
|
|
|
Confidential status has been requested for certain portions
thereof pursuant to a Confidential Treatment Request. Such
provisions have been separately filed with the Securities and
Exchange Commission. |
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.
II-2
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.
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
April 12, 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 April 12, 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/ Raymond
J. Bromark
Raymond
J. Bromark
|
|
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 Tesoro Logistics LP 2011 Long-Term Incentive Plan
|
|
10
|
.4*
|
|
|
|
Form of Omnibus Agreement
|
|
10
|
.5*
|
|
|
|
Form of Operational Services Agreement
|
|
10
|
.6*
|
|
|
|
Form of Transportation Services Agreement (High Plains Pipeline
System)
|
|
10
|
.7*
|
|
|
|
Form of Trucking Transportation Services Agreement
|
|
10
|
.8*
|
|
|
|
Form of Master Terminalling Services Agreement
|
|
10
|
.9*
|
|
|
|
Form of Transportation Services Agreement (SLC Short Haul
Pipelines)
|
|
10
|
.10*
|
|
|
|
Form of Salt Lake City Storage and Transportation Services
Agreement
|
|
10
|
.11*
|
|
|
|
Employment Agreement of Gregory J. Goff
|
|
10
|
.12*
|
|
|
|
Employment Agreement of Charles D. Parrish
|
|
10
|
.13*
|
|
|
|
Management Stability Agreement of Phillip M. Anderson
|
|
10
|
.14*
|
|
|
|
Management Stability Agreement of G. Scott Spendlove
|
|
10
|
.15*
|
|
|
|
Management Stability Agreement of Ralph J. Grimmer
|
|
10
|
.16*#
|
|
|
|
Tesoro Logistics LP 2011 Non-Employee Director Compensation
Program
|
|
10
|
.17*#
|
|
|
|
Form of Tesoro Logistics LP 2011 Long-Term Incentive Plan
Phantom Unit Award (Employee time-vesting award)
|
|
10
|
.18*#
|
|
|
|
Form of Tesoro Logistics LP 2011 Long-Term Incentive Plan
Phantom Unit Award (Non-employee director award)
|
|
21
|
.1*
|
|
|
|
List of Subsidiaries of Tesoro Logistics LP
|
|
23
|
.1
|
|
|
|
Consent of Ernst & Young LLP
|
|
23
|
.2*
|
|
|
|
Consent of Latham & Watkins, LLP (contained in Exhibit 5.1)
|
|
23
|
.3
|
|
|
|
Consent of Latham & Watkins, LLP (contained in Exhibit 8.1)
|
|
24
|
.1*
|
|
|
|
Powers of Attorney (contained on the signature page to this
Registration Statement)
|
|
|
|
* |
|
Previously filed. |
|
# |
|
Compensatory plan or arrangement |
|
|
|
Confidential status has been requested for certain portions
thereof pursuant to a Confidential Treatment Request. Such
provisions have been separately filed with the Securities and
Exchange Commission. |