S-1 1 h78279sv1.htm FORM S-1 sv1
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As filed with the Securities and Exchange Commission on January 4, 2011
Registration No. 333-      
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
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 Registrant’s 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)
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
    Amount of
Title of Each Class of
    Aggregate Offering
    Registration
Securities to be Registered     Price(1)(2)     Fee
Common units representing limited partner interests
    $230,000,000     $26,703
             
 
(1)  Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
 
(2)  Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o).
 
 
 
 
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.
 


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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 JANUARY 4, 2011.
 
PRELIMINARY PROSPECTUS
          Common Units
Representing Limited Partner Interests
 
Tesoro Logistics LP
 
 
 
 
This is an initial public offering of common units representing limited partner interests of Tesoro Logistics LP. We are offering           common units in this offering. Prior to this offering, there has been no public market for our common units. We currently estimate that the initial public offering price per common unit will be between $      and $     . We intend to apply to list our common units on the New York Stock Exchange under the symbol “TLLP.”
 
 
 
 
Investing in our common units involves risks. See “Risk Factors” beginning on page 16. These risks include the following:
 
  •  Tesoro Corporation 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.
 
  •  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.
 
  •  Tesoro’s 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.
 
  •  A material decrease in the refining margins at Tesoro’s 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 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 Tesoro’s 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 (before expenses)
  $       $  
 
 
(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.”
 
To the extent that the underwriters sell more than      common units in this offering, the underwriters have the option to purchase up to an additional      common units from Tesoro Logistics LP at the initial public offering price less underwriting discounts and the structuring fee payable to Citigroup Global Markets Inc.
 
The underwriters expect to deliver the common units to purchasers on or about          , 2011 through the book-entry facilities of The Depository Trust Company.
 
 
 
Citi
 
 
 
          , 2011.


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 EX-3.1
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 EX-23.1
 EX-23.2
 
 
You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.
 
Through and including          , 2011 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s 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.


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SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before purchasing our common units. You should read the entire prospectus carefully, including the historical and pro forma combined financial statements and notes to those financial statements. Unless expressly stated otherwise, the information presented in this prospectus assumes (1) an initial public offering price of $      per common unit and (2) that the underwriters’ option to purchase additional common units is not exercised. You should read “Risk Factors” beginning on page 16 for more information about important factors that you should consider before purchasing our common units.
 
Unless the context otherwise requires, references in this prospectus to “Tesoro Logistics LP,” “our partnership,” “we,” “our,” “us,” or like terms, when used in a historical context, refer to Tesoro Logistics LP Predecessor, our predecessor for accounting purposes, also referenced as “our predecessor,” and when used in the present tense or prospectively, refer to Tesoro Logistics LP and its subsidiaries. References in this prospectus to “Tesoro” refer collectively to Tesoro Corporation and its subsidiaries, other than Tesoro Logistics LP, its subsidiaries and its general partner.
 
Tesoro Logistics LP
 
Overview
 
We are a fee-based, growth-oriented Delaware limited partnership recently formed by Tesoro to own, operate, develop and acquire crude oil and refined products logistics assets. Our logistics assets are integral to the success of Tesoro’s 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 Tesoro’s Mandan, North Dakota refinery. This system gathers and transports crude oil produced from the Williston Basin, one of the most prolific onshore crude oil


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producing basins in North America, including production from the Bakken Shale formation. We refer to this area, a significant portion of which is serviced by our High Plains system, as the Bakken Shale/Williston Basin area. Currently, Tesoro’s 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 Tesoro’s 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 Tesoro’s Salt Lake City refinery, including a refined products and crude oil storage facility with total shell capacity of approximately 878,000 barrels and three short-haul crude oil supply pipelines and two short-haul refined product delivery pipelines connected to third-party interstate pipelines. Our terminalling, transportation and storage assets serve regions that are expected to experience growth in refined product demand at a rate greater than the national average for the United States over the next 25 years according to the United States Energy Information Administration (EIA).
 
For the year ended December 31, 2009, we had pro forma EBITDA of approximately $51.5 million and pro forma net income of approximately $40.3 million. Tesoro accounted for 93% of our pro forma EBITDA and 91% of our pro forma net income for that period. For the year ended December 31, 2009, we had pro forma revenue of $48.8 million from our crude oil gathering segment and $42.1 million from our terminalling, transportation and storage segment. Please read “Summary Historical and Pro Forma Combined Financial and Operating Data” 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 Tesoro’s 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 Tesoro’s 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 Tesoro’s 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — How We Generate Revenue” and “Certain Relationships and Related Party Transactions — Agreements Governing the Transactions — Commercial Agreements with Tesoro.”


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Business Strategies
 
Our primary business objectives are to maintain stable cash flows and to increase our quarterly cash distribution per unit over time. We intend to accomplish these objectives by executing the following strategies:
 
  •  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 Tesoro’s 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 Tesoro’s Mandan refinery, and our refined products terminals provide critical storage and distribution infrastructure for six of Tesoro’s 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.


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Growth Opportunities
 
Crude Oil Gathering.  We believe there are a number of potential growth opportunities that capitalize on the strategic position of our High Plains system within the Bakken Shale/Williston Basin area, ranging from projects with modest capital requirements to larger greenfield projects that would require a larger investment. For example, we could increase the volume of third-party crude oil that we ship on our High Plains system by making outlet connections to several existing third-party pipelines. We could also increase the throughput capacity of this system through the addition of pumping capacity or the construction of additional gathering infrastructure.
 
Terminalling, Transportation and Storage.  We believe our growth in this segment will primarily be driven by pursuing opportunities to increase Tesoro and third-party volumes and by completing organic growth and expansion projects, including those constructed by Tesoro and purchased by us after construction is completed. For example, we intend to add ethanol blending capabilities to several of our terminals where there is existing demand. Additionally, we believe we are well positioned to expand our business at our existing terminals to handle additional Tesoro volumes on a more cost-effective basis than competing third-party terminals.
 
Our Relationship with Tesoro Corporation
 
One of our principal strengths is our relationship with Tesoro. Tesoro is the third largest independent refiner in the United States by crude capacity and owns and operates seven refineries that serve markets in Alaska, Arizona, California, Hawaii, Idaho, Minnesota, Nevada, North Dakota, Oregon, Utah, Washington and Wyoming. Tesoro also sells transportation fuels and convenience products in 15 states through a network of over 800 retail stations, primarily under the Tesoro®, Mirastar®, Shell®, and USA Gasolinetm brands. For the year ended December 31, 2009, Tesoro had consolidated revenues of approximately $16.9 billion and consolidated total assets of approximately $8.0 billion. Tesoro Corporation’s common stock trades on the New York Stock Exchange (NYSE) under the symbol “TSO.”
 
Following the completion of this offering, Tesoro will continue to own and operate substantial crude oil and refined products logistics assets and will retain a significant interest in us through its ownership of a     % limited partner interest and a 2.0% general partner interest in us, as well as all of our incentive distribution rights. Given Tesoro’s 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 Tesoro’s 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.
 
In addition to the commercial agreements we will enter into with Tesoro upon the closing of this offering, we will enter into an omnibus agreement and an operational services agreement with Tesoro. Under the omnibus agreement, subject to certain exceptions, Tesoro will agree not to engage in the business of owning or operating crude oil or refined products pipelines, terminals or storage facilities in the United States that are not integral to a Tesoro refinery. Additionally, under the omnibus agreement, Tesoro will grant us a right of first offer to acquire certain of its retained logistics assets, including terminals, pipelines, docks, storage facilities and other related logistic assets located in California, Alaska and Washington, to the extent it decides to sell any of those assets. As of September 30, 2010, the aggregate gross book value of the retained logistics assets on which we have a right of first offer was approximately $240.0 million, as compared to an aggregate gross book value of approximately $190.0 million for the assets being contributed to us in connection with this offering. The omnibus agreement will also address our payment of a fee to Tesoro for the provision of various centralized corporate services, Tesoro’s reimbursement of us for certain maintenance capital expenditures, and Tesoro’s 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.”
 
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performed by certain of Tesoro’s 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.”
 
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” 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 Tesoro’s business decisions and operations and Tesoro is under no obligation to adopt a business strategy that favors us.”
 
The Transactions
 
General
 
In connection with the closing of this offering, the following transactions will occur:
 
  •  Tesoro will contribute all of our predecessor’s assets and operations to us (excluding working capital and other noncurrent liabilities);
 
  •  we will issue           common units and           subordinated units to Tesoro, representing an aggregate     % limited partner interest in us, and           general partner units, representing a 2.0% general partner interest in us, and all of our incentive distribution rights to our general partner;
 
  •  we will issue           common units to the public in this offering, representing a     % limited partner interest in us, and will apply the net proceeds as described in “Use of Proceeds”;
 
  •  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.
 
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. Please read “Risk Factors” beginning on page 16 carefully for a discussion of these risks.


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Organizational Structure After the Transactions
 
The following simplified diagram depicts our organizational structure after giving effect to the transactions described above.
 
         
Public common units
          %
Tesoro common units
      %
Tesoro subordinated units
      %
General partner units
      %
         
Total
    100 %
         
 
(FLOW CHART)       


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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.”
 
In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, various operating subsidiaries. However, neither we nor our subsidiaries have any employees. Our general partner has the sole responsibility for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by Tesoro or others. All of the personnel that will conduct our business immediately following the closing of this offering will be employed by our general partner and its affiliates, including Tesoro, but we sometimes refer to these individuals in this prospectus as our employees.
 
Principal Executive Offices and Internet Address
 
Our principal executive offices are located at 19100 Ridgewood Parkway, San Antonio, Texas 78259-1828, and our telephone number is (210) 626-6000. Following the completion of this offering, our website will be located at www.          .com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission (SEC) available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.
 
Summary of Conflicts of Interest and Fiduciary Duties
 
Our general partner has a legal duty to manage us in a manner beneficial to our unitholders. This legal duty originates in statutes and judicial decisions and is commonly referred to as a “fiduciary duty.” However, because our general partner is a wholly owned subsidiary of Tesoro, the officers and directors of our general partner have fiduciary duties to manage the business of our general partner in a manner beneficial to Tesoro. As a result of this relationship, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, including Tesoro, on the other hand. For example, our general partner will be entitled to make determinations that affect the amount of cash distributions we make to the holders of common units, which in turn has an effect on whether our general partner receives incentive cash distributions. In addition, our general partner may determine to manage our business in a way that directly benefits Tesoro’s 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.”
 
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 partner’s 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.


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The Offering
 
Common units offered to the public           common units.
 
          common units if the underwriters exercise in full their option to purchase additional common units from us.
 
Units outstanding after this offering           common units and          subordinated units, each representing a 49.0% limited partner interest in us.
 
Use of proceeds We expect to receive net proceeds of $      million from this offering, after deducting underwriting discounts, a structuring fee, an advisory fee and estimated offering expenses. We intend to retain $      million of the net proceeds for general partnership purposes, including to fund our working capital needs, and use the remainder 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 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.
 
Cash distributions We intend to make a minimum quarterly distribution of $      per unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner.
 
For the quarter in which this offering closes, we will pay a prorated distribution on our units covering the period from the completion of this offering through          , 2011, based on the actual length of that period.
 
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 $      plus any arrearages from prior quarters;
 
• second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $     ; and
 
• third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received a distribution of $     .
 
If cash distributions to our unitholders exceed $      per unit in any quarter, our general partner will receive, in addition to distributions on its 2.0% general partner interest, increasing percentages, up to 48.0%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive


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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.”
 
Pro forma cash available for distribution generated during the year ended December 31, 2009 and the twelve months ended September 30, 2010 was approximately $43.2 million and $46.7 million, respectively. The amount of available cash we need to pay the minimum quarterly distribution for four quarters on our common units and subordinated units to be outstanding immediately after this offering and the corresponding distribution on our 2.0% general partner interest is approximately $      million (or an average of approximately $      million per quarter). As a result, for the year ended December 31, 2009 and the twelve months ended September 30, 2010 we would have generated available cash sufficient to pay the full minimum quarterly distribution on all of our common units, and our subordinated units during those periods. Please read “Cash Distribution Policy and Restrictions on Distributions — Unaudited Pro Forma Available Cash for the Year Ended December 31, 2009 and the Twelve Months Ended September 30, 2010.”
 
We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions — Estimated EBITDA for the Year Ending December 31, 2011” that we will have sufficient available cash to pay the minimum quarterly distribution of $      on all of our units and the corresponding distribution on our general partner’s 2.0% interest for the year ending December 31, 2011. Please read “Cash Distribution Policy and Restrictions on Distributions.”
 
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 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) $      (the minimum quarterly distribution on an annualized basis) on each outstanding unit and the corresponding distribution on our general partner’s 2.0% interest for each of three consecutive, non-overlapping four quarter periods ending on or after          , 2014 or (2) $      (150.0% of the annualized minimum quarterly distribution) on each outstanding unit and the corresponding distributions on our general partner’s 2.0% interest and the incentive distribution rights for the four-quarter period immediately preceding that date, in each case provided there are no arrearages on our common units at that time.


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The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holders of subordinated units or their affiliates are voted in favor of that removal.
 
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.”
 
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” and “The Partnership Agreement — Issuance of Additional Securities.”
 
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     % of our common and subordinated units (or     % of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). This will give Tesoro the ability to prevent the removal of our general partner. Please read “The Partnership Agreement — Voting Rights.”
 
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 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.”
 
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 approximately     % of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $      per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $      per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially


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increase. Please read “Material Federal Income Tax Consequences — Tax Consequences of Unit Ownership — Ratio of Taxable Income to Distributions” 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.”
 
Exchange listing We intend to apply to list our common units on the New York Stock Exchange under the symbol “TLLP.”


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Summary Historical and Pro Forma Combined Financial and Operating Data
 
The following table shows summary historical combined financial and operating data of Tesoro Logistics LP Predecessor, our predecessor for accounting purposes, and summary pro forma combined financial and operating data of Tesoro Logistics LP for the periods and as of the dates indicated. The summary historical combined financial data of our predecessor for the years ended December 31, 2007, 2008 and 2009 are derived from the audited combined financial statements of our predecessor appearing elsewhere in this prospectus. The summary historical combined financial data of our predecessor for the nine months ended September 30, 2009 and 2010 are derived from the unaudited combined financial statements of our predecessor appearing elsewhere in this prospectus. The following table should be read together with, and is qualified in its entirety by reference to, the historical and unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
The summary pro forma combined financial data presented in the following table for the year ended December 31, 2009 and as of and for the nine months ended September 30, 2010 are derived from the unaudited pro forma combined financial statements included elsewhere in this prospectus. The pro forma balance sheet assumes that the offering and the related transactions occurred as of September 30, 2010, and the pro forma statements of operations for the year ended December 31, 2009 and the nine months ended September 30, 2010 assume that the offering and the related transactions occurred as of January 1, 2009. These transactions include, and the pro forma financial data give effect to, the following:
 
  •  Tesoro’s contribution of all of our predecessor’s 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           common units to the public,           general partner units and the incentive distribution rights to our general partner and           common units and           subordinated units to Tesoro; and
 
  •  the application of the net proceeds of this offering, together with the proceeds from borrowings under our revolving credit facility, as described in “Use of Proceeds”.
 
The pro forma combined financial data do not give effect to the estimated $3.0 million in incremental annual general and administrative expenses we expect to incur as a result of being a separate publicly traded partnership.
 
Our assets have historically been a part of the integrated operations of Tesoro, and our predecessor generally recognized only the costs, but not the revenue, associated with the short-haul pipeline transportation, terminalling, storage or trucking services provided to Tesoro on an intercompany basis. Accordingly, the revenues in our predecessor’s 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Factors Affecting the Comparability of Our Financial Results,” our future results of operations will not be comparable to our predecessor’s historical results.


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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.”
                                                         
          Tesoro Logistics LP
 
    Tesoro Logistics LP Predecessor Historical     Pro Forma  
          Nine Months
          Nine Months
 
          Ended
    Year Ended
    Ended
 
    Year Ended December 31,     September 30,     December 31,     September 30,  
    2007     2008     2009     2009     2010     2009     2010  
                      (Unaudited)     (Unaudited)  
    (In thousands, except per unit data and operating information)  
 
Statement of Operations Data:
                                                       
REVENUES(1):
                                                       
Crude oil gathering
  $ 20,646     $ 21,190     $ 19,422     $ 14,239     $ 14,177     $ 48,827     $ 37,461  
Terminalling, transportation and storage
    3,251       3,297       3,237       2,324       2,797       42,136       33,165  
                                                         
Total Revenues
  $ 23,897     $ 24,487     $ 22,659     $ 16,563     $ 16,974     $ 90,963     $ 70,626  
Operating and maintenance expense(2)
    26,858       29,741       32,566       24,209       25,990       35,499       28,832  
Depreciation expense
    6,342       6,625       8,820       6,975       5,983       8,820       5,983  
General and administrative expense(3)
    2,800       2,525       3,141       2,340       2,337       4,008       3,006  
                                                         
OPERATING INCOME (LOSS)
    (12,103 )     (14,404 )     (21,868 )     (16,961 )     (17,336 )     42,636       32,805  
Interest expense, net(4)
                                  2,306       1,730  
                                                         
NET INCOME (LOSS)
  $ (12,103 )   $ (14,404 )   $ (21,868 )   $ (16,961 )   $ (17,336 )   $ 40,330     $ 31,075  
                                                         
General partner interest in net income
                                          $       $    
Common unitholders interest in net income
                                          $       $    
Subordinated unitholders interest in net income
                                          $       $    
Pro forma net income (loss) per common unit
                                          $       $    
Pro forma net income (loss) per subordinated unit
                                          $       $    
Balance Sheet Data (at period end):
                                                       
Property, Plant and Equipment, net
    127,226     $ 138,785     $ 138,055     $ 139,049     $ 133,151             $ 133,151  
Total Assets
    130,752       141,697       141,215       142,295       136,811               138,151  
Total Liabilities
    5,404       8,686       5,499       5,664       6,267               50,000  
Total Division Equity/Partners’ Capital
    125,348       133,011       135,716       136,631       130,544               88,151  
Cash Flow Data:
                                                       
Net cash from (used in):
                                                       
Operating activities
  $ (5,703 )   $ (6,045 )   $ (12,324 )   $ (9,286 )   $ (9,997 )                
Investing activities
    (19,050 )     (16,022 )     (12,249 )     (11,295 )     (2,167 )                
Financing activities
  $ 24,753       22,067     $ 24,573     $ 20,581     $ 12,164                  
Other Financial Data:
                                                       
EBITDA(5)
  $ (5,761 )   $ (7,779 )   $ (13,048 )   $ (9,986 )     (11,353 )     51,456       38,788  
Capital expenditures:
                                                       
Maintenance
  $ 3,713     $ 8,475     $ 3,319     $ 2,688     $ 1,297     $ 3,319     $ 1,297  
Expansion(6)
    15,527       10,186       5,915       5,626       289       5,915       289  
                                                         
Total
  $ 19,240     $ 18,661     $ 9,234     $ 8,314     $ 1,586     $ 9,234     $ 1,586  
Operating Information:
                                                       
Crude oil gathering segment:
                                                       
Pipeline throughput (bpd)(7)
    56,232       54,737       52,806       52,645       47,954       52,806       47,954  
Average pipeline revenue per barrel(8)
  $ 1.01     $ 1.06     $ 1.01     $ 0.99     $ 1.08     $ 1.28     $ 1.38  
Trucking volume (bpd)
    18,560       23,752       22,963       22,571       23,386       22,963       23,386  
Average trucking revenue per barrel(8)
                                          $ 2.88     $ 3.03  
Terminalling, transportation and storage segment:
                                                       
Terminal throughput (bpd)(9)
    103,305       112,868       113,135       112,031       113,964       113,135       113,964  
Average terminal revenue per barrel(8)
                                          $ 0.77     $ 0.82  
Short-haul pipeline throughput (bpd)
    60,395       60,894       56,942       58,537       52,798       56,942       52,798  
Average short-haul pipeline revenue per barrel
                                          $ 0.25     $ 0.25  
Storage capacity reserved (shell capacity barrels)
                                            878,000       878,000  
Storage per shell capacity barrel (per month)
                                          $ 0.50     $ 0.50  


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(1) Pro forma revenues reflect recognition of affiliate revenues generated by pipeline and terminal assets to be contributed to us at the closing of this offering that were not previously recorded in the historical financial records of Tesoro Logistics LP Predecessor. Product volumes used in the calculations are historical volumes transported or terminalled through facilities included in the Tesoro Logistics LP Predecessor financial statements. Tariff rates and service fees were calculated using the rates and fees in the commercial agreements to be entered into with Tesoro at the closing of this offering and tariff rates on our High Plains pipeline system to be in effect at the time of closing of this offering.
 
(2) Operating and maintenance expense includes losses on fixed asset disposals. Operating and maintenance expense in 2009 includes a $1.1 million loss on fixed asset disposals primarily related to the retirement of a portion of our Los Angeles terminal. Pro forma operating and maintenance expense for the year ended December 31, 2009 and for the nine months ended September 30, 2010 includes incremental operating and maintenance expenses primarily related to purchased additives, inspection and port charges, and insurance premiums for business interruption and property insurance.
 
(3) Pro forma general and administrative expenses have been adjusted to give effect to the annual corporate services fee of $2.5 million that we will pay to Tesoro under the omnibus agreement for providing treasury, accounting, legal and other general and administrative services as well as higher employee-related expenses of $0.9 million, but do not include the estimated $3.0 million in incremental annual general and administrative expenses we expect to incur as a result of being a separate publicly traded partnership.
 
(4) Pro forma interest expense is related to expected borrowings under our revolving credit facility, commitment fees on the unutilized portion of our revolving credit facility and amortization of related debt issuance costs. Interest expense is calculated assuming an estimated annual interest rate of 2.8%. If the actual interest rate increases or decreases by 1.0%, pro forma interest expense would increase or decrease by approximately $0.5 million per year.
 
(5) EBITDA is defined in “Non-GAAP Financial Measure” below.
 
(6) Expansion capital expenditures reflect the $12.6 million acquisition of our Los Angeles terminal in May 2007 and a $3.5 million truck rack expansion project at this terminal in 2008.
 
(7) Pro forma and historical pipeline throughput for the nine months ended September 30, 2010 include the effects of a scheduled turnaround at Tesoro’s Mandan refinery in April and May of 2010.
 
(8) Average pipeline revenue per barrel includes tariffs for committed and uncommitted volumes of crude oil under the pipeline transportation services agreement to be entered into with Tesoro at the closing of this offering, as well as fees for the injection of crude oil into the pipeline system from trucking receipt points, which we refer to as pumpover fees. Average trucking service revenue per barrel includes tank usage fees and fees for providing trucking, dispatching, accounting and data services under the trucking transportation services agreement to be entered into with Tesoro at the closing of this offering. Average terminal revenue per barrel includes terminal throughput fees as well as ancillary services fees for ethanol blending and additive injection.
 
(9) Terminal throughput includes throughput from our Los Angeles terminal following its acquisition by Tesoro in May 2007.


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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 Predecessor Historical     Tesoro Logistics LP Pro Forma  
          Nine Months
          Nine Months
 
          Ended
    Year Ended
    Ended
 
    Years Ended December 31,     September 30,     December 31,     September 30,  
    2007     2008     2009     2009     2010     2009     2010  
                      (Unaudited)     (Unaudited)  
    (In thousands)  
 
Reconciliation of EBITDA to net income (loss):
                                                       
Net Income (Loss)
  $ (12,103 )   $ (14,404 )   $ (21,868 )   $ (16,961 )   $ (17,336 )   $ 40,330     $ 31,075  
Add:
                                                       
Depreciation expense
    6,342       6,625       8,820       6,975       5,983       8,820       5,983  
Interest expense, net
                                  2,306       1,730  
                                                         
EBITDA
  $ (5,761 )   $ (7,779 )   $ (13,048 )   $ (9,986 )   $ (11,353 )   $ 51,456     $ 38,788  
                                                         
Reconciliation of EBITDA to net cash from (used in) operating activities:
                                                       
Net cash from (used in) operating activities
  $ (5,703 )   $ (6,045 )   $ (12,324 )   $ (9,286 )   $ (9,997 )                
Changes in assets and liabilities
    167       (1,258 )     390       343       (850 )                
Loss on asset disposals
    (225 )     (476 )     (1,114 )     (1,043 )     (506 )                
                                                         
EBITDA
  $ (5,761 )   $ (7,779 )   $ (13,048 )   $ (9,986 )   $ (11,353 )                
                                                         


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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. If Tesoro changes its business strategy, is unable to satisfy its obligations under our commercial agreements for any reason or significantly reduces the volumes transported through our pipelines or handled at our terminals, our revenues would decline and our financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be adversely affected.
 
For each of the year ended December 31, 2009 and the nine months ended September 30, 2010, Tesoro accounted for approximately 96% of our pro forma revenues. Tesoro is the primary shipper on our High Plains system and has historically operated the system solely to supply its Mandan, North Dakota refinery and not as a stand-alone business. Tesoro is also our primary customer in our terminalling, transportation and services segment. As we expect to continue to derive the substantial majority of our revenues from Tesoro for the foreseeable future, we are subject to the risk of nonpayment or nonperformance by Tesoro under our commercial agreements. Any event, whether in our areas of operation or otherwise, that materially and adversely affects Tesoro’s 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 Tesoro’s business and the business of its suppliers, customers, business partners and lenders;
 
  •  the risk of contract cancellation, non-renewal or failure to perform by Tesoro’s customers, and Tesoro’s inability to replace such contracts and/or customers;
 
  •  disruptions due to equipment interruption or failure at Tesoro’s facilities, such as the recent fire at Tesoro’s Anacortes, Washington refinery, or at third-party facilities on which Tesoro’s business is dependent;
 
  •  the timing and extent of changes in commodity prices and demand for Tesoro’s refined products, and the availability and costs of crude oil and other refinery feedstocks;
 
  •  Tesoro’s 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, modifying or closing facilities or terminating operations. Changes may be considered to meet market demands,


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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.
 
We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.
 
In order to pay the minimum quarterly distribution of $      per unit per quarter, or $      per unit per year, we will require available cash of approximately $      million per quarter, or approximately $      million per year, based on the number of common units, subordinated units and general partner units to be outstanding immediately after completion of this offering. We may not have sufficient available cash from operating surplus each quarter to enable us to pay the minimum quarterly distribution. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:
 
  •  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.
 
The assumptions underlying the forecast of cash available for distribution that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks that could cause our actual cash available for distribution to differ materially from our forecast.
 
The forecast of cash available for distribution set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations, EBITDA and cash available for distribution for the year ending December 31, 2011. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct and that are discussed in “Cash Distribution Policy and Restrictions on Distributions.” 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


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forecasted EBITDA, we may not be able to make the minimum quarterly distribution or pay any amount on our common units or subordinated units, and the market price of our common units may decline materially.
 
Tesoro may suspend, reduce or terminate its obligations under our commercial agreements in some circumstances, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.
 
Our commercial agreements with Tesoro include provisions that permit Tesoro to suspend, reduce or terminate its obligations under the applicable agreement if certain events occur. These events include Tesoro deciding to permanently or indefinitely suspend refining operations at one or more of its refineries as well as our being subject to certain force majeure events that would prevent us from performing required services under the applicable agreement. Tesoro has the discretion to make such decisions notwithstanding the fact that they may significantly and adversely affect us. For instance, under the agreements, if Tesoro decides to permanently or indefinitely suspend refining operations at a refinery for a period that will continue for at least 12 consecutive months, then it may terminate the agreement on no less than 12 months’ prior written notice to us, unless it publicly announces its intent to resume operations at the refinery at least two months prior to the expiration of the 12-month notice period.
 
Generally, although Tesoro is not entitled to claim a force majeure event, Tesoro’s and our obligations under these agreements will be proportionately reduced or suspended to the extent that we are unable to perform under the agreements upon our declaration of a force majeure event. As defined in our commercial agreements, force majeure events include any acts or occurrences that prevent us from providing services under the applicable agreement, such as:
 
  •  acts of God, or fires, floods or storms;
 
  •  compliance with orders of courts or any governmental authority;
 
  •  explosions, wars, terrorist acts, riots, strikes, lockouts or other industrial disturbances;
 
  •  accidental disruption of service;
 
  •  breakdown of machinery, storage tanks or pipelines and inability to obtain or unavoidable delay in obtaining material or equipment; and
 
  •  similar events or circumstances, so long as such events or circumstances are beyond our reasonable control and could not have been prevented by our due diligence.
 
Accordingly, there exists a broad range of events that could result in our no longer being required to transport or distribute Tesoro’s 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. Any reduction or suspension of Tesoro’s obligations under any of our commercial agreements 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.”
 
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 Tesoro’s obligations under our commercial agreements are not suspended, reduced or terminated due to a refinery


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shutdown or force majeure event. In addition, the terms of Tesoro’s 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 Tesoro’s Mandan refinery. The rates charged on the High Plains pipeline system for such services will vary depending on the origin point on the system from which barrels are transported. Accordingly, while we believe the agreement should provide us with a stable base of throughput volumes, our revenues generated on the High Plains pipeline system are subject to risks relative to the mix of tariff rates applied to the volumes shipped by Tesoro. Should the High Plains pipeline transportation services agreement be invalidated for any reason, all intrastate volumes would be shipped at the lower uncommitted tariff rate, thereby potentially lowering our revenues. Under our master terminalling services agreement, Tesoro is obligated to throughput a volume of refined products equal to an average of 100,000 bpd per month for all of our terminals on an aggregate basis. However, the rates that we charge for the terminalling services that we provide, including for the provision of ancillary services such as ethanol blending and additive injection, vary depending on both the service type and the terminal at which such services are provided. Variances in rates applied under our commercial agreements could impact the stability of our revenues and thus the stability of our distributions to unitholders.
 
If our interstate or intrastate tariffs are successfully challenged, we could be required to reduce our tariff rates, which would reduce our revenues and our ability to make distributions to our unitholders.
 
Tesoro has agreed not to challenge, or to cause others to challenge or assist others in challenging, our tariffs in effect during the term of our High Plains pipeline transportation services agreement with Tesoro. 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, Tesoro’s 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.
 
Tesoro’s 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.
 
Tesoro must devote a portion of its cash flows from operating activities to service its indebtedness, and therefore cash flows may not be available for use in pursuing its growth strategy, including the expansion of its logistics operations. Furthermore, a higher level of indebtedness at Tesoro in the future increases the risk that it may default on its obligations to us under our commercial agreements. As of September 30, 2010, Tesoro had long-term indebtedness of approximately $1.85 billion. The covenants contained in the agreements governing Tesoro’s 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, Tesoro’s 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.


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Furthermore, in the event that Tesoro were to default under certain of its debt obligations, there is a risk that Tesoro’s 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.
 
Tesoro’s 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 Tesoro’s debt ratings when assigning ours because of Tesoro’s 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 general partner is a wholly owned subsidiary of Tesoro and may guarantee or pledge any or all of its assets (other than its general partner interest, except as permitted by the partnership agreement) to secure the indebtedness of any of its affiliates. If our general partner were required to honor its guarantee or if lenders foreclosed on our general partner’s assets, the ability of our general partner to manage our business might be adversely affected. If our general partner were unable to meet any obligations to such lenders, it might be required to file for bankruptcy, which would cause our dissolution under our partnership agreement and which might have other adverse effects.
 
Our logistics operations and Tesoro’s refining operations are subject to many risks and operational hazards, some of which may result in business interruptions and shutdowns of our or Tesoro’s facilities and damages for which we may not be fully covered by insurance. If a significant accident or event occurs that results in business interruption or shutdown for which we are not adequately insured, our operations and financial results could be adversely affected.
 
Our logistics operations are subject to all of the risks and operational hazards inherent in transporting and storing crude oil and refined products, including:
 
  •  damages to pipelines and facilities, related equipment and surrounding properties caused by earthquakes, floods, fires, severe weather, explosions and other natural disasters and acts of terrorism;
 
  •  mechanical or structural failures at our facilities or at third-party facilities on which our operations are dependent, including Tesoro’s 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, Tesoro’s 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 Tesoro’s facilities, such as the April 2010 fire at Tesoro’s 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 Tesoro’s refineries and their associated pipelines.


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We do not maintain insurance coverage against all potential losses and could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We carry separate policies of property and business interruption insurance and are insured under Tesoro’s liability policies and we are subject to Tesoro’s 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 Tesoro’s 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 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 Tesoro’s 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 Tesoro’s 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.
 
If the demand for refined products, particularly in Tesoro’s primary market areas, decreases significantly, or if there were a material increase in the price of crude oil supplied to Tesoro’s 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 Tesoro’s committed volumes, depends on the volume of refined products produced at Tesoro’s Mandan refinery. The volume of refined products produced depends, in part, on the availability of attractively-priced, high-quality crude oil


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produced in the Bakken Shale/Williston Basin area, which is the primary source of supply for Tesoro’s 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 Tesoro’s 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 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 Tesoro’s 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, Tesoro’s operational requirements at its 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.


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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.
 
If we are unable to make acquisitions on economically acceptable terms from Tesoro or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash generated from operations on a per unit basis.
 
A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions that result in an increase in distributable cash flow per unit. The acquisition component of our growth strategy is based, in large part, on our expectation of ongoing divestitures of gathering, transportation and storage assets by industry participants, including Tesoro. A material decrease in such divestitures would limit our opportunities for future acquisitions and could adversely affect our ability to grow our operations and increase cash distributions to our unitholders. If we are unable to make acquisitions from Tesoro or third parties, because we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, we are unable to obtain financing for these acquisitions on economically acceptable terms or we are outbid by competitors, our future growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in distributable cash flow per unit. Any acquisition involves potential risks, including, among other things:
 
  •  mistaken assumptions about revenues and costs, including synergies;
 
  •  the assumption of unknown liabilities;


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  •  limitations on rights to indemnity from the seller;
 
  •  mistaken assumptions about the overall costs of equity or debt;
 
  •  the diversion of management’s 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 Tesoro’s 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 Tesoro’s 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, Tesoro’s 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 Tesoro’s 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.”
 
Our ability to expand and increase our utilization rates may be limited if Tesoro’s refining and marketing business does not grow as expected.
 
Part of our growth strategy depends on the growth of Tesoro’s refining and marketing business. For example, in our terminals and storage business, we believe our growth will primarily be driven by identifying and executing organic expansion projects that will result in increased throughput volumes from Tesoro and third parties. Our prospects for organic growth currently include projects that we expect Tesoro to undertake, such as constructing new tankage, and that we expect to have an opportunity to purchase from Tesoro. If Tesoro focuses on other growth areas or does not make capital expenditures to fund the organic growth of its logistics operations, we may not be able to fully execute our growth strategy.
 
Any reduction in the capacity of, or the allocations to, our shippers in interconnecting, third-party pipelines could cause a reduction of volumes distributed through our terminals and through our short-haul crude oil pipelines.
 
Tesoro is dependent upon connections to third-party pipelines to transport refined products to certain of our terminals and to ship crude oil through our short-haul crude oil pipelines. Any reduction of capacities of these interconnecting pipelines due to testing, line repair, reduced operating pressures or other causes could result in reduced volumes of refined products distributed through our terminals and shipments of crude oil through our short-haul pipelines. Similarly, if additional shippers begin transporting volumes of refined products or crude oil over interconnecting pipelines, the allocations to Tesoro and other existing shippers on these pipelines could be reduced, which could also reduce volumes distributed through our terminals or


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transported through short-haul crude oil pipelines. Any significant reduction in volumes would adversely affect our revenues and cash flow and our ability to make distributions to our unitholders.
 
Our exposure to direct commodity price risk may increase in the future.
 
We currently generate substantially all of our revenues from Tesoro, primarily pursuant to fee-based commercial agreements under which we are paid based on the volumes of crude oil and refined products that we handle and the ancillary services we provide, rather than the value of the commodities themselves. Although some of our commercial agreements with Tesoro contain loss allowance provisions that require us to bear the risk of any volume loss relating to the services we provide, our existing operations and cash flows generally have limited exposure to direct commodity price risk. We may acquire or develop additional assets in the future that have a greater exposure to fluctuations in commodity price risk than our current operations. In addition, although we intend to continue to contractually minimize our exposure to direct commodity price risk in the future, our efforts to negotiate such contracts may not be successful. Increased exposure to the volatility of oil and refined product prices in the future could have a material adverse effect on our revenues and cash flow and our ability to make distributions to our unitholders.
 
We do not own all of the land on which our pipelines and terminals are located, which could result in disruptions to our operations.
 
We do not own all of the land on which our pipelines and terminals are located, and we are, therefore, subject to the possibility of more onerous terms and increased costs to retain necessary land use if we do not have valid leases or rights-of-way or if such rights-of-way lapse or terminate. We obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.
 
We operate refined products terminals on leased property in Stockton, California, Vancouver, Washington and Anchorage, Alaska. Our lease with the Port of Stockton expires in 2014 and we have the option to renew this lease for up to three additional five-year terms. Our lease with the Port of Vancouver expires in 2016 and we have the option to renew this lease for up to two additional 10-year terms. Our Anchorage terminal has leases with the Alaska Railroad Corporation and the Port of Anchorage. Our lease with the Alaska Railroad Corporation expires in 2011 and we have the option to renew this lease for up to three additional five-year terms. Our lease with the Port of Anchorage expires in 2014 and there can be no guarantee we will be able to renew this lease on satisfactory terms or at all.
 
Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make cash distributions to our unitholders and the value of our units.
 
We will be dependent upon the earnings and cash flow generated by our operations in order to meet our debt service obligations and to allow us to make cash distributions to our unitholders. The operating and financial restrictions and covenants in our revolving credit facility and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities, which may, in turn, limit our ability to make cash distributions to our unitholders. For example, we expect that our revolving credit facility will restrict our ability to, among other things
 
  •  make cash distributions;
 
  •  incur indebtedness;
 
  •  create liens;
 
  •  make 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 “Management’s Discussion and Analysis of Financial Condition and Results of


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Operations — Capital Resources and Liquidity — Revolving Credit Facility” 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity.”
 
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
 
  •  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.


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We do not operate the central control room for our High Plains pipeline system, and we may face higher costs associated with control room services in the future.
 
The control room management functions for the pipelines in our High Plains pipeline system are performed under a control center services agreement with a third-party operator that expires in December 2012 and continues year to year thereafter unless terminated by either party. Under the terms of the agreement, the third-party control room operator controls, monitors, records and reports on the operation of the High Plains system, including supervisory control and data acquisition (SCADA) systems that monitor pipeline conditions and controls some of the valves and pump switches remotely through satellite communication. The control room operator also provides leak detection, data reporting, customer support, general maintenance and technical support and emergency response procedure compliance services. Under our current control room contract, we are liable for any losses resulting from actions of the third-party control room operator, unless such losses resulted from the gross negligence or willful misconduct of the operator. If disputes arise over the operation of the control room, or if our operator fails to provide the services contracted under the agreement, our business, results of operation, and financial condition could be adversely affected. Upon the expiration of our existing agreement in 2012, we will be required to negotiate the renewal of the terms of this agreement, negotiate a similar arrangement with Tesoro or another third party or install our own control room and hire and train personnel to operate this control room. We anticipate that the costs of these services under a negotiated renewal of our existing agreement or a new similar agreement will increase relative to historical costs. Increased costs associated with control room operation services will decrease the amount of cash available for distribution to unitholders to the extent we are not indemnified for these costs by Tesoro under our omnibus agreement.
 
Our assets and operations are subject to federal, state, and local laws and regulations relating to environmental protection and safety that could require us to make substantial expenditures.
 
Our assets and operations involve the transportation and storage of crude oil and refined products, which is subject to increasingly stringent federal, state, and local laws and regulations governing the discharge of materials into the environment and operational safety matters. Our business of transporting and storing crude oil and refined products involves the risk that crude oil, refined products and other hydrocarbons may gradually or suddenly be released into the environment. We also own or lease a number of properties that have been used to store or distribute crude oil and refined products for many years; many of these properties have been operated by third parties whose handling, disposal, or release of hydrocarbons and other wastes were not 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 operations are closely monitored by federal, state and local agencies and environmental interest groups. Transportation 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 “worst case discharge” to the maximum extent possible. To meet this requirement, we have contracted with various spill response companies in the areas in which we transport crude oil and refined products; however, these companies may not be able to adequately contain a “worst case discharge” in all instances. 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 facility 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.


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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” and “Business — Rate and Other Regulation.”
 
Meeting the requirements of evolving environmental, health and safety laws and regulations, including those related to climate change, could adversely affect our performance.
 
Environmental laws and regulations have raised operating costs for the oil and refined products industry and compliance with such laws and regulations may cause us and Tesoro to incur potentially material capital expenditures associated with the construction, maintenance, and upgrading of equipment and facilities. We may be required to address conditions discovered in the future that require environmental response actions or remediation. Also, future environmental, health and safety requirements or changed interpretations of existing requirements, may impose more stringent requirements on our assets and operations, which may require us to incur potentially material expenditures to ensure continued compliance. Future developments in federal laws and regulations governing environmental, health and safety and energy matters are especially difficult to predict.
 
Currently, various legislative and regulatory measures to address greenhouse gas emissions (including carbon dioxide, methane and other gases) are in various phases of discussion or implementation. These include requirements effective January 2010 that require Tesoro’s 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 Tesoro’s 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 Administration’s 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


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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 Tesoro’s refineries, our storage facility, any of our pipelines or refined products terminals, or any other facility to which we send or have sent wastes or by-products for treatment or disposal, we could be liable for all costs and penalties associated with the remediation of such facilities under federal, state and local environmental laws or the common law. We may also be liable for personal injury or property damage claims from third parties alleging contamination from spills or releases from our facilities or operations. In addition, our indemnification for certain environmental liabilities under the omnibus agreement will be limited to liabilities identified prior to the earlier of the fifth anniversary of the closing of this offering and the date that Tesoro no longer controls our general partner (provided that, in any event, such date shall be no earlier than the second anniversary of the closing of this offering). Even if we are insured or indemnified against such risks, we may be responsible for costs or penalties to the extent our insurers or indemnitors do not fulfill their obligations to us. The payment of such costs or penalties could be significant and have a material adverse effect on our business, financial condition and results of operations.
 
We are subject to regulation by multiple governmental agencies, which could adversely impact our business, results of operations and financial condition.
 
Our business activities are subject to regulation by multiple federal, state and local governmental agencies. Our historical and projected operating costs reflect the recurring costs resulting from compliance with these regulations, and we do not anticipate material expenditures in excess of these amounts in the absence of future acquisitions, or changes in regulation, or discovery of existing but unknown compliance issues. Additional proposals and proceedings that affect the crude oil and refined products industry are regularly considered by Congress, as well as by state legislatures and federal and state regulatory commissions and agencies and courts. We cannot predict when or whether any such proposals may become effective or the magnitude of the impact changes in laws and regulations may have on our business; however, additions or enhancements to the regulatory burden on our industry generally increase the cost of doing business and affect our profitability.
 
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 FERC’s 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.
 
FERC’s 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, FERC’s order increases the adjustment to the PPI to plus 2.65% (rather than PPI plus 1.3% currently in effect). FERC’s order is subject to rehearing during a period of thirty days or may be appealed without seeking rehearing to the U.S. Court of Appeals during a period of sixty days after issuance of the order. The current or any revised indexing formula could hamper our ability to recover our costs because: (1) the indexing methodology is tied to an inflation index; (2) it is not based on pipeline-specific costs; and (3) it could later be reduced in comparison to current or proposed formulas. Any of the foregoing would adversely affect our revenues and cash flow. FERC could limit our ability to set rates based on our costs, order us to reduce rates, require the payment of refunds or reparations to shippers, or any or all of these actions, which could adversely affect our financial position, cash flows, and results of operations.
 
The balance of our High Plains system provides intrastate service that is subject to regulation by the NDPSC. Similar to FERC, NDPSC could limit our ability to set rates based on our costs or could order us to reduce our rates and could require the payment of refunds to shippers. Such regulation or a successful challenge to our intrastate pipeline rates could adversely affect our financial position, cash flows or results of operations. Furthermore, although NDPSC has not officially adopted the FERC indexing methodology, our


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existing intrastate tariffs have utilized the FERC indexing methodology as a basis for annual tariff rate adjustment.
 
If FERC’s or NDPSC’s 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, FERC’s ratemaking methodologies may limit our ability to set rates based on our actual costs, may delay the use of rates that reflect increased costs, and may subject us to potentially burdensome and expensive operational, reporting and other requirements. Any of the foregoing could adversely affect our business, results of operations and financial condition.
 
We believe that neither our interconnecting pipelines between our Salt Lake City storage facility and Tesoro’s Salt Lake City refinery nor our five Salt Lake City short-haul pipelines will be subject to FERC regulation, either because FERC will not assert jurisdiction over single-user pipelines that deliver crude oil and refined products within a single state, or because FERC will exempt the pipelines from regulation because only one affiliated shipper takes service on the pipelines. We will file for a FERC ruling disclaiming or exempting from FERC jurisdiction transportation service on these pipelines. If FERC, however, were to deny our request and assert jurisdiction over transportation service on these pipelines, we would be required to file tariffs with FERC for each pipeline that would establish the rates and terms and conditions for service on each pipeline. If this were to occur, our short-haul pipeline transportation services agreement with Tesoro requires Tesoro and us to negotiate appropriate changes to the terms of the agreement to restore to each party the economic benefits expected prior to FERC’s 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 firm’s, 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


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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 Tesoro’s business decisions and operations, and Tesoro is under no obligation to adopt a business strategy that favors us.
 
Following the offering, Tesoro will own a 2.0% general partner interest and a    % limited partner interest in us and will own and control our general partner. Although our general partner has a fiduciary duty to manage us in a manner that is beneficial to us and our unitholders, the directors and officers of our general partner have a fiduciary duty to manage our general partner in the manner that is beneficial to its owner, Tesoro. Conflicts of interest may arise between Tesoro and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including Tesoro, over the interests of our common unitholders. These conflicts include, among others, the following situations:
 
  •  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. Tesoro’s directors and officers have a fiduciary duty to make these decisions in the best interests of the stockholders of Tesoro;
 
  •  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 arm’s-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 Tesoro’s 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 any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or expansion or investment capital expenditures, which do not reduce operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and to our general partner and the ability of the subordinated units to convert to common units;
 
  •  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;


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  •  Our partnership agreement permits us to classify up to $      million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or to our general partner in respect of the general partner interest or the incentive distribution rights;
 
  •  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 partner’s 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.
 
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” and “Conflicts of Interest and Fiduciary Duties.”
 
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.


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Our partnership agreement limits our general partner’s 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.”
 
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;


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(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.”
 
Cost reimbursements, which will be determined in our general partner’s 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 required to pay Tesoro an annual corporate services fee, initially in the amount of $2.5 million, for the provision of various centralized corporate services. Under the terms of our operational services agreement, we will pay Tesoro an annual service fee, initially in the amount of $0.2 million, for services performed by certain of Tesoro’s 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 management’s decisions regarding our business. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by the members of our general partner, which are wholly owned subsidiaries of Tesoro Corporation. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.
 
The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of the offering to be able to prevent its removal. The vote of the holders of at least 662/3% of all outstanding common units and subordinated units voting together as a single class is required to remove our general partner. At closing, our general partner and its affiliates will own     % of the common units and subordinated units. Also, if our general partner is removed without cause during the subordination period and common units and subordinated units held by our


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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 partner’s 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 the partnership agreement on the ability of Tesoro to transfer its membership interest in our general partner to a third party. The new partners of our general partner would then be in a position to replace the board of directors and officers of our general partner with their own choices and to control the decisions taken by the board of directors and officers.
 
The incentive distribution rights of our general partner may be transferred to a third party without unitholder consent.
 
Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party but retains its general partner interest, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of its incentive distribution rights. For example, a transfer of incentive distribution rights by our general partner could reduce the likelihood of Tesoro accepting offers made by us relating to assets subject to the right of first offer contained in our omnibus agreement, as Tesoro would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.
 
You will experience immediate and substantial dilution in pro forma net tangible book value of $      per common unit.
 
The assumed initial public offering price of $      per common unit exceeds our pro forma net tangible book value of $      per unit. Based on an assumed initial public offering price of $      per common unit, you will incur immediate and substantial dilution of $      per common unit. This dilution results primarily because the assets contributed by Tesoro are recorded in accordance with GAAP at their historical cost, and not their fair value. Please read “Dilution.”


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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          common units and           subordinated units. All of the subordinated units will convert into common units at the end of the subordination period and may convert earlier under certain circumstances. Additionally, we have agreed to provide Tesoro with certain registration rights. Please read “Units Eligible for Future Sale.” 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.
 
Our general partner’s discretion in establishing cash reserves may reduce the amount of cash available for distribution to unitholders.
 
The partnership agreement requires our general partner to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating expenditures. In addition, the partnership agreement permits the general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These cash reserves will affect the amount of cash available for distribution to unitholders.
 
Tesoro may compete with us.
 
Tesoro may compete with us. Under our omnibus agreement, for so long as Tesoro controls our general partner, Tesoro and its affiliates will agree not to engage in, whether by acquisition or otherwise, the business of owning or operating crude oil or refined products pipelines, terminals or storage facilities in the United States that are not within, directly connected to, substantially dedicated to, or otherwise an integral part of, any refinery owned, acquired or constructed by Tesoro. This restriction, however, does not apply to:
 
  •  any assets owned by Tesoro at the closing of this offering (including replacements or expansions of those assets);
 
  •  any asset or business that Tesoro acquires or constructs that has a fair market value of less than $5.0 million; and
 
  •  any asset or business that Tesoro acquires or constructs that has a fair market value of $5.0 million or more if we have been offered the opportunity to purchase the asset or business for fair market value not


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  later than six months after completion of such acquisition or construction, and we decline to do so with the concurrence of our conflicts committee.
 
As a result, Tesoro has the ability to construct assets which directly compete with our assets so long as they are integral to a refinery owned by Tesoro. The limitations on the ability of Tesoro to compete with us will terminate if Tesoro ceases to control our general partner.
 
Our general partner may cause us to borrow funds in order to make cash distributions, even where the purpose or effect of the borrowing benefits the general partner or its affiliates.
 
In some instances, our general partner may cause us to borrow funds from Tesoro or from third parties in order to permit the payment of cash distributions. These borrowings are permitted even if the purpose and effect of the borrowing is to enable us to make a distribution on the subordinated units, to make incentive distributions or to hasten the expiration of the subordination period.
 
Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.
 
If at any time our general partner and its affiliates own more than 75% of our common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering and assuming no exercise of the underwriters’ option to purchase additional common units, our general partner and its affiliates will own approximately     % of our common units. At the end of the subordination period (which could occur as early as          ), assuming no additional issuances of common units (other than upon the conversion of the subordinated units), our general partner and its affiliates will own approximately     % of our common units. For additional information about the call right, please read “The Partnership Agreement — Limited Call Right.”
 
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 state’s 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” 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


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liable for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
 
There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.
 
Prior to this offering, there has been no public market for our common units. After this offering, there will be only           publicly traded common units. In addition, Tesoro will own          common and           subordinated units, representing an aggregate     % limited partner interest in us. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.
 
The initial public offering price for the common units offered hereby will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:
 
  •  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;
 
  •  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


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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 partner’s 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 Partner’s Right to Reset Incentive Distribution Levels.”
 
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 will not be entitled to receive distributions or allocations of income or loss on their common units 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 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.”
 
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.”


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The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.
 
We intend to apply to list our common units on the NYSE. Because we will be a publicly traded limited partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s 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.”
 
Tax Risks
 
In addition to reading the following risk factors, please read “Material Federal Income Tax Consequences” 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 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.


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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 unitholder’s 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 IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s 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 counsel’s conclusions or the positions we take. Any 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 unitholder’s 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” for a further discussion of the foregoing.


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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” 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 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.”
 
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


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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 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” 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


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conduct business in Alaska, California, Colorado, Idaho, Montana, North Dakota, Texas, Utah and Washington. Many of these states currently impose a personal income tax on individuals. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units.
 
Compliance with and changes in tax laws could adversely affect our performance.
 
We are subject to extensive tax laws and regulations, including federal, state, and foreign income taxes and transactional taxes such as excise, sales/use, payroll, franchise, and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted that could result in increased tax expenditures in the future. Many of these tax liabilities are subject to audits by the respective taxing authority. These audits may result in additional taxes as well as interest and penalties.


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USE OF PROCEEDS
 
We expect to receive net proceeds of approximately $      million from the sale of           common units offered by this prospectus, after deducting underwriting discounts, a structuring fee, an advisory fee and estimated offering expenses. Please see “Underwriting.” We intend to retain $      million of these proceeds for general partnership purposes, including to fund our working capital needs, and use the remainder to make a cash distribution to Tesoro. 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 net proceeds from any exercise by the underwriters of their option to purchase additional common units will be used to redeem from Tesoro a number of common units equal to the number of common units issued upon exercise of the option at a price per common unit equal to the proceeds per common unit before expenses but after deducting underwriting discounts and the structuring fee.
 
An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts and the structuring fee, to increase or decrease by $      million. If the proceeds increase due to a higher initial public offering price or decrease due to a lower initial public offering price, then the cash distribution to Tesoro from the proceeds of this offering will increase or decrease, as applicable, by a corresponding amount.


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CAPITALIZATION
 
The following table shows:
 
  •  historical cash and cash equivalents and capitalization of our predecessor as of September 30, 2010; and
 
  •  our pro forma capitalization as of September 30, 2010, giving effect to the pro forma adjustments described in our unaudited pro forma combined financial statements included elsewhere in this prospectus, including this offering and the application of the net proceeds of this offering in the manner described under “Use of Proceeds,” borrowings under our revolving credit facility and the other transactions described under “Summary — The Transactions.”
 
This table is derived from, should be read together with and is qualified in its entirety by reference to our historical and pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus.
 
                 
    As of September 30, 2010  
    Predecessor
    Partnership
 
    Historical     Pro Forma  
    (In millions)  
 
Cash and cash equivalents
  $     $ 3.0  
Revolving credit facility
              50.0  
Division equity/partners’ capital:
               
Tesoro division equity
  $    130.5        
Held by public:
               
Common units
             
Held by Tesoro:
               
Common units
             
Subordinated units
             
General partner units
             
                 
Total division equity/partners’ capital
    130.5          
                 
Total capitalization
  $ 130.5     $  
                 


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DILUTION
 
Dilution is the amount by which the offering price per common unit in this offering will exceed the net tangible book value per unit after the offering. On a pro forma basis as of September 30, 2010, after giving effect to the offering of common units and the related transactions, our net tangible book value was approximately $      million, or $      per unit. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.
 
                 
Assumed initial public offering price per common unit
          $        
Pro forma net tangible book value per unit before the offering(1)
  $                
Decrease in net tangible book value per unit attributable to purchasers in the offering
               
                 
Less: Pro forma net tangible book value per unit after the offering(2)
               
                 
Immediate dilution in net tangible book value per common unit to purchasers in the offering
          $    
                 
 
 
(1) Determined by dividing the number of units (           common units,          subordinated units and           general partner units) to be issued to the general partner and its affiliates for their contribution of assets and liabilities to us into the net tangible book value of the contributed assets and liabilities.
 
(2) Determined by dividing the number of units (           common units,           subordinated units and           general partner units) to be outstanding after the offering into our pro forma net tangible book value.
 
The following table sets forth the number of units that we will issue and the total consideration contributed to us by the general partner and its affiliates in respect of their units and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus.
 
                                 
    Units Acquired     Total Consideration  
    Number     Percent     Amount     Percent  
                (In thousands)        
 
General partner and its affiliates(1)(2)
                          %   $                          %
Purchasers in this offering
            %             %
                                 
Total
            %   $         %
                                 
 
 
(1) Upon the consummation of the transactions contemplated by this prospectus, our general partner and its affiliates will own           common units,          subordinated units and           general partner units.
 
(2) The assets contributed by the general partner and its affiliates were recorded at historical cost in accordance with accounting principles generally accepted in the United States. Book value of the consideration provided by the general partner and its affiliates, as of September 30, 2010, after giving effect to the application of the net proceeds of the offering, is as follows:
 
         
    (In thousands)  
 
Book value of net assets contributed
  $        
Less: Distribution to Tesoro from net proceeds of this offering
       
Distribution to Tesoro from borrowings under our revolving credit facility
       
         
Total consideration
  $        
         


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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” and “Risk Factors” 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Revolving Credit Facility.”
 
  •  Our general partner will have the authority to establish cash reserves for the prudent conduct of our business and for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.
 
  •  While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions contained therein, may be amended. Our partnership agreement may not be amended during the subordination period without the approval of our public common unitholders, except in those limited circumstances when our general partner can amend our partnership agreement without any unitholder approval. However, after the subordination period has ended our partnership agreement may be amended with the consent of our general partner and the approval of a majority of the outstanding common units, including common units owned by Tesoro. At the closing of this offering, Tesoro will own our general partner and will own an aggregate of approximately     % of the outstanding common units and subordinated units. Please read “The Partnership Agreement — Amendment of the Partnership Agreement.”


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  •  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.” 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.” 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.”
 
Our Minimum Quarterly Distribution
 
Upon the consummation of this offering, our partnership agreement will provide for a minimum quarterly distribution of $      per unit for each complete quarter, or $      per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “— General — Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Quarterly distributions, if any, will be made within 45 days after the end of each quarter, on or about the 15th day of each February, May, August and November to holders of record on or about the first day of each such month. If the distribution date does not fall on a business day, we will make the distribution on the first business day immediately preceding the indicated distribution date. We do not expect to make distributions for the period that begins on          , 2011 and ends on the day prior to the closing of this offering other than the distributions to be made to Tesoro in connection with the closing of this offering that are described in “Summary — The Transactions” and “Use of Proceeds.” We will adjust our first


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distribution for the period from the closing of this offering through          , 2011 based on the actual length of the period. The amount of available cash needed to pay the minimum quarterly distribution on all of our common units, subordinated units and general partner units to be outstanding immediately after this offering for one quarter and on an annualized basis is summarized in the table below:
 
                         
          Minimum Quarterly Distributions  
                Annualized
 
    Number of Units     One Quarter     (Four Quarters)  
 
Publicly held common units
                     $                  $               
Common units held by Tesoro
                       
Subordinated units held by Tesoro
                       
General partner units held by Tesoro
                       
                         
Total
          $       $  
                         
 
As of the date of this offering, our general partner will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner’s initial 2.0% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its initial 2.0% general partner interest. Our general partner will also hold the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48.0%, of the cash we distribute in excess of $      per unit per quarter.
 
During the subordination period, before we make any quarterly distributions to our subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution plus any arrearages in distributions of the minimum quarterly distribution from prior quarters. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions — Subordination Period.” 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.”
 
Our cash distribution policy, as expressed in our partnership agreement, may not be modified or repealed without amending our partnership agreement; however, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business and the amount of reserves our general partner establishes in accordance with our partnership agreement as described above.
 
Unaudited Pro Forma Available Cash for the Year Ended December 31, 2009 and the Twelve Months Ended September 30, 2010
 
If we had completed the transactions contemplated in this prospectus on January 1, 2009, pro forma available cash generated for the year ended December 31, 2009 would have been approximately $43.2 million. If we had completed the transactions contemplated in this prospectus on October 1, 2009, our pro forma available cash generated for the twelve months ended September 30, 2010 would have been approximately $46.7 million. These amounts would have been sufficient to pay the minimum quarterly distribution of $      per unit per quarter ($      per unit on an annualized basis) on all of our common units and subordinated units for such periods.
 
We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present our results of operations had the 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


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financial data have been prepared on an accrual basis. As a result, you should view the amount of pro forma available cash only as a general indication of the amount of cash available to pay distributions that we might have generated had we been formed in earlier periods.
 
The following table illustrates, on a pro forma basis, for the year ended December 31, 2009 and the twelve months ended September 30, 2010, the amount of cash that would have been available for distribution to our unitholders, assuming in each case that this offering and the other transactions contemplated in this prospectus had been consummated at the beginning of each period.
 
Tesoro Logistics LP
Unaudited Pro Forma Available Cash
 
                 
    Pro Forma  
    Year Ended
    Twelve Months Ended
 
    December 31, 2009     September 30, 2010  
    (In thousands)  
 
Pro Forma Net Income(1)
  $          40,330     $            43,402  
                 
Plus:
               
Interest expense, net(2)
    2,306       2,306  
Depreciation expense
    8,820       7,828  
                 
EBITDA(3)
  $ 51,456     $ 53,536  
Less:
               
Cash interest paid(2)
    1,905       1,905  
Maintenance capital expenditures
    3,319       1,928  
Incremental general and administrative expense of being a separate publicly traded partnership(4)
    3,030       3,030  
                 
Pro Forma Available Cash
  $ 43,202     $ 46,673  
                 
Pro Forma Cash Distributions:
               
Annualized minimum quarterly distribution per unit(5)
  $       $  
                 
Distributions to public common unitholders
               
Distributions to Tesoro — common units
               
Distributions to Tesoro — subordinated units
               
                 
Distributions to our general partner
               
                 
Total distributions to unitholders and general partner
               
                 
Excess
               
                 
Percent of distributions payable to common unitholders
      %     %
Percent of distributions payable to subordinated unitholders
      %     %
 
 
(1) Reflects our pro forma net income for the period indicated and gives pro forma effect to our High Plains pipeline system tariffs and the various commercial agreements, omnibus agreement and operational services agreements that will be entered into with Tesoro at the closing of this offering. Pro forma net income for the twelve months ended September 30, 2010 includes shortfall payments from Tesoro of $1.8 million, $0.1 million and $0.1 million, respectively, under the High Plains pipeline transportation services agreement, the master terminalling services agreement and the short haul pipeline transportation services agreement that we will enter into with Tesoro at the closing of this offering.
 
(2) Interest expense and cash interest paid both include commitment fees and interest expense that would have been paid by our predecessor had our revolving credit facility been in place during the periods presented and we had borrowed $50.0 million under the facility at the beginning of the period. Interest expense also includes the amortization of debt issuance costs incurred in connection with our revolving credit facility.
 
(3) EBITDA is defined in “Summary — Summary Historical and Pro Forma Combined Financial and Operating Data — Non-GAAP Financial Measure.”


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(4) Reflects approximately $3.0 million of estimated annual incremental general and administrative expenses that we expect to incur as a result of being a separate publicly traded partnership.
 
(5) Assumes the issuance of           general partner units and the incentive distribution rights to our general partner,          common units and           subordinated units to Tesoro and          common units to the public.
 
Estimated EBITDA for the Year Ending December 31, 2011
 
In order to fund the aggregate minimum quarterly distribution on all units for the year ending December 31, 2011, totaling $      million, we will need to generate EBITDA of at least $      million. For a definition of EBITDA and a reconciliation of EBITDA to its most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Summary — Summary Historical and Pro Forma Combined Financial and Operating Data — Non-GAAP Financial Measure.” Based on the assumptions described below under “— Significant Forecast Assumptions,” we believe we will generate the minimum estimated EBITDA of $      million for the year ending December 31, 2011. The forecast of estimated EBITDA set forth below should not be viewed as management’s projection of the actual amount of EBITDA that we will generate during the year ending December 31, 2011. Furthermore, there is a risk that we will not generate the minimum estimated EBITDA for such period. If we fail to generate the minimum estimated EBITDA, we would not expect to have sufficient cash available for distribution to pay the minimum quarterly distribution on all of our units without incurring borrowings under our revolving credit facility.
 
We have not historically made public projections as to future operations, earnings or other results. However, management has prepared the forecast of estimated EBITDA and related assumptions set forth below to substantiate our belief that we will have sufficient available cash to pay the minimum quarterly distribution to all our unitholders for the year ending December 31, 2011. Please read below under “— Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast. This forecast is a forward-looking statement and should be read together with our historical and pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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 management’s knowledge and belief, the assumptions on which we base our belief that we can generate the minimum estimated EBITDA necessary for us to have sufficient cash available for distribution to pay the minimum quarterly distribution to all unitholders for the forecasted period. However, this information is not fact and should not be relied upon as being necessarily indicative of our future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.
 
The prospective financial information included in this registration statement has been prepared by, and is the responsibility of our management. Ernst & Young LLP has neither compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto. The Ernst & Young LLP report included in this registration statement relates to our historical financial information. It does not extend to the prospective financial information and should not be read to do so.
 
When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” 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.


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Tesoro Logistics LP
 
Statement of Estimated EBITDA
 
         
    Year Ending
 
    December 31, 2011  
    (In thousands)  
 
REVENUES:
       
Crude oil gathering:
       
Affiliate
  $ 49,560  
Third-party
     
Terminalling, transportation and storage:
       
Affiliate
  $          41,127  
Third-party
    3,457  
         
Total Revenues
    94,144  
COSTS AND EXPENSES:
       
Operating and maintenance expense
    38,099  
Depreciation expense
    8,592  
General and administrative expense(1)
    7,038  
         
Total Costs and Expenses
    53,729  
         
OPERATING INCOME
  $ 40,415  
Interest expense, net
    2,306  
         
NET INCOME
    38,109  
Plus:
       
Interest expense, net
    2,306  
Depreciation expense
    8,592  
         
Estimated EBITDA(2)
    49,007  
Less:
       
Cash interest paid
    1,905  
Maintenance capital expenditures
    3,225  
Expansion capital expenditures
    1,100  
Plus:
       
Cash on hand to fund expansion capital expenditures
    1,100  
         
Estimated cash available for distribution
  $ 43,877  
         
Distributions to public common unitholders
       
Distributions to Tesoro — common units
       
Distributions to Tesoro — subordinated units
       
Distributions to our general partner
  $  
         
Total distributions to unitholders and general partner
       
         
Excess of cash available for distribution over aggregate annualized minimum quarterly distributions
       
Calculation of minimum estimated EBITDA necessary to pay aggregate annualized minimum quarterly distributions:
       
Estimated EBITDA
       
Excess of cash available for distribution over aggregate annualized minimum quarterly distributions
       
         
Minimum estimated EBITDA necessary to pay aggregate annualized minimum quarterly distributions
  $  
         
 
 
(1) Includes approximately $3.0 million of estimated annual incremental general and administrative expenses that we expect to incur as a result of being a separate publicly traded partnership.
 
(2) EBITDA is defined in “Summary — Summary Historical and Pro Forma Combined Financial and Operating Data — Non-GAAP Financial Measure.”
 
Significant Forecast Assumptions
 
The forecast has been prepared by and is the responsibility of management. The forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the year ending December 31, 2011. While the assumptions disclosed in this prospectus are not


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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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting the Comparability of Our Financial Results.” Substantially all of our revenues will be derived from fee-based business, primarily pursuant to long-term commercial agreements with Tesoro that include minimum volume commitments. As we do not generally own the refined products or crude oil that we handle, and because all of our commercial agreements with Tesoro, other than our master terminalling agreement, generally require Tesoro to bear the risk of any volume loss relating to the services we provide, we are not directly exposed to material commodity risk. We have not forecasted any gains or losses from commodity imbalances and accordingly have not made any assumptions regarding future commodity price levels in developing our forecast of estimated EBITDA for the year ending December 31, 2011.
 
Revenues
 
We estimate that we will generate revenue of $94.1 million for the year ending December 31, 2011, as compared to pro forma revenues of $91.0 million and $93.1 million for the year ended December 31, 2009 and the twelve months ended September 30, 2010, respectively. Based on our assumptions for the year ending December 31, 2011, we expect approximately 96% of our forecasted revenues to be generated by our commercial agreements with, and tariffs paid by, Tesoro and 85% to be supported by Tesoro’s minimum volume commitments under our commercial agreements. Additionally, our commercial agreements include provisions that generally permit Tesoro to suspend, reduce or terminate its obligations under the applicable agreement if certain events occur. These events include Tesoro deciding to permanently or indefinitely suspend refining operations at one or more of its refineries, as well as our being subject to certain force majeure events that would prevent us from performing required services under the applicable agreement.
 
Volumes.  Our forecasted revenues have been determined for our crude oil gathering segment and our terminalling, transportation and storage segment by reference to historical volumes handled by us for the twelve months ended September 30, 2010 for Tesoro and third parties. The forecasted revenues also take into consideration existing contracts with third parties and our commercial agreements with Tesoro that we will enter into at the closing of this offering, as well as forecasted usage by Tesoro of services above the minimum throughput requirements under these commercial agreements. We expect that any variances between actual revenues and forecasted revenues will be driven by differences between actual volumes and forecasted volumes (subject to the minimum volume commitments of Tesoro), by changes in uncommitted volumes, by changes in the weighted average amount per barrel charged for volumes of crude oil and refined products that we handle and by variations between such weighted average amounts per barrel and actual rates applied to such volumes.


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The following table compares forecasted volumes to historical volumes, contrasted against our minimum volume commitments and reserved storage capacity (which represents 100% of our currently-available storage capacity).
 
                                         
    Pro Forma     Forecasted           Contracted
 
          Twelve Months
    Year
          Minimum
 
    Year Ended
    Ended
    Ending
          as a
 
    December 31,
    September 30,
    December 31,
    Contracted
    Percentage
 
    2009     2010     2011     Minimum     of Forecast  
 
Crude oil pipeline throughput (bpd)
    52,806       49,297 (1)     55,500 (2)     49,000       88 %
Trucking volume (bpd)
    22,963       23,573       22,700       22,000       97 %
Terminal throughput (bpd)
    113,135       114,587       116,800       100,000       86 %
Short-haul pipeline throughput (bpd)
    56,942       52,650       60,300       54,000       90 %
Storage capacity reserved (barrels)
    878,000       878,000       878,000       878,000       100 %
 
 
(1) Of the 49,297 bpd crude oil pipeline throughput for the twelve months ended September 30, 2010, approximately 44,900 bpd were crude oil barrels from North Dakota origin points that would be transported as part of Tesoro’s minimum throughput commitment under the terms of the High Plains pipeline transportation services agreement that we will enter into with Tesoro at the closing of this offering, resulting in a shortfall of approximately 4,100 bpd under this agreement. This shortfall was the result of the scheduled turnaround at Tesoro’s Mandan refinery during April and May of 2010.
 
(2) Of the 55,500 bpd forecasted for the year ending December 31, 2011, 49,000 bpd represent Tesoro’s minimum throughput commitment under the High Plains pipeline transportation services agreement, which is subject to our committed NDPSC tariff rates, 3,700 bpd represent barrels from North Dakota origin points in excess of Tesoro’s minimum throughput commitment, which are subject to our uncommitted NDPSC tariff rates, and 2,800 bpd represent interstate barrels from Montana origin points, which are subject to our FERC tariff rates.
 
Crude Oil Gathering Revenues.  We estimate that our total crude oil gathering revenues for the year ending December 31, 2011 will be $49.6 million, as compared to $48.8 million and $49.1 million for the year ended December 31, 2009 and the twelve months ended September 30, 2010, respectively, on a pro forma basis. Of the total revenues forecasted for this segment, $41.6 million, or 84%, relate to minimum volumes under the High Plains pipeline transportation services agreement and the trucking transportation services agreement that we will enter into with Tesoro at the closing of this offering. The balance of these estimated revenues represents forecasted usage by Tesoro of services above the minimum requirements under these agreements, the gathering and transportation of interstate volumes subject to our FERC tariff rates, pumpover fees and tank usage fees paid by Tesoro. For a more detailed discussion of our committed and uncommitted volumes, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — How We Generate Revenue.”
 
The following table shows our total crude oil gathering revenues and our revenue per barrel handled in this segment for the periods indicated.
 
                         
    Pro Forma     Forecasted  
          Twelve Months
    Year
 
    Year Ended
    Ended
    Ending
 
    December 31, 2009     September 30, 2010     December 31, 2011  
 
Revenues (in millions):
                       
Pipeline gathering(1)
  $ 24.7     $ 24.4     $ 25.6  
Trucking
    24.1       24.7       24.0  
                         
Total
    48.8       49.1       49.6  
                         
Revenue (per barrel):
                       
Pipeline gathering(1)
  $ 1.28     $ 1.35     $ 1.26  
Trucking
    2.88       2.87       2.89  


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(1) Pro forma revenues for the twelve months ended September 30, 2010 include a shortfall payment from Tesoro of $1.8 million, or $0.11 per barrel, based on a shortfall of 4,100 bpd barrels under the terms of the High Plains pipeline transportation services agreement that we will enter into with Tesoro at the closing of this offering. This shortfall was the result of the scheduled turnaround at Tesoro’s Mandan refinery during April and May of 2010.
 
Pipeline Gathering Services.  We estimate that total revenues attributable to the pipeline portion of our crude oil gathering segment will be $25.6 million, or $1.26 per barrel, for the year ending December 31, 2011, as compared to $24.7 million, or $1.28 per barrel, and $24.4 million, or $1.35 per barrel, for the year ended December 31, 2009 and the twelve months ended September 30, 2010, respectively, on a pro forma basis. The pipeline gathering portion of this segment includes revenues from trunkline transportation, pipeline gathering and pumpover services. Of the $25.6 million for the pipeline gathering portion, $19.7 million relates to Tesoro’s minimum throughput commitment under our High Plains pipeline transportation services agreement, under which we will charge tariffs that we estimate will average (on a volume weighted basis) approximately $1.10 per barrel (which excludes gathering and pumpover fees). Under this agreement, Tesoro is obligated to ship an average of at least 49,000 bpd per month on our High Plains pipeline system from North Dakota origin points. The remaining $5.9 million of forecasted revenue for the year ending December 31, 2011 relates to volumes shipped from North Dakota origin points in excess of the minimum throughput commitment, volumes shipped from Montana origin points, as well as uncommitted pipeline gathering and pumpover fees. The increase in our forecasted revenues for the forecast period compared to our pro forma revenues for the year ended December 31, 2009 and the twelve months ended September 30, 2010 primarily relates to higher anticipated throughput volumes. The anticipated higher throughput volumes are due to expected higher demand by Tesoro’s Mandan refinery as a result of higher operating capabilities at the refinery following the completion of a turnaround at the refinery during April and May of 2010, as well as an expectation that the Mandan refinery will operate for 12 months during the forecast period compared to only 10.5 months of operations during 2010 as a result of the turnaround.
 
Trucking Services.  We estimate that total revenues attributable to the trucking portion of our High Plains crude oil gathering system will be $24.0 million, or $2.89 per truck-hauled barrel, for the year ending December 31, 2011. Of this amount, $21.8 million relates to the minimum throughput commitments under the trucking transportation services agreement that we will enter into with Tesoro at the closing of this offering, and does not include tank usage fees. Under this agreement, we will charge $2.72 per barrel to provide crude oil trucking, scheduling and dispatching services to Tesoro, and Tesoro will agree to gather and transport an average of at least 22,000 bpd per month utilizing our trucking services. The remaining $2.2 million of forecasted revenue primarily relates to fees for tank usage and also forecasted hauling volumes in excess of the minimum throughput commitments. Revenues of $24.0 million for the forecast period are relatively flat compared to pro forma revenues of $24.1 million for the year ended December 31, 2009. The decrease in our forecasted revenue for the forecast period as compared to our pro forma revenues for the twelve months ended September 30, 2010 primarily relates to lower demand for trucking services following the turnaround at Tesoro’s Mandan refinery during April and May of 2010. Because of the turnaround, crude oil had to be trucked to alternative destinations during those months, resulting in higher trucking revenues.
 
Terminalling, Transportation and Storage Revenues.  We estimate that our total terminalling, transportation and storage services revenues for the year ending December 31, 2011 will be $44.6 million, as compared to $42.1 million and $44.1 million for the year ended December 31, 2009 and the twelve months ended September 30, 2010, respectively, on a pro forma basis. Of the total forecasted revenues, $38.9 million, or 87%, relate to minimum volume commitments under the terminalling, transportation and storage agreements that we will enter into with Tesoro at the closing of this offering. The balance of these estimated revenues represents volumes above Tesoro’s minimum commitments as well as third-party volumes. We expect revenues to increase in our forecast period due to increased Tesoro and third-party throughput volumes at our terminals, as well as increased volumes on our short-haul pipelines. The following table shows our total


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terminalling, transportation and storage revenues and our revenue per barrel in this segment for the periods indicated.
 
                         
    Pro Forma     Forecasted  
          Twelve Months
       
    Year Ended
    Ended
    Year Ending
 
    December 31, 2009     September 30, 2010     December 31, 2011  
    (In millions, except per barrel amounts)  
 
Revenues:
                       
Terminalling(1)
  $ 31.6     $ 33.9     $ 33.8  
Short-Haul Pipeline
                       
Transportation(1)
    5.2       4.9       5.5  
Storage
    5.3       5.3       5.3  
                         
Total
  $ 42.1     $ 44.1     $ 44.6  
Revenues:
                       
Terminalling (per barrel)
  $ 0.77     $ 0.81     $ 0.79  
Short-Haul Pipeline
                       
Transportation (per barrel)
    0.25       0.25       0.25  
Storage (per shell capacity barrel, per month)
  $ 0.50     $ 0.50     $ 0.50  
 
 
(1) Pro forma revenues for the twelve months ended September 30, 2010 include shortfall payments of $0.1 million and $0.1 million, respectively, due to shortfalls resulting from actual services and shipments below Tesoro’s minimum throughput commitments under the master terminalling services agreement and the short-haul pipeline transportation services agreement that we will enter into with Tesoro at the closing of this offering.
 
Terminalling.  We estimate that total revenues attributable to our terminalling services will be $33.8 million, or $0.79 per barrel, for the year ending December 31, 2011. Of this amount, $28.7 million relates to Tesoro’s minimum throughput commitments and related ancillary services under the master terminalling services agreement that we will enter into with Tesoro at the closing of this offering. Under this agreement, Tesoro is obligated to throughput an aggregate average of at least 100,000 bpd per month through our terminals. The remaining $5.1 million of forecasted revenue is the result of terminalling volumes of approximately 11,200 bpd for third parties and 5,600 bpd for Tesoro in excess of Tesoro’s minimum throughput commitments, and for related ancillary services. Of the approximately 11,200 bpd terminalled for third parties, approximately 3,800 bpd is subject to month-to-month contracts, and approximately 7,400 bpd is subject to contracts with terms ranging from 90 days to one year. Revenues of $33.8 million for the forecast period are relatively flat compared to pro forma revenues of $33.9 million for the year ended September 30, 2010. The increase in our forecasted revenues for the forecast period compared to the year ended December 31, 2009 primarily relates to higher terminalling volume demand during the forecast period as compared to prior periods and higher anticipated throughput volumes at our terminals related to higher anticipated production at Tesoro’s 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 $5.5 million for the year ending December 31, 2011. Of this amount, $4.9 million relates to Tesoro’s 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, Tesoro’s Salt Lake City refinery, and Tesoro will agree to ship an average of at least 54,000 bpd utilizing our short-haul crude oil and refined products pipelines. The remaining $0.6 million of forecasted revenue relates to throughput volumes in excess of Tesoro’s minimum throughput commitment. The increase in our forecasted revenues compared to pro forma revenues for the year ended December 31, 2009 primarily relates to higher anticipated throughput volumes during the forecast period. The increase in our forecasted revenues compared to pro forma revenues for the twelve months ended September 30, 2010 primarily relates to higher anticipated throughput volumes during


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the forecast period, as the twelve months ended September 30, 2010 included a scheduled turnaround at Tesoro’s Salt Lake City refinery, which resulted in a shortfall payment of $0.1 million due to actual shipments being below Tesoro’s minimum throughput commitment.
 
Storage Services.  We estimate that our storage revenues will be $5.3 million for the year ending December 31, 2011. Our forecasted storage revenues relate to our storage and transportation services agreement that we will enter into with Tesoro at the closing of this offering under which we will provide 878,000 barrels of tank shell capacity (100% of the currently available storage capacity) at our storage facility, and all of the currently available capacity on our interconnecting pipelines, to Tesoro, and Tesoro will pay us $0.50 per barrel of tank shell capacity per month for these storage and transportation services.
 
Operating and Maintenance Expense
 
Our operating and maintenance expenses include labor expenses, lease costs, utility costs, insurance premiums, repairs and maintenance expenses and related property taxes. We estimate that we will incur operating and maintenance expense of $38.1 million for the year ending December 31, 2011 as compared to $35.5 million and $35.6 million for the year ended December 31, 2009 and the twelve months ended September 30, 2010, respectively, on a pro forma basis. The increase in our forecasted operating and maintenance expenses is primarily related to a credit to operating and maintenance expenses of $1.6 million and $2.3 million for the year ended December 31, 2009 and the twelve months ended September 30, 2010, respectively, for imbalance gains. We have not included any imbalance gains or losses in our forecasted operating and maintenance expenses. Certain of our commercial agreements with Tesoro will have loss allowance provisions relating to imbalances under which we may recognize measurement gains or losses. While we may continue to recognize imbalance gains following the closing of this offering similar to those we recognized in prior periods, we have not made any assumptions in that regard for purposes of our forecast of estimated operating and maintenance expenses. Our commercial agreements with Tesoro and many of our contracts with third parties also contain inflation adjustment provisions that should substantially mitigate inflation-related increases in operating costs in rising operating cost environments.
 
General and Administrative Expenses
 
We estimate that our total general and administrative expenses will be $7.0 million for the year ending December 31, 2011, compared to $4.0 million for the year ended December 31, 2009 and for the twelve months ended September 30, 2010, on a pro forma basis. These expenses consist of:
 
  •  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”;
 
  •  approximately $1.5 million of direct costs for estimated employee-related expenses relating to the management of our assets; and
 
  •  approximately $3.0 million of incremental annual expenses as a result of being a separate publicly traded partnership, such as costs associated with annual and quarterly reports to unitholders, financial statement audit, tax return and Schedule K-1 preparation and distribution, investor relations, activities, registrar and transfer agent fees, incremental director and officer liability insurance premiums, independent director compensation and incremental employee benefit costs.
 
By comparison, for the year ended December 31, 2009, our predecessor recorded total general and administrative expenses of approximately $3.1 million, which included both direct costs for employee-related expenses related to the management of our assets, as well as allocated costs for the provision of treasury, accounting legal and other centralized corporate services.


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Depreciation Expense
 
We estimate that depreciation expense will be approximately $8.6 million for the year ending December 31, 2011, compared to approximately $8.8 million and $7.8 million for the year ended December 31, 2009 and the twelve months ended September 30, 2010, respectively, on a pro forma basis. Depreciation expense is expected to increase for the year ending December 31, 2011 compared to the twelve months ended September 30, 2010, due to an expected increase in maintenance and expansion capital expenditures during the forecast period.
 
Financing
 
We estimate that interest expense will be approximately $2.3 million for the year ending December 31, 2011. Our interest expense for the twelve months ended September 30, 2010 and December 31, 2009, on a pro forma basis, was also approximately $2.3 million. Our interest expense for the year ending December 31, 2011 is based on the following assumptions:
 
  •  through December 31, 2011, we will have average borrowings of approximately $50.0 million under our revolving credit facility, with an estimated average interest rate of 2.8% through December 31, 2011. An increase or decrease of 1.0% in the interest rate will result in increased or decreased, respectively, annual interest expenses of $0.5 million.
 
  •  interest expense includes commitment fees for the unused portion of our revolving credit facility at an assumed rate of 0.50%;
 
  •  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 year ending December 31, 2011 will be $4.3 million as compared to pro forma capital expenditures of $9.2 million and $2.5 million for the year ended December 31, 2009 and the twelve months ended September 30, 2010, respectively. This forecast estimate is based on the following assumptions:
 
  •  Maintenance Capital Expenditures.  We estimate that our maintenance capital expenditures will be $3.2 million for the year ending December 31, 2011, of which $1.4 million relates primarily to our High Plains pipeline system and $1.8 million relates to pipeline and terminal integrity projects for our other assets. Maintenance capital expenditures were $3.3 million for the year ended December 31, 2009 and $1.9 million for the twelve months ended September 30, 2010.
 
  •  Expansion Capital Expenditures.  We have assumed expansion capital expenditures of our existing assets of $1.1 million for the year ending December 31, 2011. The $1.1 million of assumed expansion capital expenditures is related to the installation of an ethanol tank and rack blending system at our Burley terminal. Expansion capital expenditures were $5.9 million for the year ended December 31, 2009 and $0.6 million for the twelve months ended September 30, 2010. Our significantly higher capital expenditures during 2009 were attributable to upgrades at our Los Angeles and Boise terminals.
 
Regulatory, Industry and Economic Factors
 
Our forecast of estimated EBITDA for the year ending December 31, 2011 is based on the following significant assumptions related to regulatory, industry and economic factors:
 
  •  Tesoro will not default under any of our commercial agreements or reduce, suspend or terminate its obligations, nor will any events occur that would be deemed a force majeure event, under such agreements;


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  •  there will not be any new federal, state or local regulation, or any interpretation of existing regulation, of the portions of the refining or logistics industries in which we operate that will be materially adverse to our business;
 
  •  there will not be any material accidents, weather-related incidents, unscheduled downtime or similar unanticipated events with respect to our assets or Tesoro’s 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.


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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS
 
Distributions of Available Cash
 
General
 
Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending          , 2011, we distribute our available cash to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the closing of the offering through          , 2011 based on the actual length of the period.
 
Definition of Available Cash
 
Available cash generally means, for any quarter, all cash on hand at the end of the quarter:
 
  •  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 $      per unit, or $      on an annualized basis, to the extent we have sufficient cash from our operations after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our general partner. However, there is no guarantee that we will pay the minimum quarterly distribution or any amount on our units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Revolving Credit Facility” for a discussion of certain covenants to be included in our revolving credit facility that may restrict our ability to make distributions.
 
General Partner Interest and Incentive Distribution Rights
 
As of the date of this offering, our general partner is entitled to 2.0% of all quarterly distributions that we make prior to our liquidation. This 2.0% general partner interest will be represented by           general


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partner units upon the completion of this offering and may be reduced if we issue additional limited partner interests in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2.0% general partner interest. Our general partner has the right, but not the obligation, to contribute capital to us in order to maintain its current general partner interest.
 
Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 50.0%, of the cash we distribute from operating surplus (as defined below) in excess of $      per unit per quarter. The maximum distribution of 50.0% includes distributions paid to our general partner on its 2.0% general partner interest and assumes that our general partner maintains its general partner interest at 2.0%. The maximum distribution of 50.0% does not include any distributions that our general partner may receive on common units or subordinated units that it owns. Please read “— General Partner Interest and Incentive Distribution Rights” 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:
 
  •  $      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); 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”; 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.
 
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 $      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


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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;
 
  •  investment 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);
 
  •  non-pro rata repurchases of partnership interests made with the proceeds of an interim capital transaction; or
 
  •  any other payments made in connection with this offering that are described under “Use of Proceeds.”
 
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 current 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, asset base or operating income. Examples of maintenance capital expenditures include capital expenditures associated with the repair, refurbishment and replacement of pipelines and terminals.
 
Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating capacity, asset base or operating income over the long term.


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Examples of expansion capital expenditures include capital expenditures associated with the expansion of the operating capacity of our pipelines and terminals. Expansion capital expenditures include interest payments (and related fees) on debt incurred to finance the construction, acquisition or development of an improvement of a capital asset and paid in respect of the period beginning on the date of such financing and ending on the earlier to occur of the date that such capital improvement commences commercial service or the date that such capital improvement is abandoned or disposed of.
 
Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes or development of facilities that are in excess of the maintenance of our existing operating capacity or operating income, but which are not expected to expand, for more than the short term, our operating capacity or operating income.
 
Neither investment capital expenditures nor expansion capital expenditures are included in operating expenditures and thus will not reduce operating surplus. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of the construction, acquisition or development of an improvement of a capital asset (such as pipelines, terminals or storage facilities) in respect of the period that begins on the date of such financing and ending on the earlier to occur of the date that such capital improvement commences commercial service or the date that it is abandoned or disposed of, such interest payments are also not subtracted from operating surplus.
 
Capital expenditures that are made in part for two or more purposes consisting of maintenance capital purposes, expansion capital purposes or investment capital purposes will be allocated as maintenance capital expenditures, expansion capital expenditures or investment capital expenditures by our general partner.
 
Subordination Period
 
General
 
Our partnership agreement provides that, during the subordination period (which we define below), our common units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $      per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on our common units from prior quarters, before any distributions of available cash from operating surplus may be made on our subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, our subordinated units will not be entitled to receive any distributions until our common units have received the minimum quarterly distribution plus any arrearages from prior quarters. Furthermore, no arrearages will be paid on our subordinated units. The practical effect of our subordinated units is to increase the likelihood that during the subordination period there will be available cash to be distributed on our common units.
 
Definition of Subordination Period
 
The subordination period will begin upon the date of this offering and will extend until the first business day after the distribution to unitholders in respect of any quarter beginning with the quarter ending          , 2014 that each of the following tests are met:
 
  •  distributions of available cash from operating surplus on each of the outstanding common units, subordinated units and general partner units equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;
 
  •  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


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  the minimum quarterly distributions on all of the outstanding common units, subordinated units and general partner units on a fully diluted basis during those periods; 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 similar fees under future contracts) expected to be received during such period.
 
Early Termination of Subordination Period
 
Notwithstanding the foregoing, the subordination period will automatically terminate on the first business day after the distribution to unitholders in respect of any quarter, if each of the following has occurred:
 
  •  distributions of available cash from operating surplus on each of the outstanding common units, subordinated units and general partner units equaled or exceeded $      (150.0% of the annualized minimum quarterly distribution) for the immediately preceding four-quarter period; and
 
  •  the “adjusted operating surplus” (as defined below) generated during the immediately preceding four-quarter period equaled or exceeded the sum of $      (150.0% of the annualized minimum quarterly distribution) on each of the outstanding common, subordinated and general partner units during that period on a fully diluted basis; 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 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 or any transferee of incentive distribution rights 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.
 
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


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  •  any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus
 
  •  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.
 
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 partner’s 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


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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 $      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 $      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 $      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 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
       $                     98.0 %     2.0 %
First Target Distribution
  above $           up to $             98.0 %     2.0 %
Second Target Distribution
  above $           up to $             85.0 %     15.0 %
Third Target Distribution
  above $           up to $             75.0 %     25.0 %
Thereafter
  above $                     50.0 %     50.0 %


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General Partner’s 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 partner’s 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.
 
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;


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  •  third, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and
 
  •  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 $     .
 
                                                         
                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
               $             98.0 %     2.0 %                     $          
First Target Distribution
  above $           up to $             98.0 %     2.0 %                 up to $      (1 )
Second Target Distribution
  above $           up to $             85.0 %     2.0 %     13.0 %   above $       (1)   up to $      (2 )
Third Target Distribution
  above $           up to $             75.0 %     2.0 %     23.0 %   above $       (2)   up to $      (3 )
Thereafter
          above $             50.0 %     2.0 %     48.0 %           above $      (3 )
 
 
(1) This amount is 115.0% of the hypothetical reset minimum quarterly distribution.
 
(2) This amount is 125.0% of the hypothetical reset minimum quarterly distribution.
 
(3) This amount is 150.0% of the hypothetical reset minimum quarterly distribution.
 
The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and our general partner, including in respect of incentive distribution rights, or IDRs, based on an average of the amounts distributed each quarter for the two quarters immediately prior to the reset. The table assumes that immediately prior to the reset there would be           common units outstanding, our general partner has maintained its 2.0% general partner interest, and the average distribution to each common unit was $      for the two quarters prior to the reset.
 
                                                                 
                      Cash Distributions to General
       
          Cash
    Partner Prior to Reset        
          Distributions to
          2.0%
                   
    Quarterly
    Common
          General
    Incentive
             
    Distribution per
    Unitholders
    Common
    Partner
    Distribution
          Total
 
    Unit Prior to Reset     Prior to Reset     Units     Interest     Rights     Total     Distributions  
 
Minimum Quarterly Distribution
               $           $           $     $           $     $           $        
First Target Distribution
  above $           up to $                                                    
Second Target Distribution
  above $           up to $                                                      
Third Target Distribution
  above $           up to $                                                      
Thereafter
          above $                                                      
                                                                 
                    $       $     $       $       $       $    
                                                                 
 
The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and our general partner, including in respect of incentive distribution rights, with respect to the quarter in which the reset occurs. The table reflects that as a result of the reset there would be      common units outstanding, our general partner’s 2.0% interest has been maintained, and the average distribution to each common unit would be $      . The number of common units to be issued to our general partner upon the reset was calculated by dividing (i) the average of the amounts received by our general partner in respect of its incentive distribution rights for the two quarters prior to the reset as shown in the table


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above, or $      , by (ii) the average available cash distributed on each common unit for the two quarters prior to the reset as shown in the table above, or $     .
 
                                                                 
                      Cash Distributions to General
       
          Cash
    Partner After Reset        
          Distributions to
          2.0%
                   
    Quarterly
    Common
          General
    Incentive
             
    Distribution per
    Unitholders
    Common
    Partner
    Distribution
          Total
 
    Unit After Reset     After Reset     Units     Interest     Rights     Total     Distributions  
 
Minimum Quarterly Distribution
               $           $       $       $       $     $       $    
First Target Distribution
  above $       up to $                                            
Second Target Distribution
  above $       up to $                                            
Third Target Distribution
  above $       up to $                                            
Thereafter
          above $                                            
                                                                 
                    $       $       $       $       $       $    
                                                                 
 
Our general partner will be entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the prior four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.
 
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


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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 quarter and the denominator of which is the sum of available cash for that quarter plus our general partner’s 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;


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  •  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;
 
  •  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


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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 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.


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SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING DATA
 
The following table shows selected historical combined financial and operating data of Tesoro Logistics LP Predecessor, our predecessor for accounting purposes, and selected pro forma combined financial data of Tesoro Logistics LP for the periods and as of the dates indicated. The selected historical combined financial data of our predecessor for the years ended December 31, 2007, 2008 and 2009 are derived from the audited combined financial statements of our predecessor appearing elsewhere in this prospectus. The selected historical combined financial data of our predecessor for the nine months ended September 30, 2009 and 2010 are derived from the unaudited combined financial statements of our predecessor appearing elsewhere in this prospectus. The selected historical combined financial data of our predecessor as of December 31, 2005 and 2006 are derived from unaudited historical combined financial statements of our predecessor that are not included in this prospectus. The following table should be read together with, and is qualified in its entirety by reference to, the historical and unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
The selected pro forma combined financial data presented in the following table for the year ended December 31, 2009 and as of and for the nine months ended September 30, 2010 are derived from the unaudited pro forma combined financial statements included elsewhere in this prospectus. The pro forma balance sheet assumes that the offering and the related transactions occurred as of September 30, 2010 and the pro forma statements of operations for the year ended December 31, 2009 and the nine months ended September 30, 2010 assume that the offering and the related transactions occurred as of January 1, 2009. These transactions include, and the pro forma financial data give effect to, the following:
 
  •  Tesoro’s contribution of all of our predecessor’s assets and operations to us (excluding working capital and other noncurrent liabilities);
 
  •  our execution of multiple long-term commercial agreements with Tesoro and recognition of incremental revenues under those agreements that were not recognized by our predecessor;
 
  •  certain intrastate tariff increases on our High Plains System;
 
  •  our execution of an omnibus agreement and an operational services agreement with Tesoro;
 
  •  the consummation of this offering and our issuance of           common units to the public,          general partner units and the incentive distribution rights to our general partner and           common units and subordinated units to Tesoro; and
 
  •  the application of the net proceeds of this offering, together with the proceeds from borrowings under our revolving credit facility, as described in “Use of Proceeds”.
 
The pro forma combined financial data do not give effect to the estimated $3.0 million in incremental annual general and administrative expense we expect to incur as a result of being a separate publicly traded partnership.
 
Our assets have historically been a part of the integrated operations of Tesoro and our predecessor generally recognized only the costs, but not the revenue, associated with the short-haul pipeline transportation, terminalling, storage or trucking services provided to Tesoro on an intercompany basis. Accordingly, the revenues in our predecessor’s 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Factors Affecting the Comparability of Our Financial Results,” our future results of operations will not be comparable to our predecessor’s historical results.


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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.”
 
                                                                         
                                              Tesoro Logistics LP Pro Forma  
    Tesoro Logistics LP Predecessor Historical           Nine Months
 
                                  Nine Months Ended
    Year Ended
    Ended
 
    Year Ended December 31,     September 30,     December 31,     September 30,  
    2005     2006     2007     2008     2009     2009     2010     2009     2010  
    (Unaudited)                       (Unaudited)     (Unaudited)  
    (In thousands, except per unit data and operating information)  
 
Statement of Operations Data:
                                                                       
REVENUES(1):
                                                                       
Crude oil gathering
  $ 17,395     $ 17,948     $ 20,646     $ 21,190     $ 19,422     $ 14,239     $ 14,177     $ 48,827     $ 37,461  
Terminalling, transportation and storage
    2,713       2,983       3,251       3,297       3,237       2,324       2,797       42,136       33,165  
                                                                         
Total Revenues
  $ 20,108     $ 20,931     $ 23,897     $ 24,487     $ 22,659     $ 16,563     $ 16,974     $ 90,963     $ 70,626  
Operating and maintenance expense(2)
    24,271       25,560       26,858       29,741       32,566       24,209       25,990       35,499       28,832  
Depreciation expense
    5,941       6,011       6,342       6,625       8,820       6,975       5,983       8,820       5,983  
General and administrative expense(3)
    1,942       2,218       2,800       2,525       3,141       2,340       2,337       4,008       3,006  
                                                                         
OPERATING INCOME (LOSS)
    (12,046 )     (12,858 )     (12,103 )     (14,404 )     (21,868 )     (16,961 )     (17,336 )     42,636       32,805  
Interest expense, net(4)
                                              2,306       1,730  
                                                                         
NET INCOME (LOSS)
    (12,046 )     (12,858 )     (12,103 )     (14,404 )     (21,868 )     (16,961 )     (17,336 )   $ 40,330     $ 31,075  
                                                                         
General partner interest in net income
                                                          $       $    
Common unitholders interest in net income
                                                          $       $    
Subordinated unitholders interest in net income
                                                          $       $    
Pro forma Net Income (Loss) per common unit
                                                          $       $    
Pro forma Net Income (Loss) per subordinated unit
                                                          $       $    
Balance Sheet Data (at period end):
                                                                       
Property, Plant and Equipment, net
  $ 115,555     $ 114,524     $ 127,226     $ 138,785     $ 138,055     $ 139,049     $ 133,151             $ 133,151  
Total Assets
    118,514       117,787       130,752       141,697       141,215       142,295       136,811               138,151  
Total Liabilities
    4,124       5,089       5,404       8,686       5,499       5,664       6,267               50,000  
Total Division Equity/Partners’ Capital
    114,390       112,698       125,348       133,011       135,716       136,631       130,544               88,151  
Cash Flow Data:
                                                                       
Net cash from (used in):
                                                                       
Operating activities
  $ (5,850 )   $ (6,524 )   $ (5,703 )   $ (6,045 )   $ (12,324 )   $ (9,286 )   $ (9,997 )                
Investing activities
    (1,646 )     (4,641 )     (19,050 )     (16,022 )     (12,249 )     (11,295 )     (2,167 )                
Financing activities
  $ 7,496     $ 11,165     $ 24,753       22,067     $ 24,573     $ 20,581     $ 12,164                  
Other Financial Data:
                                                                       
EBITDA(5)
  $ (6,105 )   $ (6,847 )   $ (5,761 )   $ (7,779 )   $ (13,048 )   $ (9,986 )   $ (11,353 )     51,456       38,788  
Capital expenditures:
                                                                       
Maintenance
  $ 1,866     $ 4,312     $ 3,713     $ 8,475     $ 3,319     $ 2,688     $ 1,297     $ 3,319     $ 1,297  
Expansion(6)
    8       915       15,527       10,186       5,915       5,626       289       5,915       289  
                                                                         
Total
  $ 1,874     $ 5,227     $ 19,240     $ 18,661     $ 9,234     $ 8,314     $ 1,586     $ 9,234     $ 1,586  
Operating Information
                                                                       
Crude oil gathering segment:
                                                                       
Pipeline throughput (bpd)(7)
    52,893       54,639       56,232       54,737       52,806       52,645       47,954       52,806       47,954  
Average pipeline revenue per barrel(8)
  $ 0.90     $ 0.90     $ 1.01     $ 1.06     $ 1.01     $ 0.99     $ 1.08     $ 1.28     $ 1.38  
Trucking volume (bpd)
    18,300       17,759       18,560       23,752       22,963       22,571       23,386       22,963       23,386  
Average trucking revenue per barrel(8)
                                                          $ 2.88     $ 3.03  
Terminalling, transportation and storage segment:
                                                                       
Terminal throughput (bpd)(9)
    76,203       79,752       103,305       112,868       113,135       112,031       113,964       113,135       113,964  
Average terminal revenue per barrel(8)
                                                          $ 0.77     $ 0.82  
Short-haul pipeline throughput (bpd)
    62,316       68,415       60,395       60,894       56,942       58,537       52,798       56,942       52,798  
Average short-haul pipeline revenue per barrel
                                                          $ 0.25     $ 0.25  
Storage capacity reserved (shell capacity barrels)
                                                            878,000       878,000  
Storage per shell capacity barrel (per month)
                                                          $ 0.50     $ 0.50  
 
 
(1) Pro forma revenues reflect recognition of affiliate revenues generated by pipeline and terminal assets to be contributed to us at the closing of this offering that were not previously recorded in the historical financial records of Tesoro Logistics LP Predecessor. Product volumes used in the calculations are historical


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volumes transported or terminalled through facilities included in the Tesoro Logistics LP Predecessor financial statements. Tariff rates and service fees were calculated using the rates and fees in the commercial agreements to be entered into with Tesoro at the closing of this offering and tariff rates on our High Plains pipeline system to be in effect at the time of closing of this offering.
 
(2) Operating and maintenance expenses includes losses on fixed asset disposals. Operating and maintenance expense in 2009 includes a $1.1 million loss on fixed asset disposals primarily related to the retirement of a portion of our Los Angeles terminal. Pro forma operating and maintenance expense for the year ended December 31, 2009 and the nine months ended September 30, 2010 includes incremental operating and maintenance expenses primarily related to purchased additives, inspection and port charges, and insurance premiums for business interruption and property insurance.
 
(3) Pro forma general and administrative expenses have been adjusted to give effect to the annual corporate services fee of $2.5 million that we will pay to Tesoro under the omnibus agreement for providing treasury, accounting, legal and other centralized corporate services as well as higher employee-related expenses of $0.9 million, but do not include the estimated $3.0 million in incremental annual general and administrative expenses we expect to incur as a result of being a separate publicly traded partnership.
 
(4) Pro forma interest expense is related to expected borrowings under our revolving credit facility, commitment fees on the unutilized portion of our revolving credit facility, amortization of related debt issuance costs. Interest expense is calculated assuming an estimated annual interest rate of 2.8%. If the actual interest rate increases or decreases by 1.0%, pro forma interest expense would increase or decrease by approximately $0.5 million per year.
 
(5) For a discussion of the non-GAAP financial measure of EBITDA, please read “Summary — Summary Historical and Pro Forma Combined Financial and Operating Data — Non-GAAP Financial Measure” beginning on page 15 of this prospectus and please read “— Non-GAAP Financial Measure” below.
 
(6) Expansion capital expenditures reflect the $12.6 million acquisition of our Los Angeles terminal in May 2007 and a $3.5 million truck rack expansion project at this terminal in 2008.
 
(7) Pro forma and historical pipeline throughput for the nine months ended September 30, 2010 include the effects of a scheduled turnaround at Tesoro’s Mandan refinery in April and May of 2010.
 
(8) Average pipeline revenue per barrel includes tariffs for committed and uncommitted volumes of crude oil under the pipeline transportation services agreement to be entered into with Tesoro at the closing of this offering, as well as fees for the injection of crude oil into the pipeline system from trucking receipt points, which we refer to as pumpover fees. Average trucking service revenue per barrel includes tank usage fees and fees for providing trucking, dispatching, accounting and data services under the trucking transportation services agreement to be entered into with Tesoro at the closing of this offering. Average terminal revenue per barrel includes terminal throughput fees as well as ancillary services fees for ethanol blending and additive injection.
 
(9) Terminal throughput includes throughput from our Los Angeles terminal following its acquisition by Tesoro in May 2007.


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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 15 of this prospectus. The following table presents a reconciliation of EBITDA to net income and net cash from (used in) operating activities, the most directly comparable GAAP financial measures, on a historical basis and pro forma basis, as applicable, for each of the periods indicated.
 
                                                                         
                Tesoro Logistics LP Pro Forma  
    Tesoro Logistics LP Predecessor Historical           Nine Months
 
          Nine Months Ended
    Year Ended
    Ended
 
    Year Ended December 31,     September 30,     December 31,     September 30,  
    2005     2006     2007     2008     2009     2009     2010     2009     2010  
    (Unaudited)                       (Unaudited)     (Unaudited)  
    (In thousands)  
 
Reconciliation of EBITDA to net income (loss):
                                                                       
Net Income(Loss)
  $ (12,046 )   $ (12,858 )   $ (12,103 )   $ (14,404 )   $ (21,868 )   $ (16,961 )   $ (17,336 )   $ 40,330     $ 31,075  
Add:
                                                                       
Depreciation expense
    5,941       6,011       6,342       6,625       8,820       6,975       5,983       8,820       5,983  
Interest expense, net
                                              2,306       1,730  
                                                                         
EBITDA
  $ (6,105 )   $ (6,847 )   $ (5,761 )   $ (7,779 )   $ (13,048 )   $ (9,986 )   $ (11,353 )   $ 51,456     $ 38,788  
                                                                         
Reconciliation of EBITDA to net cash used in operating activities:
                                                                       
Net cash from used in operating activities
  $ (5,850 )   $ (6,524 )   $ (5,703 )   $ (6,045 )   $ (12,324 )   $ (9,286 )   $ (9,997 )                
Changes in assets and liabilities
    261       (82 )     167       (1,258 )     390       343       (850 )                
Loss on asset disposals
    (516 )     (241 )     (225 )     (476 )     (1,114 )     (1,043 )     (506 )                
                                                                         
EBITDA
  $ (6,105 )   $ (6,847 )   $ (5,761 )   $ (7,779 )   $ (13,048 )   $ (9,986 )   $ (11,353 )                
                                                                         


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