S-1 1 d570955ds1.htm FORM S-1 Form S-1
Table of Contents
Index to Financial Statements

As filed with the Securities and Exchange Commission on July 25, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

WESTERN REFINING LOGISTICS, LP

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   4610  

46-3205923

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

123 W. Mills Avenue

El Paso, Texas 79901

(915) 534-1400

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Lowry Barfield

Senior Vice President—Legal, General Counsel and Secretary

123 W. Mills Avenue

El Paso, Texas 79901

(915) 534-1400

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

David P. Oelman

Alan Beck

Vinson & Elkins L.L.P.

1001 Fannin Street, Suite 2500

Houston, Texas 77002

(713) 758-2222

 

Joshua Davidson

M. Breen Haire

Baker Botts L.L.P.

One Shell Plaza

910 Louisiana Street

Houston, Texas 77002

(713) 229-1234

 

 

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.  ¨

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.  ¨

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.  ¨

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.  ¨

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  ¨   Accelerated filer   ¨    Non-accelerated filer  þ   Smaller reporting company  ¨
     (Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate

Offering Price(1) (2)

 

Amount of

Registration Fee

Common units representing limited partner interests

  $287,500,000   $39,215

 

 

(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.

 

 

 


Table of Contents
Index to Financial Statements

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

Preliminary Prospectus, dated July 25, 2013

 

 

PROSPECTUS

 

LOGO

            Common Units

Representing Limited Partner Interests

Western Refining Logistics, LP

 

 

This is the initial public offering of our common units representing limited partner interests. Prior to this offering, there has been no public market for our common units. We currently expect the initial public offering price to be between $         and $         per common unit. We intend to apply to list our common units on the New York Stock Exchange under the symbol “WNRL.” We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012.

 

 

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 20.

These risks include the following:

 

   

Our parent company, Western Refining, Inc., or Western, accounts for substantially all of our revenues. If Western 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 and gathering systems 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 costs and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.

 

   

Western may suspend, reduce, or terminate its obligations under each of our commercial agreements and our services agreement in some circumstances, which would have a material adverse effect on our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders.

 

   

Western will own a     % limited partner interest in us and will control our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including Western, have conflicts of interest with us and limited duties to us and may favor their own interests to the detriment of our unitholders.

 

   

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

 

   

Unitholders will experience immediate and substantial dilution of $         per common unit.

 

   

Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes, then our cash available for distribution to our unitholders would be substantially reduced.

 

   

Our unitholders will be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.

 

 

 

    

Per Common Unit

  

    Total    

Public offering price

   $                            $            

Underwriting discount (1)

   $                            $            

Proceeds to Western Refining Logistics, LP (before expenses)

   $                            $            

 

(1) Excludes a structuring fee equal to     % of the gross proceeds of this offering payable to Merrill Lynch, Pierce, Fenner & Smith Incorporated and Barclays Capital Inc. Please read “Underwriting” for a description of all underwriting compensation payable in connection with this offering.

The underwriters may also exercise their option to purchase up to an additional                 common units from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common units to purchasers on or about                     , 2013 through the book-entry facilities of The Depository Trust Company.

 

 

Joint Book-Running Managers

 

BofA Merrill Lynch   Barclays

 

 

The date of this prospectus is                     , 2013


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

SUMMARY

     1   

Western Refining Logistics, LP

     1   

Overview

     1   

Our Assets and Operations

     2   

Business Objectives and Strategies

     2   

Competitive Strengths

     3   

Growth Opportunities

     4   

Our Relationship with Western

     7   

Our Commercial Agreements with Western

     7   

Our Emerging Growth Company Status

     7   

Risk Factors

     8   

Formation Transactions and Partnership Structure

     9   

Ownership of Western Refining Logistics, LP

     9   

Our Management

     10   

Principal Executive Offices and Internet Address

     11   

Summary of Conflicts of Interest and Duties

     11   

The Offering

     12   

Summary Historical and Pro Forma Financial Data

     17   

RISK FACTORS

     20   

Risks Related to Our Business

     20   

Risks Inherent in an Investment in Us

     40   

Tax Risks to Our Common Unitholders

     50   

USE OF PROCEEDS

     55   

CAPITALIZATION

     56   

DILUTION

     57   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     58   

General

     58   

Minimum Quarterly Distribution

     60   

Unaudited Pro Forma Cash Available for Distribution for the Twelve Months Ended March  31, 2013 and the Year Ended December 31, 2012

     61   

Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2014

     64   

Significant Forecast Assumptions

     67   

HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

     73   

Distributions of Available Cash

     73   

Operating Surplus and Capital Surplus

     74   

Capital Expenditures

     76   

Subordination Period

     77   

Distributions of Available Cash From Operating Surplus During the Subordination Period

     78   

Distributions of Available Cash From Operating Surplus After the Subordination Period

     79   

General Partner Interest and Incentive Distribution Rights

     79   

Percentage Allocations of Available Cash From Operating Surplus

     80   

Our General Partner’s Right to Reset Incentive Distribution Levels

     80   

Distributions From Capital Surplus

     83   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     83   

Distributions of Cash Upon Liquidation

     84   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

     87   

Non-GAAP Financial Measure

     89   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     90   

Overview

     90   

 

i


Table of Contents
Index to Financial Statements

How We Generate Revenue

     90   

How We Evaluate Our Operations

     93   

Factors Affecting the Comparability of Our Financial Results

     94   

Other Factors That Will Significantly Affect Our Results

     95   

Results of Operations

     96   

Capital Resources and Liquidity

     98   

Critical Accounting Policies and Estimates

     102   

Qualitative and Quantitative Disclosures about Market Risk

     102   

BUSINESS

     104   

Overview

     104   

Our Relationship with Western

     104   

Business Objectives and Strategies

     105   

Competitive Strengths

     105   

Growth Opportunities

     107   

Our Assets and Operations

     108   

Our Commercial Agreements with Western

     119   

Other Agreements with Western

     127   

Western’s Operations

     128   

Competition

     130   

Safety and Maintenance Regulation

     130   

Insurance

     130   

Pipeline and Terminal Control Operations

     131   

Rate and Other Regulation

     131   

Environmental Regulation

     134   

Title to Properties and Permits

     138   

Employees

     138   

Legal Proceedings

     138   

MANAGEMENT

     139   

Management of Western Refining Logistics, LP

     139   

Directors and Executive Officers of Western Refining Logistics GP, LLC

     140   

Compensation of Our Directors and Executive Officers

     141   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     144   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     146   

Distributions and Payments to Our General Partner and its Affiliates

     146   

Agreements Governing the Transactions

     147   

Our Commercial Agreements with Western

     150   

Procedures for Review, Approval and Ratification of Transactions with Related Persons

     157   

CONFLICTS OF INTEREST AND DUTIES

     159   

Conflicts of Interest

     159   

Elimination and Replacement of Fiduciary Duties

     164   

DESCRIPTION OF THE COMMON UNITS

     166   

The Units

     166   

Transfer Agent and Registrar

     166   

Transfer of Common Units

     166   

THE PARTNERSHIP AGREEMENT

     168   

Organization and Duration

     168   

Purpose

     168   

Cash Distributions

     168   

Capital Contributions

     168   

Voting Rights

     169   

Applicable Law; Forum, Venue and Jurisdiction

     170   

Limited Liability

     170   

 

ii


Table of Contents
Index to Financial Statements

Issuance of Additional Interests

     171   

Amendment of the Partnership Agreement

     172   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     174   

Dissolution

     174   

Liquidation and Distribution of Proceeds

     175   

Withdrawal or Removal of Our General Partner

     175   

Transfer of General Partner Interest

     176   

Transfer of Ownership Interests in the General Partner

     176   

Transfer of Subordinated Units and Incentive Distribution Rights

     177   

Change of Management Provisions

     177   

Limited Call Right

     177   

Non-Taxpaying Holders; Redemption

     178   

Non-Citizen Assignees; Redemption

     178   

Meetings; Voting

     178   

Voting Rights of Incentive Distribution Rights

     179   

Status as Limited Partner

     179   

Indemnification

     180   

Reimbursement of Expenses

     180   

Books and Reports

     180   

Right to Inspect Our Books and Records

     181   

Registration Rights

     181   

UNITS ELIGIBLE FOR FUTURE SALE

     182   

Rule 144

     182   

Issuance of Additional Interests

     182   

Registration Rights

     182   

Lock-up Agreements

     183   

Registration Statement on Form S-8

     183   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     184   

Taxation of the Partnership

     184   

Tax Consequences of Unit Ownership

     186   

Tax Treatment of Operations

     190   

Disposition of Units

     191   

Uniformity of Units

     193   

Tax-Exempt Organizations and Other Investors

     193   

Administrative Matters

     194   

State, Local and Other Tax Considerations

     195   

INVESTMENT IN WESTERN REFINING LOGISTICS, LP BY EMPLOYEE BENEFIT PLANS

     197   

UNDERWRITING

     199   

Commissions and Discounts

     199   

Option to Purchase Additional Common Units

     200   

Reserved Common Units

     200   

Lock-Up Restrictions

     200   

New York Stock Exchange Listing

     201   

Price Stabilization, Short Positions, and Penalty Bids

     201   

Electronic Distribution

     202   

Conflicts of Interest

     202   

FINRA

     202   

Other Relationships

     202   

Notice to Prospective Investors in Australia

     202   

Notice to Prospective Investors in the European Economic Area

     203   

Notice to Prospective Investors in Germany

     204   

Notice to Prospective Investors in Hong Kong

     205   

 

iii


Table of Contents
Index to Financial Statements

Notice to Prospective Investors in the Netherlands

     205   

Notice to Prospective Investors in Switzerland

     205   

Notice to Prospective Investors in the United Kingdom

     205   

VALIDITY OF OUR COMMON UNITS

     207   

EXPERTS

     207   

WHERE YOU CAN FIND MORE INFORMATION

     207   

FORWARD-LOOKING STATEMENTS

     208   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A—AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF WESTERN REFINING LOGISTICS, LP

     A-1   

APPENDIX B—GLOSSARY TERMS

     B-1   

 

 

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 information different from that contained in this prospectus and any free writing prospectus. 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.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Forward-Looking Statements.”

Industry and Market Data

This prospectus includes industry data and forecasts that we obtained from industry publications and surveys, public filings, and internal company sources. These data sources generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of the included information. Moreover, forecasted information is inherently uncertain and we can provide no assurance that forecasted information will materialize. Statements as to our market position and market estimates are based on independent industry publications, government publications, third-party forecasts, management’s estimates and assumptions about our markets, and our internal research. Certain market and industry data has been derived from a report commissioned by us and prepared by BENTEK Energy, LLC (“BENTEK”). While we are not aware of any misstatements regarding the market, industry or similar data presented herein, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Forward-Looking Statements” and “Risk Factors” in this prospectus.

Trademarks and Trade Names

We own or have rights to various trademarks, service marks, and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks, and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, the trademarks, service marks, and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks, and trade names.

 

iv


Table of Contents
Index to Financial Statements

SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements, before investing in our common units. The information presented in this prospectus assumes, unless otherwise indicated, (1) an initial public offering price of $             per common unit (the mid-point of the price range set forth on the cover of this prospectus) and (2) that the underwriters’ option to purchase additional common units is not exercised. You should read “Risk Factors” for information about important risks that you should consider before buying our common units.

Unless the context otherwise requires, references in this prospectus to “Western Refining Logistics, LP,” “our partnership,” “we,” “our,” “us,” or like terms when used in a historical context, refer to Western Refining Logistics, LP Predecessor, our predecessor for accounting purposes, also referred to as “the Predecessor,” and when used in the present tense or prospectively, refer to Western Refining Logistics, LP and its subsidiaries. Unless the context otherwise requires, references in this prospectus to “Western” refer collectively to Western Refining, Inc. and its subsidiaries, other than Western Refining Logistics, LP, its subsidiaries and its general partner.

Western Refining Logistics, LP

Overview

We are a fee-based, growth oriented Delaware limited partnership recently formed by Western to own, operate, develop, and acquire terminals, storage tanks, pipelines, and other logistics assets. Our initial assets consist of pipeline and gathering assets and terminalling, transportation, and storage assets in the Southwestern portion of the U.S., including approximately 300 miles of pipelines and approximately 7.9 million barrels of active storage capacity, as well as other assets. Most of our assets are integral to the operations of Western’s refineries located in El Paso, Texas, and near Gallup, New Mexico.

We generate revenue primarily by charging fees and tariffs for transporting crude oil and refined and other products through our terminals and pipelines and for providing storage at our storage tanks and terminals. We do not take ownership of the hydrocarbons or products (other than certain additives) that we handle or engage in the trading of any commodities. Accordingly, we generally do not have direct exposure to fluctuations in commodity prices. Initially, substantially all of our revenue will be derived from two 10-year, fee-based agreements with Western, supported by minimum volume commitments and inflation escalators. We believe these contracts will generate stable and predictable cash flows. Please read “—Our Commercial Agreements with Western” below for a description of these agreements.

Our relationship with Western is one of our principal strengths. Western is a publicly traded (NYSE: WNR) independent crude oil refiner and marketer of refined and other products, and owns and operates two refineries, in El Paso, Texas and Gallup, New Mexico (referred to as Western’s “El Paso Refinery” and “Gallup Refinery,” respectively), with a total crude oil throughput capacity of 153,000 barrels per day (“bpd”). Western’s primary operating areas that we support encompass West Texas, Arizona, New Mexico, Utah, and Colorado. In addition to its refineries, Western also operates retail convenience stores in Arizona, Colorado, New Mexico, and Texas; a fleet of crude oil and refined product truck transports; and a wholesale petroleum products distributor that operates in Arizona, California, Colorado, Georgia, Nevada, New Mexico, Texas, Maryland, and Virginia. For the year ended December 31, 2012, Western reported net sales, operating income and net income of $9.5 billion, $711.9 million and $398.9 million, respectively. For the three months ended March 31, 2013, Western reported net sales, operating income and net income of $2.2 billion, $173.1 million and $83.7 million, respectively. As of March 31, 2013, Western reported total assets of $2.7 billion and total debt of $713.6 million.

 

 

1


Table of Contents
Index to Financial Statements

We intend to expand our business primarily by increasing utilization of our existing systems, acquiring additional logistics assets from Western and third parties and executing organic growth projects. The Permian Basin in general, and the Delaware Basin in particular, are experiencing significant crude oil production growth as a result of improved drilling and completion techniques. This production growth provides the El Paso Refinery with a local supply of high quality, cost-advantaged crude oil. Western has stated that it intends to increase its access to this production and grow its logistics business generally, and has formed us to be the primary growth vehicle for this business. Western will grant us a right of first offer on certain logistics assets that it will retain following the completion of this offering, as well as on additional assets that Western may acquire or construct in our existing areas of operation in the future. Please read “Business—Our Assets and Operations—Right of First Offer.” We do not have a current agreement or understanding with Western to purchase any assets covered by our rights of first offer.

Our Assets and Operations

Our initial assets consist of the following:

 

   

Pipeline and Gathering Assets. Our pipeline and gathering assets consist of approximately 300 miles of crude oil pipelines and gathering systems and approximately 566,000 barrels of active crude oil storage located primarily in the Delaware Basin in the Permian Basin area of West Texas and southern New Mexico and in the Four Corners area in northwestern New Mexico. These assets serve as a key source of high quality, cost-advantaged crude oil for Western’s El Paso and Gallup Refineries.

 

   

Terminalling, Transportation, and Storage Assets. Our terminalling, transportation, and storage assets consist of terminals and storage assets located on site at each of Western’s El Paso and Gallup Refineries, and standalone refined products terminals located in Bloomfield and Albuquerque, New Mexico. These assets include approximately 6.9 million barrels of active shell storage capacity. These assets primarily receive, store, and distribute crude oil, feedstock, and refined products for Western’s refineries. We also provide fee-based asphalt terminalling and processing services at an asphalt plant and terminal in El Paso and asphalt terminalling services at three stand-alone asphalt terminals located in Albuquerque, New Mexico and Phoenix and Tucson, Arizona, which have a combined storage capacity of approximately 473,000 barrels.

Business Objectives and 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:

 

   

Generate Stable, Fee-Based Revenues. We are focused on generating stable and predictable cash flows by providing fee-based logistics services. Initially, substantially all of our revenue will be derived from two 10-year, fee-based agreements with Western, supported by minimum volume commitments and inflation escalators. As we grow our business, we will seek to enter into similar contracts with third parties that generate stable and predictable cash flows, as well as increase volumes under our existing contracts with Western. Pursuant to our contracts with Western, we generally do not have exposure to variability in the prices of the hydrocarbons and other products we handle.

 

   

Increase Utilization and Pursue Attractive Organic Growth Opportunities. We expect to realize increased throughput on our existing systems due to projected crude oil production growth in the Delaware Basin and Four Corners area and the continued ramp-up of our new gathering system in

 

 

2


Table of Contents
Index to Financial Statements
 

the Delaware Basin. We also intend to evaluate organic growth opportunities to increase utilization of our existing assets by, for example, adding gathering lines to connect new production to our mainline gathering lines. Additionally, we intend to take other steps to accommodate growth in Western’s business as well as increased third-party activity in our existing areas of operations.

 

   

Grow Through Strategic Acquisitions. We plan to pursue accretive acquisitions of complementary assets from Western as well as third parties. In order to provide us with initial acquisition opportunities, Western will grant us a right of first offer to acquire certain logistics assets that it will retain following this offering, as well as additional assets that it may acquire or construct in our existing areas of operation in the future. We believe we complement Western’s acquisition strategy by providing a specialized vehicle for owning, operating and acquiring logistics assets. This allows us to either bid jointly with Western for assets with associated logistics or subsequently purchase logistics assets from Western pursuant to our right of first offer in the omnibus agreement.

 

   

Maintain Safe, Reliable, and Efficient Operations. We are committed to maintaining and improving the safety, reliability, environmental compliance, and efficiency of our operations. We believe these objectives are integral to maintaining stable cash flows and are critical to the success of our business.

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:

 

   

Well-Positioned Assets in High-Growth Regions. Most of our assets are located in or near the Delaware Basin in the Permian Basin area of West Texas and southern New Mexico and in the Four Corners area in the San Juan and Paradox Basins in northwestern New Mexico. These shale-focused, crude oil producing basins are experiencing significant growth in production. According to BENTEK Energy, LLC (“BENTEK”), an energy market analytics company, Delaware Basin crude oil production was 450,000 bpd as of June 2013. BENTEK predicts that Delaware Basin crude oil production will increase by approximately 120,000 bpd over the next five years based on current drilling, and could increase by as much as an additional 300,000 bpd, for a total of 870,000 bpd, over this same period assuming increases in horizontal rig count, well count, and initial production (“IP”) rates. Western’s Gallup Refinery is currently sourcing approximately 25,000 bpd of crude oil primarily from the San Juan and Paradox Basins. Drilling activity in the area is increasing, and BENTEK predicts total production in the San Juan Basin alone could grow from approximately 7,700 bpd currently to between 20,000 bpd and 52,000 bpd over the next five years. This range is based on certain assumptions by BENTEK relating to horizontal rig count, well count, and IP rates. We believe crude oil production growth in these basins should increase utilization of our pipeline and gathering assets and create organic growth opportunities.

 

   

Relationship with Western. One of our principal strengths is our relationship with Western. We believe that Western will be incentivized to grow our business as a result of its significant economic interest in us, as well as its stated strategies of growing its logistics business and increasing its access to crude oil produced in its existing areas of operations. In particular, we expect to benefit from the following aspects of our relationship with Western:

 

   

Acquisition Opportunities. Western will grant us a right of first offer to acquire certain logistics assets that it will retain following this offering, as well as additional assets that it may acquire or construct in its existing areas of operation in the future;

 

 

3


Table of Contents
Index to Financial Statements
   

Strength and Stability of Western’s Refining Business. Western’s El Paso and Gallup Refineries have a combined crude oil throughput capacity of 153,000 bpd. Western’s refining margins are supported throughout the refining cycle by a combination of abundant and lower cost feedstocks and strong values for its refined products. Through access to multiple strategic product pipelines afforded by our assets, Western sells products into several areas in the southwestern United States where refined product margins have historically been higher than Gulf Coast benchmarks. In addition, Western’s integrated distribution network of wholesale and retail assets provides a ratable output for products produced at its refineries;

 

   

Integration of Assets with Western’s Refineries. Most of our assets are integral to the operations of Western’s refineries. The refineries are strategically located in West Texas and New Mexico, which gives Western access to a diverse slate of high quality, advantageously priced crude oils. Our assets provide the refineries with their primary access to this supply of crude oil, and many of our assets are located adjacent to these refineries; and

 

   

Access to Operational and Industry Expertise. We expect to benefit from Western’s extensive operational, commercial, and technical expertise, as well as its industry relationships, as we seek to optimize and expand our existing asset base.

 

   

Long-Term, Fee-Based Contracts. Initially, we will generate substantially all of our revenue under two 10-year, fee-based contracts with Western that will include minimum volume commitments and inflation escalators. We believe these contracts will generate stable, predictable cash flows and mitigate substantially all of our direct exposure to commodity price fluctuations. For the twelve months ending September 30, 2014, Western’s aggregate annual minimum fees under these agreements are expected to total $119.7 million, or approximately 92% of our forecasted revenues of $130.8 million for such period. Please read “Our Cash Distribution Policy and Restrictions on Distributions—Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2014” for additional information regarding our forecasted revenues and related assumptions.

 

   

Experienced Management Team. Our management team is experienced in the operation of logistics assets and the execution of expansion and acquisition strategies. Our management team includes some of the most senior officers of Western, who average more than 20 years of experience in the energy industry.

 

   

Financial Flexibility. In connection with this offering, we expect to enter into a new $300 million revolving credit facility and will have no initial indebtedness at the closing of this offering. In addition, we expect to retain $50 million as cash-on-hand from the proceeds of this offering. We believe we will have the financial flexibility to execute our growth strategy through cash-on-hand, the available capacity under our revolving credit facility, and our ability to access the debt and equity capital markets.

Growth Opportunities

Over the last few years, the U.S. has experienced a significant increase in crude oil production, driven primarily by new technologies including multi-stage fracturing and horizontal drilling. According to BENTEK, U.S. and Canadian crude oil production has grown from approximately 8.7 million bpd in 2011 to approximately 11.0 million bpd as of June 2013. The Permian Basin is among those basins experiencing significant growth. For example, according to BENTEK, current crude oil production in the Delaware Basin area of the Permian Basin was 450,000 bpd as of June 2013. BENTEK predicts that Delaware Basin crude oil production will increase by

 

 

4


Table of Contents
Index to Financial Statements

approximately 120,000 bpd over the next five years based on current drilling, and could increase by as much as an additional 300,000 bpd, for a total of 870,000 bpd, over this same period assuming increases in horizontal rig count, well count, and IP rates. We believe there are a number of potential growth opportunities for infrastructure projects within the Permian Basin and Four Corners areas to facilitate the delivery of crude oil from the wellhead to Western’s refineries and potentially other third parties.

Our asset portfolio consists of pipeline and gathering assets and terminalling, transportation, and storage assets, which are primarily located in or near the Delaware and San Juan Basins, and provide Western’s El Paso and Gallup Refineries with their primary access to the crude oil production in these areas. The anticipated increase in production in these basins provides us two distinct ways to grow our revenues and cash flow:

 

   

Increasing throughput on our existing systems. Our Delaware Basin system was placed into service in April 2013 and throughput on this system is increasing. In anticipation of increased crude oil production in the region and the addition of new gathering connections, mainline capacity of the system is designed to handle 100,000 bpd. In addition, there is approximately 38,000 bpd of truck unloading capacity at our Mason Station crude oil facility. Western’s forecasted throughput for the twelve months ending September 30, 2014 is 27,250 bpd on the mainline and 14,900 bpd at the Mason Station truck rack, representing approximately 27% and 39% of total capacity, respectively. Our Four Corners system also has available throughput capacity to accept increased production in the San Juan and Paradox Basins.

 

   

Organic growth projects to connect additional production to our system. We expect to construct or acquire from Western additional pipelines that connect to our existing gathering systems. These additional pipelines would generate revenue not only through fees charged for volumes transported on such pipelines, but also through increased throughput on our existing pipeline assets to which they connect.

Rights of First Offer

We believe that our relationship with Western should provide us with a number of potential future growth opportunities, including the opportunity to potentially acquire the following assets that Western will grant us a right of first offer to acquire for a period of 10 years after the closing of this offering:

 

   

TexNew Mex 16” Pipeline. At the closing of this offering, Western will contribute to us an approximately 43-mile segment of its TexNew Mex 16” Pipeline, and retain the remaining 299-mile segment that is currently not operating but is being evaluated for return to service. The retained segment extends from our crude oil station in Star Lake, New Mexico in the Four Corners area to near Maljamar, New Mexico in the Delaware Basin, and has hydraulic capacity to flow in a northerly or southerly direction. Western also anticipates the potential construction of crude oil gathering and storage tanks along this line should it be brought back into service. However, we currently do not expect Western to return this pipeline to service during the twelve months ending September 30, 2014.

 

   

Jal NGL Terminal. Western’s Jal NGL Terminal, located in Lea County, New Mexico, receives, stores, and ships various light hydrocarbon products or natural gas liquids (“NGLs”) via truck, rail, and pipeline. On an annual average basis, Western uses approximately 25% of this terminal’s throughput capacity primarily to receive and store butanes in support of its El Paso Refinery. Primary storage at the Jal NGL Terminal consists of four large NGL storage caverns, with combined storage capacity of approximately 562,000 barrels, that are connected to the Enterprise Products Partners L.P. (“Enterprise”) MAPL system connecting NGL hubs at Conway, Kansas and Mt. Belvieu, Texas. Brine ponds are available on site to support product movement in and out of the

 

 

5


Table of Contents
Index to Financial Statements
 

storage caverns. The terminal also includes 17 storage tanks with a combined shell storage capacity of approximately 15,000 barrels, and loading and unloading capacity of up to 6,000 bpd, utilizing either a three-bay truck rack or a rail loading facility located on the Texas-New Mexico Railroad that has 16 loading spots.

 

   

Crude Oil Trucking and Refined Products Trucking. Western operates a fleet of approximately 190 crude oil and refined product truck transports. Twenty-nine crude truck transports in the Four Corners area gather approximately 9,100 bpd of crude oil, and Western anticipates growing its newly-created Delaware Basin fleet to approximately 40 truck transports by the end of 2013. In addition, Western has a fleet of 156 refined product truck transports that operate in Texas, New Mexico, Arizona, Colorado, Utah, and California.

 

   

Wholesale Fuel/Jobber/Lube Facilities. Western’s wholesale operations market and distribute approximately 73,900 bpd of Western’s refinery production. Western’s lubricant marketing, distribution and warehousing operations handle approximately one million gallons per month. Western’s wholesale operations distribute refined products and lubricants in Arizona, California, Colorado, Nevada, New Mexico, and Texas.

In addition, Western will grant us a right of first offer to acquire additional logistics assets in the Permian Basin or the Four Corners area that it may construct or acquire in the future. Western currently anticipates constructing additional logistics assets that would be subject to our rights of first offer, if constructed. These assets, which may require significant capital to construct and place into service, include:

 

   

Additional gathering lines connected to the Delaware Basin system and the Four Corners system. The Delaware Basin system mainline is designed to handle up to 100,000 bpd in anticipation of the expected growth of crude oil production in the surrounding area. Western is evaluating building gathering facilities to tie nearby production facilities to our mainlines. Western is also evaluating building additional gathering lines to connect producers in the Four Corners area to our Four Corners system.

 

   

Pipeline to connect Delaware Basin system and TexNew Mex 16” Pipeline. Western is in the initial engineering phase for the potential construction of an approximately 70-mile pipeline to connect the TexNew Mex 16” Pipeline near Maljamar with our Delaware Basin system. Western anticipates the potential construction of additional crude oil gathering systems, both pipeline and truck, and additional storage tank capacity along this pipeline, should it be completed.

We refer to the assets listed above as our “right of first offer assets” and our rights related to them as our “rights of first offer.” Pursuant to an omnibus agreement, Western will be required to offer us the opportunity to acquire these assets in the future if it decides to sell them. We expect that Western would be the primary customer for these assets after any purchase of such assets by us. The consummation and timing of any acquisition of assets owned by Western will depend upon, among other things, Western’s willingness to offer the asset for sale and obtain any necessary consents, the determination that the asset is suitable for our business at that particular time, our ability to agree on a mutually acceptable price, our ability to negotiate an acceptable purchase agreement and services agreement with respect to the asset and our ability to obtain financing on acceptable terms. We do not have a current agreement or understanding with Western to purchase any assets covered by our rights of first offer.

 

 

6


Table of Contents
Index to Financial Statements

Our Relationship with Western

Following the completion of this offering, Western will continue to own and operate its refining and other assets and will retain a significant interest in us through its ownership of a     % limited partner interest, as well as ownership of our general partner and, indirectly, all of our incentive distribution rights. Given Western’s significant ownership in us following this offering, as well as its stated strategies of growing its logistics business and increasing its access to crude oil produced in our existing areas of operations, we believe it will be in Western’s best interests for it to contribute additional assets to us over time and to facilitate organic growth opportunities and accretive acquisitions from third parties. However, Western is under no obligation to contribute or sell any assets to us or accept any offer for its assets that we may choose to make.

In addition to the commercial agreements we will enter into with Western upon the closing of this offering, we will also enter into an omnibus agreement and a services agreement with Western. Under the omnibus agreement, subject to certain exceptions, Western will grant us our rights of first offer. The omnibus agreement will also address our reimbursement to Western for the provision of various administrative services in support of our assets and Western’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.”

While our relationship with Western and its subsidiaries is a significant strength, it is also a source of potential conflicts. Please read “Conflicts of Interest and Duties” and “Risk Factors.”

Our Commercial Agreements with Western

Initially, substantially all of our revenue will be derived from two 10-year, fee-based agreements with Western (one for pipeline and gathering services, and another for terminalling, transportation and storage services), supported by minimum volume commitments and inflation escalators, that may be renewed for two five-year periods upon mutual agreement of us and Western. Under these agreements, we will provide various crude oil gathering, terminalling, and storage services to Western, and Western will commit to provide us with minimum monthly throughput volumes of crude oil and refined and other products, and to reserve storage capacity. For the twelve months ending September 30, 2014, Western’s aggregate annual minimum fees under these agreements are expected to total $119.7 million, or approximately 92% of our forecasted revenues of $130.8 million for such period. Please read “Our Cash Distribution Policy and Restrictions on Distributions—Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2014” for additional information regarding our forecasted revenues and related assumptions.

For additional information about these commercial agreements, please read “Certain Relationships and Related Party Transactions—Our Commercial Agreements with Western.”

Our Emerging Growth Company Status

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. As long as a company is deemed an emerging growth company, it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies. These provisions include:

 

   

a requirement to present only two years of audited financial statements and related Management’s Discussion and Analysis included in an initial public offering registration statement;

 

   

an exemption to provide fewer than five years of selected financial data in an initial public offering registration statement;

 

 

7


Table of Contents
Index to Financial Statements
   

an exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal controls over financial reporting;

 

   

an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

   

an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

   

reduced disclosure about the emerging growth company’s executive compensation arrangements; and

 

   

no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of these provisions until we are no longer an emerging growth company, which will occur on the earliest of (1) the last day of the fiscal year following the fifth anniversary of this offering, (2) the last day of the fiscal year in which we have more than $1.0 billion in annual revenues, (3) the date on which we have more than $700 million in market value of our common units held by non-affiliates or (4) the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period.

We have elected to adopt the reduced disclosure requirements described above, except we have elected to opt out of the exemption that allows emerging growth companies to extend the transition period for complying with new or revised financial accounting standards (this election is irrevocable). As a result of these elections, the information that we provide in this prospectus may be different from the information you may receive from other public companies in which you hold equity interests.

Risk Factors

An investment in our common units involves risks associated with our business, regulatory and legal matters, our limited partnership structure, and the tax characteristics of our common units. You should read carefully the risks under the caption “Risk Factors.”

 

 

8


Table of Contents
Index to Financial Statements

Formation Transactions and Partnership Structure

We are a Delaware limited partnership formed in July 2013 by Western to own, operate, develop, and acquire terminals, storage tanks, pipelines, and other logistics assets. In connection with this offering, Western will contribute certain assets and operations to us.

Additionally, at the closing of this offering, the following transactions will occur:

 

   

we will issue a non-economic general partner interest in us, as well as all of our incentive distribution rights, to our general partner;

 

   

we will issue              common units and              subordinated units to Western, representing an aggregate     % limited partner interest in us;

 

   

we will issue              common units in this offering to the public, representing a     % limited partner interest in us;

 

   

we will enter into a new $300 million revolving credit facility, with no borrowings under the facility at the closing of this offering;

 

   

we will enter into two 10-year commercial agreements with Western;

 

   

we will enter into an omnibus agreement with Western; and

 

   

we will enter into a services agreement with Western.

We will use the net proceeds from this offering (including any net proceeds from the exercise of the underwriters’ option to purchase additional common units from us) as described in “Use of Proceeds.”

The diagram on the following page depicts a simplified version of our organization and ownership structure after giving effect to this offering and the related formation transactions.

Ownership of Western Refining Logistics, LP

After giving effect to the transactions described above, assuming the underwriters’ option to purchase additional common units from us is not exercised, all of our incentive distribution rights will be held by our general partner and our units will be held as follows:

 

Public Common Units

         

Common Units held by Western

         

Subordinated Units held by Western

         

Non-Economic General Partner Interest held by Western Refining Logistics GP, LLC

       
  

 

 

 

Total

         100

 

 

9


Table of Contents
Index to Financial Statements

The following simplified diagram depicts our organizational structure after giving effect to the transactions described above.

 

LOGO

Our Management

We are managed and operated by the board of directors and executive officers of Western Refining Logistics GP, LLC, our general partner. Western is the sole owner of our general partner and has the right to appoint the entire board of directors of our general partner, including the independent directors appointed in accordance with the listing standards of the New York Stock Exchange (“NYSE”). 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. Many of the executive officers and directors of our general partner also currently serve as executive officers of Western. For more information about the directors and executive officers of our general partner, please read “Management—Directors and Executive Officers of Western Refining 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 will 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 Western or others. All of the personnel that will conduct our business immediately following the closing of this offering will be employed or contracted by our general partner and its affiliates, including Western, but we sometimes refer to these individuals in this prospectus as our employees because they provide services directly to us.

 

 

10


Table of Contents
Index to Financial Statements

Principal Executive Offices and Internet Address

Our principal executive offices are located at 123 W. Mills Avenue, El Paso, Texas 79901 and our telephone number is (915) 534-1400. Our website will be located at                 . We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission (the “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 Duties

General. Under our partnership agreement, our general partner has a duty to manage us in a manner it believes to be in the best interests of our partnership. However, because our general partner is a wholly owned subsidiary of Western, the officers and directors of our general partner also have a duty to manage our general partner in a manner that is in the best interests of Western. Consequently, 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 Western, on the other hand.

Partnership Agreement Replacement of Fiduciary Duties. Our partnership agreement limits the liability and eliminates and replaces the fiduciary duties of our general partner to our unitholders, and also restricts the remedies available to our unitholders for actions that might otherwise constitute a breach of our general partner’s duties. By purchasing a common unit, each purchaser agrees to be bound by the terms of our partnership agreement. Each unitholder is also treated as having consented 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.

For a more detailed description of the conflicts of interest and duties of our general partner, please read “Conflicts of Interest and Duties.”

 

 

11


Table of Contents
Index to Financial Statements

The Offering

 

Common units offered to the public

             common units.

 

               common units if the underwriters exercise their option to purchase an additional              common units (the “option units”) in full.

 

Units outstanding after this offering

             common units and              subordinated units, for a total of limited partner units, regardless of whether the underwriters exercise their option to purchase any of the option units, representing a 100% limited partner interest in us. Of this amount,              common units will be issued to Western or a wholly owned subsidiary of Western at the closing of this offering and, assuming the underwriters do not exercise their option to purchase any of the option units, all such option units will be issued to Western, upon the expiration of the underwriters’ option exercise period. However, if the underwriters exercise their option to purchase any portion of the option units, we will (1) issue to the public the number of option units purchased by the underwriters pursuant to such exercise, and (2) issue to Western, upon the expiration of the option exercise period, all remaining option units. Any such option units issued to Western will be issued for no additional consideration. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. In addition, our general partner will own a non-economic general partner interest in us.

 

Use of proceeds

We intend to use the estimated net proceeds of approximately $         million from this offering, based upon the assumed initial public offering price of $         per common unit (the midpoint of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, structuring fees and offering expenses, as follows:

 

   

we will retain $50 million for general partnership purposes; and

 

   

we will distribute the balance of any net proceeds to Western in partial consideration of its contribution of assets to us in connection with this offering and to reimburse Western for certain capital expenditures incurred with respect to such assets.

 

  If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds to us would be approximately $         million. The net proceeds from any exercise by the underwriters of their option to purchase additional common units from us will be distributed to Western.

 

Cash distributions

Upon completion of this offering, our partnership agreement will provide for a minimum quarterly distribution of $         per common unit and subordinated unit ($         per common unit and subordinated

 

 

12


Table of Contents
Index to Financial Statements
 

unit on an annualized basis) to the extent we have sufficient cash after establishment of reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We refer to this cash as “available cash,” and it is defined in our partnership agreement included in this prospectus as Appendix A. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Our Cash Distribution Policy and Restrictions on Distributions.”

 

  For the first quarter that we are publicly traded, we anticipate that we will pay investors in this offering a prorated distribution covering the period from the completion of this offering through                     , 2013, based on the actual length of that period.

 

  Our partnership agreement requires us to distribute all of our available cash each quarter in the following manner:

 

   

first, to the holders of common units, until each common unit has received the minimum quarterly distribution of $         plus any arrearages from prior quarters;

 

   

second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $         ; and

 

   

third, to all unitholders, pro rata, until each unit has received a distribution of $        .

 

  If cash distributions to our unitholders exceed $         per unit in any quarter, our general partner, as the holder of our incentive distribution rights, will receive distributions according to the following percentage allocations:

 

    

Marginal Percentage

Interest in Distributions

Total Quarterly Distribution
Target Amount

  

Unitholders

  

General Partner (as
Holder of Our
Incentive Distribution
Rights)

above $             up to $            

   85.0%    15.0%

above $             up to $            

   75.0%    25.0%

above $            

   50.0%    50.0%

 

  We refer to these distributions as “incentive distributions.” Please read “How We Make Distributions to Our Partners.”

 

 

We believe, based on our financial forecast and related assumptions included in “Our Cash Distribution Policy and Restrictions on Distributions,” that we will have sufficient available cash to pay the minimum quarterly distribution of $         on all of our common units and subordinated units for each quarter in the twelve months ending

 

 

13


Table of Contents
Index to Financial Statements
 

September 30, 2014. However, we do not have a legal obligation to pay quarterly distributions at our minimum quarterly distribution rate or at any other rate, except as provided in our partnership agreement. If we do not generate sufficient cash from operations we may, but are not required to, borrow funds to pay the minimum quarterly distribution to our unitholders. There is no guarantee that we will distribute quarterly cash distributions to our unitholders in any quarter. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

 

  If we had completed this offering and related transactions on April 1, 2012, our unaudited pro forma cash available for distribution for the twelve-month period ended March 31, 2013 would have been approximately $33.1 million. This amount 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 a cash distribution of $         per unit per quarter ($         per unit on an annualized basis), or approximately     % of the minimum quarterly distribution, on all of our subordinated units for such period.

 

  If we had completed this offering and related transactions on January 1, 2012, our unaudited pro forma cash available for distribution for the year ended December 31, 2012 would have been approximately $34.2 million. This amount 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 a cash distribution of $         per unit per quarter ($         per unit on an annualized basis), or approximately     % of the minimum quarterly distribution, on all of our subordinated units for such period.

 

Subordinated units

Western will initially own, directly or indirectly, all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are not 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 distributions of available cash of at least (1) $         (the minimum quarterly distribution on an annualized basis) on each outstanding common and subordinated unit for each of three consecutive, non-overlapping four-quarter periods ending on or after                     , 2016, or (2) $         (150% of the annualized minimum quarterly distribution) on each outstanding common and subordinated unit and the related distributions on the incentive distribution rights for any four-quarter period ending on or after                     , 2014, in each case provided there are no arrearages in the payment of the minimum quarterly distributions on our common units at that time.

 

 

14


Table of Contents
Index to Financial Statements

 

  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 holder(s) 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 thereafter common units will no longer be entitled to arrearages.

 

Our general partner’s right to reset the target distribution levels

Our general partner, as the initial holder of all of our incentive distribution rights, has the right, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (50.0%) for each of the prior four consecutive whole fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distributions at the time of the exercise of the reset election. If our general partner transfers all or a portion of our incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. 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 the same 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 equal to the number of common units that would have entitled their holder to an aggregate quarterly cash distribution in the quarter prior to the reset election equal to the distribution to our general partner on the incentive distribution rights in the quarter prior to the reset election. Please read “How We Make Distributions to Our Partners—Our General Partner’s Right to Reset Incentive Distribution Levels.”

 

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 Interests.”

 

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 66 2/3% 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, Western will own an aggregate of     % of our outstanding voting units (or     % of our outstanding voting units, if the underwriters exercise their option to purchase additional common

 

 

15


Table of Contents
Index to Financial Statements
 

units in full). This will give Western 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 80% of the outstanding common units, our general partner will have 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 the common units over the 20 trading days preceding the date 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, 2015, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $         per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $         per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership” 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 U.S. Federal Income Tax Consequences.”

 

Directed unit program

At our request, the underwriters have reserved for sale up to         % of the common units being offered by this prospectus for sale at the initial public offering price to the directors and executive officers of our general partner and Western, and certain other employees and consultants of Western and its affiliates. We do not know if these persons will choose to purchase all or any portion of these reserved common units, but any purchases they do make will reduce the number of common units available to the general public. Please read “Underwriting—Reserved Common Units.”

 

Exchange listing

We intend to apply to list our common units on the NYSE under the symbol “WNRL.”

 

 

16


Table of Contents
Index to Financial Statements

Summary Historical and Pro Forma Financial Data

The following table shows summary historical combined financial data of the Predecessor, and summary unaudited pro forma combined financial data of Western Refining Logistics, LP for the periods and as of the dates indicated. The summary historical combined financial statements of the Predecessor, as of and for the years ended December 31, 2012, and December 31, 2011, are derived from the audited combined financial statements of the Predecessor appearing elsewhere in this prospectus. The summary historical interim combined financial data of the Predecessor as of and for the three months ended March 31, 2013, and March 31, 2012, are derived from the unaudited interim combined financial statements of the 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 unaudited pro forma combined financial statements presented in the following table as of and for the three months ended March 31, 2013, and for the year ended December 31, 2012, are derived from the unaudited pro forma combined financial statements included elsewhere in this prospectus. The unaudited pro forma combined balance sheet assumes the offering and the related transactions occurred as of March 31, 2013, and the unaudited pro forma combined statements of operations for the three months ended March 31, 2013 and the year ended December 31, 2012, assume the offering and the related transactions occurred as of January 1, 2012. These transactions include, and the unaudited pro forma combined financial statements give effect to, the following:

 

   

Western’s contribution of certain of the Predecessor’s assets to us and the elimination of certain of the Predecessor’s assets that will not be contributed to us;

 

   

our entering into a new $300 million revolving credit facility, under which there will be no borrowings at the closing of this offering;

 

   

our entering into two 10-year commercial agreements with Western, and the recognition of crude oil gathering and transportation, terminalling, and storage revenue under those agreements at rates that were not recognized on a historical basis by the Predecessor;

 

   

our entering into an omnibus agreement and services agreement with Western;

 

   

the completion of this offering, and our issuance of (i) our non-economic general partner interest and all of our incentive distribution rights to our general partner; (ii)              common units and              subordinated units, representing an aggregate     % limited partner interest in us to Western and its subsidiaries; and (iii) common units, representing a     % limited partner interest in us, to the public; and

 

   

the application of the net proceeds of this offering as described in “Use of Proceeds.”

The unaudited pro forma combined financial statements do not include $3.5 million in estimated incremental general and administrative expenses that we expect to incur annually as a result of being a separate publicly traded partnership.

 

 

17


Table of Contents
Index to Financial Statements
   

Western Refining Logistics, LP Predecessor
Historical

   

Western Refining Logistics, LP
Pro forma

 
    Three months
ended March 31,
    Year ended
December 31,
    Three months
ended March 31,
    Year ended
December 31,
 

(in thousands, except per unit amounts)

  2013     2012     2012     2011     2013     2012  
    (unaudited)                 (unaudited)  

Combined statements of income:

           

Revenues (1):

           

Affiliate

  $ 912      $ 723      $ 3,167      $ 2,439      $ 23,909      $ 100,385   

Third-party

    227        233        678        992        227        678   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    1,139        956        3,845        3,431        24,136        101,063   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

           

Operating and maintenance expenses

    15,567        12,113        58,667        53,766        14,137        51,347   

General and administrative expenses

    1,041        1,058        4,227        4,045        1,041        4,227   

Loss (gain) on disposal of assets

    —          335        335        (26,687     —          335   

Depreciation and amortization expense

    2,930        2,910        11,620        12,694        2,433        9,527   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    19,538        16,416        74,849        43,818        17,611        65,436   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (18,399     (15,460     (71,004     (40,387     6,525        35,627   

Other income (expense):

           

Interest expense and other financing costs

    —          —          —          —          (455     (1,445

Other, net

    2        2        12        14        2        12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (18,397     (15,458     (70,992     (40,373     6,072        34,194   

Provision for income taxes

    —          —          —          —          (101     (448
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (18,397   $ (15,458   $ (70,992   $ (40,373   $ 5,971      $ 33,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per limited partner unit (basic and diluted):

           

Common units

           

Subordinated units

           

Combined balance sheets (at period end):

           

Cash and cash equivalents

  $ —          $ —        $ —        $ 50,000     

Property, plant and equipment, net

    153,729          134,596        120,015        125,891     

Total assets

    154,380          135,331        120,384        177,491     

Total liabilities

    3,600          5,558        2,450        —       

Division equity

    150,780          129,773        117,934        —       

Partners’ capital

    —            —          —          177,491     

Total liabilities, division equity, and partners’ capital

    154,380          135,331        120,384        177,491     

Combined statements of cash flows:

           

Net cash provided by (used in):

           

Operating activities

    (17,015     (13,095     (57,331     (53,603    

Investing activities

    (22,389     (2,938     (25,500     36,069       

Financing activities

    39,404        16,033        82,831        17,534       

Other financial data:

           

Capital Expenditures:

           

Maintenance

    752        2,117        5,922        3,302        752        5,922   

Expansion

    21,311        1,252        20,839        656        21,311        20,839   

EBITDA (2)

  $ (15,467   $ (12,548   $ (59,372   $ (27,679   $ 8,960      $ 45,166   

 

 

18


Table of Contents
Index to Financial Statements

 

(1) Our assets have historically been a part of the integrated operations of Western, and the Predecessor generally recognized only the costs and did not record revenue associated with the transportation, terminalling, or storage services provided to Western on an intercompany basis. Accordingly, the revenues in the Predecessor’s historical combined financial statements relate only to amounts received from third parties for these services and minimum amounts required to be recorded for Western for local tax purposes. Following the closing of this offering, our revenues will be generated by existing third-party contracts and from the commercial agreements that we will enter into with Western at the closing of this offering. Pro forma revenues reflect recognition of affiliate revenues generated by pipeline and gathering assets and terminalling, transportation and storage assets to be contributed to us at the closing of this offering that were not previously recorded in the historical financial records of the Predecessor.

 

(2) We define EBITDA as net income (loss) before net interest expense, income taxes, and depreciation and amortization. For a reconciliation of EBITDA to our most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles (“GAAP”), please read “Selected Historical and Pro Forma Financial Data—Non-GAAP Financial Measures.”

 

 

19


Table of Contents
Index to Financial Statements

RISK FACTORS

Limited partner interests are inherently different from capital stock of a corporation, although many of the business risks that we are subject to are similar to those that would be faced by a corporation engaged in similar businesses. 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 or cash flows could be materially adversely affected. In that case, we might not be able to pay the minimum quarterly distribution or any distributions at all 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

Western accounts for substantially all of our revenues, and therefore we are subject to the business risks of Western. If Western 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 and gathering systems or handled at our terminals, our revenues would decline and our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders would be adversely affected.

For the three months ended March 31, 2013 and the year ended December 31, 2012, Western accounted for greater than 99% of our unaudited pro forma revenues. Western is the primary shipper on our pipelines and gathering systems and our primary customer for our terminalling and storage activities. As we expect to continue to derive substantially all of our revenues from Western for the foreseeable future, we are subject to the risk of nonpayment or nonperformance by Western under our commercial agreements. Any event, whether in our existing areas of operation or otherwise, that materially and adversely affects Western’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 Western, some of which are related to the following:

 

   

the price volatility of crude oil, other feedstock, refined and other products, and fuel and utility services may have a material adverse effect on Western’s earnings and cash flows;

 

   

if the price of crude oil increases significantly or Western’s credit profile changes, or if Western is unable to access its revolving credit facility for borrowings or for letters of credit, Western’s liquidity and ability to purchase enough crude oil to operate its refineries at full capacity could be materially and adversely affected;

 

   

Western’s hedging transactions may limit its gains and expose Western to other risks;

 

   

the risk of contract cancellation, non-renewal or failure to perform by Western’s customers, and Western’s inability to replace such contracts and/or customers could have a material adverse effect on Western’s earnings and cash flows;

 

   

Western’s indebtedness may limit its ability to obtain additional financing and Western may also face difficulties complying with the terms of its indebtedness agreements;

 

   

covenants and events of default in Western’s debt instruments could limit its ability to undertake certain types of transactions and adversely affect its liquidity;

 

   

Western has capital needs for which its internally generated cash flows and other sources of liquidity may not be adequate;

 

20


Table of Contents
Index to Financial Statements
   

the dangers inherent in Western’s operations could cause disruptions and could expose Western to potentially significant losses, costs, or liabilities. Any significant interruptions in the operations of any of Western’s refineries could materially and adversely affect its business, financial condition, results of operations, and cash flows;

 

   

Western’s operations involve environmental risks that could give rise to material liabilities;

 

   

Western may incur significant costs to comply with environmental, health, and safety laws and regulations;

 

   

Western could experience business interruptions caused by pipeline shutdowns or interruptions;

 

   

a material decrease in the supply of crude oil available to Western’s refineries could significantly reduce its production levels;

 

   

severe weather could interrupt the supply of some of Western’s feedstock for its refineries that could have a material adverse effect on its business, financial condition, results of operation, and cash flows;

 

   

Western could incur substantial costs or disruptions in its business if it cannot obtain or maintain necessary permits and authorizations;

 

   

competition in the refining and marketing industry is intense, and an increase in competition in the areas in which Western sells its refined and other products could adversely affect Western’s sales and profitability;

 

   

Western’s business, financial condition, results of operations, and cash flow may be materially adversely affected by a continued economic downturn;

 

   

Western’s insurance policies do not cover all losses, costs, or liabilities that Western may experience;

 

   

Western could be subject to damages based on claims brought by its customers or lose customers as a result of a failure of its products to meet certain quality specifications;

 

   

a substantial portion of Western’s refining workforce is unionized, and Western may face labor disruptions that would interfere with their operations;

 

   

if Western loses any of its key personnel, Western’s ability to manage its business could be negatively impacted; and

 

   

terrorist attacks, cyber-attacks, threats of war, or actual war may negatively affect Western’s operations, financial condition, results of operations, cash flows, and prospects.

Petroleum refining and marketing is highly competitive. Due to their geographic diversity, larger and more complex refineries, integrated operations, and greater resources, some of Western’s competitors may be better able to withstand volatile market conditions, compete on the basis of price, obtain crude oil in times of shortage, and bear the economic risk inherent in all phases of the refining industry. The El Paso and Gallup Refineries primarily compete with Valero Energy Corp., Phillips 66 Company, Alon USA Energy, Inc., HollyFrontier Corporation, Tesoro Corporation, Chevron Products Company, and Suncor Energy, Inc. as well as refineries in other regions of the country that serve the regions Western serves through pipelines. The areas where Western sells refined products are also supplied by various refined product pipelines. Any expansions or

 

21


Table of Contents
Index to Financial Statements

additional products supplied by these third-party pipelines could put downward pressure on refined product prices in these areas.

Western is not obligated to use our services with respect to volumes of crude oil or refined and other products in excess of the minimum volume commitments under its commercial agreements with us. In addition, the initial terms of Western’s obligations under those agreements are 10 years. If Western fails to use our assets and services after expiration of those agreements, or should our commercial agreements be invalidated for any reason, and we are unable to generate additional revenue from third parties, our ability to make cash distributions to unitholders may be materially and adversely affected.

Additionally, Western may consider opportunities presented by third parties with respect to its refinery assets. These opportunities may include offers to purchase assets and joint venture propositions. Western may also change its refineries’ operations by developing new facilities, suspending or reducing certain operations, modifying or closing facilities or terminating operations. Changes may be considered to meet market demands, to satisfy regulatory requirements or environmental and safety objectives, to improve operational efficiency or for other reasons. Western 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. No such changes will be subject to our consent.

Furthermore, conflicts of interest may arise between Western and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. We have no control over Western, our largest source of revenue and our primary customer, and Western may elect to pursue a business strategy that does not favor us and our business. Please read “Risk Factors—Risks Inherent in an Investment in Us.”

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 on an annualized basis, we will require available cash of approximately $             million per quarter, or approximately $             million per year, based on the number of common units and subordinated 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 and other products we handle;

 

   

the transportation, terminalling, and storage fees with respect to volumes that we handle;

 

   

our entitlement to payments associated with the minimum volume commitments under our commercial agreements with Western;

 

   

timely payments by Western and our other customers; 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 Western in respect of those expenses;

 

   

the level of capital expenditures we make;

 

22


Table of Contents
Index to Financial Statements
   

the cost of acquisitions and organic growth projects, 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.

On an unaudited pro forma basis, we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all units for the twelve months ended March 31, 2013 or the year ended December 31, 2012.

The amount of available cash we need to pay the minimum quarterly distribution for four quarters on all of our units to be outstanding immediately after this offering will be approximately $             million. The amount of our pro forma cash available for distribution generated during the twelve months ended March 31, 2013 was $33.1 million, which would have been sufficient to allow us to pay the full minimum quarterly distribution on all of our common units during such period but only     % of the minimum quarterly distribution on our subordinated units during this period. The amount of pro forma cash available for distribution generated during the year ended December 31, 2012 was $34.2 million, which would have been sufficient to allow us to pay the minimum quarterly distribution on all of our common units during such period but only     % of the minimum quarterly distributions on our subordinated units during this period. For a calculation of our ability to make distributions to unitholders based on our pro forma results for the twelve months ended March 31, 2013 and the year ended December 31, 2012, please read “Our Cash Distribution Policy and Restrictions on Distributions.” If we are not able to generate additional cash for distribution to our unitholders in future periods, we may not be able to pay the full minimum quarterly distribution or any amount on our common or subordinated units, in which event the market price of our common units may decline materially.

The assumptions underlying the forecast of cash available for distribution, as set forth in “Our Cash Distribution Policy and Restrictions on Distributions,” are inherently uncertain and are subject to significant business, economic, financial, regulatory, and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.

The forecast of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecasted results of operations, EBITDA and cash available for distribution for the twelve months ending September 30, 2014. Our ability to pay the full minimum quarterly distributions in the forecast period is based upon a number of assumptions that may not prove to be correct that are discussed in “Our Cash Distribution Policy and Restrictions on Distributions.” Management has prepared the financial forecast and has not received 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, financial, regulatory, and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted. If we do not achieve the forecasted results, we may not be able to pay the full minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially. Please read “Our Cash Distribution Policy and Restrictions on Distributions.”

 

23


Table of Contents
Index to Financial Statements

Western may suspend, reduce, or terminate its obligations under each of our commercial agreements and our services agreement in some circumstances, which would have a material adverse effect on our financial condition, results of operations, cash flows, and ability to make distributions to unitholders.

Our commercial agreements and services agreement with Western include provisions that permit Western to suspend, reduce, or terminate its obligations under the applicable agreement if certain events occur. These events include a material breach of the agreement by us, or Western 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. Western has the discretion to make such decisions notwithstanding the fact that they may significantly and adversely affect us. For instance, under the commercial agreements, if Western decides to permanently or indefinitely suspend, in full or in part, refining operations at a refinery for a period that will continue for at least twelve consecutive months, then it may terminate or proportionately reduce, as applicable, its obligations under the agreement on no less than twelve-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 twelve-month notice period. Under the commercial agreements, Western has the right to terminate such agreements with respect to any services for which performance will be suspended by a force majeure event for a period in excess of twelve months. Additionally, under the commercial agreements, Western has the right to terminate such agreements in the event of a material breach by us, subject to a 20-business day cure period.

Generally, although Western is not entitled to claim a force majeure event under the commercial agreements, Western’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 and in the services agreement, force majeure events include any acts or occurrences that prevent services from being performed under the applicable agreement, including, but not limited to:

 

   

acts of God, or fires, floods or storms;

 

   

compliance with orders of courts or any governmental authority;

 

   

explosions, wars, terrorist acts, riots, strikes, lockouts or other industrial disturbances;

 

   

accidental disruption of service;

 

   

breakdown of machinery, storage tanks or pipelines, and inability to obtain or unavoidable delay in obtaining material or equipment; and

 

   

similar events or circumstances, so long as such events or circumstances are beyond the service provider’s reasonable control and could not have been prevented by the service provider’s due diligence.

Accordingly, under our commercial agreements there exists a broad range of events that could result in our no longer being required to transport or distribute Western’s minimum throughput commitments on our pipelines and gathering systems or at our terminals, respectively, or to reserve dedicated storage capacity for Western’s products and Western no longer being required to pay the full amount of fees that would have been associated with its minimum throughput commitments and storage capacity reservations. Additionally, we have no control over Western’s business decisions and operations, and conflicts of interest may arise between Western and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. Western is not required to pursue a business strategy that favors us or utilizes our assets, and could elect to decrease refinery production or shutdown or re-configure a refinery. Furthermore, a single event or business decision relating to one of Western’s refineries could have an impact on each of our commercial agreements with

 

24


Table of Contents
Index to Financial Statements

Western. These actions, as well the other activities described above, could result in a reduction or suspension of Western’s obligations under one or more of our commercial agreements. Any such reduction or suspension would have a material adverse effect on our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders. Please read “Certain Relationships and Related Party Transactions—Our Commercial Agreements with Western.”

If Western satisfies only its minimum obligations under, or if we are unable to renew or extend, the various commercial agreements we have with Western, our ability to make distributions to our unitholders will be reduced.

Western is not obligated to use our services with respect to volumes of crude oil or refined and other products in excess of the minimum commitments under the various commercial agreements with us. Our ability to make the minimum quarterly distribution on all outstanding units will be adversely affected if we do not transport additional volumes for Western on our pipeline and gathering systems (in excess of the minimum volume commitments under our commercial agreements), and handle additional Western and/or third-party volumes at our terminals, or if Western’s obligations under our commercial agreements are suspended, reduced or terminated due to a refinery shutdown or force majeure event. In addition, the terms of Western’s obligations under those agreements extend 10 years from the completion of this offering. If Western 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.

A material decrease in the refining margins at Western’s refineries could materially reduce the volumes of crude oil or refined and other products that we handle, which could adversely affect our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders.

The volume of refined and other products that we handle at our refined products terminals and the volume of crude oil that we transport on our pipeline and gathering systems depend substantially on Western’s refining margins. Refining margins are dependent both upon the price of crude oil or other refinery feedstock and the price of refined and other products. These prices are affected by numerous factors beyond our or Western’s control, including the global supply and demand for crude oil, gasoline and refined and other products. Refining margins historically have been volatile, and are likely to continue to be volatile, as a result of a variety of factors, including fluctuations in the prices of crude oil, other feedstocks, refined products, and fuel and utility services. In particular, Western’s refining margins were significantly lower in 2010 compared to 2012 and 2011 due to decreased demand for refined products, substantial increases in feedstock costs, and lower increases in product prices throughout much of 2010. Western’s refining margins have been positively impacted by the discount of WTI crude oil to Brent crude oil and the discount of WTI Midland crude oil to WTI Cushing crude oil, as the majority of its crude oil purchases are based on pricing tied to WTI Midland. However, both the WTI/Brent discount and the WTI Midland/Cushing discount have narrowed recently. For example, the WTI/Brent discount decreased from a high of $25.53 on November 15, 2012 to $0.20 as of July 19, 2013, based on New York Mercantile Exchange and Intercontinental Exchange closing prices. Both the WTI/Brent discount and the WTI Midland/Cushing discount remain volatile, and either or both of these discounts could remain narrow, further decline, or invert in the future.

In addition to current market conditions, there are long-term factors that may impact the supply and demand of refined and other products in the United States. These factors include:

 

   

changes in global and local economic conditions;

 

   

demand for crude oil and refined products, especially in the U.S., China, and India;

 

   

worldwide political conditions, particularly in significant oil producing regions such as the Middle East, West Africa, and Latin America;

 

25


Table of Contents
Index to Financial Statements
   

the level of foreign and domestic production of crude oil and refined products and the level of crude oil, feedstocks, and refined products imported into the U.S., which can be impacted by accidents, interruptions in transportation, inclement weather, or other events affecting producers and suppliers;

 

   

utilization rates of U.S. refineries;

 

   

changes in fuel specifications required by environmental and other laws;

 

   

the ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to maintain oil price and production controls;

 

   

development and marketing of alternative and competing fuels;

 

   

pricing and other actions taken by competitors that impact the market;

 

   

product pipeline capacity, including the Magellan Southwest System pipeline, as well as Kinder Morgan’s expansion of its East Line, both of which could increase supply in certain of Western’s service areas and therefore reduce Western’s margins;

 

   

accidents, interruptions in transportation, inclement weather or other events that can cause unscheduled shutdowns or otherwise adversely affect our plants, machinery or equipment, or those of our suppliers or customers; and

 

   

local factors, including market conditions, weather conditions, and the level of operations of other refineries and pipelines in our service areas.

If the demand for refined and other products, particularly in Western’s primary market areas, decreases significantly, or if there were a material increase in the price of crude oil supplied to Western’s refineries without an increase in the value of the products produced by those refineries, either temporary or permanent, that caused Western to reduce production of refined and other products at its refineries, there would likely be a reduction in the volumes of crude oil and refined and other products we handle for Western. Any such reduction could adversely affect our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders.

Our logistics operations and Western’s refining operations are subject to many risks and operational hazards, some of which may result in business interruptions and shutdowns of our or Western’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 and other 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;

 

   

the inability of third-party facilities on which our operations are dependent, including Western’s facilities, to complete capital projects and to restart timely refining operations following a shutdown;

 

   

mechanical or structural failures at our facilities or at third-party facilities on which our operations are dependent, including Western’s facilities;

 

26


Table of Contents
Index to Financial Statements
   

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, Western’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 Western’s facilities 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 Western’s refineries and their associated pipelines.

We will be insured under the property, liability and business interruption policies of Western, subject to the deductibles and limits under those policies. To the extent Western experiences losses under the insurance policies, the limits of our coverage may be decreased. 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.

Our substantial dependence on the El Paso and Gallup Refineries as well as the lack of diversification of our assets and geographic locations could adversely affect our ability to make distributions to our common unitholders.

We believe that most of our revenues for the foreseeable future will be derived from operations supporting the El Paso and Gallup Refineries. Any event that renders either refinery temporarily or permanently unavailable or that temporarily or permanently reduces rates at either refinery could have a material adverse effect on our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders.

We rely on revenues generated from our pipelines and gathering operations, and our transportation, terminalling, and storage operations that are located in West Texas, New Mexico and Arizona. Due to our lack of diversification in assets and geographic location, an adverse development in our businesses or areas of operations, including adverse developments due to catastrophic events, weather, regulatory action, and decreases in demand for crude oil and refined products, could have a significantly greater impact on our results of operations and cash available for distribution to our common unitholders than if we maintained more diverse assets and locations. Such events may constitute force majeure events under our commercial agreements, potentially resulting in the suspension, reduction or termination of multiple commercial agreements in the impacted geographic area. In addition, during a refinery turnaround, we expect that Western may only satisfy its minimum volume commitments with respect to our assets that serve such refinery. Please read “—Western may suspend, reduce, or terminate its obligations under each of our commercial agreements and our services agreement in some circumstances, which would have a material adverse effect on our financial condition, results of operations, cash flows, and ability to make distributions to unitholders” and “—If Western satisfies only its minimum obligations under, or if we are unable to renew or extend, the various commercial agreements we have with Western, our ability to make distributions to our unitholders will be reduced.”

Terrorist attacks, cyber-attacks, threats of war, or actual war may negatively affect our and Western’s operations, financial condition, results of operations, cash flows, and prospects.

Terrorist attacks in the U.S., as well as events occurring in response to or in connection with them, may adversely affect our and Western’s operations, financial condition, results of operations, cash flows, and prospects. Energy related assets (that could include third-party pipelines and refineries, such as the Western refineries on which we are substantially dependent, and terminals and pipelines such as ours) may be at greater

 

27


Table of Contents
Index to Financial Statements

risk of future terrorist attacks than other possible targets. A direct attack on our assets or assets used by us could have a material adverse effect on our operations, financial condition, results of operations, cash flows, and prospects. In addition, any terrorist attack could have an adverse impact on energy prices, including prices for Western’s crude oil and refined and other products. In addition, disruption or significant increases in energy prices could result in government imposed price controls. While we currently maintain some insurance that provides coverage against terrorist attacks, such insurance has become increasingly expensive and difficult to obtain. As a result, insurance providers may not continue to offer this coverage to us on terms that we consider affordable, or at all.

We and Western are dependent on technology infrastructure and maintain and rely upon certain critical information systems for the effective operation of our respective businesses. These information systems include data network and telecommunications, internet access and our websites, and various computer hardware equipment and software applications, including those that are critical to the safe operation of our pipelines and terminals. These information systems are subject to damage or interruption from a number of potential sources including natural disasters, software viruses or other malware, power failures, cyber-attacks, and other events. To the extent that these information systems are under our control, we have implemented measures such as virus protection software, and emergency recovery processes to address the outlined risks. However, security measures for information systems cannot be guaranteed to be failsafe. Any compromise of our data security or our inability to use or access these information systems at critical points in time could unfavorably impact the timely and efficient operation of our business and subject us to additional costs and liabilities.

A material decrease in the supply of crude oil available to Western’s refineries could significantly reduce the volume of crude oil gathered and transported by our pipeline systems and the refined and other products distributed by our terminals, 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 pipeline systems and the volume of refined and other products that we distribute at our terminals depends on the volume of refined and other products produced at Western’s refineries. Western continually contracts with third-party crude oil suppliers to maintain a sufficient supply of crude oil for production at their refineries. In order to maintain or increase refined and other product production levels at their refineries, Western must continually contract for new crude oil supplies at a greater rate than the rate of decline in Western’s current supplies. A decline in available crude oil to Western’s refineries or an inability to secure additional crude oil supplies to meet the needs of current or future refinery expansion could result in an overall decline in volumes of refined and other products produced by Western’s refineries. If the volume of attractively-priced, high-quality crude oil available to Western’s refineries is materially reduced for a prolonged period of time, the volume of crude oil gathered and transported by our pipeline systems and the volume of refined and other products distributed by our terminals, 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 increase our third-party revenue significantly or at all due to competition and other factors, which could limit our ability to grow and extend our dependence on Western.

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 acquiring or developing new assets independently from Western. 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. 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, transportation, terminalling, and storage services to third parties on only a limited basis. We can provide no assurance that we will be able to attract any material third-

 

28


Table of Contents
Index to Financial Statements

party service opportunities, and we are currently restricted from doing so under our commercial agreements with Western in circumstances where it would inhibit our ability to provide services to Western. Our efforts to attract new unaffiliated customers may be adversely affected by our relationship with Western, our desire to provide services pursuant to fee-based contracts and, with respect to the pipeline systems, Western’s operational requirements at its refineries that rely upon our pipeline and gathering systems to supply a significant portion of their crude oil requirements and that we expect to continue to utilize substantially all of the available capacity of the current pipeline systems for transportation of crude oil to the refineries. 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.

Our and Western’s expansion of existing assets and development of new assets may not result in revenue increases and will be subject to risks associated with crude oil production and 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 our unitholders is dependent on projected increased crude oil production in our existing areas of operation and on our or Western’s ability to expand existing assets and to develop additional assets. There can be no assurance that expected crude oil production increases will occur in the future or that crude oil production in our existing areas of operations will not decline in the future. For example, a period of sustained crude oil price declines could lead to a decline in drilling activity and production. Additionally, drilling activities by third parties as well as 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, legal, and economic uncertainties, most of which are beyond our control.

If we or Western undertake these projects, they may not be completed on schedule, completed at all, or completed 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, we may develop facilities to capture anticipated future growth in production in a region in which such growth does not materialize. Moreover, 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. 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 Western or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.

A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions that result in an increase in cash flow. The acquisition component of our growth strategy is based, in large part, on our expectation of ongoing divestitures of gathering, transportation and storage assets by industry participants, including Western. 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 Western or third parties, because we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, we are unable to obtain financing for these acquisitions on economically acceptable terms or we are outbid by competitors, our future growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in cash flow. Any acquisition involves potential risks, including, among other things:

 

   

mistaken assumptions about revenues and costs, including synergies;

 

29


Table of Contents
Index to Financial Statements
   

an inability to integrate successfully the businesses or assets we acquire;

 

   

the assumption of unknown liabilities;

 

   

limitations on rights to indemnity from the seller;

 

   

mistaken assumptions about the overall costs of equity or debt;

 

   

the diversion of 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 Western’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 Western’s existing assets and certain logistics assets Western may acquire or construct in the future in the Permian Basin or the Four Corners area for a period of 10 years after the closing of this offering. We do not have a current agreement or understanding with Western to purchase any assets covered by our rights of first offer. The consummation and timing of any future acquisitions of these assets will depend upon, among other things, Western’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 rights of first offer, and Western is under no obligation to accept any offer that we may choose to make. In addition, certain of the assets covered by our rights 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 these or a variety of other reasons, we may decide not to exercise our rights 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 rights of first offer may be terminated by Western 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 Western’s refining and marketing operations do not grow as expected.

Part of our growth strategy depends on the growth of Western’s refining and marketing operations. For example, we believe our growth will primarily be driven by identifying and executing organic expansion projects that will result in increased throughput volumes from Western and third parties. Our prospects for organic growth currently include projects that we expect Western to undertake, such as adding gathering lines to our existing systems, and that we expect to have an opportunity to purchase from Western. If Western 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, shippers in interconnecting, third-party pipelines could cause a reduction of volumes distributed through our terminals and pipelines.

Western is dependent upon connections to third-party pipelines to transport refined and other products to certain of our terminals and to ship crude oil through certain of our pipelines. For example, Western’s El Paso

 

30


Table of Contents
Index to Financial Statements

Refinery is dependent on a pipeline owned by a subsidiary of Kinder Morgan Energy Partners, LP (“Kinder Morgan”) for the delivery of all of its crude oil. Any reduction of capacities of these interconnecting pipelines due to testing, line repair, reduced operating pressures, retirement or abandonment of facilities or other causes could result in reduced volumes of refined and other products distributed through our terminals and shipments of crude oil through our pipelines. Similarly, if additional shippers begin transporting volumes of refined and other products or crude oil over interconnecting pipelines, the allocations to Western and other existing shippers on these pipelines could be reduced, which could also reduce volumes distributed through our terminals or transported through our pipelines. Allocation reductions of this nature are not infrequent and are beyond our control. Any significant reduction in volumes would adversely affect our revenues and cash flow and our ability to make distributions to our unitholders.

We could incur substantial costs or disruptions in our business if we cannot obtain or maintain necessary permits and authorizations or otherwise comply with health, safety, environmental, and other laws and regulations.

Our operations require numerous permits and authorizations under various laws and regulations, including environmental and health and safety laws and regulations. These authorizations and permits are subject to revocation, renewal, or modification and can require operational changes that may involve significant costs to limit impacts or potential impacts on the environment and/or health and safety. A violation of these authorization or permit conditions or other legal or regulatory requirements could result in substantial fines, criminal sanctions, permit revocations, injunctions, and/or refinery shutdowns. In addition, major modifications of our operations could require modifications to our existing permits or expensive upgrades to our existing pollution control equipment that could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We do not own all of the land on which our pipelines, terminals, and other assets are located, which could result in disruptions to our operations.

We do not own all of the land on which our pipelines, terminals, and other assets 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 develop 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 rights-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.

Severe weather, including hurricanes, could interrupt the supply of some of Western’s feedstock.

Crude oil supplies for the El Paso Refinery come from the Permian Basin in Texas and New Mexico, and therefore are not generally subject to interruption from hurricanes. However, due to severe weather or other factors, if there is an interruption to Western’s supply of feedstock for its El Paso Refinery for a prolonged period of time, the volume of crude oil gathered and transported by our pipeline systems and the volume of refined and other products distributed by our terminals, 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.

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

 

31


Table of Contents
Index to Financial Statements

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 certain cash distributions;

 

   

incur certain indebtedness;

 

   

create certain liens;

 

   

make certain investments; and

 

   

merge or sell all or substantially all of our assets.

Furthermore, our revolving credit facility will contain covenants requiring us to maintain certain financial ratios. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Our New 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 that 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, acquisitions, organic growth projects, investments or capital expenditures, selling assets or issuing equity. We may not be able to affect any of these actions on satisfactory terms or at all.

 

32


Table of Contents
Index to Financial Statements

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.

Western’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. Our ability to obtain credit in the future may also be affected by Western’s credit rating.

Western 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 Western in the future increases the risk that it may default on its obligations to us under each of our commercial agreements. As of March 31, 2013, Western had long-term indebtedness of approximately $713.6 million.

The covenants contained in the agreements governing Western’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, Western’s indebtedness requires that any transactions it enters into with us must be on terms no less favorable to Western than those that would have been obtained in a comparable arm’s-length transaction with an unaffiliated person. Furthermore, in the event that Western were to default under certain of its debt obligations, there is a risk that Western’s creditors would attempt to assert claims against our assets during the litigation of their claims against Western. 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.

Western’s long-term credit ratings are currently below investment grade. If these ratings are lowered in the future, Western’s borrowing costs 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 Western’s debt ratings when assigning ours because of Western’s ownership interest in us, the significant commercial relationships between Western and us, and our reliance on Western for substantially all of our revenues. If one or more credit rating agencies were to downgrade the outstanding indebtedness of Western, 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 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, terminalling, and storage of crude oil and refined and other products, which is subject to increasingly stringent federal, state, and local laws and regulations governing operational safety and the discharge of materials into the environment. Our business of transporting, terminalling, and storing crude oil and refined and other products involves the risk that crude oil, refined and other 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 and other 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.

 

33


Table of Contents
Index to Financial Statements

Our pipelines, terminals, and storage assets are also subject to increasingly strict federal, state, and local laws and regulations related to protection of the environment and that require us to comply with various safety requirements regarding the design, installation, testing, construction, and operational management of our pipeline systems, terminals, and storage assets. These regulations have raised operating costs for the crude oil and refined products industry and compliance with such laws and regulations may cause us and Western to incur potentially material capital expenditures associated with the construction, maintenance, and upgrading of equipment and facilities. Environmental laws and regulations, in particular, are subject to frequent change, and many of them have become and will continue to become more stringent.

We could incur potentially significant additional expenses should we determine that any of our assets are not in compliance with applicable laws and regulations. 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” and “Business—Rate and Other Regulation—Pipeline Safety.”

Our pipeline systems are subject to stringent environmental regulations governing spills and releases that could require us to make substantial expenditures.

Transportation of crude oil and refined and other products involves inherent risks of spills and releases from our facilities, and can subject us to various federal and state laws governing spills and releases, including reporting and remediation obligations. The costs associated with such obligations can be substantial, as can costs associated with related enforcement matters, including possible fines and penalties. Transportation of such products over water or proximate to navigable water bodies involves inherent risks (including risks of spills) and could subject us to the provisions of the Oil Pollution Act of 1990 (the “Oil Pollution Act”) and similar state environmental laws should a spill occur from our facilities. Among other things, the Oil Pollution Act requires us to prepare a facility response plan identifying the personnel and equipment necessary to remove to the maximum extent practicable a “worst case discharge.” Some of our facilities are required to maintain such facility response plans. To meet this requirement, we and Western have contracted with various spill response service companies in the areas in which we transport or store crude oil and refined and other products; however, these companies may not be able to adequately contain a “worst case discharge” in all instances, and we cannot ensure that all of their services would be available for our or Western’s use at any given time. Many factors that could inhibit the availability of these service providers, include, but are not limited to, weather conditions, governmental regulations or other global events. In these and other cases, we may be subject to liability in connection with the discharge of crude oil or products into navigable waters.

If any of these events occur or are discovered in the future, whether in connection with any of our pipelines, terminals or storage assets, or any other facility that we send or have sent wastes or by-products to 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 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, we will be subject to a deductible of $100,000 per claim before we are entitled to indemnification from Western for certain environmental liabilities under our omnibus agreement. 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. Please read “Business—Environmental Regulation—Waste Management and Related Liabilities.”

Increased regulation of hydraulic fracturing could result in reductions or delays in crude oil production in our existing areas of operation, which could adversely impact our revenues.

A significant percentage of the crude oil production in our existing areas of operation is being developed from unconventional sources, such as hydrocarbon shales. These reservoirs require hydraulic fracturing

 

34


Table of Contents
Index to Financial Statements

completion processes to release the oil or natural gas from the rock so it can flow through casing to the surface. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation to stimulate production. A number of federal agencies, including the EPA and the U.S. Department of Energy, are analyzing, or have been requested to review, a variety of environmental issues associated with shale development, including hydraulic fracturing. Along these lines, on May 11, 2012, the Bureau of Land Management, or BLM, issued a proposed rule that would require the public disclosure of chemicals used in hydraulic fracturing operations, set requirements for well-bore integrity and establish flowback water standards for all hydraulic fracturing operations on federal public lands and American Indian Tribal lands. In addition, the EPA has asserted federal regulatory authority over hydraulic fracturing involving diesel additives under the Safe Drinking Water Act’s Underground Injection Control Program and has begun the process of drafting guidance documents related to this assertion of regulatory authority. Further, some states and municipalities have adopted, and other states and municipalities are considering adopting, regulations that could prohibit hydraulic fracturing in certain areas or impose more stringent disclosure and/or well construction requirements on hydraulic fracturing operations. At the same time, certain environmental groups have suggested that additional laws may be needed to more closely and uniformly regulate the hydraulic fracturing process, and legislation has been proposed by some members of Congress to provide for such regulation. We cannot predict whether any such legislation will ever be enacted and if so, what its provisions would be. If additional levels of regulation are imposed at the federal or state level, that could result in corresponding delays, increased operating costs and process prohibitions for crude oil producers and potentially reduce throughput on our systems, which would materially adversely affect our revenues, results of operations and cash available for distribution to unitholders.

We may incur significant costs and liabilities as a result of pipeline integrity management programs or safety standards.

Certain of our pipeline facilities are subject to the pipeline safety regulations of the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) at the U.S. Department of Transportation (the “DOT”). PHMSA regulates the design, construction, testing, operation, maintenance and emergency response of crude oil, petroleum products and other hazardous liquid pipeline facilities.

PHMSA has adopted regulations requiring pipeline operators to develop integrity management programs for hazardous liquids pipelines located where a leak or rupture could affect “high consequence areas” that are populated or environmentally sensitive areas. PHMSA has also issued regulations that subject certain rural low-stress hazardous liquids pipelines to the integrity management requirements. The integrity management regulations require operators, including us, to:

 

   

perform ongoing assessments of pipeline integrity;

 

   

identify and characterize applicable threats to pipeline segments that could impact a high consequence area;

 

   

maintain processes for data collection, integration, and analysis;

 

   

repair and remediate pipelines as necessary; and

 

   

implement preventive and mitigating actions.

PHMSA also carries out the Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011, which reauthorized funding for federal pipeline safety programs through 2015, increased penalties for safety violations, established additional safety requirements for newly constructed pipelines, imposed new emergency response and incident notification requirements, and required studies of certain safety issues that could result in the adoption of new regulatory requirements for existing pipelines.

 

35


Table of Contents
Index to Financial Statements

We may incur significant costs and liabilities associated with compliance with pipeline safety regulations and any corresponding repair, remediation, preventive or mitigation measures required for our non-exempt pipeline facilities, including lost cash flows resulting from shutting down our pipelines during the pendency of such repairs. Moreover, changes to pipeline safety laws and regulations that result in more stringent or costly pipeline integrity management or safety standards could have a material adverse effect on us and similarly situated operators.

Meeting the requirements of evolving environmental, health and safety laws and regulations, including those related to climate change, could adversely affect our financial performance.

Potential additional regulations regarding climate change could affect our operations. Currently, various legislative and regulatory measures to address greenhouse gas emissions (including carbon dioxide, methane, and other gases) are in various phases of review, discussion or implementation in the United States. These measures include EPA programs to control greenhouse gas emissions and state actions to develop statewide or regional programs, each of which could impose reductions in greenhouse gas emissions. These actions could result in increased (1) costs to operate and maintain our facilities, (2) capital expenditures to install new emission controls on our facilities, and (3) costs to administer and manage any potential greenhouse gas emissions regulations or carbon trading or tax programs. In addition, 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 gas emission controls for those sources. The EPA has also issued its plan for establishing specific greenhouse gas emission requirements under the Clean Air Act. Under this plan, the EPA was expected to propose broad standards for refineries by the end of 2012, but these standards will not be proposed until 2013. These developments could have an indirect adverse effect on our business if Western’s refinery operations are adversely affected due to increased regulation of Western’s facilities or reduced demand for crude oil and refined and other products, and a direct adverse effect on our business from increased regulation of our facilities. Please read “Business—Environmental Regulation—Air Emissions and Climate Change.”

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 assets is inherently subject to the risks of spills, discharges or other inadvertent releases of petroleum or other hazardous substances. If any of these events have previously occurred or occur in the future, whether in connection with any of Western’s refineries, our pipelines, refined products terminals or storage assets, or any other facility that we send or have sent wastes or by-products to 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 fifth 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

 

36


Table of Contents
Index to Financial Statements

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.

Transportation on certain of our pipelines is subject to federal or state rate and service regulation, and the imposition and/or cost of compliance with such regulation could adversely affect our operations, revenues and cash flows available.

Our Main 12-inch pipeline, West 10-inch pipeline, East 10-inch pipeline, San Juan 6-inch pipeline, West 6-inch pipeline, TexNew Mex 16” Pipeline segment, East 6-inch pipeline, Wingate 4-inch NGL pipeline and Riverbend 4-inch gathering pipeline provide services that may be subject to regulation by the FERC, under the Interstate Commerce Act (“ICA”), the Energy Policy Act (the “EPAct 1992”) and/or state regulators. The FERC uses prescribed rate methodologies for developing regulated tariff rates for interstate oil and product pipelines. Our tariff rates approved by the FERC may not recover all of our costs of providing services. In addition, these methodologies and changes to the FERC’s approved rate methodologies, or challenges to our application of an approved methodology, could also adversely affect our rates.

Shippers may protest (and the FERC may investigate) the lawfulness of new or changed tariff rates. The FERC can suspend those tariff rates for up to seven months. It can also require refunds of amounts collected pursuant to rates that are ultimately found to be unlawful and prescribe new rates prospectively. The FERC and interested parties can also challenge tariff rates that have become final and effective. The FERC can order new rates to take effect prospectively and order reparations for past rates that exceed the just and reasonable level for time periods up to two years prior to the date of a complaint. Due to the complexity of rate making, the lawfulness of any rate is never assured. A successful challenge of our rates could adversely affect our revenues.

The FERC also regulates the terms and conditions of service, including access rights, for interstate transportation on common carrier pipelines subject to its jurisdiction. Certain of our pipelines are common carriers and, as a consequence, we may be required to provide service to customers with credit and other performance characteristics with whom we would otherwise choose not to do business.

Certain of our pipelines provide intrastate service that is subject to regulation by the New Mexico Public Regulation Commission and the Texas Railroad Commission. The New Mexico Public Regulation Commission and the Texas Railroad Commission could limit our ability to increase our rates or 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. Please read “Business—Rate and Other Regulation.”

Pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company.

We will be required to disclose changes made in our internal control over financial reporting on a quarterly basis, and we will be required to assess the effectiveness of our controls annually. However, for as long as we are an “emerging growth company” under the recently enacted JOBS Act, we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not emerging growth companies, including not being required to provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, and reduced disclosure obligations regarding executive compensation in our periodic reports. We will remain an emerging growth company for up to five years. See “Summary—Our Emerging Growth Company Status.” Effective internal controls are necessary for us to provide reliable and

 

37


Table of Contents
Index to Financial Statements

timely financial reports, prevent fraud and to operate successfully as a publicly traded partnership. We prepare our consolidated financial statements in accordance with GAAP, but our internal accounting controls may not meet all standards applicable to companies with publicly traded securities. 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. For example, Section 404 will require us, among other things, to annually review and report on the effectiveness of our internal control over financial reporting. We must comply with Section 404 (except for the requirement for an auditor’s attestation report) beginning with our fiscal year ending December 31, 2014. 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. Even if we conclude that our internal controls over financial reporting are effective, our independent registered public accounting firm may still decline to attest to our assessment or may issue a report that is qualified if it is not satisfied with our controls or the level at which the our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us.

Given the difficulties inherent in the design and operation of internal controls over financial reporting, in addition to our limited accounting personnel and management resources, we can provide no assurance as to our, or our independent registered public accounting firm’s, future conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Any failure to implement and maintain effective internal controls over financial reporting will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.

We may take advantage of these exemptions until we are no longer an “emerging growth company.” We cannot predict if investors will find our units less attractive because we will rely on these exemptions. If some investors find our units less attractive as a result, there may be a less active trading market for our units and our trading price may be more volatile.

Our insurance policies do not cover all losses, costs, or liabilities that we may experience.

The policies we are insured under do not cover all potential losses, costs, or liabilities that we may experience. We could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. Our ability to obtain and maintain adequate insurance may be adversely affected by conditions in the insurance market over which we have no control. In addition, if we experience insurable events, our annual premiums could increase further or insurance may not be available at all. The occurrence of an event that is not fully covered by insurance or the loss of insurance coverage could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

The loss of key personnel could adversely affect our ability to operate.

We depend on the leadership, involvement and services of a relatively small group of our general partner’s key management personnel, including its Chief Executive Officer and other executive officers and key technical and commercial personnel. The services of these individuals may not be available to us in the future. Because competition for experienced personnel in the midstream industry is intense, we may not be able to find acceptable replacements with comparable skills and experience. Accordingly, the loss of the services of one or more of these individuals could have a material adverse effect on our ability to operate our business.

 

38


Table of Contents
Index to Financial Statements

We and our general partner do not have any employees and rely solely on employees of Western.

None of the officers of Western Refining Logistics GP, LLC are employees of our general partner. Affiliates of Western conduct businesses and activities of their own in which we have no economic interest, including businesses and activities relating to Western. As a result, there could be material competition for the time and efforts of the employees who provide services to our general partner and Western. If the employees of Western do not devote sufficient attention to the operation of our business, our financial results may suffer and our ability to make distributions to our unitholders may be reduced.

Many of our assets have been in service for several years and require significant expenditures to maintain them. As a result, our maintenance or repair costs may increase in the future.

Our pipelines, terminals, and storage assets are generally long-lived assets, and many of them have been in service for many years. The age and condition of our assets could result in increased maintenance or repair expenditures in the future. Any significant increase in these expenditures could adversely affect our results of operations, financial position or cash flows, as well as our ability to make cash distributions to our unitholders.

The adoption of derivatives legislation by Congress could have an adverse impact on our customers’ ability to hedge risks associated with their business.

On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act regulates derivative transactions, which include certain instruments used in our risk management activities.

The new legislation and regulations promulgated thereunder could increase the operational and transactional cost of derivatives contracts and affect the number and/or creditworthiness of counterparties available to us, to Western or to our or Western’s customers.

Certain components of our revenue have exposure to direct commodity price risk, and our exposure to direct commodity price risk may increase in the future.

We have exposure to direct commodity price risk through the loss allowance provisions of our commercial agreements. Based on our financial forecast included under the caption “Our Cash Distribution Policy and Restrictions on Distributions—Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2014,” for the twelve months ending September 30, 2014, we have forecasted that approximately 1% of our forecasted revenue for the period will be derived from our loss allowance provisions. Any future losses due to our commodity price risk exposure could materially and adversely affect our results of operations and financial condition and our ability in the future to make distributions to our unitholders. For more information about these loss allowance and commodity imbalance provisions, please read “Our Cash Distribution Policy and Restrictions on Distributions—Significant Forecast Assumptions” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Qualitative and Quantitative Disclosures About Market Risk.”

Increases in interest rates could adversely affect our business.

We will have exposure to increases in interest rates. At the closing of this offering, we expect to enter into a new $300 million revolving credit facility. While we do not expect to make any borrowings at the closing of this offering, any future borrowings are expected to bear interest at LIBOR plus an applicable margin. As a result, if we make any borrowings in the future our results of operations, cash flows, and financial condition could be materially adversely affected by significant increases in interest rates.

 

39


Table of Contents
Index to Financial Statements

Certain U.S. federal income tax deductions currently available with respect to oil and gas exploration and development may be eliminated as a result of future legislation, which could reduce the amount of transportation and storage fees we receive and our cash available for distribution to our unitholders.

The Fiscal Year 2014 Budget proposed by the President recommends the elimination of certain key U.S. federal income tax incentives currently available to oil and gas exploration and production companies, and from time to time legislation has been introduced in Congress which would implement many of these proposals. The proposed changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for certain domestic production activities and (iv) an extension of the amortization period for certain geological and geophysical expenditures. We cannot predict whether these or similar changes will be enacted and, if enacted, when any such changes would become effective. The passage of any legislation as a result of these proposals or any other similar changes in U.S. federal income tax laws could raise the cost of energy production and reduce oil and gas exploration and production activities. Because we generate revenue primarily by charging fees and tariffs for transporting crude oil and refined products and for providing storage at our storage tanks and terminals, a reduction in oil and gas production activities could reduce our transportation and storage fee revenue and thus reduce our cash available for distribution to our unitholders.

Risks Inherent in an Investment in Us

Western will own a     % limited partner interest in us and will control our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including Western, have conflicts of interest with us and limited duties to us and may favor their own interests to your detriment.

Following the offering, Western will own and control our general partner and will appoint all of the directors of our general partner. Some of the directors and all of the executive officers of our general partner are also directors or officers of Western. Although our general partner has a duty to manage us in a manner it believes to be in our best interests, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is in the best interests of Western, in its capacity as the sole member of our general partner. Conflicts of interest may arise between Western and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:

 

   

neither our partnership agreement nor any other agreement requires Western to pursue a business strategy that favors us or utilizes our assets, which could involve decisions by Western to increase or decrease refinery production, connect our pipeline systems to third-party delivery points, shutdown or reconfigure a refinery, enter into commercial agreements with us or pursue and grow particular markets. Western’s directors and officers have a fiduciary duty to make these decisions in the best interests of the owners of Western and affiliated entities, which may be contrary to our interests;

 

   

Western 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;

 

   

Western, as our primary customer, has an economic incentive to cause us to not seek higher tariff rates 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;

 

   

some officers of Western who provide services to us also will devote significant time to the business of Western, and will be compensated by Western for the services rendered to it;

 

40


Table of Contents
Index to Financial Statements
   

our general partner determines the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities, and reserves, each of which can affect the amount of cash that is distributed to unitholders;

 

   

our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period;

 

   

our general partner determines which costs incurred by it are reimbursable by us;

 

   

our partnership agreement permits us to distribute 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 the incentive distribution rights;

 

   

our general partner is allowed to take into account the interests of parties other than us in exercising certain rights under our partnership agreement;

 

   

our partnership agreement limits the liability of, and replaces the duties owed by, our general partner and also restricts the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty;

 

   

contracts between us, on the one hand, and our general partner and its affiliates, on the other, are not and will not be the result of arm’s-length negotiations;

 

   

except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;

 

   

disputes may arise under our commercial agreements with Western;

 

   

our general partner will determine the amount and timing of many of our cash expenditures and whether a cash expenditure is classified as an expansion capital expenditure, which would not reduce operating surplus, or a maintenance capital expenditure, which would reduce our operating surplus. This determination can affect the amount of cash from operating surplus that is distributed to our unitholders and to our general partner, the amount of adjusted operating surplus generated in any given period and the ability of the subordinated units to convert into common units;

 

   

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 80% 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, omnibus agreement and services agreement with Western;

 

   

our general partner decides whether to retain separate counsel, accountants or others to perform services for us;

 

   

our general partner, as the holder of our incentive distribution rights, may elect to cause us to issue common units to it in connection with a resetting of incentive distribution levels without the approval of our unitholders. This election may result in lower distributions to our common unitholders in certain situations; and

 

   

our general partner, as the holder of our incentive distribution rights, may transfer the incentive distribution rights without the approval of our unitholders.

 

41


Table of Contents
Index to Financial Statements

Western may compete with us.

Western may compete with us. Pursuant to 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 Western and its executive officers and directors and Western. Except as provided in the 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 (other than the implied contractual covenant of good faith and fair dealing) 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 common unitholders. Please read “Conflicts of Interest and Duties.”

Our general partner intends to limit its liability regarding our obligations.

Our general partner intends to limit its liability under contractual arrangements between us and third parties so that the counterparties to such arrangements have recourse only against our assets, and not against our general partner or its assets. Our general partner may therefore cause us to incur indebtedness or other obligations that are nonrecourse to our general partner. Our partnership agreement provides that any action taken by our general partner to limit its liability is not a breach of our general partner’s duties, even if we could have obtained more favorable terms without the limitation on liability. In addition, we are obligated to reimburse or indemnify our general partner to the extent that it incurs obligations on our behalf. Any such reimbursement or indemnification payments would reduce the amount of cash otherwise available for distribution to our unitholders.

Ongoing cost reimbursements due to our general partner and its affiliates for services provided, which will be determined by our general partner, will be substantial and will reduce our cash available for distribution to our unitholders.

Prior to making distributions on our common units, we will reimburse our general partner and its affiliates for all expenses they incur on our behalf. These expenses will include all costs incurred by our general partner and its affiliates in managing and operating us, including costs for rendering corporate staff and support services to us. There is no limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. Our partnership agreement provides that our general partner will determine the expenses that are allocable to us in good faith. In addition, under Delaware partnership law, our general partner has unlimited liability for our obligations, such as our debts and environmental liabilities, except for our contractual obligations that are expressly made without recourse to our general partner. To the extent our general partner incurs obligations on our behalf, we are obligated to reimburse or indemnify it. If we are unable or unwilling to reimburse or indemnify our general partner, our general partner may take actions to cause us to make payments of these obligations and liabilities. Any such payments could reduce the amount of cash otherwise available for distribution to our unitholders.

Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.

Because we distribute all of our available cash to our unitholders, we expect that we will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our expansion capital expenditures and acquisitions. 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 businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in

 

42


Table of Contents
Index to Financial Statements

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, and we do not anticipate that there will be limitations in our new revolving credit facility, on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which in turn may impact the available cash that we have to distribute to our unitholders.

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our units with contractual standards governing its duties.

Our partnership agreement contains provisions that eliminate and replace the fiduciary standards that our general partner would otherwise be held to 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 other than the implied contractual covenant of good faith and fair dealing, which means that a court will enforce the reasonable expectations of the parties where the language in our partnership agreement does not provide for a clear course of action. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or 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 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;

 

   

whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement; and

 

   

whether or not the general partner should elect to seek the approval of the conflicts committee or the unitholders, or neither, of any conflicted transaction.

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 Duties —Elimination and Replacement of Fiduciary Duties.”

Our partnership agreement restricts the remedies available to holders of our 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 (other than the implied contractual covenant of good faith and fair dealing);

 

43


Table of Contents
Index to Financial Statements
   

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, meaning that it subjectively believed that the decision was in the best interests of our partnership;

 

   

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, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and

 

   

our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is:

 

   

approved by the conflicts committee of the board of directors of our general partner, although our general partner is not obligated to seek such approval; or

 

   

approved by the vote of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates.

Our general partner will not have any liability to us or our unitholders for decisions whether or not to seek the approval of the conflicts committee of the board of directors of our general partner or holders of a majority of the outstanding common units, excluding any common units owned by our general partner and its affiliates. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or the conflicts committee then it will be presumed that, in making its decision, taking any action or failing to act, 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 Duties.”

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 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, as the initial holder of our incentive distribution rights, at any time when there are no subordinated units outstanding and our general partner has received incentive distributions at the highest level to which it is entitled (50.0%) for the prior four consecutive fiscal quarters and the amount of each such distribution did not exceed the adjusted operating surplus for such quarter, 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 by our general partner, 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. The number of common units to be issued to our general partner will equal the number of common units that would have entitled the holder to an aggregate quarterly cash distribution in the quarter prior to the reset election equal to the distribution to our general partner on the incentive distribution rights in the quarter 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

 

44


Table of Contents
Index to Financial Statements

the right to receive incentive 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 our common unitholders would have otherwise received had we not issued new common units to our general partner in connection with resetting the target distribution levels. Please read “How We Make Distributions to Our Partners—Our General Partner’s Right to Reset Incentive Distribution Levels.”

Increases in interest rates could adversely impact our unit price and our ability to issue additional equity, to incur debt to capture growth opportunities or for other purposes, or to make cash distributions at our intended levels.

If interest rates rise, the interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by the level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank related 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 additional equity, to incur debt to expand or for other purposes, or to make cash distributions at our intended levels.

Holders of our common units have limited voting rights and are not entitled to elect our general partner or the board of directors of our general partner, which could reduce the price at which our common units will trade.

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 will 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, including its independent directors, will be chosen by the member of our general partner. Furthermore, if unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. 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. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

Even if unitholders are dissatisfied, they cannot initially remove our general partner without its consent.

The unitholders will initially be unable to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of this offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding units voting together as a single class is required to remove the general partner. Following the closing of this offering, our general partner and its affiliates will own a     % limited partner interest in us. Also, if our general partner is removed without cause during the subordination period and units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically convert into common units and any existing arrearages on our common units will be extinguished. A removal of our general partner under these circumstances would adversely affect our common units by prematurely eliminating their distribution and liquidation preference over our 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.

 

45


Table of Contents
Index to Financial Statements

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

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.

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 our unitholders. Furthermore, our partnership agreement does not restrict the ability of Western from transferring all or a portion of the ownership interest in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own choices and thereby exert significant control over the decisions made by the board of directors and officers. This effectively permits a “change of control” without the vote or consent of the unitholders.

The incentive distribution rights held by our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer the incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers the incentive distribution rights to a third party it 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 the incentive distribution rights. For example, a transfer of incentive distribution rights by our general partner could reduce the likelihood of Western accepting offers made by us relating to assets owned by it, as Western would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

Immediately effective upon closing, you will experience substantial dilution of $             in tangible net book value per common unit.

The assumed initial public offering price of $             per unit exceeds our pro forma net tangible book value of $             per unit. Based on the assumed initial public offering price of $             per unit, you will incur immediate and substantial dilution of $             per common unit after giving effect to the offering of common units and the application of the related net proceeds. Dilution results primarily because the assets contributed by our general partner and its affiliates are recorded in accordance with GAAP at their historical cost, and not their fair value. Please read “Dilution.”

We may issue additional units, including units that are senior to the common units, without your approval, which would dilute your existing ownership interests.

Our partnership agreement does not limit the number of additional limited partner interests that we may issue at any time without the approval of our unitholders. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

   

each unitholder’s 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;

 

46


Table of Contents
Index to Financial Statements
   

because the amount payable to holders of incentive distribution rights is based on a percentage of the total cash available for distribution, the distributions to holders of incentive distribution rights will increase even if the per unit distribution on common units remains the same;

 

   

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 the common units may decline.

There are no limitations in our partnership agreement on our ability to issue units ranking senior to the common units.

In accordance with Delaware law and the provisions of our partnership agreement, we may issue additional partnership interests that are senior to the common units in right of distribution, liquidation, and voting. The issuance by us of units of senior rank may (1) reduce or eliminate the amount of cash available for distribution to our common unitholders; (2) diminish the relative voting strength of the total common units outstanding as a class; or (3) subordinate the claims of the common unitholders to our assets in the event of our liquidation.

Western may sell common units in the public markets or otherwise, which sales could have an adverse impact on the trading price of the common units.

After the sale of the common units offered hereby, Western 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 some may convert earlier. Additionally, we have agreed to provide Western with certain registration rights. Please read “Units Eligible for Future Sale.” The sale of these units 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.

Our 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 that we are a party to, or to provide funds for future distributions to partners. These cash reserves will affect the amount of cash available for distribution to unitholders.

Our general partner has a limited call right that may require unitholders to sell their common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of the 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 equal to the greater of (1) the average of the daily closing price of the common units over the 20 trading days preceding the date 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. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return or a negative return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our

 

47


Table of Contents
Index to Financial Statements

partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private. Upon consummation of this offering, and assuming no exercise of the underwriters’ option to purchase additional common units, Western will own an aggregate of     % of our common units. At the end of the subordination period, assuming no additional issuances of units (other than upon the conversion of the subordinated units), Western will own     % of our common units. For additional information about the limited 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 will initially own assets and conduct business in Texas, New Mexico, and Arizona. You could be liable for any and all of our obligations as if you were a general partner if:

 

   

a court or government agency determines that we were conducting business in a state but had not complied with that particular state’s partnership statute; or

 

   

your rights 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.

For a discussion of the implications of the limitations of liability on a unitholder, please read “The Partnership Agreement—Limited Liability.”

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 (the “Delaware 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. Substituted limited partners are liable for the obligations of the assignor to make contributions to the partnership that are known to the substituted limited partner at the time it became a limited partner 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 nonrecourse 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, which could cause you to lose all or part of your investment.

Prior to the offering, there has been no public market for the common units. After the offering, there will be only             publicly traded common units. 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.

 

48


Table of Contents
Index to Financial Statements

The initial public offering price for the common units 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;

 

   

the loss of Western as a customer;

 

   

events affecting Western;

 

   

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.”

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 the 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 our partnership agreement. If our general partner, with the advice of counsel, determines that our not being treated as an association taxable as a corporation or otherwise taxable as an entity for U.S. federal income tax purposes, coupled with the tax status (or lack of proof thereof) of one or more of our limited partners, has, or is reasonably likely to have, a material adverse effect on the maximum applicable rates chargeable to customers by us, then our general partner may adopt such amendments to our partnership agreement as it determines 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.

Furthermore, in order to comply with certain of the FERC rate-making policies applicable to entities like us that pass their taxable income through to their owners, we have adopted requirements regarding who can be our owners. Our partnership agreement requires that a transferee of common units, including underwriters and those who purchase common units from underwriters, properly complete and deliver to us a transfer application containing a certification that such transferee is an Eligible Holder as of the date of such transfer application. Eligible Holders are individuals or entities whose U.S. federal income tax status (or lack thereof) has not or is not reasonably likely to have, as determined by our general partner, a material adverse effect on the rates that can be charged to our customers with respect to assets that are subject to regulation by the FERC or a similar regulatory body. In addition, our general partner may require any owner of our units to recertify its status as being subject to

 

49


Table of Contents
Index to Financial Statements

United States federal income taxation on the income generated by us. The form or forms used for any such recertification will be specified by our general partner and may be changed in any manner our general partner determines necessary or appropriate. If a transferee or other unitholder does not properly complete the transfer application or recertification, for any reason, the transferee or other unitholder will have no right to receive any distributions or allocations of income or loss on its common units or to vote its units on any matter and we will have the right to redeem such units at a price equal to the lower of the transferee’s purchase price or the then-current market price of such units, calculated in accordance with a formula specified in our partnership agreement. 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-Taxpaying Holders; Redemption.”

The NYSE does not require a publicly traded 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 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 Western Refining Logistics, LP.”

We will incur increased costs as a result of being a publicly-traded partnership.

We have no history operating as a publicly-traded partnership. As a publicly-traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE, requires publicly-traded entities to adopt various corporate governance practices that will further increase our costs. Before we are able to make distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a publicly-traded partnership. As a result, the amount of cash we have available for distribution to our unitholders will be affected by the costs associated with being a public company.

Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly-traded company, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our SEC reporting requirements.

We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on our board or as executive officers.

We estimate that we will incur $3.5 million of incremental costs per year associated with being a publicly-traded partnership; however, it is possible that our actual incremental costs of being a publicly-traded partnership will be higher than we currently estimate.

Tax Risks to Our Common Unitholders

In addition to reading the following risk factors, you should read “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

 

50


Table of Contents
Index to Financial Statements

Our tax treatment depends on our status as a partnership for federal tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service treats us as a corporation for federal income tax purposes, or we become subject to entity-level taxation for state tax purposes, our cash available for distribution to you would be substantially reduced.

The anticipated after-tax benefit of an investment in our units depends largely on our being treated as a partnership for U.S. federal income tax purposes.

Despite the fact that we are organized as limited partnerships under Delaware law, we would be treated as a corporation for U.S. federal income tax purposes unless we satisfy a “qualifying income” requirement. Based upon our current operations, we believe we satisfy the qualifying income requirement. However, we have not requested, and do not plan to request, a ruling from the Internal Revenue Service (“IRS”) on this or any other matter affecting us. Failing to meet the qualifying income requirement or a change in current law could cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal income tax on our income at the corporate tax rate that is currently a maximum of 35%, and would likely be liable for state income tax at varying rates. Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to our unitholders. Because taxes would be imposed upon us as a corporation, our cash available for distribution to our unitholders would be substantially reduced. Therefore, our treatment as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of the 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 U.S. 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. At the state level, several states have been evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. If any state were to impose a tax upon us as an entity, the cash available for distribution to you would be reduced and the value of our common units could be negatively impacted.

The tax treatment of publicly traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.

The present U.S. 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 changes or differing interpretations at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing U.S. federal income tax laws that affect publicly traded partnerships. One such legislative proposal would have eliminated the qualifying income exception to the treatment of all publicly traded partnerships as corporations upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. We are unable to predict whether any of these changes or other proposals will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units. Any modification to U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the qualifying income requirement to be treated as a partnership for U.S. federal income tax purposes.

 

51


Table of Contents
Index to Financial Statements

If the IRS were to contest the federal income tax positions we take, it may adversely impact the market for our common units, and the costs of any such contest would reduce 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. The IRS may adopt positions that differ from the positions that we take, even positions taken with the advice of counsel. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the prices at which they trade. Moreover, the costs of any contest between us and the IRS will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.

Even if you do not receive any cash distributions from us, you will be required to pay taxes on your share of our taxable income.

You will be required to pay federal income taxes and, in some cases, state and local income taxes, on your share of our taxable income, whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax due from you with respect to that income.

Tax gain or loss on the disposition of our units could be more or less than expected.

If you sell your units, you will recognize gain or loss equal to the difference between the amount realized and your tax basis in those units. Because distributions in excess of your allocable share of our net taxable income decrease your tax basis in your units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis therein, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income to you due to potential recapture items, including depreciation and depletion recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale.

Tax-exempt entities and non-U.S. persons owning our units face unique tax issues that may result in adverse tax consequences to them.

Investment in our units by tax-exempt entities, such as 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 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 U.S. 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 your tax advisor before investing in our common units.

We will treat each purchaser of our units as having the same tax benefits without regard to the units purchased. The IRS may challenge this treatment, which could adversely affect the value of our units.

Because we cannot match transferors and transferees of units, 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. It also could affect the timing of these tax benefits or the amount of gain from your sale of units and could have a negative impact on the value of our units or result in audit adjustments to your tax returns.

 

52


Table of Contents
Index to Financial Statements

We will prorate our items of income, gain, loss, and deduction 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 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. The U.S. Treasury Department has issued proposed Treasury Regulations that provide a safe harbor pursuant to which a publicly-traded partnership may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge our proration 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.

A unitholder whose units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of units) may be considered as having disposed of those units. If so, he would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.

Because there are no specific rules governing the U.S. federal income tax consequence of loaning a partnership interest, a unitholder whose units are the subject of a securities loan may be considered as having disposed of the loaned units. In that case, the unitholder may no longer be treated for tax purposes as a partner with respect to those 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, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a securities loan are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.

We will adopt certain valuation methodologies that may result in a shift of income, gain, loss, and deduction between the 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. 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, 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 intangible assets and a lesser portion allocated to our tangible 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 income, gain, loss, and deduction between 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 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.

 

53


Table of Contents
Index to Financial Statements

The sale or exchange of 50% or more of our capital and profits interests within a twelve-month period will result in the termination of us as a partnership for federal income tax purposes.

We will be considered to have terminated as a 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 termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in our filing two tax returns for one calendar year and could result in a significant deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in taxable income for the unitholder’s taxable year that includes our termination. Our termination would not affect our classification as a partnership for federal income tax purposes, but it would result in our being treated as a new partnership for U.S. federal income tax purposes following the termination. If we were treated as a new partnership, we would be required to make new tax elections and could be subject to penalties if we were unable to determine that a termination occurred. The IRS recently announced a relief procedure whereby if a publicly traded partnership that has technically terminated requests and the IRS grants special relief, among other things, the partnership may be permitted to provide only a single Schedule K-1 to unitholders for the two short tax periods included in the year in which the termination occurs.

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 you.

If we are subjected to a material amount of entity-level taxation by individual states, our cash available for a distribution to you would be reduced. Currently, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise, and other forms of taxation. Specifically, we will initially own assets and conduct business in Texas, New Mexico, and Arizona. Texas imposes a franchise tax on all business entities at a maximum effective rate of 0.7% of the business’ gross income apportioned in Texas. In the future, we may expand our operations. Imposition of a similar tax on us in other jurisdictions that we may expand to could substantially reduce our cash available for distribution to you.

As a result of investing in our common units, you may be 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, you may be subject to other taxes, including foreign, 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 own property now or in the future, even if you do not live in any of those jurisdictions. You may be required to file foreign, state, and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements. We will initially own assets and conduct business in Texas, Arizona and New Mexico. Each of Arizona and New Mexico imposes a personal income tax on individuals as well as corporations and other entities. Texas does not impose a personal income tax on individuals, but does impose a franchise tax on corporations and all other business entities. As we make acquisitions or expand our business, we may own assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all United States federal, foreign, 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.

 

54


Table of Contents
Index to Financial Statements

USE OF PROCEEDS

We intend to use the estimated net proceeds of approximately $         million from this offering, based upon the assumed initial public offering price of $         per common unit (the midpoint of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, structuring fees, and offering expenses, as follows:

 

   

we will retain $50 million for general partnership purposes; and

 

   

we will distribute the balance of any net proceeds to Western in partial consideration of its contribution of assets to us in connection with this offering and to reimburse Western for certain capital expenditures incurred with respect to such assets.

If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds to us would be approximately $         million. The net proceeds from any exercise by the underwriters of their option to purchase additional common units from us will be distributed to Western.

If and to the extent the underwriters exercise their option to purchase additional common units, the number of additional common units purchased by the underwriters pursuant to such exercise will be issued to the public and the remainder of the additional common units, if any, will be issued to Western or a wholly owned subsidiary of Western. Any such units issued to Western or a wholly owned subsidiary of Western will be issued for no additional consideration. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. Please read “Underwriting.”

An increase or decrease in the offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts, structuring fees, and offering expenses, to increase or decrease by $         million.

 

55


Table of Contents
Index to Financial Statements

CAPITALIZATION

The following table shows:

 

   

the historical cash and cash equivalents and capitalization of the Predecessor as of March 31, 2013; and

 

   

our pro forma capitalization as of March 31, 2013, 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” and the other transactions described under “Summary—Formation Transactions and Partnership Structure.”

This table is derived from, and should be read together with, the unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Summary—Formation Transactions and Partnership Structure,” “Use of Proceeds,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of March 31, 2013  
    

Predecessor Historical

    

Western Refining
Logistics, LP

Pro Forma

 
     (in thousands)  

Cash and cash equivalents

   $ —         $ 50,000   
  

 

 

    

 

 

 

New revolving credit facility

   $ —         $ —     

Net investment/Partners’ equity:

     

Division equity

     150,780         —     

Held by public:

     

Common units (1)

     —        

Held by Western:

     

Common units (1)

     —        

Subordinated units

     —        
  

 

 

    

 

 

 

Total partners’ equity

     —        
  

 

 

    

 

 

 

Total capitalization

   $ 150,780       $     
  

 

 

    

 

 

 

 

(1) An increase or decrease in the offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts, structuring fees, and offering expenses, to increase or decrease by $              million. If the net 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 Western from the net proceeds of this offering will increase or decrease, as applicable, by a corresponding amount.

 

56


Table of Contents
Index to Financial Statements

DILUTION

Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the pro forma net tangible book value per common unit after the offering. Based on an assumed initial public offering price of $         per common unit, on an unaudited pro forma basis as of             , 2013, after giving effect to the offering of common units and the related transactions, our net tangible book value would have been approximately $         million, or $         per common unit. Purchasers of our 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.

 

Initial public offering price per common unit

   $                

Pro forma net tangible book value per common unit before the offering (1)

  

Increase in pro forma net tangible book value per common unit attributable to purchasers in the offering

  

Less: Pro forma net tangible book value per common unit after the offering (2)

  
  

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in the offering (3)

   $     
  

 

 

 

 

(1) Determined by dividing the pro forma net tangible book value of the contributed assets and liabilities by the number of units (                 common units and                  subordinated units) to be issued to Western and its affiliates for their contribution of assets and liabilities to us.

 

(2) Determined by dividing our pro forma net tangible book value, after giving effect to the use of the net proceeds of the offering, by the total number of units (                 common units and                  subordinated units) to be outstanding after the offering.

 

(3) Because the total number of units outstanding following this offering will not be impacted by an exercise of the underwriters’ option to purchase additional common units and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per common unit to purchasers in the offering due to any exercise of the option.

If the initial public offering price were to increase or decrease by $1.00 per common unit, then dilution in net tangible book value per common unit would equal $         and $        , respectively.

The following table sets forth the number of units that we will issue and the total consideration contributed to us by our general partner and its affiliates and by the purchasers of our common units in this offering upon completion of the transactions contemplated by this prospectus.

 

     Units      Total Consideration  
     Number    Percent      Amount      Percent  

General partner and its affiliates (1)(2)(3)

        %       $                      %   

Purchasers in the offering

        %       $           %   
  

 

  

 

 

    

 

 

    

 

 

 

Total

        100.0%       $           100.0%   
  

 

  

 

 

    

 

 

    

 

 

 

 

(1) Upon the completion of the transactions contemplated by this prospectus, our general partner and its affiliates will own          common units and                  subordinated units.

 

(2) The assets contributed by Western will be recorded at historical cost. The book value of the consideration provided by Western as of             , 2013, after giving effect to the application of the net proceeds of the offering, is as follows:

 

         (in millions)      

Book value of net assets contributed

   $                        

Less: Distribution to Western from net proceeds of this offering

  
  

 

 

 

Total consideration

   $     
  

 

 

 

 

(3) Assumes the underwriters’ option to purchase additional common units is not exercised.

 

57


Table of Contents
Index to Financial Statements

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

You should read the following discussion of our cash distribution policy in conjunction with specific assumptions included in this section. For more detailed information regarding the factors and assumptions upon which our cash distribution policy is based, please read “Significant Forecast Assumptions” below. 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 certain risks inherent in our business.

For additional information regarding our historical and pro forma operating results, you should refer to our historical and pro forma financial statements included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy.

Our partnership agreement requires us to distribute all of our available cash quarterly. Our cash distribution policy reflects our belief that our unitholders will be better served if we distribute rather than retain available cash, because, among other reasons, we believe we will generally finance any expansion capital expenditures from external financing sources. Under our current cash distribution policy, we intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $         per unit, or $         per unit on an annualized basis, to the extent we have sufficient cash from our operations after the establishment of cash reserves and the payment of costs and expenses, including the payment of expenses to our general partner and its affiliates. However, other than the requirement in our partnership agreement to distribute all of our available cash each quarter, we have no legal obligation to make quarterly cash distributions in this or any other amount, and our general partner has considerable discretion to determine the amount of our available cash each quarter. In addition, our general partner may change our cash distribution policy at any time, subject to the requirement in our partnership agreement to distribute all of our available cash quarterly. Generally, our available cash is the sum of our (x) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (y) cash on hand resulting from borrowings under our revolving credit facility made after the end of the quarter. Because we are not subject to an entity-level federal income tax, we have more cash to distribute to our unitholders than would be the case were we subject to federal income tax. If we do not generate sufficient available cash from operations, we may, but are under no obligation to, borrow funds to pay the minimum quarterly distribution to our unitholders.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.

Although our partnership agreement requires that we distribute all of our available cash quarterly, there is no guarantee that we will make quarterly cash distributions to our unitholders at our minimum quarterly distribution rate or at any other rate, and we have no legal obligation to do so. Our current cash distribution policy is subject to certain restrictions, as well as the considerable discretion of our general partner in determining the amount of our available cash each quarter. The following factors will affect our ability to make cash distributions, as well as the amount of any cash distributions we make:

 

   

Our distribution policy may be affected by restrictions on distributions under the revolving credit facility that we expect to enter into at the closing of this offering. That revolving credit facility is expected to contain covenants requiring us to maintain certain financial ratios and tests. Should we be unable to satisfy these restrictions or we are otherwise in default under the revolving credit facility, we would be prohibited from making cash distributions to our unitholders, notwithstanding our stated cash distribution policy. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Our New Credit Facility.”

 

   

Our general partner will have the authority to establish reserves for the prudent conduct of our business and for future cash distributions to our unitholders, the establishment or increase of which

 

58


Table of Contents
Index to Financial Statements
 

could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated distribution policy. Any determination to establish cash reserves made by our general partner in good faith will be binding on our unitholders. Our partnership agreement provides that in order for a determination by our general partner to be considered to have been made in good faith, our general partner must subjectively believe that the determination is in our best interests.

 

   

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 generally may not be amended during the subordination period without the approval of our public common unitholders (other than in limited circumstances where no unitholder approval is required). However, our partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units (including common units held by our general partner and its affiliates) after the subordination period has ended. At the closing of this offering, assuming no exercise of the underwriters’ option to purchase additional common units, Western will own our general partner as well as approximately     % of our outstanding common units and all of our outstanding subordinated units, representing an aggregate     % limited partner interest in us. Please read “The Partnership Agreement—Amendment of the Partnership Agreement.”

 

   

Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay 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 Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and administrative expense, principal and interest payments on our debt, working capital requirements and anticipated cash needs. Our cash available for distribution to common unitholders is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase. Please read “How We Make Distributions to our Partners—Distributions of Available Cash.”

 

   

If and to the extent our cash available for distribution materially declines, we may elect to reduce our quarterly cash distributions in order to service or repay our debt or fund expansion capital expenditures.

 

   

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 upon both cash on our balance sheet and on 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. Accordingly, 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,

 

59


Table of Contents
Index to Financial Statements

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, and we do not anticipate that there will be limitations in our new revolving credit facility, 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.”

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 60 days after the end of each quarter, 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 following the indicated distribution date. We will not make distributions for the period that begins on                     , 2013 and ends on the day prior to the closing of this offering other than the distribution to be made to Western in connection with the closing of this offering as described in “Summary—Formation Transactions and Partnership Structure” and “Use of Proceeds.” We will adjust the amount of our distribution for the period from the completion of this offering through                     , 2013, 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 and subordinated units to be outstanding immediately after this offering for one quarter and on an annualized basis is summarized in the table below:

 

          Aggregate Minimum Quarterly
Distributions
 
    

Number of Units

  

One Quarter

    

Annualized (Four
Quarters)

 

Publicly held common units (1)

      $                    $                

Common units held by Western (1)

        

Subordinated units held by Western

        
  

 

  

 

 

    

 

 

 

Total

      $         $     
  

 

  

 

 

    

 

 

 

 

(1) Assuming no exercise of the underwriters’ option to purchase additional common units.

Our general partner will also hold the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 50%, 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 “How We Make Distributions to Our Partners—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

 

60


Table of Contents
Index to Financial Statements

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 subjectively believe that the determination is in our best interests. Please read “Conflicts of Interest and 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.

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our annualized minimum quarterly distribution of $         per unit for the twelve-month period ending September 30, 2014. In those sections, we present two tables, consisting of:

 

   

“Unaudited Pro Forma Cash Available for Distribution,” in which we present the amount of cash we would have had available for distribution on an unaudited pro forma basis for the twelve-month period ended March 31, 2013 and the year ended December 31, 2012, derived from our unaudited pro forma financial data that are included in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and

 

   

“Unaudited Estimated Cash Available for Distribution,” in which we explain our belief that we will be able to generate sufficient cash available for distribution for us to pay the minimum quarterly distribution on all units for the twelve-month period ending September 30, 2014.

Unaudited Pro Forma Cash Available for Distribution for the Twelve Months Ended March 31, 2013 and the Year Ended December 31, 2012

If we had completed this offering and related transactions on April 1, 2012, our unaudited pro forma cash available for distribution for the twelve-month period ended March 31, 2013 would have been approximately $33.1 million. This amount 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 a cash distribution of $              per unit per quarter ($         per unit on an annualized basis), or approximately     % of the minimum quarterly distribution, on all of our subordinated units for such period.

If we had completed this offering and related transactions on January 1, 2012, our unaudited pro forma cash available for distribution for the year ended December 31, 2012 would have been approximately $34.2 million. This amount 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 a cash distribution of $         per unit per quarter ($         per unit on an annualized basis), or approximately     % of the minimum quarterly distribution, on all of our subordinated units for such period.

Our unaudited pro forma cash available for distribution for the twelve-month period ended March 31, 2013 and the year ended December 31, 2012 includes $3.5 million of estimated incremental general and administrative expenses that we expect to incur as a result of becoming a publicly traded partnership. Incremental general and administrative expenses related to being a publicly traded partnership include expenses associated with quarterly and annual reports to unitholders, financial statement audit, tax returns and Schedule K-1 preparation and distribution, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance premiums, and independent director compensation. These expenses are not reflected in the historical financial statements of the Predecessor or our unaudited pro forma financial statements included elsewhere in the prospectus.

 

61


Table of Contents
Index to Financial Statements

Our unaudited pro forma cash available for distribution for the twelve-month period ended March 31, 2013 and the year ended December 31, 2012 does not include any results of operations attributable to our Delaware Basin system, which we placed into service in 2013. Please read “—Significant Forecast Assumptions—General Considerations.”

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 this offering and related formation transactions been completed as of the dates indicated. In addition, cash available for distribution is primarily a cash accounting concept, while the historical financial statements of the Predecessor and our unaudited pro forma financial statements included elsewhere in the prospectus have been prepared on the accrual basis of accounting. As a result, you should view the amount of pro forma cash available for distribution only as a general indication of the amount of cash available for distributions that we might have generated had we completed this offering on the dates indicated. The pro forma amounts below are presented on a twelve-month basis, and there is no guarantee that we would have had available cash sufficient to pay the full minimum quarterly distribution on all of our outstanding common units and subordinated units for each quarter within the twelve-month periods presented.

The following table illustrates, on an unaudited pro forma basis, for the twelve-month period ended March 31, 2013 and the year ended December 31, 2012, the amount of cash that would have been available for distribution to our unitholders, assuming that this offering and the related formation transactions had been completed on April 1, 2012 and January 1, 2012, respectively.

 

62


Table of Contents
Index to Financial Statements

Western Refining Logistics, LP

Unaudited Pro Forma Cash Available for Distribution

 

   

Twelve Months
Ended March 31,
2013

   

Year Ended
December 31,
2012

 
   

($ in thousands except

per unit data)

 

Revenues:

   

Western

  $         100,857      $ 100,385   

Third parties

    672        678   
 

 

 

   

 

 

 

Total revenues

    101,529        101,063   
 

 

 

   

 

 

 

Operating costs and expenses:

   

Operating and maintenance expenses

    54,625        51,347   

General and administrative expenses

    4,210        4,227   

Loss (gain) on disposal of assets

    —          335   

Depreciation and amortization expense

    9,600        9,527   
 

 

 

   

 

 

 

Total operating costs and expenses

    68,435        65,436   
 

 

 

   

 

 

 

Operating income

    33,094        35,627   

Other income (expense):

   

Interest expense and other financing costs, net (2)

    (1,445     (1,445

Other, net

    12        12   
 

 

 

   

 

 

 

Net income before income taxes

    31,661        34,194   

Provision for income taxes (3)

    (441     (448
 

 

 

   

 

 

 

Pro forma net income (1)

  $ 31,220      $ 33,746   

Plus:

   

Interest expense and other financing costs, net (2)

    1,445        1,445   

Provision for income taxes (3)

    441        448   

Depreciation and amortization expense

    9,600        9,527   
 

 

 

   

 

 

 

EBITDA (4)

    42,706        45,166   

Less:

   

Cash interest paid, net (2)

    (1,125     (1,125

Income taxes paid (3)

    (441     (448

Incremental general and administrative expense (5)

    (3,500     (3,500

Maintenance capital expenditures (6)

    (4,557     (5,922

Expansion capital expenditures (6)

    (40,898     (20,839

Add:

   

Offering proceeds retained to fund expansion capital expenditures

    40,898        20,839   
 

 

 

   

 

 

 

Pro forma cash available for distribution

  $ 33,083      $ 34,171   
 

 

 

   

 

 

 

Distributions to public common unitholders

   

Distributions to Western

   

Common units

   

Subordinated units

   
 

 

 

   

 

 

 

Aggregate annualized minimum quarterly distribution

   
 

 

 

   

 

 

 

Excess (shortfall) of cash available for distribution over aggregate annualized minimum quarterly distributions

   
 

 

 

   

 

 

 

Percentage of annualized minimum quarterly distributions payable to:

   

Common unitholders

    100     100

Subordinated unitholders

                 

 

(1) See our unaudited pro forma combined financial statements included elsewhere in this prospectus for an explanation of the adjustments used to derive pro forma net income.

 

63


Table of Contents
Index to Financial Statements
(2) Interest expense and other financing costs, net and cash interest paid, net both include commitment fees that would have been paid by the Predecessor had our revolving credit facility been in place during the periods presented and we had no borrowings outstanding during the periods presented. Interest expense and other financing costs, net also includes the amortization of debt issuance costs incurred in connection with our new revolving credit facility. Cash interest paid, net excludes the amortization of debt issuance costs.

 

(3) Reflects estimated Texas margin tax that would be due based on the pro forma results of operations for the periods presented.

 

(4) We define EBITDA as net income (loss) before net interest expense, income taxes, and depreciation and amortization. For a reconciliation of EBITDA to our most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Financial Data—Non-GAAP Financial Measures.”

 

(5) Reflects approximately $3.5 million of estimated annual incremental general and administrative expenses that we expect to incur as a result of being a separate publicly traded partnership.

 

(6) Historically, we did not distinguish between maintenance capital expenditures and expansion capital expenditures in accordance with the definition of those terms in our partnership agreement. We believe that the amount of maintenance and expansion capital expenditures shown above approximates the maintenance and expansion capital expenditures we would have recorded in accordance with our partnership agreement for the twelve months ended March 31, 2013 and the year ended December 31, 2012. For a discussion of maintenance and expansion capital expenditures, please read “How We Make Distributions to our Partners—Capital Expenditures.”

Estimated Cash Available for Distribution for the Twelve Months Ending September 30, 2014

We forecast that our estimated cash available for distribution during the twelve-month period ending September 30, 2014 will be approximately $57.7 million. This amount would exceed the amount needed to pay the minimum quarterly distribution of $          per unit on all of our units for the twelve-month period ending September 30, 2014 by $          million.

We are providing the forecast of estimated cash available for distribution to supplement the historical financial statements of the Predecessor and our unaudited pro forma financial statements included elsewhere in the prospectus in support of our belief that we will have sufficient cash available to allow us to pay cash distributions at the minimum quarterly distribution rate on all of our units for the twelve-month period ending September 30, 2014. Please read “Significant Forecast Assumptions” for further information as to the assumptions we have made for the forecast. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” for information as to the accounting policies we have followed for the financial forecast.

Our forecast reflects the conditions we expect to exist and assumptions as of the date of this prospectus and the course of action we expect to take during the twelve-month period ending September 30, 2014. We believe that our actual results of operations will approximate those reflected in our forecast, but we give no assurance that our forecasted results will be achieved. If our assumptions and estimates are not realized, we may not be able to pay the minimum quarterly distribution or any other distribution on our common units. Although we consider the assumptions and estimates underlying our forecast reasonable as of the date of this prospectus, they are inherently uncertain. Our assumptions and estimates are subject to a wide variety of significant business,

economic, and competitive risks and uncertainties that could cause actual results to differ materially from those contained in our forecast, including, among others, risks and uncertainties contained in “Risk Factors.” Accordingly, there can be no assurance that the forecast is indicative of our future performance or that actual results will not differ materially from those presented in our forecast.

 

64


Table of Contents
Index to Financial Statements

We do not as a matter of course make public projections as to future sales, earnings, or other results. However, we have prepared the following forecast set forth below to present the estimated cash available for distribution to our unitholders during the forecast period. The accompanying prospective financial information was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in our view, 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 expected course of action and our expected future financial performance. However, this information is not fact and should not be relied upon as being necessarily indicative of future results and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

Neither our independent registered public accounting firm, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information. The independent registered public accounting firm’s report included in this prospectus relates to historical financial information only. It does not extend to prospective financial information and should not be read to do so.

We do not undertake any obligation to publicly release the results of any future revisions we may make to our financial forecast or to update this financial forecast or the assumptions used to prepare the forecast to reflect events or circumstances after the completion of this offering. In light of this, the statement that we believe that we will have sufficient cash available for distribution to allow us to make the full minimum quarterly distribution on all of our outstanding units for the twelve-month period ending September 30, 2014, should not be regarded as a representation by us, the underwriters or any other person that we will make such distribution. Therefore, you are cautioned not to place undue reliance on this information.

 

65


Table of Contents
Index to Financial Statements

Western Refining Logistics, LP

Unaudited Estimated Cash Available for Distribution

 

   

Twelve Months Ending
September 30, 2014

 
    ($ in thousands, except
per unit data)
 

Revenues:

 

Western

  $ 129,007   

Third parties

    1,769   
 

 

 

 

Total revenues

    130,776   
 

 

 

 

Operating costs and expenses:

 

Operating and maintenance expenses

    57,126   

General and administrative expenses (1)

    7,664   

Depreciation and amortization expense

    13,183   
 

 

 

 

Total operating costs and expenses

    77,973   
 

 

 

 

Operating income

    52,803   

Other income (expense):

 

Interest expense and other financing costs, net (2)

    (1,445

Other, net

    14   
 

 

 

 

Net income before income taxes

    51,371   

Provision for income taxes (3)

    (572
 

 

 

 

Net income attributable to partners

    50,799   

Plus:

 

Interest expense and other financing costs, net (2)

    1,445   

Provision for income taxes (3)

    572   

Depreciation and amortization expense

    13,183   
 

 

 

 

EBITDA (4)

    66,000   

Less:

 

Cash interest paid, net (2)

    (1,125

Income taxes paid (3)

    (572

Maintenance capital expenditures

    (6,600
 

 

 

 

Estimated cash available for distribution

  $ 57,703   
 

 

 

 

Distributions to public common unitholders

 

Distributions to Western

 

Common units

 

Subordinated units

 

Aggregate annualized minimum quarterly distribution

 

Excess of cash available for distribution over aggregate annualized minimum quarterly distributions

 

 

(1) Includes $3.5 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) Interest expense and other financing costs, net and cash interest paid, net both include estimated commitment fees for our new revolving credit facility and assume we had no borrowings outstanding under the revolving credit facility during the period. Interest expense and other financing costs, net also includes the amortization of debt issuance costs incurred in connection with our new revolving credit facility. Cash interest paid, net excludes the amortization of debt issuance costs.

 

(3) Consists of Texas margin tax.

 

66


Table of Contents
Index to Financial Statements
(4) We define EBITDA as net income (loss) before net interest expense, income taxes, and depreciation and amortization. For a reconciliation of EBITDA to our most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Financial Data—Non-GAAP Financial Measures.”

Significant Forecast Assumptions

The forecast is unaudited and has been prepared by and is the responsibility of management. The forecast reflects our judgment about conditions we expect to exist as of the date of this prospectus and the course of action we expect to take during the twelve-month period ending September 30, 2014. While the assumptions discussed below are not all-inclusive, they include those that we believe are most significant to our forecasted results of operations, and any assumptions not discussed below were not deemed to be significant. 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 our actual results and those differences could be material. If the forecasted results are 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, substantially all of our revenues and a significant portion of our expenses will be determined by contractual arrangements that we will enter into with Western at the closing of this offering. Substantially all of our revenues will be derived from two 10-year, fee-based commercial agreements with Western that include minimum volume commitments.

Our forecasted results are not directly comparable with historical periods. The primary factors impacting the comparability of our forecasted results and our historical results are:

 

   

Delaware Basin System. Our Delaware Basin system includes approximately 38 miles of 10-inch and 12-inch mainlines located in southeast New Mexico and West Texas and handles crude oil produced in the Delaware Basin area of the Permian Basin. The Mason Station crude oil facility was placed into service in April 2013. The Main 12-inch pipeline and the East 10-inch pipeline were placed into service in July 2013. The West 10-inch pipeline is expected to begin service in the third quarter of 2013. The Delaware Basin system is designed to handle up to 138,000 bpd, comprised of a mainline capacity of 100,000 bpd and truck unloading capacity of 38,000 bpd. For the period ending September 30, 2014, we assume Western will ship only its minimum volume commitment of approximately 27,250 bpd on this mainline and 14,900 bpd at the Mason Station truck rack. We would expect these shipments to increase over time concurrent with upstream development in the Delaware Basin area and as new gathering connections are added to the system. Our unaudited pro forma financial statements included elsewhere in this prospectus do not give effect to the expected financial contribution of our Delaware Basin system assets; accordingly, this system is a significant driver of growth in our forecasted results for the twelve months ending September 30, 2014.

 

   

Four Corners System. For the twelve months ending September 30, 2014, we forecast that mainline movement volumes handled by our Four Corners system will increase approximately 10,000 bpd to a total of 44,180 bpd, as compared to 33,946 bpd during the twelve months ended March 31, 2013. This forecasted increase is generally consistent with volume growth we have recently experienced on our Four Corners system, which handled approximately 36,000 bpd for the three months ended March 31, 2013 and approximately 39,000 bpd for the three months ended June 30, 2013.

 

   

Inflation Escalators in Commercial Agreements with Western. Under the terms of our commercial agreements with Western, the rates we charge Western for our services will be adjusted upwards on July 1 of each year, in accordance with either the FERC’s indexing methodology or the producer price index (“PPI”). For July 1, 2014, these increases were assumed to be 4.69% for mainline movement fees and 2.04% for services other than mainline movements.

 

67


Table of Contents
Index to Financial Statements

Please read “Management’s Discussion and Analysis of Financial Condition and Result of Operations—Factors Affecting the Comparability of our Financial Results” for additional information regarding the factors impacting the comparability of our financial results.

Volumes

With respect to volumes handled by our terminalling, transportation and storage assets, we have generally forecast volumes consistent with the volumes we have handled for Western in historical periods. With respect to our pipeline and gathering assets, forecasted mainline movements and gathering (truck offloading) volumes are materially greater than the historical volumes for the twelve months ended March 31, 2013, due to (i) us placing our Delaware Basin system into service in April 2013 and (ii) recent and projected growth in the crude oil volumes transported on our Four Corners system.

In some cases, Western’s minimum volume commitments under the commercial agreements cover 80% of the throughput for each service. However, Western will commit to throughput 100% of the volumes we forecast to be transported, gathered and injected into our Delaware Basin system during the twelve months ending September 30, 2014. In order to minimize our exposure to fluctuations in the supply and demand for asphalt, Western will also commit to throughput 100% of the volumes we forecast to be processed, terminalled and stored by our asphalt plant and terminals during the twelve months ending September 30, 2014. Finally, Western has agreed to reserve 100% of our active shell storage capacity of crude oil, blendstock, refined product and asphalt storage. These minimum commitments will continue at the same levels for the duration of the 10-year commercial agreements and any renewal periods.

The following table compares forecasted volumes to historical volumes, contrasted against Western’s minimum volume commitments and reserved storage capacity.

 

    Unaudited Volumes Handled  
    Historical     Forecasted     Western Contracted
Volume
 
   

Twelve
Months Ended
March 31,
2013

   

Year Ended
December 31,
2012

   

Twelve Months
Ending
September 30,
2014

   

Contracted
Minimum
Volume or
Capacity
Reservation

   

Contracted
Minimum
as a
Percentage
of Forecast

 

Pipeline and Gathering

         

Mainline movements (bpd) (1)

         

Permian/Delaware Basin system

    —          —          27,250        27,250        100.0

Four Corners system

    33,946        33,629        44,180        35,340        80.0
 

 

 

   

 

 

   

 

 

   

 

 

   

Total

    33,946        33,629        71,430        62,590        87.6

Gathering (truck offloading)(bpd)

    8,142        7,943        37,310        32,830        88.0

Pipeline gathering and injection into system (bpd)

    22,150        22,112        26,220        20,970        80.0

Pipeline tank storage (bbls) (2)

    383,116        363,116        566,450        566,450        100.0

Terminalling, Transportation, and Storage

         

Crude oil, blendstock, and refined product storage (bbls)

    6,881,964        6,881,964        6,881,960        6,881,960        100.0

Shipments into and out of storage (bpd)

    328,769        338,518        363,380        290,710        80.0

Additive and blending services (bpd)

    203,824        208,728        223,970        179,180        80.0

Asphalt storage (bbls) (2)

    473,468        473,468        473,470        473,470        100.0

Shipments into and out of asphalt storage (bpd)

    16,691        16,368        15,890        15,890        100.0

Asphalt processing and blending fees (bpd)

    4,428        4,375        4,520        4,520        100.0

 

(1) Represents the sum of volumes transported through each separately tariffed pipeline segment on our Permian Basin system, our Four Corners system or both, as applicable.

 

(2) Represents a weighted-average shell capacity for the periods indicated.

 

68


Table of Contents
Index to Financial Statements

Revenues

We estimate that we will generate revenues of $130.8 million for the twelve months ending September 30, 2014, as compared to pro forma revenues of $101.5 million for the twelve months ended March 31, 2013, and $101.1 million for the year ended December 31, 2012. Based on our assumptions for the twelve months ending September 30, 2014, we expect approximately 92% of our forecasted revenues to be supported by Western’s minimum volume commitments under each of our commercial agreements and 99% of our forecasted revenues to be generated by our commercial agreements, including tariffs, with Western.

Our commercial agreements include provisions that generally permit Western to suspend, reduce, or terminate its obligations under the applicable agreement if certain events occur. These events include Western 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.

The following table shows our total unaudited forecasted volumes, weighted average fee and forecasted revenues for each category of services we provide to generate revenues, for the twelve months ending September 30, 2014.

 

    

Forecasted
Volume

    

Weighted
Average Fee
($ per bbl or $
per bbl
per month) (1)

    

Forecasted
Revenue
($ in
thousands)

 

Pipeline and Gathering

        

Mainline movements (bpd)

        

Permian/Delaware Basin system (bpd)

     27,250       $ 1.42       $ 14,090   

Four Corners system (bpd)

     44,180         0.92         14,910   
  

 

 

       

 

 

 

Subtotal Mainline movements (bpd)

     71,430            29,000   

Gathering (truck offloading) (bpd)

     37,310         0.48         6,560   

Pipeline gathering and injection into system (bpd)

     26,220         0.05         500   

Pipeline tank storage (bbls)

     566,450         0.51         3,480   
        

 

 

 

Subtotal Pipeline and Gathering (2)

           39,540   
        

 

 

 

Terminalling, Transportation, and Storage

        

Crude oil, blendstock, and refined product storage (bbls)

     6,881,960         0.51         42,450   

Shipments into and out of storage (bpd)

     363,380         0.15         19,540   

Additive and blending services (bpd) (3)

     223,970         0.12         9,950   

Asphalt storage (bbls)

     473,470         0.77         4,360   

Shipments into and out of asphalt storage (bpd)

     15,890         0.95         5,510   

Asphalt processing and blending fees (bpd) (3)

     4,520         4.72         7,780   
        

 

 

 

Subtotal Terminalling, Transportation, and Storage

           89,590   
        

 

 

 

Total (2)

         $ 129,130   
        

 

 

 

 

(1) Assumes a 2.04% increase in the fees charged under our commercial agreements for services other than mainline movements, and a 4.69% increase in mainline movement fees, in each case on July 1, 2014, due to the inflation escalators in our commercial agreements.

 

(2) Does not include $1.63 million in forecasted revenues under the 0.20% pipeline loss allowance provision in our pipeline and gathering services agreement with Western. Forecasted pipeline loss allowance revenue was calculated based on forecasted volumes of crude oil handled and an assumed WTI crude oil price of approximately $90 per barrel for the twelve months ending September 30, 2014.

 

69


Table of Contents
Index to Financial Statements
(3) Weighted average fee and forecasted revenue for additive and blending services and asphalt processing and blending fees include an assumed average $0.09 and $3.06 per barrel and $2.6 million and $2.7 million per year in reimbursements for additive product cost, respectively. While the actual costs we incur in acquiring such additives may fluctuate, Western is required to reimburse us for 100% of the actual cost of the additives we provide as part of additive injection and asphalt processing and blending services, respectively. Accordingly, any increase or decrease in our revenues due to fluctuations in the costs of additives will be directly offset by a corresponding increase or decrease in our operating expenses, and we will have no direct economic exposure to the fluctuation in additive costs.

Pipeline and Gathering Revenues

We estimate that our total pipeline and gathering revenues on our Permian Basin system and our Four Corners system for the twelve months ending September 30, 2014, will be $41.2 million, compared with $15.7 million for the twelve months ended March 31, 2013, and $14.3 million for the year ended December 31, 2012, both on a pro forma basis. Of the total revenues forecasted, $36.0 million, or 87%, will be supported by the minimum committed volumes under the commercial agreements we will enter into with Western at the closing of this offering. The balance of the estimated revenues primarily represents forecasted volumes from Western in excess of the minimum commitments under these agreements.

Terminalling, Transportation, and Storage Revenues

We estimate that our total terminalling, transportation, and storage revenues at our network of crude oil and refined product terminals and our asphalt plant and terminals for the twelve months ending September 30, 2014, will be $89.6 million, compared with $85.9 million for the twelve months ended March 31, 2013, and $85.8 million for the year ended December 31, 2012, both on a pro forma basis. Of the total revenues forecasted, $83.7 million, or 93%, will be supported by the minimum committed volumes under the commercial agreements we will enter into with Western at the closing of this offering. The balance of the estimated revenues represents forecasted volumes from Western in excess of the minimum commitments under these agreements, and $1.8 million in projected revenues for providing terminalling, transportation, and storage services to third parties.

Operating and Maintenance Expenses

Our operating and maintenance expenses include product and transportation costs, labor expenses, lease costs, utility costs, insurance premiums, property taxes, and other typical maintenance costs. We estimate that we will incur operating and maintenance expenses of $57.1 million for the twelve months ending September 30, 2014 as compared to $54.6 million for the twelve months ended March 31, 2013, and $51.3 million for the year ended December 31, 2012, both on a pro forma basis. The increase in our forecasted operating and maintenance expenses is primarily attributable to the Delaware Basin system being placed into service in 2013. We forecast that $5.3 million of our operating and maintenance expenses will consist of costs associated with additives that we provide to Western in connection with our additive and blending and asphalt processing and blending services, for which Western is required to reimburse us. Accordingly, any increase or decrease in our revenues due to fluctuations in the costs of additives will be directly offset by a corresponding increase or decrease in our operating expenses, and we will have no direct economic exposure to the fluctuation in additive costs. In addition, our commercial agreements with Western contain inflation adjustment provisions that should substantially mitigate inflation-related increases in operating costs in rising operating cost environments. See “Capital Expenditures” below.

General and Administrative Expenses

We estimate that our total general and administrative expenses will be $7.7 million for the twelve months ending September 30, 2014, compared to $4.2 million for each of the twelve months ended March 31, 2013, and the year ended December 31, 2012, both on a pro forma basis. This increase is primarily due to $3.5 million of estimated incremental annual expenses we expect to incur as a result of being a separate publicly

 

70


Table of Contents
Index to Financial Statements

traded partnership. Incremental general and administrative expenses related to being a publicly traded partnership include expenses associated with quarterly and annual reports to unitholders, financial statement audit, tax returns and Schedule K-1 preparation and distribution, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance premiums, and independent director compensation.

Depreciation and Amortization Expense

We estimate that depreciation and amortization expense will be approximately $13.2 million for the twelve months ending September 30, 2014. Our depreciation and amortization expense for the twelve months ended March 31, 2013 and the year ended December 31, 2012, both on a pro forma basis, was $9.6 million and $9.5 million, respectively. This increase is primarily due to the depreciation and amortization expense associated with our Delaware Basin system, which was placed into service in 2013.

Financing

Our interest expense and other financing costs, net for the twelve months ending September 30, 2014, is based on the following assumptions:

 

   

we will not draw any amounts under our revolving credit facility during the twelve-month forecast period;

 

   

our interest expense will include annual commitment fees associated with undrawn capacity of 0.375%, as well as the amortization of estimated deferred financing costs of $1.6 million incurred in connection with our $300 million revolving credit facility; and

 

   

we will remain in compliance with the financial and other covenants in our revolving credit facility.

Capital Expenditures

We estimate that total capital expenditures for the twelve months ending September 30, 2014, will be $6.6 million as compared to pro forma capital expenditures of $45.5 million for the twelve months ended March 31, 2013, and $26.8 million for the year ended December 31, 2012, both on a pro forma basis. This forecast estimate is based on the following assumptions:

 

   

Maintenance Capital Expenditures—We estimate that our maintenance capital expenditures will be $6.6 million for the twelve months ending September 30, 2014 compared to $4.6 million for the twelve months ended March 31, 2013, and $5.9 million for the year ended December 31, 2012, both on a pro forma basis; and

 

   

Expansion Capital Expenditures—We have assumed no expansion capital expenditures for the twelve months ending September 30, 2014. Although we currently have no budgeted expansion capital expenditures, we may make expansion capital expenditures in connection with acquisitions from Western or its affiliates or unrelated third-parties or in connection with organic growth projects. Pro forma expansion capital expenditures of $40.9 million and $20.8 million for the twelve months ended March 31, 2013 and the year ended December 31, 2012, respectively, primarily related to construction of our Delaware Basin system.

 

71


Table of Contents
Index to Financial Statements

Regulatory, Industry, and Economic Factors

Our forecast of estimated cash available for distribution for the twelve months ending September 30, 2014, is based on the following significant assumptions related to regulatory, industry, and economic factors:

 

   

Western will not default under any of our commercial agreements or reduce, suspend or terminate its obligations, nor will any events occur that would be deemed a force majeure event, under such agreements;

 

   

there will not be any new federal, state or local regulation, or any interpretation of existing regulation, of the portions of the refining or midstream energy 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, Western’s refineries or third party pipelines and related infrastructure;

 

   

there will not be a shortage of skilled labor;

 

   

inflation will be consistent with current trends; and

 

   

there will not be any material adverse changes in the refining industry, the midstream energy sector, or market, or overall economic conditions.

 

72


Table of Contents
Index to Financial Statements

HOW WE MAKE DISTRIBUTIONS TO OUR PARTNERS

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

Distributions of Available Cash

General

Our partnership agreement requires that, within 60 days after the end of each quarter, beginning with the quarter ending                     , 2013 we distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the completion of the offering through of                     , 2013, based on the actual length of that period.

Definition of Available Cash

Available cash, for any quarter, generally consists of all cash and cash equivalents on hand at the end of that quarter:

 

   

less, the amount of cash reserves established by our general partner to:

 

   

provide for the proper conduct of our business;

 

   

comply with applicable law, any of our debt instruments or other agreements or any other obligation; and

 

   

provide funds for distributions to our unitholders for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for the payment of distributions unless it determines that the establishment of such reserves will not prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter);

 

   

plus, if our general partner so determines on the date of determination, all or any portion of the cash on hand immediately prior to the date of distribution of available cash for the quarter, including cash on hand resulting from working capital borrowings made after the end of the quarter.

The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash received by us after the end of the quarter but on or before the date of distribution of available cash for that quarter, including cash on hand resulting from working capital borrowings made after the end of the quarter, to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are borrowings that are made under a credit agreement, commercial paper facility or similar financing arrangement with the intent to repay such borrowings within twelve months from sources other than additional working capital borrowings, and that are used solely for working capital purposes or to pay distributions to partners.

Intent to Distribute the Minimum Quarterly Distribution

Within 60 days after the end of each quarter, beginning with the quarter ending                     , 2013 we intend to distribute to the holders of common and subordinated units on a quarterly basis at least the minimum quarterly distribution of $          per unit, or $          on an annualized basis, to the extent we have sufficient cash after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. However, there is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. The amount of distributions paid under our cash distribution policy and the decision to make any

 

73


Table of Contents
Index to Financial Statements

distribution will be 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—Our New Credit Facility” for a discussion of the restrictions included in our revolving credit facility that may restrict our ability to make distributions.

General Partner Interest and Incentive Distribution Rights

Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity securities in us and will be entitled to receive distributions on any such interests.

Our general partner also 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% does not include any distributions that Western may receive on any limited partner units that it owns.

Operating Surplus and Capital Surplus

General

All cash distributed to unitholders will be characterized as being paid from either “operating surplus” or “capital surplus.” Our partnership agreement requires that we distribute available cash from operating surplus differently than available cash from capital surplus.

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 period but on or before the date of determination of operating surplus for the period; plus

 

   

cash distributions paid in respect of 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 or expenditures for a replacement capital asset in respect of the period from such financing until the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of; plus

 

   

cash distributions paid in respect of equity issued (including incremental distributions on incentive distribution rights) to pay the construction period interest on debt incurred, or to pay construction period distributions on equity issued, to finance the expansion capital expenditures or expenditures for a replacement capital asset referred to above, in each case, in respect of the period from such financing until the earlier to occur of the date the capital asset is placed in service and the date that it is abandoned or disposed of; less

 

   

all of our operating expenditures (as defined below) after the closing of this offering; less

 

   

the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

 

74


Table of Contents
Index to Financial Statements
   

all working capital borrowings not repaid within twelve months after having been incurred, or repaid within such twelve-month period with the proceeds of additional working capital borrowings; less

 

   

any loss realized on disposition of an investment capital expenditure.

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 non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such 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 in our partnership agreement, which generally means all of our cash expenditures, including, but not limited to, taxes, reimbursement of expenses to our general partner or its affiliates, payments made under interest rate hedge agreements or commodity hedge agreements, officer compensation, repayment of working capital borrowings, debt service payments and estimated maintenance capital expenditures (as discussed in further detail below), provided that operating expenditures will not include:

 

   

repayment 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 our partners (including distributions in respect of our incentive distribution rights);

 

   

repurchases of equity interests except to fund obligations under employee benefit plans; or

 

   

any other expenditures or payments using the proceeds of this offering that are described in “Use of Proceeds.”

Capital Surplus

Capital surplus is defined in our partnership agreement as any distribution of available cash in excess of our cumulative operating surplus. Accordingly, except as described above, capital surplus would generally be generated by:

 

   

borrowings other than working capital borrowings;

 

   

sales of our equity and debt securities; and

 

75


Table of Contents
Index to Financial Statements
   

sales or other dispositions of assets, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of ordinary course retirement or replacement of assets.

Characterization of Cash Distributions

Our partnership agreement requires that we treat all available cash distributed by us as coming from operating surplus until the sum of all available cash distributed since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. Our partnership agreement requires that we treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. As described above, operating surplus includes a basket of $         million, and therefore does not reflect actual cash on hand that is available for distribution to our unitholders. Rather, this provision will enable us, if we choose, to distribute as operating surplus up to that amount of cash we receive in the future from interim capital transactions that would otherwise be distributed as capital surplus. We do not anticipate that we will make any distributions from capital surplus.

Capital Expenditures

Maintenance capital expenditures are those capital expenditures required to maintain our long-term operating capacity or operating income. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace pipelines, terminals, and storage assets, to maintain equipment reliability, integrity and safety, and to address environmental laws and regulations. Capital expenditures made solely for investment purposes will not be considered maintenance capital expenditures.

Expansion capital expenditures are those capital expenditures that we expect will increase our operating capacity or operating income over the long term. Examples of expansion capital expenditures include the acquisition of equipment, or the construction, development or acquisition of additional pipelines, terminals or storage capacity, to the extent such capital expenditures are expected to expand, over the long term, either our operating capacity or operating income. Expansion capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued (including incremental distributions on incentive distribution rights) to finance all or any portion of the development of such capital improvement in respect of the period that commences when we enter into a binding obligation to commence development of a capital improvement and ending on the earlier to occur of the date any such capital improvement commences commercial service and the date that it is disposed of or abandoned. Capital expenditures made solely for investment purposes will not be considered expansion capital expenditures.

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 assets that are in excess of the maintenance of our existing operating capacity, but that are not expected to expand, for more than the short term, our operating capacity.

As described above, 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 development, replacement or improvement of a capital asset in respect of a period that begins when we enter into a binding obligation to commence development of a capital improvement and ending on the earlier to occur of the date any such capital asset commences commercial service and the date that it is abandoned or disposed of, such interest payments also do not reduce operating surplus. Losses on disposition of an investment capital expenditure will reduce operating surplus when realized and cash receipts from an investment capital expenditure will be treated as a cash receipt for purposes of calculating operating surplus only to the extent the cash receipt is a return on principal.

 

76


Table of Contents
Index to Financial Statements

Capital expenditures that are made in part for maintenance capital purposes, investment capital purposes and/or expansion capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditures by our general partner.

Subordination Period

General

Our partnership agreement provides that, during the subordination period (which we define below), the 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 the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions from operating surplus until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be sufficient available cash from operating surplus to pay the minimum quarterly distribution on the common units.

Determination of Subordination Period

Western will initially own all of our subordinated units. Except as described below, the subordination period will begin on the closing date of this offering and expire on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending                     , 2016 if each of the following has occurred:

 

   

distributions of available cash from operating surplus on each of the outstanding common and subordinated units equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

   

the “adjusted operating surplus” (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distribution on all of the outstanding common and subordinated units during those periods on a fully diluted weighted average basis; and

 

   

there are no arrearages in payment of the minimum quarterly distribution on the common units.

Early Termination of Subordination Period

Notwithstanding the foregoing, the subordination period will automatically terminate, and all of the subordinated units will convert into common units on a one-for-one basis, on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending                 , 2014 if each of the following has occurred:

 

   

distributions of available cash from operating surplus on each of the outstanding common and subordinated units exceeded $         (150.0% of the annualized minimum quarterly distribution) for the four-quarter period immediately preceding that date;

 

   

the “adjusted operating surplus” (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of $         (150.0% of the annualized minimum quarterly distribution) on all of the outstanding common and subordinated units during that period on a fully diluted weighted average basis, plus the related distribution on the incentive distribution rights; and

 

77


Table of Contents
Index to Financial Statements
   

there are no arrearages in payment of the minimum quarterly distributions on the common units.

Expiration Upon Removal of the General Partner

In addition, if the unitholders remove our general partner other than for cause:

 

   

the subordinated units held by any person will immediately and automatically convert into common units on a one-for-one basis, provided (1) neither such person nor any of its affiliates voted any of its units in favor of the removal and (2) such person is not an affiliate of the successor general partner; and

 

   

if all of the subordinated units convert pursuant to the foregoing, all cumulative common unit arrearages on the common units will be extinguished and the subordination period will end.

Expiration of the Subordination Period

When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash.

Adjusted Operating Surplus

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods. Adjusted operating surplus consists of:

 

   

operating surplus generated with respect to that period (excluding any amounts attributable to the items described in the first bullet point under “—Operating Surplus and Capital Surplus—Operating Surplus” above); less

 

   

any net increase in working capital borrowings with respect to that period; less

 

   

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

 

   

any net decrease in working capital borrowings with respect to that period; 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; plus

 

   

any net decrease made in subsequent periods in cash reserves for operating expenditures initially established with respect to such period to the extent such decrease results in a reduction of adjusted operating surplus in subsequent periods pursuant to the third bullet point above.

Distributions of Available Cash From Operating Surplus During the Subordination Period

Our partnership agreement requires that we make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:

 

   

first, to the common unitholders, pro rata, until we distribute for each common unit an amount equal to the minimum quarterly distribution for that quarter and any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters;

 

   

second, to the subordinated unitholders, pro rata, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

78


Table of Contents
Index to Financial Statements
   

thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

Distributions of Available Cash From Operating Surplus After the Subordination Period

Our partnership agreement requires that we make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:

 

   

first, to all common unitholders, pro rata, until we distribute for each common 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 general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity securities in us and will be entitled to receive distributions on any such interests.

Incentive distribution rights represent the right to receive increasing percentages (15.0%, 25.0% and 50.0%) 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 at any time.

If for any quarter:

 

   

we have distributed available cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

   

we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then our partnership agreement requires that we distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner (as the holder of our incentive distribution rights) in the following manner:

 

   

first, to all unitholders, pro rata, until each unitholder receives a total of $         per unit for that quarter (the “first target distribution”);

 

   

second, 85.0% to all common unitholders and subordinated unitholders, pro rata, and 15.0% to the holders of our incentive distribution rights, until each unitholder receives a total of $         per unit for that quarter (the “second target distribution”);

 

   

third, 75.0% to all common unitholders and subordinated unitholders, pro rata, and 25.0% to the holders of our incentive distribution rights, until each unitholder receives a total of $         per unit for that quarter (the “third target distribution”); and

 

   

thereafter, 50.0% to all common unitholders and subordinated unitholders, pro rata, and 50.0% to the holders of our incentive distribution rights.

 

79


Table of Contents
Index to Financial Statements

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 (as the holder of our incentive distribution rights) based on the specified target distribution levels. The amounts set forth under the column heading “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 assume our general partner has not transferred its incentive distribution rights and there are no arrearages on common units.

 

     Total Quarterly Distribution
per Unit Target Amount
     Marginal Percentage
Interest in Distributions
 
        Unitholders     General Partner  

Minimum Quarterly Distribution

   $                      100.0     —     

First Target Distribution

   above $              up to $                      100.0     —     

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

Our 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, subject to certain conditions, 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 our incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following discussion assumes that our general partner holds all of the incentive distribution rights at the time that a reset election is made. Our general partner’s right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions payable to our general partner are based may be exercised, without approval of our unitholders or the conflicts committee of our general partner, at any time when there are no subordinated units outstanding, we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the four consecutive fiscal quarters immediately preceding such time and the amount of each such distribution did not exceed adjusted operating surplus for such quarter, respectively. 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 will be subject to the prior written concurrence of our 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 our general partner will not receive any incentive distributions 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 distributions prior to the reset, our general partner will be entitled to receive a number of newly issued common units based on a predetermined formula described below that takes into account the “cash parity” value

 

80


Table of Contents
Index to Financial Statements

of the average cash distributions related to the incentive distribution rights received by our general partner for the two quarters immediately preceding the reset event as compared to the average cash distributions per common unit during that two-quarter period.

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 aggregate amount of cash distributions received by our general partner in respect of its incentive distribution rights during the fiscal quarter ended immediately prior to the date of such reset election by (y) the average of the aggregate amount of cash distributed per common unit during the quarter immediately prior to the date of such reset election.

Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the cash distribution amount per common unit for the fiscal quarter 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, to all common unitholders, pro rata, until each unitholder receives an amount per unit equal to 115.0% of the reset minimum quarterly distribution for that quarter;

 

   

second, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for the quarter;

 

   

third, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and

 

   

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.

Because a reset election can only occur after the subordination period expires, the reset minimum quarterly distribution will have no significance except as a baseline for the target distribution levels.

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner at various cash distribution levels (1) pursuant to the cash distribution provisions of our partnership agreement in effect at the completion of this offering, as well as (2) 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
   

  

    Quarterly Distribution
Per Unit Prior to Reset
  Unitholders     General
Partner
    Quarterly Distribution Per  Unit
Following Hypothetical Reset

Minimum Quarterly Distribution

  $                 100.0     —        $            (1)

First Target Distribution

  above $            up to $                 100.0     —        above $            (1) up to $             (2)

Second Target Distribution

  above $            up to $                  85.0     15.0   above $            (2) up to $             (3)

Third Target Distribution

  above $            up to $                  75.0     25.0   above $            (3) up to $            (4)

Thereafter

  above $                 50.0     50.0   above $            (4)

 

(1) This amount is equal to the hypothetical reset minimum quarterly distribution.

 

(2) This amount is 115.0% of the hypothetical reset minimum quarterly distribution.

 

81


Table of Contents
Index to Financial Statements
(3) This amount is 125.0% of the hypothetical reset minimum quarterly distribution.

 

(4) 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 based on an amount distributed for the quarter immediately prior to the reset. The table assumes that immediately prior to the reset there would be                 common units outstanding and the average distribution to each common unit would be $         per quarter for the quarter prior to the reset.

 

    Quarterly Distribution Per Unit
Prior to Reset
    Cash Distributions
to Common
Unitholders Prior
to Reset
    Cash Distributions
to General Partner
(as Holder of Our
Incentive
Distribution Rights)
Prior to Reset
    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 (as the holder of our incentive distribution rights) in respect of its 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 and the 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 (x) the amount received by our general partner in respect of its incentive distribution rights for the quarter prior to the reset as shown in the table above, or $        , by (y) the cash distributed on each common unit for the quarter prior to the reset as shown in the table above, or $        .

 

   

  

   

  

    Cash Distributions to    

  

 
   

  

    Cash
Distributions
to Common
Unitholders
    General Partner (as Holder of Our
Incentive Distribution Rights)
After Reset
   

  

 
    Quarterly
Distribution  Per
Unit After Reset
    After Reset     Common
Units (1)
    Incentive
Distribution
Rights
    Total     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 $                          
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $                   $                   $                   $                   $                
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents distributions in respect of the common units issued to our general partner upon the reset.

Our general partner (as the holder of our incentive distribution rights) will be entitled to cause 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.

 

82


Table of Contents
Index to Financial Statements

Distributions From Capital Surplus

How Distributions From Capital Surplus Will Be Made

Our partnership agreement requires that we make distributions of available cash from capital surplus, if any, in the following manner:

 

   

first, to all common unitholders and subordinated unitholders, pro rata, until the minimum quarterly distribution is reduced to zero, as described below;

 

   

second, to the common unitholders, pro rata, 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 common units; and

 

   

thereafter, we will make all distributions of available cash from capital surplus as if they were from operating surplus.

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. 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 relation to the fair market value of the common units prior to the announcement of the distribution. Because distributions of capital surplus will reduce the minimum quarterly distribution and target distribution levels 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 minimum quarterly distribution is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

Once we reduce the minimum quarterly distribution and target distribution levels to zero, all future distributions will be made such that 50.0% is paid to all unitholders, pro rata, and 50.0% is paid to the holder or holders of incentive distribution rights, pro rata.

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 common units into fewer common units or subdivide our common units into a greater number of common units, our partnership agreement specifies that the following items will be proportionately adjusted:

 

   

the minimum quarterly distribution;

 

   

the target distribution levels;

 

   

the initial unit price, as described below under “—Distributions of Cash Upon Liquidation”;

 

   

the per unit amount of any outstanding arrearages in payment of the minimum quarterly distribution on the common units; and

 

   

the number of subordinated units.

 

83


Table of Contents
Index to Financial Statements

For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the initial unit price would each be reduced to 50.0% of its initial level. If we combine our common units into a lesser number of units or subdivide our common units into a greater number of units, we will combine or subdivide our subordinated units using the same ratio applied to the common units. Our partnership agreement provides that we do not make any adjustment by reason of the issuance of additional units for cash or property.

In addition, if as a result of a change in law or interpretation thereof, we or any of our subsidiaries is treated as an association taxable as a corporation or is otherwise subject to additional taxation as an entity for U.S. federal, state, local or non-U.S. income or withholding tax purposes, our general partner may, in its sole discretion, reduce the minimum quarterly distribution and the target distribution levels for each quarter by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter (after deducting our general partner’s estimate of our additional aggregate liability for the quarter for such income and withholdings taxes payable by reason of such change in law or interpretation) and the denominator of which is the sum of (x) available cash for that quarter, plus (y) our general partner’s estimate of our additional aggregate liability for the quarter for such income and withholding taxes payable by reason of such change in law or interpretation thereof. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in distributions with respect to subsequent quarters.

Distributions of Cash Upon Liquidation

General

If we dissolve in accordance with the 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 the holders of the incentive distribution rights, 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 units to a repayment of the initial value contributed by unitholders for their units in this offering, which we refer to as the “initial unit price” for each unit. The allocations of gain and loss upon liquidation are also intended, to the extent possible, to entitle the holders of common units to a preference over the holders of subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their 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 the common units. However, there may not be sufficient gain upon our liquidation to enable the common unitholders 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 the partnership agreement. If our liquidation occurs before the end of the subordination period, we will generally allocate any gain to the partners in the following manner:

 

   

first, to our general partner to the extent of certain prior losses specially allocated to our general partner;

 

   

second, to the common unitholders, pro rata, until the capital account for each common unit is equal to the sum of: (x) the initial unit price; (y) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and (z) any unpaid arrearages in payment of the minimum quarterly distribution;

 

84


Table of Contents
Index to Financial Statements
   

third, to the subordinated unitholders, pro rata, until the capital account for each subordinated unit is equal to the sum of: (x) the initial unit price; and (y) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;

 

   

fourth, to all unitholders, pro rata, until we allocate under this paragraph an amount per unit equal to: (x) 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 (y) 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 to the unitholders, pro rata, for each quarter of our existence;

 

   

fifth, 85.0% to all unitholders, pro rata, and 15.0% to our general partner (as the holder of our incentive distribution rights), until we allocate under this paragraph an amount per unit equal to: (x) 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 (y) 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 (as the holder of our incentive distribution rights), until we allocate under this paragraph an amount per unit equal to: (x) 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 (y) 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 (as the holder of our incentive distribution rights) for each quarter of our existence; and

 

   

thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our general partner (as the holder of our incentive distribution rights).

The percentage interests set forth above for our general partner assume it has not transferred the incentive distribution rights.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (z) of the second bullet point above and all of the third bullet point above will no longer be applicable.

We may make special allocations of gain among the partners in a manner to create economic uniformity among the common units into which the subordinated units convert and the common units held by public unitholders.

Manner of Adjustments for Losses

If our liquidation occurs before the end of the subordination period, we will generally allocate any loss to our general partner and the unitholders in the following manner:

 

   

first, to holders of subordinated units in proportion to the positive balances in their capital accounts until the capital accounts of the subordinated unitholders have been reduced to zero;

 

   

second, to the holders of common units in proportion to the positive balances in their capital accounts, until the capital accounts of the common unitholders have been reduced to zero; and

 

   

thereafter, 100.0% to our general partner.

 

85


Table of Contents
Index to Financial Statements

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.

We may make special allocations of loss among the partners in a manner to create economic uniformity among the common units into which the subordinated units convert and the common units held by public unitholders.

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 federal income tax purposes, unrecognized gain resulting from the adjustments to the unitholders and our general partner (as the holder of our incentive distribution rights) in the same manner as we allocate gain upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, 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 that results, 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.

 

86


Table of Contents
Index to Financial Statements

SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The following table shows selected historical combined financial data of the Predecessor, and selected unaudited pro forma combined financial data of Western Refining Logistics, LP for the periods and as of the dates indicated. The selected historical combined financial statements of the Predecessor as of and for the years ended December 31, 2012, and December 31, 2011, are derived from the audited combined financial statements of the Predecessor appearing elsewhere in this prospectus. The selected historical interim combined financial data of the Predecessor as of and for the three months ended March 31, 2013, and March 31, 2012, are derived from the unaudited interim combined financial statements of the 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 selected unaudited pro forma combined financial statements presented in the following table as of and for the three months ended March 31, 2013, and for the year ended December 31, 2012, are derived from the unaudited pro forma combined financial statements included elsewhere in this prospectus. The unaudited pro forma combined balance sheet assumes the offering and the related transactions occurred as of March 31, 2013, and the unaudited pro forma combined statements of operations for the three months ended March 31, 2013 and the year ended December 31, 2012, assume the offering and the related transactions occurred as of January 1, 2012. These transactions include, and the unaudited pro forma combined financial statements give effect to, the following:

 

   

Western’s contribution of certain of the Predecessor’s assets to us and the elimination of certain of the Predecessor’s assets that will not be contributed to us;

 

   

our entering into a new $300 million revolving credit facility, under which there will be no borrowings at the closing of this offering;

 

   

our entering into two 10-year commercial agreements with Western, and the recognition of crude oil gathering and transportation, terminalling, and storage revenue under those agreements at rates that were not recognized on a historical basis by the Predecessor;

 

   

our entering into an omnibus agreement and services agreement with Western;

 

   

the completion of this offering, and our issuance of (i) our non-economic general partner interest and all of our incentive distribution rights to our general partner; (ii)             common units and              subordinated units, representing an aggregate     % limited partner interest in us to Western and its subsidiaries; and (iii) common units, representing a     % limited partner interest in us, to the public; and

 

   

the application of the net proceeds of this offering as described in “Use of Proceeds.”

 

87


Table of Contents
Index to Financial Statements

The unaudited pro forma combined financial statements do not include $3.5 million in estimated incremental general and administrative expenses that we expect to incur annually as a result of being a separate publicly traded partnership.

 

    Western Refining Logistics, LP
Predecessor Historical
    Western Refining Logistics, LP
Pro forma
 
    Three months
ended March 31,
    Year ended
December 31,
    Three months
ended March 31,
    Year ended
December 31,
 

(in thousands, except per unit amounts)

  2013     2012     2012     2011     2013     2012  
    (unaudited)                 (unaudited)  

Combined statements of income:

           

Revenues (1):

           

Affiliate

  $ 912      $ 723      $ 3,167      $ 2,439      $ 23,909      $ 100,385   

Third-party

    227        233        678        992        227        678   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    1,139        956        3,845        3,431        24,136        101,063   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

           

Operating and maintenance expenses

    15,567        12,113        58,667        53,766        14,137        51,347   

General and administrative expenses

    1,041        1,058        4,227        4,045        1,041        4,227   

Loss (gain) on disposal of assets

    —          335        335        (26,687     —          335   

Depreciation and amortization expense

    2,930        2,910        11,620        12,694        2,433        9,527   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    19,538        16,416        74,849        43,818        17,611        65,436   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (18,399     (15,460     (71,004     (40,387     6,525        35,627   

Other income (expense):

           

Interest expense and other financing costs

    —          —          —          —          (455     (1,445

Other, net

    2        2        12        14        2        12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (18,397     (15,458     (70,992     (40,373     6,072        34,194   

Provision for income taxes

    —          —          —          —          (101     (448
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (18,397   $ (15,458   $ (70,992   $ (40,373   $ 5,971      $ 33,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per limited partner unit (basic and diluted):

           

Common units

           

Subordinated units

           

Combined balance sheets (at period end):

           

Cash and cash equivalents

  $ —