As filed with the Securities and Exchange Commission on April 1, 2011

Registration No. 333-171525

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Amendment No. 4
to
Form S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

 

 

 

19100 Ridgewood Parkway

San Antonio, Texas 78259-1828

(210) 626-6000

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

 

Charles S. Parrish

Vice President, General Counsel and Secretary

19100 Ridgewood Parkway

San Antonio, Texas 78259-1828

(210) 626-4280

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

 

 

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:   As soon as practicable after this Registration Statement becomes effective.

 

 

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

 

 

 

TABLE OF CONTENTS

 

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Through and including          , 2011 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

Industry and Market Data

 

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications or other published independent sources. Some data are also based on our good faith estimates. Although we believe these third-party sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness.

 

SUMMARY

 

Tesoro Logistics LP

 

Overview

 

Our Assets and Operations

 

Our Commercial Agreements with Tesoro

	•	a 10-year pipeline transportation services agreement under which Tesoro will pay us fees for gathering and transporting crude oil on our High Plains pipeline system;
	•	a two-year trucking transportation services agreement under which Tesoro will pay us fees for crude oil trucking and related services and scheduling and dispatching services that we provide through our High Plains truck-based crude oil gathering operation;
	•	a 10-year master terminalling services agreement under which Tesoro will pay us fees for providing terminalling services at our eight refined products terminals;
	•	a 10-year pipeline transportation services agreement under which Tesoro will pay us fees for transporting crude oil and refined products on our five Salt Lake City short-haul pipelines; and
	•	a 10-year storage and transportation services agreement under which Tesoro will pay us fees for storing crude oil and refined products at our Salt Lake City storage facility and transporting crude oil and refined products between the storage facility and Tesoro’s Salt Lake City refinery through interconnecting pipelines on a dedicated basis.

 

Business Strategies

	•	Focus on Stable, Fee-Based Business.   We intend to focus on opportunities to provide committed, fee-based logistics services to Tesoro and third parties and to minimize our direct exposure to commodity price fluctuations.
	•	Pursue Attractive Organic Growth Opportunities.   We intend to evaluate investment opportunities to expand our existing asset base that may arise from the growth of Tesoro’s refining and marketing business or from increased third-party activity in our areas of operations. We intend to focus on organic growth opportunities that complement our current asset base or provide attractive returns in new areas within our geographic footprint.
	•	Grow Through Strategic Acquisitions.   We plan to pursue accretive acquisitions of complementary assets from Tesoro as well as third parties. In order to provide us with initial acquisition opportunities, Tesoro has granted us a right of first offer to acquire certain logistics assets that it will retain following this offering. Our third-party acquisition strategy will be focused on logistics assets in the western half of the United States where we believe our knowledge of the market will provide us with a competitive advantage.
	•	Optimize Existing Asset Base and Pursue Third-Party Volumes.   We will seek to enhance the profitability of our existing assets by pursuing opportunities to add Tesoro and third-party volumes, improve operating efficiencies and increase utilization.

 

Competitive Strengths

	•	Long-Term, Fee-Based Contracts.   Initially, we will generate a substantial majority of our revenue under long-term, fee-based contracts with Tesoro that include minimum volume commitments and fees that are indexed for inflation. These contracts should promote cash flow stability and minimize our direct exposure to commodity price fluctuations.
	•	Relationship with Tesoro.   We have a strategic relationship with Tesoro, which we believe will provide us with a stable base of cash flows as well as opportunities for growth. Our High Plains system currently delivers all of the crude oil processed by Tesoro’s Mandan refinery, and our refined products terminals provide critical storage and distribution infrastructure for six of Tesoro’s seven refineries. In addition, we have a right of first offer to acquire certain logistics assets that will be retained by Tesoro following this offering.
	•	Assets Positioned in Areas of High Demand.   Our High Plains system is located in the Williston Basin, one of the most prolific onshore oil producing basins in North America, and our terminalling, transportation and storage assets are positioned in markets that the EIA projects will experience growth in demand for refined products.
	•	Experienced Management Team.   Our management team has significant experience in the management and operation of logistics assets and the execution of expansion and acquisition strategies. Our management team includes some of the most senior officers of Tesoro, who average over 27 years of experience in the energy industry.
	•	Financial Flexibility.   We believe we will have the financial flexibility to execute our growth strategy through the available capacity under our revolving credit facility and our ability to access the debt and equity capital markets.

 

Growth Opportunities

 

Our Relationship with Tesoro

 

	•	Tesoro Corporation accounts for substantially all of our revenues. Additionally, conflicts of interest may arise between Tesoro and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. If Tesoro changes its business strategy, is unable to satisfy its obligations under our commercial agreements for any reason or significantly reduces the volumes transported through our pipelines or handled at our terminals, our revenues would decline and our financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be adversely affected.

	•	We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.
	•	Tesoro may suspend, reduce or terminate its obligations under our commercial agreements in some circumstances, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.
	•	Tesoro’s level of indebtedness, the terms of its borrowings and its credit ratings could adversely affect our ability to grow our business, our ability to make cash distributions to our unitholders and our credit ratings and profile. Our ability to obtain credit in the future may also be affected by Tesoro’s credit rating.
	•	A material decrease in the refining margins at Tesoro’s refineries could materially reduce the volumes of crude oil or refined products that we handle, which could adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.
	•	We may not be able to significantly increase our third-party revenue due to competition and other factors, which could limit our ability to grow and extend our dependence on Tesoro.
	•	Our general partner and its affiliates, including Tesoro, have conflicts of interest with us and limited fiduciary duties, and they may favor their own interests to the detriment of us and our common unitholders. Additionally, we have no control over Tesoro’s business decisions and operations, and Tesoro is under no obligation to adopt a business strategy that favors us.
	•	Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.
	•	Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.
	•	Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

 

The Transactions

	•	we will issue 2,754,891 common units and 15,254,891 subordinated units to Tesoro, representing an aggregate 57.8% limited partner interest in us, and 622,649 general partner units, representing a 2.0% general partner interest in us, and all of our incentive distribution rights to our general partner;

	•	we will issue 12,500,000 common units to the public in this offering, representing a 40.2% limited partner interest in us, and will apply the net proceeds as described in “Use of Proceeds” on page 46;

	•	we will enter into a new $150.0 million revolving credit facility, under which we will borrow $50.0 million to fund an additional cash distribution to Tesoro;
	•	Tesoro will enter into multiple long-term commercial agreements with us; and
	•	Tesoro will enter into an omnibus agreement and an operational services agreement with us.

 

Principal Executive Offices and Internet Address

 

The Offering

Common units offered to the public		12,500,000 common units.

		14,375,000 common units if the underwriters exercise in full their option to purchase additional common units from us.

Units outstanding after this offering		15,254,891 common units and 15,254,891 subordinated units, each representing a 49.0% limited partner interest in us.

 

Use of proceeds		We expect to receive net proceeds of $225.0 million from this offering, after deducting underwriting discounts, structuring and advisory fees, and estimated offering expenses. We intend to retain $3.0 million of the net proceeds for working capital purposes, and, after the payment of $2.0 million of debt issuance costs, use $220.0 million to make a cash distribution to Tesoro. At the closing of this offering, we will borrow $50.0 million under our revolving credit facility, all of which will be used to fund an additional cash distribution to Tesoro.

		The cash distributions to Tesoro from the proceeds of this offering and the borrowing under our revolving credit facility will be made in consideration of its contribution of assets to us and to reimburse Tesoro for certain capital expenditures incurred with respect to these assets. We are funding these distributions through a combination of net proceeds from this offering and borrowings under our revolving credit facility in order to optimize our capital structure.
		The net proceeds from any exercise by the underwriters of their option to purchase additional common units from us will be used to redeem from Tesoro a number of common units equal to the number of common units issued upon exercise of the option at a price per common unit equal to the proceeds per common unit before expenses but after deducting underwriting discounts and the structuring fee.

Cash distributions		We intend to make a minimum quarterly distribution of $0.3375 per unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner.

		For the quarter in which this offering closes, we will pay a prorated distribution on our units covering the period from the completion of this offering through June 30, 2011, based on the actual length of that period.

		In general, we will pay any cash distributions we make each quarter in the following manner:

		•  first, 98.0% to the holders of common units and 2.0% to our general partner, until each common unit has received a minimum quarterly distribution of $0.3375 plus any arrearages from prior quarters;

		•  second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $0.3375; and

		•  third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received a distribution of $0.388125.

		If cash distributions to our unitholders exceed $0.388125 per unit in any quarter, our general partner will receive, in addition to distributions on its 2.0% general partner interest, increasing percentages, up to 48.0%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” In certain circumstances, our general partner, as the initial holder of our incentive distribution rights, has the right to reset the target distribution levels described above to higher levels based on our cash distributions at the time of the exercise of this reset election. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions” beginning on page 61.

		Pro forma cash available for distribution generated during the year ended December 31, 2010 was approximately $46.0 million. The amount of available cash we need to pay the minimum quarterly distribution for four quarters on our common units and subordinated units to be outstanding immediately after this offering and the corresponding distributions on our general partner’s 2.0% interest is approximately $42.0 million (or an average of approximately $10.5 million per quarter). As a result, for the year ended December 31, 2010, on a pro forma basis, we would have generated available cash sufficient to pay the full minimum quarterly distribution on all of our common units and subordinated units and the corresponding distributions on our general partner’s 2.0% interest during those periods. Please read “Cash Distribution Policy and Restrictions on Distributions — Unaudited Pro Forma Available Cash for the Year Ended December 31, 2010” beginning on page 51.

		We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions — Estimated EBITDA for the Twelve Months Ending March 31, 2012” that we will have sufficient available cash to pay the aggregate minimum quarterly distribution of $42.0 million on all of our common units and subordinated units and the corresponding distributions on our general partner’s 2.0% interest for the twelve months ending March 31, 2012. However, we do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement, and there is no guarantee that we will make quarterly cash distributions to our unitholders. Please read “Cash Distribution Policy and Restrictions on Distributions” beginning on page 49.

Subordinated units		Tesoro will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, the subordinated units will not be entitled to receive any distribution until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

Conversion of subordinated units		The subordination period will end on the first business day after we have earned and paid at least (1) $1.35 (the minimum quarterly distribution on an annualized basis) on each outstanding common unit and subordinated unit and the corresponding distributions on our general partner’s 2.0% interest for each of three consecutive, non-overlapping four quarter periods ending on or after June 30, 2014 or (2) $2.025 (150.0% of the annualized minimum quarterly distribution) on each outstanding common unit and subordinated unit and the corresponding distributions on our general partner’s 2.0% interest and the incentive distribution rights for the four-quarter period immediately preceding that date, in each case provided there are no arrearages on our common units at that time.

		The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holders of subordinated units or their affiliates are voted in favor of that removal.
		When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and all common units thereafter will no longer be entitled to arrearages. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions — Subordination Period” beginning on page 64.

Issuance of additional units		Our partnership agreement authorizes us to issue an unlimited number of additional units without the approval of our unitholders. Please read “Units Eligible for Future Sale” beginning on page 178 and “The Partnership Agreement — Issuance of Additional Securities” beginning on page 168.

 

Limited voting rights		Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 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, Tesoro will own an aggregate of 59.0% of our common and subordinated units (or 52.8% of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). This will give Tesoro the ability to prevent the removal of our general partner. Please read “The Partnership Agreement — Voting Rights” beginning on page 166.

 

Limited call right		If at any time our general partner and its affiliates own more than 75% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (1) the average of the daily closing price of our common units over the 20 trading days preceding the date that is three days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is

		first mailed. Please read “The Partnership Agreement — Limited Call Right” beginning on page 174.

Estimated ratio of taxable income to distributions		We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2013, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be 20% or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $1.35 per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $0.27 per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material Federal Income Tax Consequences — Tax Consequences of Unit Ownership — Ratio of Taxable Income to Distributions” on page 182 for the basis of this estimate.

 

Material federal income tax consequences		For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material Federal Income Tax Consequences” beginning on page 179.

Exchange listing		We have applied to list our common units on the New York Stock Exchange under the symbol “TLLP.”

 

Summary Historical and Pro Forma Combined Financial and Operating Data

	•	Tesoro’s contribution of all of our predecessor’s assets and operations to us (excluding working capital and other noncurrent liabilities);
	•	our execution of multiple long-term commercial agreements with Tesoro and recognition of incremental revenues under those agreements that were not recognized by our predecessor;
	•	certain intrastate tariff increases on our High Plains pipeline system;
	•	our execution of an omnibus agreement and an operational services agreement with Tesoro;

	•	the consummation of this offering and our issuance of 12,500,000 common units to the public, 622,649 general partner units and the incentive distribution rights to our general partner and 2,754,891 common units and 15,254,891 subordinated units to Tesoro; and

	•	the application of the net proceeds of this offering, together with the proceeds from borrowings under our revolving credit facility, as described in “Use of Proceeds” on page 46.

														Tesoro Logistics LP
														Pro Forma
		Tesoro Logistics LP Predecessor Historical												Year Ended
		Year Ended December 31,												December 31,
		2008				2009				2010				2010
														(Unaudited)
		(In thousands, except per unit data and operating information)
Statement of Operations Data:
REVENUES(1):
Crude oil gathering		$	21,190			$	19,422			$	19,592			$	49,566
Terminalling, transportation and storage			3,297				3,237				3,708				43,588
Total Revenues			24,487				22,659				23,300				93,154
Operating and maintenance expense(2)			29,741				32,566				32,972				36,824
Depreciation expense			6,625				8,820				8,006				8,006
General and administrative expense(3)			2,525				3,141				3,198				3,442
OPERATING INCOME (LOSS)			(14,404	)			(21,868	)			(20,876	)			44,882
Interest expense, net(4)			—				—				—				2,410
NET INCOME (LOSS)		$	(14,404	)		$	(21,868	)		$	(20,876	)		$	42,472
General partner interest in net income														$	850
Common unitholders interest in net income														$	20,811
Subordinated unitholders interest in net income														$	20,811
Pro forma net income (loss) per common unit														$	2.73
Pro forma net income (loss) per subordinated unit														$	2.73
Balance Sheet Data (at year end):
Property, Plant and Equipment, net		$	138,785			$	138,055			$	131,606			$	131,606
Total Assets			141,697				141,215				135,577				136,606
Total Liabilities			8,686				5,499				6,750				50,000
Total Division Equity/Partners’ Capital			133,011				135,716				128,827				86,606
Cash Flow Data:
Net cash from (used in):
Operating activities		$	(6,045	)		$	(12,324	)		$	(11,426	)
Investing activities			(16,022	)			(12,249	)			(2,561	)
Financing activities			22,067				24,573				13,987
Other Financial Data:
EBITDA(5)		$	(7,779	)		$	(13,048	)		$	(12,870	)		$	52,888
Capital expenditures:
Maintenance		$	8,475			$	3,319			$	1,703			$	1,703
Expansion(6)			10,186				5,915				367				367
Total		$	18,661			$	9,234			$	2,070			$	2,070
Operating Information:
Crude oil gathering segment:
Pipeline throughput (bpd)(7)			54,737				52,806				50,695				50,695
Average pipeline revenue per barrel(8)		$	1.06			$	1.01			$	1.06			$	1.35
Trucking volume (bpd)			23,752				22,963				23,305				23,305
Average trucking revenue per barrel(8)														$	2.91
Terminalling, transportation and storage segment:
Terminal throughput (bpd)			112,868				113,135				113,950				113,950
Average terminal revenue per barrel(8)														$	0.79
Short-haul pipeline throughput (bpd)			68,890				62,822				60,666				60,666
Average short-haul pipeline revenue per barrel														$	0.25
Storage capacity reserved (shell capacity barrels)															878,000
Storage per shell capacity barrel (per month)														$	0.50

(1)		Pro forma revenues reflect recognition of affiliate revenues generated by pipeline and terminal assets to be contributed to us at the closing of this offering that were not previously recorded in the historical financial records of Tesoro Logistics LP Predecessor. Product volumes used in the calculations are historical volumes transported or terminalled through facilities included in the Tesoro Logistics LP Predecessor financial statements. Tariff rates and service fees were calculated using the rates and fees in the commercial agreements to be entered into with Tesoro at the closing of this offering and tariff rates on our High Plains pipeline system to be in effect at the time of closing of this offering.
(2)		Operating and maintenance expense includes losses on fixed asset disposals. Operating and maintenance expense in 2009 includes a $1.1 million loss on fixed asset disposals primarily related to the retirement of a portion of our Los Angeles terminal. The pro forma operating and maintenance expenses primarily reflect $1.4 million for purchased additives based on historical levels of such purchases that have not previously been allocated to the Predecessor but will be charged to the Partnership after the closing of this offering, as well as $1.1 million for business interruption, property and pollution liability insurance premiums that we expect to incur based on estimates from our insurance broker, $0.8 million for employee-related expenses which have not been previously recorded in the historical financial records of Tesoro Logistics LP Predecessor, and $0.3 million for an annual service fee that we will pay Tesoro under the terms of our operational services agreement.

(3)		Pro forma general and administrative expenses have been adjusted to give effect to the annual corporate services fee of $2.5 million that we will pay to Tesoro under the omnibus agreement for providing treasury, accounting, legal and other general and administrative services as well as higher employee-related expenses of $0.2 million, but do not include the estimated $3.2 million in incremental annual general and administrative expenses we expect to incur as a result of being a separate publicly traded partnership.

(4)		Pro forma interest expense is related to expected borrowings under our revolving credit facility, commitment fees on the unutilized portion of our revolving credit facility and amortization of related debt issuance costs. Interest expense is calculated assuming an estimated annual interest rate of 2.8%. If the actual interest rate increases or decreases by 1.0%, pro forma interest expense would increase or decrease by approximately $0.5 million per year.
(5)		EBITDA is defined in “Non-GAAP Financial Measure” below.
(6)		Expansion capital expenditures reflect a $3.5 million truck rack expansion project at our Los Angeles terminal in 2008.
(7)		Pro forma and historical pipeline throughput for 2010 include the effects of a scheduled turnaround at Tesoro’s Mandan refinery in April and May of 2010.
(8)		Average pipeline revenue per barrel includes tariffs for committed and uncommitted volumes of crude oil under the pipeline transportation services agreement to be entered into with Tesoro at the closing of this offering, as well as fees for the injection of crude oil into the pipeline system from trucking receipt points, which we refer to as pumpover fees. Average trucking service revenue per barrel includes tank usage fees and fees for providing trucking, dispatching, accounting and data services under the trucking transportation services agreement to be entered into with Tesoro at the closing of this offering. Average terminal revenue per barrel includes terminal throughput fees as well as ancillary service fees for services such as ethanol blending and additive injection.

	•	our operating performance as compared to those of other companies in the logistics business, without regard to financing methods, historical cost basis or capital structure;
	•	the ability of our assets to generate sufficient cash flow to make distributions to our partners;
	•	our ability to incur and service debt and fund capital expenditures; and
	•	the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

														Tesoro Logistics LP
														Pro Forma
		Tesoro Logistics LP Predecessor Historical												Year Ended
		Years Ended December 31,												December 31,
		2008				2009				2010				2010
														(Unaudited)
		(In thousands)
Reconciliation of EBITDA to net income (loss):
Net Income (Loss)		$	(14,404	)		$	(21,868	)		$	(20,876	)		$	42,472
Add:
Depreciation expense			6,625				8,820				8,006				8,006
Interest expense, net			—				—				—				2,410
EBITDA		$	(7,779	)		$	(13,048	)		$	(12,870	)		$	52,888
Reconciliation of EBITDA to net cash from (used in) operating activities:
Net cash from (used in) operating activities		$	(6,045	)		$	(12,324	)		$	(11,426	)
Changes in assets and liabilities			(1,258	)			390				(932	)
Loss on asset disposals			(476	)			(1,114	)			(512	)
EBITDA		$	(7,779	)		$	(13,048	)		$	(12,870	)

 

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

 

If any of the following risks were actually to occur, our business, financial condition, results of operations and our cash flows could be materially adversely affected. In that case, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose all or part of your investment.

 

Tesoro accounts for substantially all of our revenues. Additionally, conflicts of interest may arise between Tesoro and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. If Tesoro changes its business strategy, is unable to satisfy its obligations under our commercial agreements for any reason or significantly reduces the volumes transported through our pipelines or handled at our terminals, our revenues would decline and our financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be adversely affected.

 

For the year ended December 31, 2010, Tesoro accounted for approximately 96% of our pro forma revenues. Tesoro is the primary shipper on our High Plains system and has historically operated the system solely to supply its Mandan, North Dakota refinery and not as a stand-alone business. Tesoro is also our primary customer in our terminalling, transportation and services segment. As we expect to continue to derive the substantial majority of our revenues from Tesoro for the foreseeable future, we are subject to the risk of nonpayment or nonperformance by Tesoro under our commercial agreements. Any event, whether in our areas of operation or otherwise, that materially and adversely affects Tesoro’s financial condition, results of operations or cash flows may adversely affect our ability to sustain or increase cash distributions to our unitholders. Accordingly, we are indirectly subject to the operational and business risks of Tesoro, some of which are related to the following:

 

 

Additionally, Tesoro continually considers opportunities presented by third parties with respect to its refinery assets. These opportunities may include offers to purchase and joint venture propositions. Tesoro may also change its refineries’ operations by constructing new facilities, suspending or reducing certain operations,

modifying or closing facilities or terminating operations. Changes may be considered to meet market demands, to satisfy regulatory requirements or environmental and safety objectives, to improve operational efficiency or for other reasons. Tesoro actively manages its assets and operations, and, therefore, changes of some nature, possibly material to its business relationship with us, are likely to occur at some point in the future.

 

Furthermore, conflicts of interest may arise between Tesoro and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. We have no control over Tesoro, our largest source of revenue and our primary customer, and Tesoro may elect to pursue a business strategy that does not favor us and our business. Please read “— Risks Inherent in an Investment in Us — Our general partner and its affiliates, including Tesoro, have conflicts of interest with us and limited fiduciary duties, and they may favor their own interests to the detriment of us and our common unitholders. Additionally, we have no control over Tesoro’s business decisions and operations, and Tesoro is under no obligation to adopt a business strategy that favors us” on page 32.

 

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner and its affiliates, to enable us to pay the minimum quarterly distribution to our unitholders.

 

In order to pay the minimum quarterly distribution of $0.3375 per unit per quarter, or $1.35 per unit on an annualized basis, we will require available cash of approximately $10.5 million per quarter, or approximately $42.0 million per year, based on the number of common units and subordinated units and the general partner interest to be outstanding immediately after completion of this offering. We may not have sufficient available cash from operating surplus each quarter to enable us to pay the minimum quarterly distribution. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

 

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 assumptions underlying the forecast of cash available for distribution that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks that could cause our actual cash available for distribution to differ materially from our forecast.

 

The forecast of cash available for distribution set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations, EBITDA and cash available for distribution for the twelve months ending March 31, 2012. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct and that are discussed in “Cash Distribution Policy and Restrictions on Distributions” beginning on page 49. Our financial forecast has been prepared by management, and we have neither received nor requested an opinion or report on it from our or any other independent auditor. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks, including those discussed in this prospectus, which could cause our EBITDA to be materially less than the amount forecasted. If we do not generate the forecasted EBITDA, we may not be able to make the minimum quarterly distribution or pay any amount on our common units or subordinated units, and the market price of our common units may decline materially.

 

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

 

Our commercial agreements and operational services agreement with Tesoro include provisions that permit Tesoro to suspend, reduce or terminate its obligations under the applicable agreement if certain events occur. These events include a material branch of the agreement by us or Tesoro deciding to permanently or indefinitely suspend refining operations at one or more of its refineries as well as our being subject to certain force majeure events that would prevent us from performing required services under the applicable agreement. Tesoro has the discretion to make such decisions notwithstanding the fact that they may significantly and adversely affect us. For instance, under the commercial agreements, if Tesoro decides to permanently or indefinitely suspend refining operations at a refinery for a period that will continue for at least 12 consecutive months, then it may terminate the agreement on no less than 12 months’ prior written notice to us, unless it publicly announces its intent to resume operations at the refinery at least two months prior to the expiration of the 12-month notice period. Under the agreements, Tesoro has the right to terminate the agreement with respect to any services for which performance will be suspended by a force majeure event for a period in excess of 12 months.

 

Generally, although Tesoro is not entitled to claim a force majeure event under the commercial agreements, Tesoro’s and our obligations under these agreements will be proportionately reduced or suspended to the extent that we are unable to perform under the agreements upon our declaration of a force majeure event. As defined in our commercial agreements and in the operational service agreement, force majeure events include any acts or occurrences that prevent services from being performed under the applicable agreement, such as:

 

 

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 Tesoro’s minimum throughput commitments on our pipelines or terminals, respectively, and Tesoro no longer being required to pay the full amount of fees that would have been associated with its minimum throughput commitments. Additionally, we have no control over Tesoro’s business decisions and operations, and conflicts of interest may arise between Tesoro and its affiliates, including our general partner, on the one hand and us and our unitholders, on the other hand. Tesoro is not required to pursue a business strategy that favors us or utilizes our assets, and could elect to decrease refinery production or shut down or re-configure a refinery. These actions, as well the other activities described above, could result in a reduction or suspension of Tesoro’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 unitholders. Please read “Certain Relationships and Related Party Transactions — Agreements Governing the Transactions — Commercial Agreements with Tesoro” beginning on page 143.

 

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

 

Tesoro is not obligated to use our services with respect to volumes of crude oil or refined products in excess of the minimum volume commitments under the various commercial agreements with us. If Tesoro had satisfied only its minimum volume commitments during the past twelve months under those agreements, we would not have been able to make the minimum quarterly distribution on all outstanding units. Our ability to make the minimum quarterly distribution on all outstanding units requires that we transport additional volumes for Tesoro on our High Plains system (in excess of the minimum volume commitments under our commercial agreements), that we handle additional Tesoro and/or third-party volumes at our terminals and that Tesoro’s obligations under our commercial agreements are not suspended, reduced or terminated due to a refinery shutdown or force majeure event. In addition, the terms of Tesoro’s obligations under those agreements range from two to 10 years. If Tesoro fails to use our facilities and services after expiration of those agreements and we are unable to generate additional revenues from third parties, our ability to make cash distributions to unitholders will be reduced.

 

Although we believe our commercial agreements with Tesoro should provide us with stable throughput volumes on both our High Plains system and at our terminals, the rates charged for transporting, terminalling and storing such volumes and for related ancillary services vary. Accordingly, the mix of rates applied to such throughput volumes could impact the stability of our revenues.

 

Our commercial agreements require Tesoro to provide us with minimum throughput volumes on our High Plains system and at our terminals. Under our High Plains pipeline transportation services agreement, we will charge Tesoro for transporting crude oil from North Dakota origin points on our High Plains pipeline system pursuant to both committed and uncommitted tariff rates, and Tesoro will be obligated to transport an average of at least 49,000 bpd per month at the committed rate from North Dakota origin points to Tesoro’s Mandan refinery. The rates charged on the High Plains pipeline system for such services will vary depending on the origin point on the system from which barrels are transported. Accordingly, while we believe the agreement should provide us with a stable base of throughput volumes, our revenues generated on the High Plains pipeline system are subject to risks relative to the mix of tariff rates applied to the volumes shipped by Tesoro. Should the High Plains pipeline transportation services agreement be invalidated for any reason, all intrastate volumes would be shipped at the lower uncommitted tariff rate, thereby potentially lowering our revenues. Under our master terminalling services agreement, Tesoro is obligated to throughput a volume of refined products equal to an average of 100,000 bpd per month for all of our terminals on an aggregate basis. However, the rates that we charge for the terminalling services that we provide, including for the provision of ancillary services such as ethanol blending and additive injection, vary depending on both the service type and the terminal at which such services are provided. Variances in rates applied under our commercial agreements could impact the stability of our revenues and thus the stability of our distributions to unitholders.

If our interstate or intrastate tariffs are successfully challenged, we could be required to reduce our tariff rates, which would reduce our revenues and our ability to make distributions to our unitholders.

 

Tesoro has agreed not to challenge, or to cause others to challenge or assist others in challenging, our tariffs in effect during the term of our High Plains pipeline transportation services agreement with Tesoro. This agreement does not prevent future shippers from challenging our tariffs and any related proration rules. At the end of the term of the agreement, Tesoro will be free to challenge, or to cause other parties to challenge or assist others in challenging, our tariffs in effect at that time. If any challenge were successful, Tesoro’s minimum volume commitment under our High Plains pipeline transportation services agreement could be invalidated, and all of the volumes shipped on our High Plains pipeline system would be at the lower uncommitted tariff rate. Successful challenges would reduce our revenues and our ability to make distributions to our unitholders.

 

Tesoro’s level of indebtedness, the terms of its borrowings and its credit ratings could adversely affect our ability to grow our business, our ability to make cash distributions to our unitholders and our credit ratings and profile. Our ability to obtain credit in the future may also be affected by Tesoro’s credit rating.

 

Tesoro must devote a portion of its cash flows from operating activities to service its indebtedness, and therefore cash flows may not be available for use in pursuing its growth strategy, including the expansion of its logistics operations. Furthermore, a higher level of indebtedness at Tesoro in the future increases the risk that it may default on its obligations to us under our commercial agreements. As of December 31, 2010, Tesoro had long-term indebtedness of approximately $1.8 billion. The covenants contained in the agreements governing Tesoro’s outstanding and future indebtedness may limit its ability to borrow additional funds for development and make certain investments and may directly or indirectly impact our operations in a similar manner. For example, Tesoro’s indebtedness requires that any transactions it enters into with us must be on terms no less favorable to Tesoro than those that could have been obtained with an unrelated person. Furthermore, in the event that Tesoro were to default under certain of its debt obligations, there is a risk that Tesoro’s creditors would attempt to assert claims against our assets during the litigation of their claims against Tesoro. The defense of any such claims could be costly and could materially impact our financial condition, even absent any adverse determination. In the event these claims were successful, our ability to meet our obligations to our creditors, make distributions and finance our operations could be materially adversely affected.

 

Tesoro’s long-term credit ratings are currently below investment grade. If these ratings are lowered in the future, the interest rate and fees Tesoro pays on its revolving credit facilities may increase. In addition, although we will not have any indebtedness rated by any credit rating agency at the closing of this offering, we may have rated debt in the future. Credit rating agencies will likely consider Tesoro’s debt ratings when assigning ours because of Tesoro’s ownership interest in us, the significant commercial relationships between Tesoro and us, and our reliance on Tesoro for substantially all of our revenues. If one or more credit rating agencies were to downgrade the outstanding indebtedness of Tesoro, we could experience an increase in our borrowing costs or difficulty accessing the capital markets. Such a development could adversely affect our ability to grow our business and to make cash distributions to our unitholders.

 

Our logistics operations and Tesoro’s refining operations are subject to many risks and operational hazards, some of which may result in business interruptions and shutdowns of our or Tesoro’s facilities and damages for which we may not be fully covered by insurance. If a significant accident or event occurs that results in business interruption or shutdown for which we are not adequately insured, our operations and financial results could be adversely affected.

 

Our logistics operations are subject to all of the risks and operational hazards inherent in transporting and storing crude oil and refined products, including:

 

 

 

These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage, as well as business interruptions or shutdowns of our facilities. Any such event or unplanned shutdown could have a material adverse effect on our business, financial condition and results of operations. In addition, Tesoro’s refining operations, on which our operations are substantially dependent, are subject to similar operational hazards and risks inherent in refining crude oil. A serious accident at our facilities or at Tesoro’s facilities, such as the April 2010 fire at Tesoro’s Anacortes refinery, could result in serious injury or death to employees of our general partner or its affiliates or contractors and could expose us to significant liability for personal injury claims and reputational risk. We have no control over the operations at Tesoro’s refineries and their associated pipelines.

 

We do not maintain insurance coverage against all potential losses and could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We carry separate policies of property, business interruption and pollution liability insurance and are insured under Tesoro’s liability policies and we are subject to Tesoro’s policy limits. The occurrence of an event that is not fully covered by insurance or failure by one or more insurers to honor its coverage commitments for an insured event could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

The volume of refined products that we distribute and store at our refined products terminals and the volume of crude oil that we transport on our High Plains system depend substantially on Tesoro’s refining margins. Refining margins are dependent both upon the price of crude oil or other refinery feedstocks and the price of refined products. These prices are affected by numerous factors beyond our or Tesoro’s control, including the global supply and demand for crude oil, gasoline and other refined products. The current global economic weakness and high unemployment in the United States are expected to continue to depress demand for refined products. The impact of low demand has been further compounded by excess global refining capacity and historically high inventory levels. Tesoro expects these conditions to continue to put significant pressure on refined product margins until the economy improves and unemployment declines. Several refineries in North America and Europe have been temporarily or permanently shut down in response to falling demand and excess refining capacity. Tesoro has publicly disclosed that it will continue to assess its refineries to determine if a complete or partial shutdown of one or more of its facilities is appropriate.

 

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

 

 

 

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

 

A material decrease in the crude oil produced in the Bakken Shale/Williston Basin area could materially reduce the volume of crude oil gathered and transported by our High Plains system and refined products distributed by our Mandan terminal, which could adversely affect our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

 

The volume of crude oil that we gather and transport on our High Plains system and the volume of refined products that we distribute at our Mandan terminal, in each case, in excess of Tesoro’s committed volumes, depends on the volume of refined products produced at Tesoro’s Mandan refinery. The volume of refined products produced depends, in part, on the availability of attractively-priced, high-quality crude oil produced in the Bakken Shale/Williston Basin area, which is the primary source of supply for Tesoro’s Mandan refinery.

 

In order to maintain or increase refined product production levels at the Mandan refinery, Tesoro must continually contract for new crude oil supplies in the Bakken Shale/Williston Basin area or consider connecting to alternative sources of crude oil, such as the Enbridge pipeline at the Canada/North Dakota border. Adverse developments in the Bakken Shale/Williston Basin area could have a significantly greater impact on our financial condition, results of operations and cash flows because of our lack of geographic diversity and substantial reliance on Tesoro as a customer. Accordingly, in addition to general industry risks related to gathering and transporting crude oil, we are disproportionately exposed to risks in the area, including:

 

 

Furthermore, the development of third-party crude oil gathering systems in the Williston Basin could disproportionately impact our High Plains system, should producers ship on competing systems, thereby impacting the price and availability of crude oil Tesoro ships to its Mandan refinery. If as a result of any of these or other factors, the volume of attractively-priced, high-quality crude oil available to the Mandan refinery is materially reduced for a prolonged period of time, the volume of crude oil gathered and transported by our High Plains system and the volume of refined products distributed by our Mandan terminal, and the related fees for those services, could be materially reduced, which could adversely affect our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

 

We may not be able to significantly increase our third-party revenue due to competition and other factors, which could limit our ability to grow and extend our dependence on Tesoro.

 

Part of our growth strategy includes diversifying our customer base by identifying opportunities to offer services to third parties with our existing assets or by constructing or acquiring new assets independently from

Tesoro. Our ability to increase our third-party revenue is subject to numerous factors beyond our control, including competition from third parties and the extent to which we lack available capacity when third-party shippers require it. For example, our High Plains system is subject to competition from existing and future third-party crude oil gathering systems and trucking operations in the Williston Basin. To the extent that we have available capacity on our High Plains system for third-party volumes, we may not be able to compete effectively with third-party gathering systems for additional crude oil production in the area. Our ability to obtain third-party customers on our High Plains system is also dependent on our ability to make outlet connections to third-party pipelines, and, if we are unable to do so, the throughput on our High Plains system will be limited by the demand from Tesoro’s Mandan refinery. To the extent that we have available capacity at our refined products terminals available for third-party volumes, competition from other existing or future refined products terminals owned by third parties may limit our ability to utilize this available capacity.

 

We have historically provided gathering, transporting and storage services to third parties on only a limited basis, and we can provide no assurance that we will be able to attract any material third-party service opportunities. Our efforts to attract new unaffiliated customers may be adversely affected by our relationship with Tesoro, our desire to provide services pursuant to fee-based contracts and, with respect to the High Plains system, Tesoro’s operational requirements at its Mandan refinery, which relies upon the High Plains system to supply all of its crude oil requirements and which we expect to continue to utilize substantially all of the available capacity of the current High Plains system for transportation of crude oil to the Mandan refinery. Our potential customers may prefer to obtain services under other forms of contractual arrangements under which we would be required to assume direct commodity exposure. In addition, we will need to establish a reputation among our potential customer base for providing high quality service in order to successfully attract unaffiliated third parties.

 

Certain of our terminals face competition from third-party terminals for Tesoro refined product volumes.

 

Tesoro utilizes third-party terminals to handle volumes of certain refined products above the minimum volumes that it is committed to deliver through our terminals under our master terminalling services agreement. Our Los Angeles, Stockton and Vancouver terminals, in particular, face competition for these incremental volumes. Part of our growth strategy for our terminal business depends on Tesoro transferring all or a portion of these incremental volumes from competing third-party terminals to our terminals, thereby increasing our terminal throughput revenue. To the extent that these third-party terminals can offer terminalling services at more competitive rates or on a more reliable basis or are otherwise successful in competing with us, our ability to fully execute our growth strategy and increase our terminalling revenues could be adversely affected.

 

Our expansion of existing assets and construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our operations and financial condition.

 

A portion of our strategy to grow and increase distributions to unitholders is dependent on our ability to expand existing assets and to construct additional assets. While we are presently engaged in discussions with multiple producers to expand our pipeline gathering network in the Bakken Shale/Williston Basin area, we have no material commitments for expansion or construction projects as of the date of this prospectus. The construction of a new pipeline or terminal or the expansion of an existing pipeline or terminal, such as by adding horsepower or pump stations, increasing storage capacity or otherwise, involves numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. If we undertake these projects, they may not be completed on schedule or at all or at the budgeted cost. Moreover, we may not receive sufficient long-term contractual commitments from customers to provide the revenue needed to support such projects and we may be unable to negotiate acceptable interconnection agreements with third-party pipelines to provide destinations for increased throughput. Even if we receive such commitments or make such interconnections, we may not realize an increase in revenue for an extended period of time. For instance, if we build a new pipeline, the construction will occur over an extended period of time and we will not receive any material increases in revenues until after completion of the project. Moreover, we may construct facilities to

capture anticipated future growth in production in a region, such as the Bakken Shale/Williston Basin area, in which such growth does not materialize. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our results of operations and financial condition and our ability to make distributions to our unitholders.

 

If we are unable to make acquisitions on economically acceptable terms from Tesoro or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.

 

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

 

 

If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in determining the application of these funds and other resources.

 

Our right of first offer to acquire certain of Tesoro’s existing assets is subject to risks and uncertainty, and ultimately we may not acquire any of those assets.

 

Our omnibus agreement provides us with a right of first offer on certain of Tesoro’s existing logistics assets for a period of ten years after the closing of this offering. The consummation and timing of any future acquisitions of these assets will depend upon, among other things, Tesoro’s willingness to offer these assets for sale, our ability to negotiate acceptable purchase agreements and commercial agreements with respect to the assets and our ability to obtain financing on acceptable terms. We can offer no assurance that we will be able to successfully consummate any future acquisitions pursuant to our right of first offer, and Tesoro is under no obligation to accept any offer that we may choose to make. In addition, certain of the assets covered by our right of first offer may require substantial capital expenditures in order to maintain compliance with applicable regulatory requirements or otherwise make them suitable for our commercial needs. For example, the dock at Tesoro’s Golden Eagle wharf facility will require significant capital improvements, which may be in excess of $100.0 million, in order to maintain compliance with various governmental regulations after 2011. For these or a variety of other reasons, we may decide not to exercise our right of first offer if and when any assets are offered for sale, and our decision will not be subject to unitholder approval. In addition, our right of first offer may be terminated by Tesoro at any time after it no longer controls our general partner. Please read “Certain Relationships and Related Party Transactions — Agreements Governing the Transactions — Omnibus Agreement — Right of First Offer” beginning on page 140.

Our ability to expand and increase our utilization rates may be limited if Tesoro’s refining and marketing business does not grow as expected.

 

Part of our growth strategy depends on the growth of Tesoro’s refining and marketing business. For example, in our terminals and storage business, we believe our growth will primarily be driven by identifying and executing organic expansion projects that will result in increased throughput volumes from Tesoro and third parties. Our prospects for organic growth currently include projects that we expect Tesoro to undertake, such as constructing new tankage, and that we expect to have an opportunity to purchase from Tesoro. If Tesoro focuses on other growth areas or does not make capital expenditures to fund the organic growth of its logistics operations, we may not be able to fully execute our growth strategy.

 

Any reduction in the capacity of, or the allocations to, our shippers in interconnecting, third-party pipelines could cause a reduction of volumes distributed through our terminals and through our short-haul crude oil pipelines.

 

Tesoro is dependent upon connections to third-party pipelines to transport refined products to certain of our terminals and to ship crude oil through our short-haul crude oil pipelines. Any reduction of capacities of these interconnecting pipelines due to testing, line repair, reduced operating pressures or other causes could result in reduced volumes of refined products distributed through our terminals and shipments of crude oil through our short-haul pipelines. Similarly, if additional shippers begin transporting volumes of refined products or crude oil over interconnecting pipelines, the allocations to Tesoro and other existing shippers on these pipelines could be reduced, which could also reduce volumes distributed through our terminals or transported through short-haul crude oil pipelines. Any significant reduction in volumes would adversely affect our revenues and cash flow and our ability to make distributions to our unitholders.

 

Our exposure to direct commodity price risk may increase in the future.

 

We currently generate substantially all of our revenues from Tesoro, primarily pursuant to fee-based commercial agreements under which we are paid based on the volumes of crude oil and refined products that we handle and the ancillary services we provide, rather than the value of the commodities themselves. Although some of our commercial agreements with Tesoro contain loss allowance provisions that require us to bear the risk of any volume loss relating to the services we provide, our existing operations and cash flows generally have limited exposure to direct commodity price risk. We may acquire or develop additional assets in the future that have a greater exposure to fluctuations in commodity price risk than our current operations. In addition, although we intend to continue to contractually minimize our exposure to direct commodity price risk in the future, our efforts to negotiate such contracts may not be successful. Increased exposure to the volatility of oil and refined product prices in the future could have a material adverse effect on our revenues and cash flow and our ability to make distributions to our unitholders.

 

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

 

We do not own all of the land on which our pipelines and terminals are located, and we are, therefore, subject to the possibility of more onerous terms and increased costs to retain necessary land use if we do not have valid leases or rights-of-way or if such rights-of-way lapse or terminate. We obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

 

We operate refined products terminals on property leased by us and Tesoro in Stockton, California, Vancouver, Washington and Anchorage, Alaska. Our lease with the Port of Stockton expires in 2014 and we have the option to renew this lease for up to three additional five-year terms. Assuming we receive consent from the Port of Vancouver to Tesoro’s assignment to us, our lease with the Port of Vancouver expires in 2016 and we have the option to renew this lease for up to two additional 10-year terms. Our Anchorage terminal has leases with the Alaska Railroad Corporation and the Port of Anchorage. Our lease with the Alaska

Railroad Corporation expires in 2011 and we have the option to renew this lease for up to three additional five-year terms. Our lease with the Municipality of Anchorage expires in 2014 and there can be no guarantee we will be able to renew this lease on satisfactory terms or at all. The lessee under the Port of Vancouver lease is Tesoro Refining and Marketing Company. Tesoro Refining and Marketing Company has agreed to assign the lease to us, subject to consent from the Port of Vancouver. Until such time, we only have a license (from Tesoro Refining and Marketing Company) to enter, access, use and operate the terminal. There is no guarantee the Port of Vancouver will consent to the assignment of the lease. In the event the license for our Vancouver terminal is found to be an assignment of the lease or sublease of the terminal without consent of the Port of Vancouver in violation of the lease, the Port of Vancouver may have remedies for breach of the lease, including termination of the lease if Tesoro Refining and Marketing Company does not exercise its cure rights with respect to such breach in a timely manner. Additionally if the license is otherwise found to be unenforceable, we would lose our right to use and operate the property, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

 

Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make cash distributions to our unitholders and the value of our units.

 

We will be dependent upon the earnings and cash flow generated by our operations in order to meet our debt service obligations and to allow us to make cash distributions to our unitholders. The operating and financial restrictions and covenants in our revolving credit facility and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities, which may, in turn, limit our ability to make cash distributions to our unitholders. For example, our revolving credit facility will restrict our ability to, among other things:

 

 

 

 

 

 

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 — Revolving Credit Facility” beginning on page 87 for additional information about our revolving credit facility.

 

The provisions of our revolving credit facility may affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our revolving credit facility could result in an event of default which could enable our lenders, subject to the terms and conditions of the revolving credit facility, to declare the outstanding principal of that debt, together with accrued interest, to be immediately due and payable. If we were unable to repay the accelerated amounts, our lenders could proceed against the collateral granted to them to secure such debt. If the payment of our debt is accelerated, defaults under our other debt instruments, if any, may be triggered, and our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity” beginning on page 87.

 

Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.

 

Our future level of debt could have important consequences to us, including the following:

 

 

 

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service any future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, investments or capital expenditures, selling assets or issuing equity. We may not be able to effect any of these actions on satisfactory terms or at all. The amount of cash we have available for distribution to holders of our common and subordinated units depends primarily on our cash flow rather than on our profitability, which may prevent us from making distributions, even during periods in which we record net income.

 

The amount of cash we have available for distribution depends primarily upon our cash flow and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record net losses for financial accounting purposes, and we may not make cash distributions during periods when we record net income for financial accounting purposes. Increases in interest rates could adversely impact our unit price, our ability to issue equity or incur debt for acquisitions or other purposes, and our ability to make cash distributions at our intended levels.

 

Interest rates may increase in the future. As a result, interest rates on our debt could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price will be impacted by our cash distributions and the implied distribution yield. The distribution yield is often used by investors to compare and rank yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on our unit price and our ability to issue equity or incur debt for acquisitions or other purposes and to make cash distributions at our intended levels.

 

We do not operate the central control room for our High Plains pipeline system, and we may face higher costs associated with control room services in the future.

 

The control room management functions for the pipelines in our High Plains pipeline system are performed under a control center services agreement with a third-party operator that expires in December 2012 and continues year to year thereafter unless terminated by either party. Under the terms of the agreement, the third-party control room operator controls, monitors, records and reports on the operation of the High Plains system, including supervisory control and data acquisition (SCADA) systems that monitor pipeline conditions and controls some of the valves and pump switches remotely through satellite communication. The control room operator also provides leak detection, data reporting, customer support, general maintenance and technical support and emergency response procedure compliance services. Under our current control room contract, we are liable for any losses resulting from actions of the third-party control room operator, unless such losses resulted from the gross negligence or willful misconduct of the operator. If disputes arise over the operation of the control room, or if our operator fails to provide the services contracted under the agreement, our business, results of operation, and financial condition could be adversely affected. Upon the expiration of our existing agreement in 2012, we will be required to negotiate the renewal of the terms of this agreement, negotiate a similar arrangement with Tesoro or another third party or install our own control room and hire and train personnel to operate this control room. We anticipate that the costs of these services under a negotiated renewal of our existing agreement or a new similar agreement will increase relative to historical costs. Increased costs associated with control room operation services will decrease the amount of cash available for distribution to unitholders to the extent we are not indemnified for these costs by Tesoro under our omnibus agreement. Please see “Certain Relationships and Related Party Transactions — Agreement Governing the Transactions — Omnibus Agreement” beginning on page 138.

Our assets and operations are subject to federal, state, and local laws and regulations relating to environmental protection and safety that could require us to make substantial expenditures.

 

Our assets and operations involve the transportation and storage of crude oil and refined products, which is subject to increasingly stringent federal, state, and local laws and regulations governing the discharge of materials into the environment and operational safety matters. Our business of transporting and storing crude oil and refined products involves the risk that crude oil, refined products and other hydrocarbons may gradually or suddenly be released into the environment. We also own or lease a number of properties that have been used to store or distribute crude oil and refined products for many years; many of these properties have been operated by third parties whose handling, disposal, or release of hydrocarbons and other wastes were not under our control. To the extent not covered by insurance or an indemnity, responding to the release of regulated substances into the environment may cause us to incur potentially material expenditures related to response actions, government penalties, natural resources damages, personal injury or property damage claims from third parties and business interruption.

 

Our Anchorage and Vancouver facilities operate in environmentally sensitive waters where maritime vessel, pipeline and refined product transportation and storage operations are closely monitored by federal, state and local agencies and environmental interest groups. Transportation and storage of crude oil and refined products over water or proximate to navigable water bodies — which occurs at several of our facilities in addition to Anchorage and Vancouver — involves inherent risks and subjects us to the provisions of the Oil Pollution Act of 1990 (the “Oil Pollution Act”) and similar state environmental laws. Among other things, these laws require us to demonstrate our capacity to respond to a spill of up to 100,000 barrels of oil from an above ground storage tank adjacent to water (a “worst case discharge”) to the maximum extent possible. To meet this requirement, we and Tesoro have contracted with various spill response service companies in the areas in which we transport or store crude oil and refined products; however, these companies may not be able to adequately contain a “worst case discharge” in all instances and we cannot ensure that all of their services would be available for our or Tesoro’s use at any given time. There are many factors that could inhibit the availability of these service providers, including, but not limited to, weather conditions, governmental regulations or other global events. By requirement of state or federal ruling, the availability of these service providers could be diverted to respond to other global events. In these and other cases, we may be subject to liability in connection with the discharge of crude oil or refined products into navigable waters.

 

Our pipelines, terminals and storage facilities are also subject to increasingly strict federal, state, and local laws and regulations that require us to comply with various safety requirements regarding the design, installation, testing, construction, and operational management of our facilities. We could incur potentially significant additional expenses should we identify that any of our assets are not in compliance.

 

Our failure to comply with these or any other environmental or safety-related regulations could result in the assessment of administrative, civil, or criminal penalties, the imposition of investigatory and remedial liabilities, and the issuance of injunctions that may subject us to additional operational constraints. Any such penalties or liability could have a material adverse effect on our business, financial condition, or results of operations.

 

Please read “Business — Environmental Regulation — Environmental Liabilities” beginning on page 122 and “Business — Rate and Other Regulation” beginning on page 113.

 

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

 

Environmental laws and regulations have raised operating costs for the oil and refined products industry and compliance with such laws and regulations may cause us and Tesoro to incur potentially material capital expenditures associated with the construction, maintenance, and upgrading of equipment and facilities. We may be required to address conditions discovered in the future that require environmental response actions or remediation. Also, future environmental, health and safety requirements or changed interpretations of existing requirements, may impose more stringent requirements on our assets and operations, which may require us to incur potentially material expenditures to ensure continued compliance. Future developments in federal laws and regulations governing environmental, health and safety and energy matters are especially difficult to predict.

Currently, various legislative and regulatory measures to address greenhouse gas emissions (including carbon dioxide, methane and other gases) are in various phases of discussion or implementation. These include requirements effective January 2010 that require Tesoro’s refineries to report emissions of greenhouse gases to the EPA beginning in 2011, and proposed federal, state, and regional initiatives (such as AB 32 in California) that require, or could require, us and Tesoro to reduce greenhouse gas emissions from our facilities. Requiring reductions in greenhouse gas emissions could cause us to incur substantial costs to (i) operate and maintain our facilities, (ii) install new emission controls at our facilities and (iii) administer and manage any greenhouse gas emissions programs, including the acquisition or maintenance of emission credits or allowances. These requirements may also adversely affect Tesoro’s refinery operations and have an indirect adverse effect on our business, financial condition and results of our operations.

 

Requiring a reduction in greenhouse gas emissions and the increased use of renewable fuels could also decrease demand for refined products, which could have an indirect, but material, adverse effect on our business, financial condition and results of operations. For example, in 2010, the EPA promulgated a rule establishing greenhouse gas emission standards for new-model passenger cars, light-duty trucks, and medium-duty passenger vehicles. Also in 2010, the EPA promulgated a rule establishing greenhouse gas emission thresholds for the permitting of certain stationary sources, which could require greenhouse emission controls for those sources. These requirements could have an indirect adverse effect on our business due to reduced demand for crude oil and refined products, and a direct adverse affect on our business from increased regulation of our facilities.

 

Changes in other forms of health and safety regulations are also being considered. New pipeline safety legislation requiring more stringent spill reporting and disclosure obligations has been introduced in the U.S. Congress and was recently passed by the U.S. House of Representatives. The Department of Transportation (“DOT”) has also recently proposed legislation providing for more stringent oversight of pipelines and increased penalties for violations of safety rules, which is in addition to the Pipeline and Hazardous Materials Safety Administration’s announced intention to strengthen its rules. Such legislative and regulatory changes could have a material effect on our operations through more stringent and comprehensive safety regulations and higher penalties for the violation of those regulations.

 

Our business is impacted by environmental risks inherent in our operations.

 

Our operation of crude oil and refined products pipelines, refined products terminals and crude oil and refined products storage facilities is inherently subject to the risks of spills, discharges or other inadvertent releases of petroleum or other hazardous substances. If any of these events have previously occurred or occur in the future, whether in connection with any of Tesoro’s refineries, our storage facility, any of our pipelines or refined products terminals, or any other facility to which we send or have sent wastes or by-products for treatment or disposal, we could be liable for all costs and penalties associated with the remediation of such facilities under federal, state and local environmental laws or the common law. We may also be liable for personal injury or property damage claims from third parties alleging contamination from spills or releases from our facilities or operations. In addition, our indemnification for certain environmental liabilities under the omnibus agreement will be limited to liabilities identified prior to the earlier of the fifth anniversary of the closing of this offering and the date that Tesoro no longer controls our general partner (provided that, in any event, such date shall be no earlier than the second anniversary of the closing of this offering). Even if we are insured or indemnified against such risks, we may be responsible for costs or penalties to the extent our insurers or indemnitors do not fulfill their obligations to us. The payment of such costs or penalties could be significant and have a material adverse effect on our business, financial condition and results of operations.

 

We are subject to regulation by multiple governmental agencies, which could adversely impact our business, results of operations and financial condition.

 

Our business activities are subject to regulation by multiple federal, state and local governmental agencies. Our historical and projected operating costs reflect the recurring costs resulting from compliance with these regulations, and we do not anticipate material expenditures in excess of these amounts in the absence of future acquisitions, or changes in regulation, or discovery of existing but unknown compliance issues. Additional

proposals and proceedings that affect the crude oil and refined products industry are regularly considered by Congress, as well as by state legislatures and federal and state regulatory commissions and agencies and courts. We cannot predict when or whether any such proposals may become effective or the magnitude of the impact changes in laws and regulations may have on our business; however, additions or enhancements to the regulatory burden on our industry generally increase the cost of doing business and affect our profitability.

 

Rate regulation may not allow us to recover the full amount of increases in our costs.

 

Part of our High Plains system provides interstate service that is subject to regulation by the FERC. Rates for service on this part of our system are set using FERC’s tariff indexing methodology. The indexing methodology currently allows a pipeline to increase its rates by a percentage factor equal to the change in the producer price index for finished goods (“PPI”) plus 1.3 percent. When the index falls, we may be required to reduce rates if they exceed the new maximum allowable rate. In addition, changes in the index might not be large enough to fully reflect actual increases in our costs.

 

FERC’s indexing methodology is subject to review every five years; the current methodology will remain in place through June 30, 2011. On December 16, 2010, FERC issued an order continuing the use of the current method of indexing rates for the five-year period beginning July 1, 2011; however, FERC’s order increases the adjustment to the PPI to plus 2.65% (rather than PPI plus 1.3% currently in effect). FERC’s order is subject to rehearing or may be appealed without rehearing to the U.S. Court of Appeals. The current or any revised indexing formula could hamper our ability to recover our costs because: (1) the indexing methodology is tied to an inflation index; (2) it is not based on pipeline-specific costs; and (3) it could later be reduced in comparison to current or proposed formulas. Any of the foregoing would adversely affect our revenues and cash flow. FERC could limit our ability to set rates based on our costs, order us to reduce rates, require the payment of refunds or reparations to shippers, or any or all of these actions, which could adversely affect our financial position, cash flows, and results of operations.

 

The balance of our High Plains system provides intrastate service that is subject to regulation by the NDPSC. Similar to FERC, NDPSC could limit our ability to set rates based on our costs or could order us to reduce our rates and could require the payment of refunds to shippers. Such regulation or a successful challenge to our intrastate pipeline rates could adversely affect our financial position, cash flows or results of operations. Furthermore, although NDPSC has not officially adopted the FERC indexing methodology, our existing intrastate tariffs have utilized the FERC indexing methodology as a basis for annual tariff rate adjustment.

 

If FERC’s or NDPSC’s ratemaking methodology changes, the new methodology could also result in tariffs that generate lower revenues and cash flow and adversely affect our ability to make cash distributions to our unit holders.

 

Based on the way our pipelines are operated, we believe the only transportation on our pipelines that is or will be subject to the jurisdiction of FERC is the transportation specified in the tariff that we have on file with FERC. We cannot guarantee that the jurisdictional status of transportation on our pipelines and related facilities will remain unchanged, however. Should circumstances change, then currently non-jurisdictional transportation could be found to be FERC-jurisdictional. In that case, FERC’s ratemaking methodologies may limit our ability to set rates based on our actual costs, may delay the use of rates that reflect increased costs, and may subject us to potentially burdensome and expensive operational, reporting and other requirements. In addition, the provisions of our High Plains pipeline transportation services agreement regarding our agreement to provide, and Tesoro’s agreement to purchase, certain crude oil volumes could be viewed as a preference to Tesoro. Any of the foregoing could adversely affect our business, results of operations and financial condition.

 

We believe that neither our interconnecting pipelines between our Salt Lake City storage facility and Tesoro’s Salt Lake City refinery nor our five Salt Lake City short-haul pipelines will be subject to FERC regulation, either because FERC will not assert jurisdiction over single-user pipelines that deliver crude oil and refined products within a single state, or because FERC will exempt the pipelines from regulation because only one affiliated shipper takes service on the pipelines. We will file for a FERC ruling disclaiming or exempting from FERC jurisdiction transportation service on these pipelines. If FERC, however, were to deny our request and assert jurisdiction over transportation service on these pipelines, we would be required to file tariffs with FERC for each

pipeline that would establish the rates and terms and conditions for service on each pipeline. If this were to occur, our short-haul pipeline transportation services agreement with Tesoro requires Tesoro and us to negotiate appropriate changes to the terms of the agreement to restore to each party the economic benefits expected prior to FERC’s assertion of jurisdiction. While we and Tesoro are required to negotiate in good faith, it is possible that the negotiations will not yield the intended result and that the assertion of FERC jurisdiction could adversely affect our business, results of operations and financial condition.

 

If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which would likely have a negative impact on the market price of our common units.

 

Prior to this offering, we have not been required to file reports with the SEC. Upon the completion of this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We prepare our financial statements in accordance with GAAP, but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and to operate successfully as a publicly traded partnership. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as Section 404. For example, Section 404 will require us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting.

 

We must comply with Section 404 for our fiscal year ending December 31, 2012. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s, conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.

 

Our general partner and its affiliates, including Tesoro, have conflicts of interest with us and limited fiduciary duties, and they may favor their own interests to the detriment of us and our common unitholders. Additionally, we have no control over Tesoro’s business decisions and operations, and Tesoro is under no obligation to adopt a business strategy that favors us.

 

Following the offering, Tesoro will own a 2.0% general partner interest and a 57.8% limited partner interest in us and will own and control our general partner. Although our general partner has a fiduciary duty to manage us in a manner that is beneficial to us and our unitholders, the directors and officers of our general partner have a fiduciary duty to manage our general partner in the manner that is beneficial to its owner, Tesoro. Conflicts of interest may arise between Tesoro and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including Tesoro, over the interests of our common unitholders. These conflicts include, among others, the following situations:

 

 

 

 

 

 

 

Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers, directors and owners. Other than as provided in our omnibus agreement, any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read “Certain Relationships and Related Party Transactions — Agreements Governing the Transactions — Omnibus Agreement” beginning on page 138 and “Conflicts of Interest and Fiduciary Duties” beginning on page 156.

 

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

 

We expect that we will distribute all of our available cash to our unitholders and will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement or our revolving credit facility on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may impact the available cash that we have to distribute to our unitholders.

 

Our partnership agreement limits our general partner’s fiduciary duties to holders of our common and subordinated units.

 

Our partnership agreement contains provisions that modify and reduce the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, or otherwise free of fiduciary duties to us and our unitholders. This entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. Examples of decisions that our general partner may make in its individual capacity include:

 

 

By purchasing a common unit, a unitholder is treated as having consented to the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties — Fiduciary Duties” beginning on page 161.

Our partnership agreement restricts the remedies available to holders of our common and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement:

 

 

(1) approved by our conflicts committee, although our general partner is not obligated to seek such approval;

 

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

 

(3) on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or

 

(4) fair and reasonable to us, taking into account the totality of the relationships among the parties involved, including other transactions that may be particularly favorable or advantageous to us.

 

In connection with a situation involving a transaction with an affiliate or a conflict of interest, any determination by our general partner must be made in good faith. If an affiliate transaction or the resolution of a conflict of interest is not approved by our common unitholders or our conflicts committee and the board of directors of our general partner determines that the resolution or course of action taken with respect to the affiliate transaction or conflict of interest satisfies either of the standards set forth in subclauses (3) and (4) above, then it will be presumed that, in making its decision, the board of directors acted in good faith, and in any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Fiduciary Duties” beginning on page 156.

 

Cost reimbursements, which will be determined in our general partner’s sole discretion, and fees due our general partner and its affiliates for services provided will be substantial and will reduce our cash available for distribution to you.

 

Under our partnership agreement, we are required to reimburse our general partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our omnibus agreement or our operational services agreement, our general partner determines the amount of these expenses. Under the terms of the omnibus agreement we will be

required to pay Tesoro an annual corporate services fee, initially in the amount of $2.5 million, for the provision of various centralized corporate services. Under the terms of our operational services agreement, we will pay Tesoro an annual service fee, initially in the amount of $0.3 million, for services performed by certain of Tesoro’s field-level employees at our Mandan terminal and Salt Lake City storage facility, and we will reimburse Tesoro for any direct costs actually incurred by Tesoro in providing other operational services with respect to our other assets and operations. Our general partner and its affiliates also may provide us other services for which we will be charged fees as determined by our general partner. Payments to our general partner and its affiliates will be substantial and will reduce the amount of available cash for distribution to unitholders.

 

Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.

 

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by the members of our general partner, which are wholly owned subsidiaries of Tesoro Corporation. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

 

The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of the offering to be able to prevent its removal. The vote of the holders of at least 66 2 / 3 % of all outstanding common units and subordinated units voting together as a single class is required to remove our general partner. At closing, our general partner and its affiliates will own 59.0% of the common units and subordinated units. Also, if our general partner is removed without cause during the subordination period and common units and subordinated units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically be converted into common units, and any existing arrearages on the common units will be extinguished. A removal of our general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests.

 

Cause is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding the general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business, so the removal of our general partner because of the unitholders’ dissatisfaction with our general partner’s performance in managing our partnership will most likely result in the termination of the subordination period.

 

Furthermore, unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees, and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

 

Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

 

Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

 

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in

the partnership agreement on the ability of Tesoro to transfer its membership interest in our general partner to a third party. The new partners of our general partner would then be in a position to replace the board of directors and officers of our general partner with their own choices and to control the decisions taken by the board of directors and officers.

 

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

 

Our general partner may transfer its incentive distribution rights to a third party at any time without the consent of our unitholders. If our general partner transfers its incentive distribution rights to a third party but retains its general partner interest, our general partner may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of its incentive distribution rights. For example, a transfer of incentive distribution rights by our general partner could reduce the likelihood of Tesoro accepting offers made by us relating to assets subject to the right of first offer contained in our omnibus agreement, as Tesoro would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

 

You will experience immediate and substantial dilution in pro forma net tangible book value of $17.22 per common unit.

 

The assumed initial public offering price of $20.00 per common unit exceeds our pro forma net tangible book value of $2.78 per unit. Based on an assumed initial public offering price of $20.00 per common unit, you will incur immediate and substantial dilution of $17.22 per common unit. This dilution results primarily because the assets contributed by Tesoro are recorded in accordance with GAAP at their historical cost, and not their fair value. Please read “Dilution” beginning on page 48.

 

We may issue additional units without unitholder approval, which would dilute unitholder interests.

 

At any time, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders. Further, neither our partnership agreement nor our revolving credit facility prohibits the issuance of equity securities that may effectively rank senior to our common units. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

 

Tesoro may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

 

After the sale of the common units offered by this prospectus, Tesoro will hold 2,754,891 common units and 15,254,891 subordinated units. All of the subordinated units will convert into common units at the end of the subordination period and may convert earlier under certain circumstances. Additionally, we have agreed to provide Tesoro with certain registration rights. Please read “Units Eligible for Future Sale” beginning on page 178. The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

Our general partner’s discretion in establishing cash reserves may reduce the amount of cash available for distribution to unitholders.

 

The partnership agreement requires our general partner to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating expenditures. In addition, the partnership agreement permits the general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These cash reserves will affect the amount of cash available for distribution to unitholders.

 

Tesoro may compete with us.

 

Tesoro may compete with us. Under our omnibus agreement, Tesoro and its affiliates will agree not to engage in, whether by acquisition or otherwise, the business of owning or operating crude oil or refined products pipelines, terminals or storage facilities in the United States that are not within, directly connected to, substantially dedicated to, or otherwise an integral part of, any refinery owned, acquired or constructed by Tesoro. This restriction, however, does not apply to:

 

 

 

As a result, Tesoro has the ability to construct assets which directly compete with our assets so long as they are integral to a refinery owned by Tesoro. The limitations on the ability of Tesoro to compete with us are terminable by either party if Tesoro ceases to control our general partner.

 

Our general partner may cause us to borrow funds in order to make cash distributions, even where the purpose or effect of the borrowing benefits the general partner or its affiliates.

 

In some instances, our general partner may cause us to borrow funds from Tesoro or from third parties in order to permit the payment of cash distributions. These borrowings are permitted even if the purpose and effect of the borrowing is to enable us to make a distribution on the subordinated units, to make incentive distributions or to hasten the expiration of the subordination period.

 

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

 

If at any time our general partner and its affiliates own more than 75% of our common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering and assuming no exercise of the underwriters’ option to purchase additional common units, our general partner and its affiliates will own approximately 18.1% of our common units. At the end of the subordination period (which could occur as early as June 30, 2012), assuming no additional issuances of common units (other than upon the conversion of the subordinated units) and no exercise of the underwriters option to purchase additional common units, our general partner and its affiliates

will own approximately 59.0% of our common units. For additional information about the call right, please read “The Partnership Agreement — Limited Call Right” beginning on page 174.

 

Your liability may not be limited if a court finds that unitholder action constitutes control of our business.

 

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law, and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some jurisdictions. You could be liable for our obligations as if you were a general partner if a court or government agency were to determine that:

 

 

Please read “The Partnership Agreement — Limited Liability” beginning on page 167 for a discussion of the implications of the limitations of liability on a unitholder.

 

Unitholders may have liability to repay distributions that were wrongfully distributed to them.

 

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

 

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.

 

Prior to this offering, there has been no public market for our common units. After this offering, there will be only 12,500,000 publicly traded common units. In addition, Tesoro will own 2,754,891 common and 15,254,891 subordinated units, representing an aggregate 57.8% limited partner interest in us. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

 

The initial public offering price for the common units offered hereby will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:

 

 

 

Our general partner, or any transferee holding incentive distribution rights, may elect to cause us to issue common units and general partner units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of our conflicts committee or the holders of our common units. This could result in lower distributions to holders of our common units.

 

Our general partner has the right, at any time when there are no subordinated units outstanding and it has received distributions on its incentive distribution rights at the highest level to which it is entitled (48.0%, in addition to distributions paid on its 2.0% general partner interest) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

 

If our general partner elects to reset the target distribution levels, it will be entitled to receive a number of common units and general partner units. The number of common units to be issued to our general partner will be equal to that number of common units that would have entitled their holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to our general partner on the incentive distribution rights in the prior two quarters. Our general partner will also be issued the number of general partner units necessary to maintain our general partner’s interest in us that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our general partner could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that they would have otherwise received had we not issued new common units and general partner units in connection with resetting the target distribution levels. Additionally, our general partner has the right to transfer our incentive distribution rights at any time, and such transferee shall have the same rights as the general partner relative to resetting target distributions if our general partner concurs that the tests for resetting target distributions have been fulfilled. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions — General Partner’s Right to Reset Incentive Distribution Levels” beginning on page 68.

 

Our unitholders who fail to furnish certain information requested by our general partner or who our general partner, upon receipt of such information, determines are not eligible citizens may not be entitled to receive distributions in kind upon our liquidation and their common units will be subject to redemption.

 

Our general partner may require each limited partner to furnish information about his nationality, citizenship or related status. If a limited partner fails to furnish information about his nationality, citizenship or other related status within 30 days after a request for the information or our general partner determines after receipt of the information that the limited partner is not an eligible citizen, the limited partner may be treated as a non-citizen assignee. A non-citizen assignee does not have the right to direct the voting of his units and

may not receive distributions in kind upon our liquidation. Furthermore, we have the right to redeem all of the common units and subordinated units of any holder that is not an eligible citizen or fails to furnish the requested information. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. Please read “The Partnership Agreement — Non-Citizen Assignees; Redemption” beginning on page 175.

 

Common units held by persons who are non-taxpaying assignees will be subject to the possibility of redemption.

 

To avoid any adverse effect on the maximum applicable rates chargeable to customers by us under FERC regulations, or in order to reverse an adverse determination that has occurred regarding such maximum rate, our partnership agreement gives our general partner the power to amend the agreement. If our general partner determines that our not being treated as an association taxable as a corporation or otherwise taxable as an entity for U.S. federal income tax purposes, coupled with the tax status (or lack of proof thereof) of one or more of our limited partners, has, or is reasonably likely to have, a material adverse effect on the maximum applicable rates chargeable to customers by us, then our general partner may adopt such amendments to our partnership agreement as it determines are necessary or advisable to obtain proof of the U.S. federal income tax status of our limited partners (and their owners, to the extent relevant) and permit us to redeem the units held by any person whose tax status has or is reasonably likely to have a material adverse effect on the maximum applicable rates or who fails to comply with the procedures instituted by our general partner to obtain proof of the U.S. federal income tax status. Please read “The Partnership Agreement — Non-Taxpaying Assignees; Redemption” beginning on page 176.

 

The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.

 

We have applied to list our common units on the NYSE. Because we will be a publicly traded limited partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management — Management of Tesoro Logistics LP” beginning on page 124.

 

In addition to reading the following risk factors, please read “Material Federal Income Tax Consequences” beginning on page 179 for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

 

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service (IRS) were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, then our cash available for distribution to our unitholders would be substantially reduced.

 

The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this or any other tax matter affecting us.

 

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. Although we do not believe based upon our current operations that we are or will be so treated, a change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

 

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay

state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, if we were treated as a corporation for federal income tax purposes, there would be material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

 

Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.

 

If we were subjected to a material amount of additional entity-level taxation by individual states, it would reduce our cash available for distribution to our unitholders.

 

Changes in current state law may subject us to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes may substantially reduce the cash available for distribution to you. Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to entity-level taxation, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.

 

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

 

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. Recently, members of the U.S. Congress have considered substantive changes to the existing federal income tax laws that affect certain publicly traded partnerships, which, if enacted, may or may not be applied retroactively. Although we are unable to predict whether any of these changes or any other proposals will ultimately be enacted, any such changes could negatively impact the value of an investment in our common units.

 

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

 

Because a unitholder will be treated as a partner to whom we will allocate taxable income which could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to it, which may require the payment of federal income taxes and, in some cases, state and local income taxes, on its share of our taxable income even if it receives no cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.

 

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.

 

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any

contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

 

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

 

If you sell your common units, you will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income decrease your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the common units you sell will, in effect, become taxable income to you if you sell such common units at a price greater than your tax basis in those common units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized on any sale of your common units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your common units, you may incur a tax liability in excess of the amount of cash you receive from the sale. Please read “Material Federal Income Tax Consequences — Disposition of Common Units — Recognition of Gain or Loss” beginning on page 188 for a further discussion of the foregoing.

 

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

 

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file federal income tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult a tax advisor before investing in our common units.

 

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

 

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. Our counsel is unable to opine as to the validity of such filing positions. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material Federal Income Tax Consequences — Tax Consequences of Unit Ownership — Section 754 Election” beginning on page 186 for a further discussion of the effect of the depreciation and amortization positions we will adopt.

 

We prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

 

We will prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration

method may not be permitted under existing Treasury Regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Please read “Material Federal Income Tax Consequences — Disposition of Common Units — Allocations Between Transferors and Transferees” beginning on page 189.

 

A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, he would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

 

Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Our counsel has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to effect a short sale of common units; therefore, our unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their common units.

 

We will adopt certain valuation methodologies and monthly conventions for federal income tax purposes that may result in a shift of income, gain, loss and deduction between our general partner and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

 

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.

 

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

 

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

 

We will be considered to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of

our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has recently announced a publicly traded partnership technical termination relief program whereby, if a publicly traded partnership that technically terminated requests publicly traded partnership technical termination relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years. Please read “Material Federal Income Tax Consequences — Disposition of Common Units — Constructive Termination” on page 190 for a discussion of the consequences of our termination for federal income tax purposes.

 

As a result of investing in our common units, you may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.

 

In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or control property now or in the future, even if they do not live in any of those jurisdictions. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. We initially expect to conduct business in Alaska, California, Colorado, Idaho, Montana, North Dakota, Texas, Utah and Washington. Many of these states currently impose a personal income tax on individuals. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units.

 

Compliance with and changes in tax laws could adversely affect our performance.

 

We are subject to extensive tax laws and regulations, including federal, state, and foreign income taxes and transactional taxes such as excise, sales/use, payroll, franchise, and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted that could result in increased tax expenditures in the future. Many of these tax liabilities are subject to audits by the respective taxing authority. These audits may result in additional taxes as well as interest and penalties.

 

We expect to receive net proceeds of approximately $225.0 million from the sale of 12,500,000 common units offered by this prospectus, after deducting underwriting discounts, structuring and advisory fees and estimated offering expenses. We intend to use these proceeds as follows:

 

 

 

 

At the closing of this offering, we will enter into a new $150.0 million credit facility, under which we will borrow $50.0 million to fund an additional $50.0 million cash distribution to Tesoro. The cash distributions to Tesoro from the proceeds of this offering and the borrowing under our revolving credit facility will be made in consideration of its contribution of assets to us and to reimburse Tesoro for certain capital expenditures incurred with respect to these assets. We are funding these distributions through a combination of net proceeds from this offering and borrowings under our revolving credit facility in order to optimize our capital structure.

 

The table below sets forth our anticipated use of the expected net proceeds from this offering after deducting underwriting discounts, structuring and advisory fees and estimated offering expenses:

 

 

The net proceeds from any exercise by the underwriters of their option to purchase additional common units will be used to redeem from Tesoro a number of common units equal to the number of common units issued upon exercise of the option at a price per common unit equal to the net proceeds per common unit in this offering before expenses but after deducting underwriting discounts and the structuring fee. Accordingly, any exercise of the underwriter’s option will not affect the total number of units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units. Please read “Underwriting” beginning on page 198.

 

An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts and the structuring fee, to increase or decrease by $11.7 million. If the proceeds increase due to a higher initial public offering price or decrease due to a lower initial public offering price, then the cash distribution to Tesoro from the proceeds of this offering will increase or decrease, as applicable, by a corresponding amount.

 

The following table shows:

 

 

This table is derived from, should be read together with and is qualified in its entirety by reference to our historical and pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus.

 

 

Dilution is the amount by which the offering price per common unit in this offering will exceed the net tangible book value per unit after the offering. On a pro forma basis as of December 31, 2010, after giving effect to the offering of common units and the related transactions, our net tangible book value was approximately $86.6 million, or $2.78 per unit. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

 

 

 

 

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

 

 

 

 

 

 

You should read the following discussion of our cash distribution policy in conjunction with the specific assumptions included in this section. In addition, you should read “Forward-Looking Statements” beginning on page 204 and “Risk Factors” beginning on page 17 for information regarding statements that do not relate strictly to historical or current facts and regarding certain risks inherent in our business.

 

For additional information regarding our historical and pro forma results of operations, you should refer to our historical and pro forma combined financial statements and the notes to those financial statements included elsewhere in this prospectus.

 

Rationale for Our Cash Distribution Policy

 

Our partnership agreement requires that we distribute all of our available cash quarterly. Our cash distribution policy reflects a basic judgment that our unitholders will be better served by distributing our available cash rather than retaining it, because, among other reasons, we believe we will generally finance any expansion capital expenditures from external financing sources. Generally, our available cash is our (i) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) cash on hand resulting from working capital borrowings made after the end of the quarter. Because we are not subject to an entity-level federal income tax, we expect to have more cash to distribute than would be the case if we were subject to federal income tax.

 

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

 

There is no guarantee that we will make quarterly cash distributions to our unitholders. We do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement. Our partnership agreement requires that we distribute all of our available cash quarterly. Our cash distribution policy is subject to certain restrictions and may be changed at any time. The reasons for such uncertainties in our stated cash distribution policy include the following factors:

 

 

 

 

Our Ability to Grow is Dependent on Our Ability to Access External Expansion Capital

 

We will distribute all of our available cash to our unitholders on a quarterly basis. As a result, we expect that we will rely primarily upon external financing sources, including borrowings under our revolving credit facility and the issuance of debt and equity securities, to fund any future acquisitions and other expansion capital expenditures. To the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as businesses that reinvest all of their available cash to expand ongoing operations. Our revolving credit facility will restrict our ability to incur additional debt, including through the issuance of debt securities. Please read “Risk Factors — Risks Related to Our Business — Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make cash distributions to our unitholders and the value of our units” on page 27. To the extent we issue additional units, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units. If we incur additional debt (under our revolving credit facility or otherwise) to finance our growth strategy, we will have increased interest expense, which in turn may impact the available cash that we have to distribute to our unitholders. Please read “Risk Factors — Risks Related to Our Business — Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities” beginning on page 27.

 

Upon the consummation of this offering, our partnership agreement will provide for a minimum quarterly distribution of $0.3375 per unit for each complete quarter, or $1.35 per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “— General — Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy” beginning on page 49. Quarterly distributions, if any, will be made within 45 days after the end of each quarter, on or about the 15th day of each February, May, August and November to holders of record on or about the first day of each such month. If the distribution date does not fall on a business day, we will make the distribution on the first business day immediately preceding the indicated distribution date. We do not expect to make distributions for the period that begins on April 1, 2011 and ends on the day prior to the closing of this offering other than the distributions to be made to Tesoro in connection with the closing of this offering that are described in “Summary — The Transactions” on page 6 and “Use of Proceeds” on page 46. We will adjust our first distribution for the period from the closing of this offering through June 30, 2011 based on the actual

length of the period. The amount of available cash needed to pay the minimum quarterly distribution on all of our common units, subordinated units and general partner units to be outstanding immediately after this offering for one quarter and on an annualized basis is summarized in the table below:

 

 

As of the date of this offering, our general partner will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner’s initial 2.0% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its initial 2.0% general partner interest. Our general partner will also hold the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48.0%, of the cash we distribute in excess of $0.388125 per unit per quarter.

 

During the subordination period, before we make any quarterly distributions to our subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution plus any arrearages in distributions of the minimum quarterly distribution from prior quarters. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions — Subordination Period” beginning on page 64. We cannot guarantee, however, that we will pay the minimum quarterly distribution on our common units in any quarter.

 

Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any other standard imposed by the Delaware Act or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must believe that the determination is in, or not opposed to, our best interest. Please read “Conflicts of Interest and Fiduciary Duties” beginning on page 156.

 

Our cash distribution policy, as expressed in our partnership agreement, may not be modified or repealed without amending our partnership agreement; however, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business and the amount of reserves our general partner establishes in accordance with our partnership agreement as described above.

 

 

If we had completed the transactions contemplated in this prospectus on January 1, 2010, pro forma available cash generated for the year ended December 31, 2010 would have been approximately $46.0 million. This amount would have been sufficient to pay the minimum quarterly distribution of $0.3375 per unit per quarter ($1.35 per unit on an annualized basis) on all of our common units and subordinated units for such periods and the corresponding distributions on our general partner’s 2.0% interest.

 

We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. In addition, cash available to pay distributions is primarily a cash accounting concept, while our pro forma combined financial data have been prepared on an accrual basis. As a result, you should view the amount of pro forma available cash only as a general indication of the amount of cash available to pay distributions that we might have generated had we been formed in earlier periods.

 

The following table illustrates, on a pro forma basis, for the year ended December 31, 2010, the amount of cash that would have been available for distribution to our unitholders and our general partner, assuming in each case that this offering and the other transactions contemplated in this prospectus had been consummated at the beginning of each period.