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|TESORO LOGISTICS LP REPORTS FOURTH QUARTER AND FULL YEAR 2016 RESULTS|
SAN ANTONIO - February 6, 2017 - Tesoro Logistics LP (NYSE: TLLP) today reported fourth quarter net earnings of $73 million, or $0.31 per diluted common limited partner unit compared to $59 million, or $0.49 per diluted common limited partner unit a year ago. EBITDA for the fourth quarter 2016 was $177 million compared to $146 million last year. Net earnings and EBITDA for the fourth quarter 2016 include charges of $12 million and $11 million, respectively, related to loss attributable to Predecessors, transaction costs for the acquisitions announced in the quarter and environmental accruals, including charges for expected future remediation costs for the 2013 crude oil pipeline release at Tioga, North Dakota.
(a) Adjusted to include the historical results of the Predecessors. See "Items Impacting Comparability."
"We are proud of the success that we achieved in 2016 in executing our strategy to grow the business through optimization, organic growth and strategic investments, including third-party acquisitions and drop downs from Tesoro. This delivered growth in net earnings, EBITDA, cash from operating activities and distributable cash flow, despite a challenging market environment characterized by lower crude oil and natural gas prices," said Greg Goff, Chairman and Chief Executive Officer of TLLP's general partner. "TLLP announced $1.1 billion of acquisitions during the fourth quarter and we are excited about the growth opportunities for 2017 as we continue to execute our strategic priorities with our expanded portfolio. This should enable us to achieve our target of $550 million of annual net earnings and $1 billion of annual EBITDA in 2017."
Natural gas gathering volumes declined to 871 thousand MMBtu per day in the fourth quarter 2016 from 1,102 thousand MMBtu per day last year. The lower commodity price environment led to a reduction in drilling activity which resulted in a decline in natural gas gathering volumes. Reported natural gas gathering volumes in the fourth quarter 2015 included 132 thousand MMBtu per day of third-party throughput attributable to the Rendezvous Gas Services, L.L.C joint venture prior to its deconsolidation in the first quarter 2016.
PROCESSING. Processing operating income for the fourth quarter was $26 million compared to $28 million last year and segment EBITDA was $37 million versus $39 million a year ago. NGL processing throughput declined to 6.8 thousand barrels per day from 7.8 thousand barrels per day last year. Fee-based processing volumes were 611 thousand MMBtu per day compared to 748 thousand MMBtu per day a year ago. Market conditions that impacted TLLP's natural gas gathering volumes also affected the Company's processing volumes.
TERMINALLING AND TRANSPORTATION. Terminalling and Transportation segment operating income increased to $88 million for the fourth quarter 2016 from $59 million from last year and segment EBITDA improved to $111 million from $79 million a year ago. Terminalling volumes increased to 992 thousand barrels per day from 949 thousand barrels per day a year ago, reflecting refinery demand for waterborne crude at TLLP's marine terminals. Transportation pipeline volumes increased to 874 thousand barrels per day from 841 thousand barrels per day a year ago due to higher throughput on TLLP's Southern California pipeline system.
Additionally, operating results and volumes benefited from the acquisitions of the Alaska Storage and Terminalling Assets completed in the third quarter 2016 and the Northern California Terminalling and Storage Assets completed in the fourth quarter.
BALANCE SHEET AND CASH FLOW
Net capital expenditures for the fourth quarter 2016 were $74 million, which include $53 million of growth capital and $21 million of net maintenance capital. Capital spending for the full year 2016 was $239 million, including $197 million of growth capital and $42 million of net maintenance capital. Included in the full year 2016 capital expenditures is $64 million of Predecessors spending related to the Northern California Terminalling and Storage Assets incurred by Tesoro Corporation (NYSE: TSO) before the acquisition.
On January 18, 2017, the Company announced its quarterly cash distribution of $0.91 per limited partnership unit or $3.64 on an annualized basis. The declared distribution represents a 17% increase over the fourth quarter 2015 distribution of $0.78 per limited partner unit paid in February 2016. This also represents the 23rd consecutive quarterly increase of approximately 17% or more. Distribution coverage ratio was 0.94x for the fourth quarter. Lower coverage primarily reflects distributions related to units issued in the June offering as well as units issued to Tesoro in connection with the Alaska Storage and Terminalling Assets acquisition and the Northern California Terminalling and Storage Assets acquisition. The distribution coverage ratio for full year 2016 was 1.06x.
During the quarter, TLLP issued $750 million in debt in the form of senior notes. The proceeds of the offering were used to repay amounts outstanding under the Company's dropdown credit facility. Additionally, S&P Global Ratings upgraded TLLP's credit rating to BB+ with a stable outlook from the previous rating of BB. This rating is now the same as Tesoro's and one level below investment grade. Moody's Investors Service also changed its rating outlook for TLLP to Positive from Stable and affirmed its Ba2 Corporate Family Rating.
On January 1, 2017, TLLP closed the previously announced acquisition of crude oil, natural gas and produced water gathering systems and two natural gas processing facilities for total consideration of approximately $700 million. The North Dakota Gathering and Processing Assets include over 650 miles of crude oil, natural gas, and produced water gathering pipelines, 170 MMcf per day of natural gas processing capacity and 18,700 barrels per day of fractionation capacity in the Sanish and Pronghorn fields of the Williston Basin in North Dakota. The assets are expected to contribute $79 to $89 million of annual net earnings and $100 to $110 million of annual EBITDA in 2017.
Additionally during the quarter, Tesoro announced the proposed acquisition of Western Refining, Inc. (NYSE: WNR). Western Refining owns a majority interest in the limited partner units of Western Refining Logistics LP (NYSE: WNRL). The growth of Tesoro, as a geographically diversified and highly integrated parent company, should provide additional strategic and organic growth opportunities for Tesoro Logistics.
PUBLIC INVITED TO LISTEN TO ANALYST CONFERENCE CALL
ABOUT TESORO LOGISTICS LP
This earnings release contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements concerning: our operational, financial and growth strategies, including strong operational execution, executing strategic priorities, and growing the business through asset optimization, organic growth and strategic acquisitions from Tesoro and third parties; our ability to successfully effect those strategies and the expected timing and results thereof; growth opportunities for 2017; our financial and operational outlook, and ability to fulfill that outlook; our financial position, liquidity and capital resources; 2017 earnings targets for net earnings and EBITDA; expectations regarding future economic and market conditions and their effects on our business; expectations regarding annual net earnings and annual EBITDA from the Northern California Terminalling and Storage Assets and the North Dakota Gathering and Processing Assets; expectations for full year 2017 net earnings and EBITDA; expectations for 2017 capital expenditures, including the allocation thereof; expectations regarding 2017 annual distribution growth and coverage; Tesoro's agreement to waive its GP IDRs and the expected benefits thereof; first quarter 2017 guidance; 2017 capital expenditures guidance and outlook; and Tesoro's proposed acquisition of Western Refining, and the expected benefits thereof. For more information concerning factors that could affect these statements, see our annual report on Form 10-K, quarterly reports on Form 10-Q, and other public filings and press releases, available at http://www.tesorologistics.com. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events or otherwise.
TESORO LOGISTICS LP
TESORO LOGISTICS LP
As a supplement to our financial information presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), our management uses certain "non-GAAP" measures to analyze our results of operations, assess internal performance against budgeted and forecasted amounts and evaluate future impacts to our financial performance as a result of capital investments, acquisitions, divestitures and other strategic projects. These measures are important factors in assessing our operating results and profitability and include:
· Financial non-GAAP measures:
We present these measures because we believe they may help investors, analysts, lenders and ratings agencies analyze our results of operations and liquidity in conjunction with our U.S. GAAP results, including but not limited to:
Management also uses these measures to assess internal performance, and we believe they may provide meaningful supplemental information to the users of our financial statements. Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings, operating income and net cash from operating activities. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures. See the tables below for reconciliations between each non-GAAP financial measure and its most directly comparable U.S. GAAP financial measure.
ITEMS IMPACTING COMPARABILITY
The Partnership's future results of operations may not be comparable to the historical results of operations of the acquired assets from Tesoro ("Predecessors") for the reasons described below.
On November 21, 2016, the Partnership purchased certain terminalling and storage assets in Martinez, California (the "Northern California Terminalling and Storage Assets") owned by subsidiaries of Tesoro Corporation, for total consideration of $400 million, comprised of $360 million in cash financed with borrowings under the Partnership's dropdown credit facility, and the issuance of equity securities of the Partnership with a fair value of approximately $40 million. The Northern California Terminalling and Storage Assets include 5.5 million barrels of crude oil, feedstock, and refined product storage capacity at Tesoro's Martinez Refinery along with the Avon marine terminal capable of handling 80,000 bpd of feedstock and refined product throughput. In connection with the acquisition, Tesoro and TLLP entered into long-term, fee-based storage and throughput and use agreements.
On July 1 and September 16, 2016, the Partnership purchased certain terminalling and storage assets in Anchorage, Fairbanks and at Tesoro's Kenai Refinery (together, the "Alaska Storage and Terminalling Assets") owned by Tesoro for total consideration of $444 million. The storage assets include tankage with a shell capacity of approximately 3.5 million barrels and ancillary facilities used for the operations at Tesoro's Kenai Refinery. The refined product terminals are located in Anchorage and Fairbanks.
On November 12, 2015, the Partnership purchased crude oil and refined product storage and pipeline assets in Los Angeles, California (the "LA Storage and Handling Assets") owned by subsidiaries of Tesoro Corporation, for a total consideration of $500 million. The Partnership acquired 97 crude oil, feedstock, and refined product storage tanks with combined capacity of 6.6 million barrels and a 50% fee interest in a 16-mile pipeline that transports jet fuel from Tesoro's Los Angeles refinery to the Los Angeles International Airport. The acquisition price of $500 million included cash of approximately $250 million and the issuance of common and general partner units to Tesoro, valued at approximately $250 million.
We have a 78% interest in Rendezvous Gas Services, L.L.C. ("RGS"), which owns and operates the infrastructure that transports gas from certain fields to several re-delivery points in southwestern Wyoming, including natural gas processing facilities that are owned by us or a third party. Prior to 2016, we consolidated RGS; however, upon our reassessment performed in conjunction with our adoption of ASU 2015-02 as of January 1, 2016, we determined RGS represents a variable interest entity to us for which we are not the primary beneficiary resulting in the deconsolidation of RGS and the reporting of RGS as an equity method investment. We recognized an increase of $295 million to equity method investments as of January 1, 2016 as a result of the deconsolidation.
Our financial information includes the historical results of our Predecessors and the results of TLLP for all periods presented. The financial statements of our Predecessors have been prepared from the separate records maintained by Tesoro and may not necessarily be indicative of the conditions that would have existed or the results of operations if our Predecessors had been operated as an unaffiliated entity.
TESORO LOGISTICS LP
(a) Adjusted to include the historical results of the Predecessors. See Items Impacting Comparability.
TESORO LOGISTICS LP
(c) Operating expenses include imbalance settlement gains of $2 million for both the three months ended December 31, 2016 and 2015, and $7 million and $8 million for the years ended December 31, 2016 and 2015, respectively. Also includes reimbursements primarily related to pressure testing and repairs and maintenance costs pursuant to the Amended Omnibus Agreement of $5 million and $8 million for the three months ended December 31, 2016 and 2015, respectively, and $17 million and $34 million for the years ended December 31, 2016 and 2015, respectively.
TESORO LOGISTICS LP
TESORO LOGISTICS LP
TESORO LOGISTICS LP
(f) During the second quarter of 2016, we revised our reconciliation of distributable cash flow and pro forma distributable cash flow by reconciling the liquidity measure from net cash from operating activities. There were no impacts to previously reported amounts as a result of this methodology change.
(i) Adjustments represent cash distributions in excess of (or less than) our controlling interest in income and depreciation as well as other adjustments for depreciation and maintenance capital expenditures applicable to the noncontrolling interest obtained in the Rockies Natural Gas Business Acquisition.
TESORO LOGISTICS LP
TESORO LOGISTICS LP
(n) Prior to the deconsolidation of RGS as of January 1, 2016, fees paid by us to RGS were eliminated upon consolidation and third-party transactions, including revenue and throughput volumes, were included in our results of operations. Third party volumes associated with RGS, included in gas gathering volume for the three months and year ended December 31, 2015 were 132 thousand MMBtu per day and 141 thousand MMBtu per day, respectively, and reduced our average gas gathering revenue per MMBtu by $0.05 for each period.
TESORO LOGISTICS LP
TESORO LOGISTICS LP
(p) Total capital expenditures include spending related to the Predecessors prior to each respective acquisition date. The expenditures related to growth capital projects totaled $8 million and $64 million for the three months and year ended December 31, 2016, respectively, and $27 million and $90 million for the three months and year ended December 31, 2015, respectively. The expenditures related to maintenance capital projects totaled $1 million and $3 million for the three months and year ended December 31, 2015, respectively.
TESORO LOGISTICS LP
FORWARD LOOKING STATEMENTS
This communication contains certain statements that are "forward-looking" statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Words such as "may," "will," "could," "anticipate," "estimate," "expect," "predict," "project," "future," "potential," "intend," "plan," "assume," "believe," "forecast," "look," "build," "focus," "create," "work" "continue" or the negative of such terms or other variations thereof and words and terms of similar substance used in connection with any discussion of future plans, actions, or events identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding the proposed merger between a subsidiary of Tesoro and Western (the "Merger"). There are a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements included in this communication. For example, the expected timing and likelihood of completion of the proposed Merger, including the timing, receipt and terms and conditions of any required governmental and regulatory approvals of the proposed Merger that could reduce anticipated benefits or cause the parties to abandon the transaction, the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement, the possibility that stockholders of Tesoro may not approve the issuance of new shares of common stock in the Merger or that stockholders of Western may not approve the Merger Agreement, the risk that the parties may not be able to satisfy the conditions to the proposed transaction in a timely manner or at all and the risk that the proposed transaction will not provide additional strategic and organic growth opportunities for TLLP. All such factors are difficult to predict and are beyond TLLP's control, including those detailed in Tesoro's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and registration statement on Form S-4 filed with the SEC on December 14, 2016, as amended (the "Form S-4") that are available on its website at http://www.tsocorp.com and on the SEC's website at http://www.sec.gov, and those detailed in TLLP's annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K that are available on TLLP's website at http://www.tesorologistics.com and on the SEC's website at http://www.sec.gov. TLLP's forward-looking statements are based on assumptions that it believes to be reasonable but that may not prove to be accurate. TLLP undertakes no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances that occur, or which we become aware of, except as required by applicable law or regulation. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof.
Additional Information and Where to Find It:
This communication may be deemed to be solicitation material in respect of the proposed transaction between Tesoro and Western. In connection with the proposed transaction, Tesoro has filed the Form S-4, containing a preliminary joint proxy statement/prospectus of Tesoro and Western and Western and/or Tesoro may file one or more additional proxy statements, registration statements, proxy statement/prospectus or other documents with the SEC. This communication is not a substitute for the proxy statement, registration statement, proxy statement/prospectus or any other documents that Tesoro or Western may file with the SEC or send to stockholders in connection with the proposed transaction. STOCKHOLDERS OF TESORO AND WESTERN ARE URGED TO READ ALL RELEVANT DOCUMENTS FILED WITH THE SEC, INCLUDING THE FORM S-4 AND ANY OTHER PROXY STATEMENT(S), REGISTRATION STATEMENT(S) AND/OR PROXY STATEMENT/PROSPECTUS(ES), BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.
The Form S-4 has not yet become effective. After the Form S-4 is declared effective by the SEC, Tesoro and Western will each file with the SEC a definitive joint proxy statement/prospectus, and each of Tesoro and Western will file other documents with respect to the proposed transaction. Any definitive proxy statement(s) (if and when available) will be mailed to stockholders of Western and/or Tesoro, as applicable. Investors and security holders will be able to obtain copies of these documents, including the proxy statement/prospectus, and other documents filed with the SEC (when available) free of charge at the SEC's website, http://www.sec.gov. Copies of documents filed with the SEC by Tesoro will be made available free of charge on Tesoro's website at http://www.tsocorp.com or by contacting Tesoro's Investor Relations Department by phone at 210-626-6000. Copies of documents filed with the SEC by Western will be made available free of charge on Western's website at http://www.wnr.com or by contacting Western's Investor Relations Department by phone at 602-286-1530 or 602-286-1533.
Participants in the Solicitation:
Tesoro and its directors and executive officers, and Western and its directors and executive officers, may be deemed to be participants in the solicitation of proxies from the holders of Tesoro's common stock and Western's common stock in respect of the proposed transaction. Information about the directors and executive officers of Tesoro is set forth in the proxy statement for Tesoro's 2016 Annual Meeting of Stockholders, which was filed with the SEC on March 22, 2016, and in the other documents filed after the date thereof by Tesoro with the SEC. Information about the directors and executive officers of Western is set forth in the proxy statement for Western's 2016 Annual Meeting of Shareholders, which was filed with the SEC on April 22, 2016, and in the other documents filed after the date thereof by Western with the SEC. Investors may obtain additional information regarding the interests of such participants by reading the proxy statement/prospectus regarding the proposed transaction when it becomes available. You may obtain free copies of these documents as described in the preceding paragraph.