Organization and Basis of Presentation (Notes) | 3 Months Ended |
Mar. 31, 2015 |
Organization and Basis of Presentation | ORGANIZATION AND BASIS OF PRESENTATION |
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Organization |
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Tesoro Logistics LP (“TLLP” or the “Partnership”) is a fee-based, growth-oriented Delaware limited partnership formed in December 2010 by Tesoro Corporation and its wholly-owned subsidiary, Tesoro Logistics GP, LLC (“TLGP”), our general partner, to own, operate, develop and acquire logistics assets. Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours” refer to Tesoro Logistics LP, one or more of its consolidated subsidiaries, or all of them taken as a whole. The words “we,” “us,” “our,” or “ours” generally include our 57.8% interest in QEP Midstream Partners, LP (“QEPM”), a publicly traded limited partnership, and its subsidiaries as consolidated subsidiaries of TLLP with certain exceptions where there are transactions or obligations between QEPM and TLLP or its other subsidiaries. Unless the context otherwise requires, references in this report to “Tesoro” or our “Sponsor” refer collectively to Tesoro Corporation and any of its subsidiaries, other than TLLP, its subsidiaries and its general partner. |
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In 2014, we entered into transactions with Tesoro and TLGP, pursuant to which TLLP acquired from Tesoro three truck terminals, ten storage tanks, two rail loading and unloading facilities and a refined products pipeline (the “West Coast Logistics Assets”) effective July 1, 2014 for the terminals, storage tanks and rail facilities and effective September 30, 2014 for the refined products pipeline (collectively referred to as the “West Coast Logistics Assets Acquisition”). |
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On December 2, 2014, the Partnership acquired all of the limited liability company interests of QEP Field Services, LLC (“QEPFS”) for an aggregate purchase price of approximately $2.5 billion in cash (the “Rockies Natural Gas Business Acquisition”). See Note 2 for additional information regarding the Rockies Natural Gas Business Acquisition. |
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Subsequent Event |
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On April 6, 2015, TLLP entered into an Agreement and Plan of Merger (the “Merger Agreement”) with TLGP, QEPFS, TLLP Merger Sub LLC (“Merger Sub”), QEPM, and QEP Midstream Partners GP, LLC (“QEPM GP”). Subject to the satisfaction or waiver of certain conditions in the Merger Agreement, upon the later of the filing with the Secretary of State of the State of Delaware of a certificate of merger or the later date and time set forth in such certificate, Merger Sub will merge with and into QEPM, with QEPM surviving the merger as a wholly owned subsidiary of TLLP (the “Merger”). Following the Merger, QEPM GP will remain the general partner of QEPM, and all outstanding common units representing limited partnership interests in QEPM (the “QEPM Common Units”) other than QEPM Common Units held by QEPFS will be converted into the right to receive 0.3088 common units representing limited partnership interests in TLLP (the “TLLP Common Units”). We expect to issue approximately 7.1 million TLLP Common Units upon consummation of the Merger. No fractional TLLP Common Units will be issued in the Merger, and holders of QEPM Common Units other than QEPFS will instead receive cash in lieu of fractional TLLP Common Units, if any. Cash in lieu of fractional units will be the only cash component of the Merger. The Merger is expected to close in 2015 and is subject to customary closing conditions, including approval by the unaffiliated QEPM unitholders. |
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Principles of Combination and Consolidation and Basis of Presentation |
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The West Coast Logistics Assets Acquisition was a transfer between entities under common control. As an entity under common control with Tesoro, we record the assets that we acquire from Tesoro on our consolidated balance sheet at Tesoro’s historical basis instead of fair value. Transfers of businesses between entities under common control are accounted for as if the transfer occurred at the beginning of the period, and prior periods are retrospectively adjusted to furnish comparative information. Accordingly, the accompanying financial statements and related notes of TLLP have been retrospectively adjusted to include the historical results of the assets acquired in the West Coast Logistics Assets Acquisition for all periods presented. We refer to the historical results of the West Coast Logistics Assets prior to their respective acquisition dates as our “Predecessor.” |
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The accompanying financial statements and related notes present the results of operations and cash flows of our Predecessor at historical cost. The financial statements of our Predecessor 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 Predecessor had been operated as an unaffiliated entity. Our Predecessor did not record revenue for transactions with Tesoro in the Terminalling and Transportation segment, with the exception of regulatory tariffs charged to Tesoro on the refined products pipeline included in the West Coast Logistics Assets Acquisition. |
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The interim combined consolidated financial statements and notes thereto have been prepared by management without audit according to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results for the periods presented. Such adjustments are of a normal recurring nature, unless otherwise disclosed. |
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Certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. However, management believes that the disclosures presented herein are adequate to present the information fairly. The accompanying interim condensed combined consolidated financial statements and notes should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. |
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Our consolidated financial statements include QEPM, a variable interest entity. As the general partner of QEPM, we have the sole ability to direct the activities of QEPM that most significantly impact its economic performance. We are also considered to be the primary beneficiary for accounting purposes. In the event QEPM incurs a loss, our operating results will reflect QEPM’s loss, net of intercompany eliminations. |
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We prepare our condensed combined consolidated financial statements in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the amounts of assets and liabilities and revenues and expenses reported as of and during the periods presented. We review our estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates, and actual results could differ from those estimates. The results of operations of the Partnership, or our Predecessor, for any interim period are not necessarily indicative of results for the full year. |
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We believe the carrying value of our cash and cash equivalents, receivables, accounts payable and certain accrued liabilities approximates fair value. Our fair value assessment incorporates a variety of considerations, including: |
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• | the short term duration of the instruments (less than 2% of our trade payables and trade receivables have been outstanding for greater than 90 days); and |
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• | the expected future insignificance of bad debt expense, which includes an evaluation of counterparty credit risk. |
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The computation of the percentage of the short-term duration of our third-party receivables excludes amounts that are greater than 90 days related to XTO Energy Inc.’s (“XTO”) legal dispute with QEPFS. See further discussion regarding the XTO litigation in Note 7. |
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The fair value of our senior notes is based on prices from recent trade activity and is categorized in level 2 of the fair value hierarchy. The borrowings under our amended revolving credit facility (the “Revolving Credit Facility”), which include a variable interest rate, approximate fair value. The carrying value of our debt was approximately $2.6 billion and the fair value of our debt was approximately $2.7 billion as of March 31, 2015. The carrying value and fair value of our debt were both approximately $2.6 billion as of December 31, 2014. These carrying and fair values of our debt do not include the unamortized issuance costs associated with our total debt. |
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New Accounting Standards |
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Revenue Recognition. The Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) in May 2014, providing accounting guidance for all revenue arising from contracts to provide goods or services to customers. The requirements from the new ASU are effective for interim and annual periods beginning after December 15, 2016, and early adoption is not permitted. The FASB has proposed a one-year deferral of the effective date; however, this proposal has not been finalized. The standard allows for either full retrospective adoption or modified retrospective adoption. At this time, we are evaluating the guidance to determine the method of adoption and the impact of this ASU on our financial statements and related disclosures. |
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Pushdown Accounting. The SEC released a Staff Accounting Bulletin (“SAB”) in November 2014, overturning portions of the interpretive guidance regarding pushdown accounting. Effective November 18, 2014, the new bulletin aligns the existing guidance to the ASU issued by the FASB in October 2014. Under the new guidance, pushdown accounting can be applied in the separate financial statements of the acquired entity upon completion of the acquisition or in a subsequent period. This impacts the stand-alone financial statements of the subsidiary, but does not alter the existing reporting requirements for the parent company to record the acquired assets, liabilities, and non-controlling interests in consolidated financial statements. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period. If pushdown accounting is applied, that election is irrevocable. The SEC responded by rescinding its guidance on pushdown accounting, which had required registrants to apply pushdown accounting in certain circumstances. With regard to the Rockies Natural Gas Business Acquisition, we did not elect to apply pushdown accounting to certain acquired entities. |
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Treatment of Predecessor in EPU calculation. The Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 14-A affirming their stance to require a master limited partnership to allocate earnings or losses of transferred net assets for periods prior to asset purchases from Tesoro entirely to the general partner when calculating earnings per unit (“EPU”). The final consensus is effective for interim and annual periods beginning after December 15, 2015 and early adoption is permitted. We have elected to adopt this guidance beginning in the first quarter of 2015. Adoption of the final consensus did not impact the disclosed amounts of earnings per unit attributable to limited partners; however, the allocation of earnings presented in our EPU disclosure for the three months ended March 31, 2014 has been modified to conform to the requirements of the final consensus. There were no asset purchases from Tesoro during the three months ended March 31, 2015. |
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Debt Issuance Costs. In April 2015, the FASB issued ASU 2015-03 which will simplify the presentation of debt issuance costs. Under the new ASU, debt issuance costs related to a recognized debt liability will be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. As a result, our balance sheet will reflect a reclassification of unamortized debt issuance costs from other noncurrent assets to debt. This ASU is effective for interim and annual periods beginning after December 15, 2015, and early adoption is permitted. We have adopted this standard effective as of March 31, 2015 and applied the changes retrospectively to prior periods presented. Adoption of this standard has resulted in the reclassification of $49 million from other noncurrent assets to debt on the balance sheet at December 31, 2014. Unamortized debt issuance costs of $47 million are recorded as a reduction to debt on the balance sheet as March 31, 2015. |
Green River Processing, LLC | |
Organization and Basis of Presentation | ORGANIZATION AND BASIS OF PRESENTATION |
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Organization |
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Green River Processing consists of the assets and operations of the Blacks Fork gas processing complex and the Emigrant Trail gas plant (the “Assets”), both of which are located in southwest Wyoming. Processing capacity of the Assets include cryogenic and Joule-Thomson capacity, as well as natural gas liquids (“NGLs”) fractionation capacity at the Blacks Fork complex. |
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Green River Processing is a Delaware limited liability company that was organized on February 6, 2014, and was initially wholly-owned by QEP Field Services Company (“QEPFSC”), which is a wholly-owned subsidiary of QEP Resources, Inc. (“QEP Resources”). Prior to formation of Green River Processing, the Assets were owned by Green River Processing Operations (“Green River Processing Operations”), which was also wholly-owned by QEPFSC. On July 1, 2014, QEPFSC conveyed the Assets to Green River Processing (the “Contribution”) in connection with its sale of 40% of the membership interests in Green River Processing to QEP Midstream Partners Operating, LLC, which is wholly-owned by QEP Midstream Partners, LP (“QEPM”). |
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On December 2, 2014, TLLP acquired QEP Resources’ midstream business, including QEPFS, which was previously wholly-owned by QEPFSC. QEPFS owns 60% membership interest in Green River Processing and approximately 58% of general and limited partnership units of QEPM, which owns the remaining 40% membership interest of Green River Processing through QEP Midstream Partners Operating, LLC (collectively, the “Acquisition”). As such, financial results reported for the three months ended March 31, 2014 (the “2014 Quarter”) reflect results of operations under the management of QEP Resources, and have been prepared from the historical accounting records owned and maintained by QEP Resources. Further, financial information for the 2014 Quarter was carved out from QEPFSC data as separate and distinct accounts for Green River Processing Operations have not been maintained. Financial data reported for the three months ended March 31, 2015 (the “2015 Quarter”) reflect results of operations under the management of TLLP and have been prepared from records owned and maintained by TLLP. |
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Basis of Presentation |
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The financial statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation. Financial results reported for the 2014 Quarter have been prepared from the historical accounting records owned and maintained by QEP Resources. Further, financial information for the 2015 Quarter was carved out from QEPFSC data as separate and distinct accounts for Green River Processing Operations have not been maintained. Financial results reported for the three months ended March 31, 2015 have been prepared from records owned and maintained by TLLP. |
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The preparation of the financial statements and notes in conformity with GAAP requires that management formulate estimates and assumptions that affect the amounts of assets and liabilities and revenues and expenses reported as of and during the periods presented. The Company reviews these estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates, and actual results could differ from those estimates. |
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Green River Processing Operations is a limited liability company that is classified as a partnership for income tax purposes. |
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There were no assets or liabilities accounted for at fair value on a recurring basis as of March 31, 2015. Management believes the carrying value of our current assets and liabilities approximate fair value. |
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QEPFS and certain of its subsidiaries, including Green River Processing, were elected guarantors of TLLP’s registered 2020 5.875% Senior Notes and 2021 6.125% Senior Notes in January 2015. The guarantees are full and unconditional and joint and several, subject to certain automatic customary releases, including sale, disposition or transfer of the capital stock or substantially all of the assets of a subsidiary guarantor, exercise of legal defeasance option or covenant defeasance option, and designation of a subsidiary guarantor as unrestricted in accordance with the applicable indenture. |
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Transactions with QEP Resources and QEPFSC were considered related party for the three months ended March 31, 2014. For the three months ended March 31, 2015, transactions with QEPFS and TLLP are considered related party. See Note 2 for additional information. |
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Recent Accounting Developments |
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Revenue Recognition. The Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) in May 2014 providing accounting guidance for all revenue arising from contracts to provide goods or services to customers. The requirements from the new ASU are effective for interim and annual periods beginning after December 15, 2016, and early adoption is not permitted. The FASB has proposed a one-year deferral of the effective date, however this proposal has not been finalized at this time. The standard allows for either full retrospective adoption or modified retrospective adoption. At this time, we are evaluating the guidance to determine the method of adoption and the impact of this ASU on our financial statements and related disclosures. |
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Pushdown Accounting. The Securities and Exchange Commission (“SEC”) released a Staff Accounting Bulletin in November 2014, overturning portions of the interpretive guidance regarding pushdown accounting. Effective November 18, 2014, the new bulletin aligns the existing guidance to the ASU issued by the FASB in October 2014. Under the new guidance, pushdown accounting can be applied in the separate financial statements of the acquired entity upon completion of the acquisition or in a subsequent period. This impacts the stand-alone financial statements of the subsidiary, but does not alter the existing reporting requirements for the parent company to record the acquired assets, liabilities, and non-controlling interests in consolidated financial statements. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period. If pushdown accounting is applied, that election is irrevocable. The SEC responded by rescinding its guidance on pushdown accounting, which had required registrants to apply pushdown accounting in certain circumstances. With regard to the Acquisition, TLLP elected not to apply pushdown accounting to Green River Processing. |