April 28, 2011, 10:45 am

Report was available to subscribers 04-13-2011
TLLP - Tesoro Logistics LP

TLLP - Tesoro Logistics LP plans on offering 14.375 million units at a range of $19-$21. Citi, Wells Fargo, BofA Merrill Lynch and Credit Suisse are leading the deal, Barclays, Deutsche Bank, JP Morgan, Raymond James and RBC are co-managing. Post-ipo TLLP will have a 31.1 total units outstanding for a market capo of $622 million on a pricing of $20. Nearly all the ipo proceeds will go to parent Tesoro(TSO). In addition, on ipo TLLP will borrow $50 million which go to TSO as a cash distribution.

Refiner Tesoro(TSO) will own all non-floated shares, the general partnership and incentive distribution rights.

Yield - As an MLP, TLLP will distribute all net cash flows quarterly to unitholders. The initial distribution is expected to be $0.3375 quarterly. On an annualized $1.35, TLLP would yield 6.75% annually to unitholders.

Lets not bury the lead here. We all know by now that these energy MLP's trade based on cash flows ans yield. TLLP derives revenues based on fees from Tesoro, not based on the underlying price of the commodity. As long as TSO's refineries are operating at or near capacity, TLLP's cash flows should be consistent and predictable.

The business here, terminals and pipelines for refineries, is ideal for an MLP structure. Not a growth sector, but one in which cash flows are consistent and predictable. Growth comes from either dropdowns from the parent or acquisitions. The debtload of the ipo comes into play here. The better the balance sheet, the easier to fund acquisitions and flow those cash flows to the bottom line and unitholders.

In order to pay the full $1.35 per unit distribution and fund capital expenditures TLLP will need to borrow approximately $3 million the first 12 months public. This is not an issue as it amounts to just $0.10 per unit in a 12 month period in which TLLP plans more than normal expansion capital expenditures. This is something to keep an eye on going forward however. Ideally you want the entity(TLLP) structured so that cash flows are sufficient to pay both the full distribution and fund capital expenditures.

There are at least 4 publicly traded refined products pipeline & terminal MLP's.

SXL - Yields 5.3% annually, average debt load for the group.

PAA - Yields 6% annually, above average debtload for the group.

HEP - Yields 5.9% annually, average debtload for the group.

MMP - Yields 5.1% annually, less than average debtload for the group.

Not exactly apples to apples, the strength of the parent and the location and scalability of operations also come into play.

Based purely on yield and balance sheet, TLLP looks quite attractive in this space.

TLLP - On a $20 pricing, would yield 6.75% annually with minimal debtload.

From the prospectus:

'We are a fee-based, growth-oriented Delaware limited partnership recently formed by Tesoro to own, operate, develop and acquire crude oil and refined products logistics assets. Our logistics assets are integral to the success of Tesoro’s refining and marketing operations and are used to gather, transport and store crude oil and to distribute, transport and store refined products.'

Assets:

*Crude oil gathering system in North Dakota/Montana. Includes 23,000 barrels per day truck-based crude oil gathering operation and approximately 700 miles of pipeline and related storage units.

*Eight refined products terminals in the midwest and west with capacity of 229,000 barrels per day. Distribution for refined products from TSO's refineries in Los Angeles and Martinez, CA, Salt Lake City, Utah; Kenai, Alaska; Anacortes, Washington; and Mandan, North Dakota.

*Crude oil and refined products storage facility in Salt Lake.

*Five related short-haul pipelines in Utah

Growth plans include constructing new assets and by acquiring dropdowns from parent TSO and third parties. TSO plans on growing their logistics segment, with a focus on increasing yield for TLLP. TSO recently announced a refining expansion of 64,000 bpd at their North Dakota refinery.

As noted above revenues are derived from fees charged for gathering, transporting and storing crude oil and for terminalling, transporting and storing refined products.

Parent TSO accounts for nearly all revenues.

Tesoro(TSO) - Tesoro is the second largest independent refiner in the United States by crude capacity and owns and operates seven refineries that serve markets in Alaska, Arizona, California, Hawaii, Idaho, Minnesota, Nevada, North Dakota, Oregon, Utah, Washington and Wyoming. Tesoro also sells transportation fuels and convenience products through a network of nearly 1,200 retail stations under the Shell, Tesoro and USA Gasoline brands.

Financials

$50 million in debt post-ipo. Balance sheet is set-up here nicely for future dropdowns from parent TSO.

12 months ending 3/31/12: $97.3 million in revenues, 45% operating margins. Debt servicing will eat up just 5% of operating profits. Net margins of 42.5%. Factoring in capex, cash flows will be $1.25, $0.10 short of the expected distribution. Capex is expected to be $15 million, far higher than 2010's $1.7 million.

Conclusion - solid MLP deal coming attractively valued in range on a yield basis. We want to keep an eye on borrowings going forward as ideally cash flows should be sufficient to cover distributions and capex. For the first twelve months public TLLP plans on borrowing $0.10 per unit to fund distributions and capex. Slight negative that. Strong 6.75% yield though and very good balance sheet which should lead to acquisitions and increased yield going forward. Recommend.