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EX-32.2 - EXHIBIT 32.2 - Western Refining, Inc.exhibit322-wnrx33117.htm
EX-32.1 - EXHIBIT 32.1 - Western Refining, Inc.exhibit321-wnrx33117.htm
EX-31.2 - EXHIBIT 31.2 - Western Refining, Inc.exhibit312-wnrx33117.htm
EX-31.1 - EXHIBIT 31.1 - Western Refining, Inc.exhibit311-wnrx33117.htm
 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2017
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _____ to _____
wrlogoa04a10.jpg
Commission File Number
 
Registrant; State of Incorporation; Address and Telephone Number
 
I.R.S. Employer Identification No.
001-32721
 
WESTERN REFINING, INC.
 
20-3472415
 
 
Delaware
 
 
 
 
212 N. Clark St.
 
 
 
 
El Paso, Texas 79905
 
 
 
 
 (915) 775-3300
 
 
 
 
 
 

001-35612
 
NORTHERN TIER ENERGY LP
 
80-0763623
 
 
Delaware
 
 
 
 
1250 W. Washington Street, Suite 300
 
 
 
 
Tempe, Arizona 85281
 
 
 
 
(602) 302-5450
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Western Refining, Inc.
Yes
þ
No
o
Northern Tier Energy LP
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Western Refining, Inc.
Yes
þ
No
o
Northern Tier Energy LP
Yes
þ
No
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," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Western Refining, Inc.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
Northern Tier Energy LP
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Western Refining, Inc.
Yes
o
No
þ
Northern Tier Energy LP
Yes
o
No
þ
As of April 28, 2017, there were 108,818,053 shares outstanding, par value $0.01, of the Western Refining, Inc. common stock.
Northern Tier Energy LP meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
 
 
 
 
 



WESTERN REFINING, INC. AND SUBSIDIARIES
INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101





Explanatory Note
This report on Form 10-Q is a combined report being filed separately by Western Refining, Inc. (“Western”) and Northern Tier Energy LP (“NTI”). Western owns all of the common units of NTI and NTI meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing its information within this Form 10-Q with the reduced disclosure format. NTI's debt is in the form of senior secured notes due in 2020 and the indenture governing NTI's senior secured notes requires that it publicly disclose its quarterly financial position, results of operations and cash flows through the maturity date or retirement of its senior secured notes. Western and NTI have elected to include NTI's statements of financial position, results of operations, statements of cash flows and corresponding notes to its consolidated financial statements for all periods required within a separate section of Western's Quarterly Report on Form 10-Q. Each of Western and NTI is filing on its own behalf the information contained in this report that relates to itself, and neither entity makes any representation as to information relating to the other entity. Where information or an explanation is provided that is substantially the same for each entity, such information or explanation has been combined in this report. Where information or an explanation is not substantially the same for each entity, separate information and explanation has been provided.

Forward-Looking Statements
As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, certain statements included throughout this Quarterly Report on Form 10-Q and in particular under the section entitled Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations relating to matters that are not historical fact should be deemed forward-looking statements that represent management’s beliefs and assumptions based upon currently available information. These forward-looking statements relate to matters such as our industry, including the regulation of our industry, business strategy, our proposed merger with Tesoro Corporation (“Tesoro”), future operations, our expectations for margins and crack spreads, seasonality, the discount between West Texas Intermediate ("WTI") crude oil and Dated Brent crude oil as well as the discount between WTI Cushing and WTI Midland crude oils, volatility of crude oil prices, additions to pipeline capacity in the Permian Basin and at Cushing, Oklahoma, pipeline access to advantaged crude oil, expected share repurchases and dividends, volatility in pricing of Renewable Identification Numbers ("RIN"), taxes, capital expenditures, liquidity and capital resources and other financial and operating information. Forward-looking statements also include those regarding the timing of completion of certain operational and maintenance improvements we are making at our refineries, future operational and refinery efficiencies and cost savings, timing of future maintenance turnarounds, the amount or sufficiency of future cash flows and earnings growth, future expenditures, future contributions related to pension and postretirement obligations, our ability to manage our inventory price exposure through commodity hedging instruments, the impact upon our business of existing and future state and federal regulatory requirements, environmental loss contingency accruals, projected remediation costs or requirements and the expected outcomes of legal proceedings in which we are involved. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “position,” “potential,” “predict,” “project,” “strategy,” “will,” “future” and similar terms and phrases to identify forward-looking statements in this report.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect or that are affected by unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. In addition, our business and operations involve numerous risks and uncertainties, many that are beyond our control, that could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.
When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-Q. Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to predict or identify all of these factors, they include, among others, the following:
the possibility that the proposed merger with Tesoro is not consummated in a timely manner or at all;
the diversion of management in connection with the proposed merger with Tesoro;
our ability to realize the anticipated benefits of the merger with NTI;
availability, costs and price volatility of crude oil, other refinery feedstocks and refined products;
the successful integration and future performance of acquired assets, businesses or third-party product supply, and the possibility that expected synergies may not be achieved;
the impact on us of increased levels and cost of indebtedness used to fund our merger with NTI or the cash portion of the merger consideration and increased cost of existing indebtedness due to the actions taken to consummate the merger with NTI;

i


our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;
changes in crack spreads;
changes in the spreads between WTI Cushing crude oil and other crude oil benchmarks such as West Texas Sour crude oil, WTI Midland crude oil, Bakken shale crude oil, Dated Brent crude oil and Western Canadian Select crude oil;
effects of and exposure to risks related to our commodity hedging strategies and transactions;
availability and costs of renewable fuels for blending and RINs to meet Renewable Fuel Standards ("RFS") obligations;
construction of new or expansion of existing product or crude oil pipelines by us or our competitors, including in the Permian Basin, the San Juan Basin and at Cushing, Oklahoma;
changes in the underlying demand for our refined products;
instability and volatility in the financial markets, including as a result of potential disruptions caused by economic uncertainties, commodity price fluctuations and expectations for changes in interest rates;
a potential economic recession in the United States and/or abroad;
adverse changes in the credit ratings assigned to our and our subsidiaries' debt instruments;
changes in the availability and cost of capital;
actions of customers and competitors;
actions of third-party operators, processors and transporters;
changes in fuel and utility costs incurred by our refineries;
the effect of weather-related problems upon our operations;
disruptions due to equipment interruption, pipeline disruptions or failure at our or third-party facilities;
execution of planned capital projects, cost overruns relating to those projects and failure to realize the expected benefits from those projects;
effects of and costs relating to compliance with current and future local, state and federal environmental, economic, climate change, safety, tax and other laws, policies and regulations and enforcement initiatives;
rulings, judgments or settlements in litigation, tax or other legal or regulatory matters, including unexpected environmental remediation costs in excess of any reserves or insurance coverage;
the price, availability and acceptance of alternative fuels and alternative fuel vehicles;
labor relations;
operating hazards, natural disasters, casualty losses, acts of terrorism including cyber-attacks and other matters beyond our control; and
other factors discussed in more detail under Part I — Item 1A. Risk Factors in Western's and NTI's Annual Reports on Form 10-K for the year ended December 31, 2016 ("2016 10‑K").
Any one of these factors or a combination of these factors could materially affect our financial condition, results of operations or cash flows and could influence whether any forward-looking statements ultimately prove to be accurate. You are urged to consider these factors carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance upon these forward-looking statements.
Although we believe the forward-looking statements we make in this report related to our plans, intentions and expectations are reasonable, we can provide no assurance that such plans, intentions or expectations will be achieved. These statements are based upon assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in the circumstances. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. The forward-looking statements included herein are made only as of the date of this report and we are not required to (and will not) update any information to reflect events or circumstances that may occur after the date of this report, except as required by applicable law.


ii


Part I
Financial Information
Item 1.
Financial Statements
WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
 
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents (WNRL: $23,298 and $14,652, respectively)
$
160,027

 
$
268,581

Accounts receivable, trade, net of a reserve for doubtful accounts of $1,212 and $235, respectively (WNRL: $62,385 and $65,240, respectively)
405,699

 
423,171

Inventories (WNRL: $9,089 and $10,144, respectively)
828,974

 
771,989

Prepaid expenses (WNRL: $6,946 and $6,421, respectively)
98,431

 
95,355

Other current assets (WNRL: $4,970 and $6,403, respectively)
109,922

 
113,421

Total current assets
1,603,053

 
1,672,517

Equity method investment
104,303

 
102,685

Property, plant and equipment, net (WNRL: $417,146 and $419,448, respectively)
2,362,391

 
2,364,482

Goodwill
1,289,443

 
1,289,443

Intangible assets, net (WNRL: $6,301 and $6,515, respectively)
83,151

 
83,812

Other assets (WNRL: $3,115 and $3,233, respectively)
44,296

 
47,458

Total assets
$
5,486,637

 
$
5,560,397

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable (WNRL: $13,596 and $9,186, respectively)
$
678,649

 
$
753,933

Accrued liabilities (WNRL: $35,485 and $39,599, respectively)
206,091

 
219,607

Current portion of long-term debt
10,500

 
10,500

Total current liabilities
895,240

 
984,040

Long-term liabilities:
 
 
 
Long-term debt, less current portion (WNRL: $313,524 and $313,032, respectively)
1,892,725

 
1,871,805

Lease financing obligations
65,854

 
54,163

Deferred income tax liability, net (WNRL: $1,129 and $641, respectively)
283,217

 
260,293

Other liabilities (WNRL: $9 in both periods)
89,682

 
93,136

Total long-term liabilities
2,331,478

 
2,279,397

Commitments and contingencies


 


Equity:
 
 
 
Western shareholders' equity:
 
 
 
Common stock, par value $0.01, 240,000,000 shares authorized; 108,818,053 and 108,512,228 shares issued, respectively
1,088

 
1,085

Preferred stock, par value $0.01, 10,000,000 shares authorized; no shares issued or outstanding

 

Additional paid-in capital
630,653

 
633,381

Retained earnings
1,030,193

 
1,061,168

Accumulated other comprehensive income, net of tax
1,182

 
1,226

Total Western shareholders' equity
1,663,116

 
1,696,860

Non-controlling interests
596,803

 
600,100

Total equity
2,259,919

 
2,296,960

Total liabilities and equity
$
5,486,637

 
$
5,560,397


The accompanying notes are an integral part of these condensed consolidated financial statements.
1




WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Net sales
$
2,328,532

 
$
1,455,504

Operating costs and expenses:
 
 
 
Cost of products sold (exclusive of depreciation and amortization)
1,914,008

 
1,047,361

Direct operating expenses (exclusive of depreciation and amortization)
231,801

 
223,585

Selling, general and administrative expenses
58,641

 
53,285

Merger and reorganization costs
11,297

 
408

Gain on disposal of assets, net
(459
)
 
(130
)
Maintenance turnaround expense
3,314

 
125

Depreciation and amortization
56,804

 
52,651

Total operating costs and expenses
2,275,406

 
1,377,285

Operating income
53,126

 
78,219

Other income (expense):
 
 
 
Interest income
108

 
164

Interest and debt expense
(33,735
)
 
(26,681
)
Other, net
6,941

 
6,512

Income before income taxes
26,440

 
58,214

Provision for income taxes
(5,444
)
 
(18,629
)
Net income
20,996

 
39,585

Less net income attributable to non-controlling interests
9,428

 
9,047

Net income attributable to Western Refining, Inc.
$
11,568

 
$
30,538

 
 
 
 
Net earnings per share:
 
 
 
Basic
$
0.10

 
$
0.34

Diluted
0.10

 
0.33

Weighted-average common shares outstanding:
 
 
 
Basic
108,669

 
92,078

Diluted
109,155

 
92,144

 
 
 
 
Cash dividends declared per common share
$
0.38

 
$
0.38





The accompanying notes are an integral part of these condensed consolidated financial statements.
2




WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Net income
$
20,996

 
$
39,585

Other comprehensive income items:
 
 
 
Benefit plans:
 
 
 
Amortization of net prior service cost
(73
)
 

Reclassification of loss to income
1

 

Other comprehensive loss before tax
(72
)
 

Income tax
28

 

Other comprehensive loss, net of tax
(44
)
 

Comprehensive income
20,952

 
39,585

Less comprehensive income attributable to non-controlling interests
9,428

 
9,047

Comprehensive income attributable to Western Refining, Inc.
$
11,524

 
$
30,538




The accompanying notes are an integral part of these condensed consolidated financial statements.
3




WESTERN REFINING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
20,996

 
$
39,585

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
56,804

 
52,651

Changes in fair value of commodity hedging instruments
4,452

 
12,483

Reserve for doubtful accounts
977

 
26

Amortization of loan fees and original issue discount
2,545

 
1,628

Stock-based compensation expense
5,740

 
6,181

Deferred income taxes
22,924

 
28,561

Change in lower of cost or market reserve
(1,868
)
 
(51,734
)
Income from equity method investment, net of dividends
(1,678
)
 
(5,517
)
Gain on disposal of assets, net
(459
)
 
(130
)
Changes in operating assets and liabilities:
 
 
 

Accounts receivable
16,494

 
21,824

Inventories
(55,117
)
 
(84,321
)
Prepaid expenses
(3,076
)
 
(6,758
)
Other assets
4,826

 
(62
)
Accounts payable and accrued liabilities
(89,201
)
 
(13,165
)
Other long-term liabilities
(2,676
)
 
1,049

Net cash provided by (used in) operating activities
(18,317
)
 
2,301

Cash flows from investing activities:
 
 
 
Capital expenditures
(46,258
)
 
(79,029
)
Use of restricted cash

 
32,323

Proceeds from the sale of assets
530

 
219

Net cash used in investing activities
(45,728
)
 
(46,487
)
Cash flows from financing activities:
 
 
 
Payments on long-term debt and capital lease obligations
(3,237
)
 
(1,922
)
Borrowings on revolving credit facility
151,500

 
70,000

Repayments on revolving credit facility
(130,500
)
 
(62,500
)
Deferred financing costs
(78
)
 

Purchase of common stock for treasury

 
(75,000
)
Distribution to non-controlling interest holders
(12,629
)
 
(28,995
)
Dividends paid
(42,543
)
 
(35,601
)
Payments of tax withholdings for stock-based compensation
(7,022
)
 
(1,197
)
Net cash used in financing activities
(44,509
)
 
(135,215
)
Net decrease in cash and cash equivalents
(108,554
)
 
(179,401
)
Cash and cash equivalents at beginning of period
268,581

 
772,502

Cash and cash equivalents at end of period
$
160,027

 
$
593,101


The accompanying notes are an integral part of these condensed consolidated financial statements.
4




WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization
"Western," "we," "us," "our" and the "Company" refer to Western Refining, Inc. and, unless the context otherwise requires, our subsidiaries. Western Refining, Inc. was formed on September 16, 2005, as a holding company prior to our initial public offering and is incorporated in Delaware.
We produce refined products at our refineries in El Paso, Texas, near Gallup, New Mexico and St. Paul Park, Minnesota. We sell refined products in Arizona, Colorado, Minnesota, New Mexico, Wisconsin, West Texas, the Mid-Atlantic region and Mexico. Our product sales occur through bulk distribution terminals, wholesale marketing networks and two retail networks with a total of 545 company-owned and franchised retail sites in the United States.
On November 16, 2016, we entered into an Agreement and Plan of Merger (the “Tesoro Merger Agreement”) with Tesoro Corporation, a Delaware corporation (“Tesoro”), Tahoe Merger Sub 1, Inc., a Delaware corporation and wholly-owned subsidiary of Tesoro (“Merger Sub 1”), and Tahoe Merger Sub 2, LLC, a Delaware limited liability company and wholly-owned subsidiary of Tesoro (“Merger Sub 2”), pursuant to which Merger Sub 1 will merge with and into the Company (the “First Tesoro Merger,” and, if a second merger election as discussed below is not made, the “Tesoro Merger”), with the Company surviving the First Tesoro Merger as a wholly-owned subsidiary of Tesoro. Subject to the terms and conditions set forth in the Tesoro Merger Agreement, upon consummation of the First Tesoro Merger, each share of our common stock, par value $0.01 per share issued and outstanding immediately prior to the effective time of the First Tesoro Merger (excluding our common stock owned by the Company or Tesoro or any of their respective direct or indirect wholly-owned subsidiaries that are not held on behalf of third parties) will be converted into and become exchangeable for, at the election of the holder of each share of our common stock, either (a) $37.30 in cash or (b) 0.4350 shares of Tesoro common stock, par value $0.16⅔ per share, in each case without interest and subject to proration. See Note 23, Tesoro Merger, for additional information.
As of March 31, 2017, we own 100% of the limited partner interest in Northern Tier Energy LP ("NTI") and 100% of its general partner. We entered into an Agreement and Plan of Merger dated December 21, 2015 (the “NTI Merger Agreement”) and the merger was successfully completed on June 23, 2016 (the "NTI Merger"). We incurred $500 million of additional secured indebtedness under our amended term loan credit agreement to partially fund the NTI Merger consideration. See Note 9, Long-Term Debt, and Note 21, Acquisitions, for further discussion.
We formed Western Refining Logistics, LP ("WNRL") as a Delaware master limited partnership to own, operate, develop and acquire terminals, storage tanks, pipelines and other logistics assets and related businesses. As of March 31, 2017, we owned a 52.5% limited partner interest in WNRL and the public held a 47.5% limited partner interest. We control WNRL through our 100% ownership of its general partner and we own the majority of WNRL's limited partnership interests. WNRL owns and operates logistics assets consisting of pipeline and gathering, terminalling, storage and transportation assets as well as a wholesale business that operates primarily in the Southwest. WNRL operates its logistics assets primarily for the benefit of the Company.
On September 15, 2016, we sold certain assets consisting of terminals, transportation and storage assets and the related land located at our St. Paul Park refinery and Cottage Grove tank farm to WNRL. These assets primarily receive, store and distribute crude oil, feedstock and refined products associated with the St. Paul Park refinery (the "St. Paul Park Logistics Assets"). WNRL acquired these assets from us in exchange for $195.0 million in cash and 628,224 common units representing limited partner interests in WNRL. We refer to this transaction as the "St. Paul Park Logistics Transaction."
The WNRL financial and operational data presented includes the historical results of all assets acquired from Western in the St. Paul Park Logistics Transaction. The acquisition from Western was a transfer of assets between entities under common control. Accordingly, the financial information contained herein for WNRL has been retrospectively adjusted, to include the historical results of the assets acquired, for periods prior to the effective date of the transaction.
Our operations include three business segments: refining, WNRL and retail. See Note 3, Segment Information, for further discussion of our business segments.

5

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim consolidated financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or for any other period.
The Condensed Consolidated Balance Sheet at December 31, 2016, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Western and our subsidiaries. We own a 52.5% limited partner interest in WNRL and 100% of WNRL's general partner. As the general partner of WNRL, we have the ability to direct the activities of WNRL that most significantly impact their respective economic performance. We have reported a non-controlling interest for WNRL as of March 31, 2017 and December 31, 2016, of $596.8 million and $600.1 million, respectively, in our Condensed Consolidated Balance Sheets. All intercompany accounts and transactions have been eliminated for all periods presented. Investments in significant non-controlled entities over which we have the ability to exercise significant influence are accounted for using the equity method.
Variable Interest Entity
WNRL is a variable interest entity ("VIE") as defined under GAAP. A VIE is a legal entity whose equity owners do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or, as a group, the equity holders lack the power, through voting rights, to direct the activities that most significantly impact the entity's financial performance, the obligation to absorb the entity's expected losses or rights to expected residual returns. As the general partner of WNRL, we have the sole ability to direct the activities of WNRL that most significantly impact WNRL's financial performance, and therefore we consolidate WNRL. See Note 22, WNRL, for further discussion.
Goodwill and Other Unamortizable Intangible Assets
Goodwill represents the excess of the purchase price (cost) over the fair value of the net assets acquired and is carried at cost. We do not amortize goodwill for financial reporting purposes. We test goodwill for impairment at the reporting unit level. The reporting unit or units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business is managed. Our policy is to test goodwill and other unamortizable intangible assets for impairment annually at June 30, or more frequently if indications of impairment exist.
The risk of goodwill and intangible asset impairment losses may increase to the extent that results of operations or cash flows decline at our St. Paul Park refinery or SuperAmerica operating segments. Impairment losses may result in a material, non-cash write-down of goodwill or intangible assets. Furthermore, impairment losses could have a material adverse effect on the Company’s results of operations and shareholders’ equity.
Use of Estimates and Seasonality
The preparation of financial statements, in accordance with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the respective reporting period. Actual results could differ from those estimates.
Demand for gasoline is generally higher during the summer months than during the winter months. As a result, our operating results for the first and fourth calendar quarters are generally lower than those for the second and third calendar quarters of each year. During 2016 and continuing into 2017, the volatility in crude oil prices and refining margins contributed to the variability of our results of operations.

6

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Recent Accounting Pronouncements
Effective January 1, 2017, we adopted the accounting and reporting requirements included in the Accounting Standards Codification ("ASC") for employee share-based payment accounting. We have applied the new standard prospectively, except for the cash flow considerations, which we applied retrospectively. The adoption of these revised standards was not material to our financial position. During the three months ended March 31, 2017, we recognized all excess tax benefits and tax deficiencies as an income tax benefit in the Condensed Consolidated Statement of Operations rather than in additional paid-in capital. The presentation of our Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016, has been retrospectively adjusted to include payments of $1.2 million for tax withholdings for stock-based compensation in net cash used in financing activities that was previously reported in net cash provided by operating activities as a change in accounts payable and accrued liabilities.
ASU 2017-03 addresses the disclosure requirements in regards to the impact that recently issued accounting standards will have on the financial statements of a registrant when such standards are adopted in a future period. The specific impact of this guidance will be determined by the respective changes in GAAP.
From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on our accounting and reporting. We are currently evaluating the effect that certain of these new accounting requirements may have on our accounting and related reporting and disclosures in our condensed consolidated financial statements.
Recognition and reporting of revenues - the requirements were amended to remove inconsistencies in revenue requirements and to provide a more complete framework for addressing revenue issues across a broad range of industries and transaction types. The revised standard’s core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised standard also addresses principal versus agent considerations and indicators related to transfer of control over specified goods. These provisions are effective January 1, 2018, and can be adopted using either a full retrospective approach or a modified approach, with early adoption permitted for periods beginning after December 15, 2016, and interim periods thereafter.
We have been evaluating and continue to evaluate the provisions of this standard and its impact on our business processes, business and accounting systems, and financial statements and related disclosures. A multi-disciplined implementation team has gained an understanding of the standard’s revenue recognition model, is reviewing and documenting our contracts, and is analyzing whether enhancements are needed to our business and accounting systems. Thus far in our review and analysis, we have not identified any material differences in our existing revenue recognition methods that would require modification under the new standard. We expect to complete this phase of our implementation plan within the next several months after which we will implement any changes to existing business processes and systems to accommodate the new standard. We will adopt this standard as of January 1, 2018.
Lease accounting - the requirements were amended with regard to recognizing lease assets and lease liabilities on the balance sheet and disclosing information about leasing arrangements. The core principle is that a lessee should recognize the assets and liabilities that arise from leases. These provisions are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We have been evaluating and continue to evaluate the provisions of this standard and its impact on our business processes, business and accounting systems, and financial statements and related disclosures.
Cash flow statement - the requirements address certain classification issues related to the statement of cash flows. These provisions are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted in any interim or annual period.
Recognition of breakage for certain prepaid stored-value products - the requirements align recognition of the financial liabilities related to prepaid stored-value products with the revenue recognition standard discussed above for non-financial liabilities. Certain of these liabilities may be extinguished proportionally in earnings as redemptions occur, or when redemption is remote if issuers are not entitled to the unredeemed stored value. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 with early adoption permitted subject to certain requirements.
Cash flow statement - the requirements provide guidance on presentation in the statement of cash flows for cash, cash equivalents and restricted cash or restricted cash equivalents in order to address diversity in practice among

7

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

entities. The update would result in presentation of restricted cash as a component of beginning-of-the-period and end-of-the-period cash and cash equivalents within the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted subject to certain requirements.
Business combinations - the requirements clarify the definition of a business and provide a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. This guidance is effective in annual periods beginning after December 15, 2017, including interim periods therein. It must be applied prospectively on or after the effective date with early adoption permitted subject to certain requirements, and no disclosures for a change in accounting principle are required at transition.
Goodwill - the requirements change the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This guidance is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. Early adoption is allowed for all entities as of January 1, 2017, for annual and any interim impairment tests occurring after January 1, 2017.
Retirement plan - the requirements change how net periodic benefit costs for defined benefit pension and/or other postretirement benefit plans are presented in the income statement. Only the service cost component will be eligible for capitalization in assets. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted subject to certain requirements.
3. Segment Information
We have organized our operations into three segments: refining, WNRL and retail, based on manufacturing and marketing processes, the nature of our products and services and each segment's respective customer base.
We treated the St. Paul Park Logistics Assets that we sold to WNRL as a transfer of assets between entities under common control. Accordingly, we have retrospectively adjusted the financial information for the affected reporting segments to include or exclude the historical results of the transferred assets for periods prior to the effective date of the transaction. We moved the St. Paul Park Logistics Assets from the refining segment to the WNRL segment.
Business Segments and Principal Products
Refining. Our refining segment includes the operations of three refineries. The El Paso refinery in El Paso, Texas, has a crude oil throughput capacity of 135,000 barrels per day ("bpd"), the Gallup refinery, near Gallup, New Mexico has a 25,000 bpd capacity and the St. Paul Park refinery, in St. Paul Park, Minnesota has a 102,000 bpd capacity. Our refineries produce various grades of gasoline, diesel fuel and other products from crude oil, other feedstocks and blending components. We purchase crude oil, other feedstocks and blending components from various third-party suppliers. We also acquire refined products through exchange agreements and from various third-party suppliers to supplement supply to our customers. We sell these products to WNRL, to our retail segment, to other independent wholesalers and retailers, commercial accounts and sales and exchanges with major oil companies.
We had a supply and marketing agreement with a third party covering activities related to our refined product supply, sales and hedging in the Mid-Atlantic region. This supply agreement expired on December 31, 2016. On that date, we acquired $46.0 million in finished product inventories valued at market related to our Mid-Atlantic operations and now realize 100% of the operating results.
WNRL. WNRL owns and operates certain logistics assets that consist of pipeline and gathering, terminalling, storage and transportation assets, with which we provide related services to our refining segment in the Southwest and Upper Great Plains regions, including 705 miles of pipelines and 12.4 million barrels of active storage capacity. The majority of WNRL's logistics assets are integral to the operations of the El Paso, Gallup and St. Paul Park refineries.
WNRL also owns a wholesale business that operates primarily in the Southwest. WNRL's wholesale business includes the operations of several lubricant and bulk petroleum distribution plants and a fleet of crude oil, asphalt and refined product delivery trucks. WNRL distributes commercial wholesale petroleum products primarily in Arizona, Colorado, Nevada, New Mexico and Texas. WNRL purchases petroleum fuels and lubricants from our refining segment and from third-party suppliers.
Retail. Our retail segment operates retail networks located in the Southwest region ("Southwest Retail") and the Upper Great Plains region of the U.S. ("SuperAmerica"). Each of our retail networks sells various grades of gasoline, diesel fuel, convenience store merchandise and beverage and food products to the general public through retail convenience stores.

8

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Southwest Retail obtains the majority of its gasoline and diesel fuel supply from WNRL and purchases general merchandise and beverage and food products from various third-party suppliers. At March 31, 2017, Southwest Retail operated 259 service stations and convenience stores located in Arizona, Colorado, New Mexico and Texas compared to 258 service stations and convenience stores at March 31, 2016. In addition to its service stations and convenience stores, Southwest Retail sells various grades of gasoline and diesel fuel to commercial vehicle fleets through unmanned fleet fueling sites ("cardlocks") located in Arizona, Colorado, New Mexico and Texas. Southwest Retail operated 52 cardlocks at March 31, 2017 and March 31, 2016.
As of March 31, 2017, SuperAmerica operated 192 retail convenience stores and supported the operations of 94 franchised retail convenience stores primarily in Minnesota and Wisconsin, compared to 169 and 114 at March 31, 2016, respectively. SuperAmerica assumed full operations for 22 stores during the first quarter of 2017 through an assumption of leases and inventory purchase of previously franchised stores. SuperAmerica obtains the majority of its gasoline and diesel for its Minnesota and Wisconsin retail convenience stores from the St. Paul Park refinery.
Segment Accounting Principles. Operating income for each segment consists of net revenues less cost of products sold; direct operating expenses; selling, general and administrative expenses; merger and reorganization costs; net impact of the disposal of assets and depreciation and amortization. The refining segment also includes costs related to periodic maintenance turnaround activities. Cost of products sold includes net realized and unrealized gains and losses related to our commodity hedging activities and reflects current costs adjusted, where appropriate, for "last-in, first-out" ("LIFO") and lower of cost or market ("LCM") inventory adjustments. Intersegment revenues are reported at prices that approximate market.
Activities of our business that are not included in the three reportable segments mentioned above are included in the "Other" category. These activities consist primarily of corporate staff operations and other items that are not specific to the normal business of any one of our three reportable segments. We do not allocate certain items of other income and expense, including income taxes, to the individual segments.
Costs have been included in Merger and reorganization costs in the accompanying Condensed Consolidated Statements of Operations and are included in the "Other" category within our segment presentation. These costs consist of $8.5 million of expense related to the Tesoro Merger, which included transaction and consulting costs, $2.1 million in NTI Merger reorganization expenses including legal, employee severance and retention costs and $0.7 million of expense related to the reorganization of our Gallup refinery operations.
The total assets of each segment consist primarily of cash and cash equivalents; inventories; net accounts receivable; net property, plant and equipment and other assets directly associated with the individual segment’s operations. Included in the total assets of the corporate operations are cash and cash equivalents; various net accounts receivable; prepaid expenses; other current assets; net property, plant and equipment and other long-term assets.

9

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Disclosures regarding our reportable segments with reconciliations to consolidated totals for the three months ended March 31, 2017 and 2016, are presented below:
 
Three Months Ended
 
March 31,
 
2017
 
2016
 
(In thousands)
Operating Results:
 
 
 
Refining
 
 
 
Net sales
$
2,085,638

 
$
1,276,968

Intersegment eliminations
705,653

 
590,119

Net refining sales to external customers
1,379,985

 
686,849

WNRL
 
 
 
Net sales
604,692

 
468,039

Intersegment eliminations
190,543

 
149,462

Net WNRL sales to external customers
414,149

 
318,577

Retail
 
 
 
Net sales
542,961

 
451,627

Intersegment eliminations
8,563

 
1,549

Net retail sales to external customers
534,398

 
450,078

 
 
 
 
Consolidated net sales to external customers
$
2,328,532

 
$
1,455,504

 
 
 
 
Operating income (loss)
 
 
 
Refining (1) (2)
$
61,665

 
$
84,374

WNRL (2)
26,362

 
13,188

Retail (1)
3,848

 
3,865

Other
(38,749
)
 
(23,208
)
Operating income from segments
53,126

 
78,219

Other income (expense), net
(26,686
)
 
(20,005
)
Consolidated income before income taxes
$
26,440

 
$
58,214

 
 
 
 
Depreciation and amortization
 
 
 
Refining (2)
$
40,187

 
$
36,500

WNRL (2)
9,732

 
9,338

Retail
6,076

 
5,680

Other
809

 
1,133

Consolidated depreciation and amortization
$
56,804

 
$
52,651

 
 
 
 
Capital expenditures
 
 
 
Refining (2)
$
37,115

 
$
67,957

WNRL (2)
5,470

 
8,356

Retail
3,262

 
2,074

Other
411

 
642

Consolidated capital expenditures
$
46,258

 
$
79,029

 
 
 
 
Total assets
 
 
 
Refining (2) (including $1,267,455 of goodwill)
$
4,323,611

 
$
4,123,181


10

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Three Months Ended
 
March 31,
 
2017
 
2016
 
(In thousands)
WNRL (2)
533,250

 
556,940

Retail (including $21,988 of goodwill)
438,371

 
443,112

Other
191,405

 
630,529

Consolidated total assets
$
5,486,637

 
$
5,753,762

(1)
The effect of our economic hedging activity is included within the operating income of our refining segment as a component of cost of products sold. The cost of products sold within our refining segment included $35.3 million in net realized and unrealized economic hedging gains for the three months ended March 31, 2017, respectively, and $5.3 million in net realized and unrealized economic hedging gains for the three months ended March 31, 2016. Also included within cost of products sold for our refining segment is the net effect of non-cash LCM recoveries of $1.6 million and $51.6 million for the three months ended March 31, 2017 and 2016, respectively. Our retail segment includes non-cash LCM recoveries of $0.3 million and $0.1 million for the three months ended March 31, 2017 and 2016, respectively.
(2)
WNRL's financial data includes its historical financial results and an allocated portion of corporate general and administrative expenses, previously reported in our other category, for the three months ended March 31, 2016. The information contained herein for WNRL has been retrospectively adjusted, to include the historical results of the St. Paul Park Logistics Assets.
4. Fair Value Measurement
We utilize the market approach when measuring fair value of our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The fair value hierarchy consists of the following three levels:
Level 1
Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs that are derived principally from or corroborated by observable market data.
Level 3
Inputs are derived from valuation techniques that one or more significant inputs or value drivers are unobservable and cannot be corroborated by market data or other entity-specific inputs.
The carrying amounts of cash and cash equivalents, which we consider Level 1 assets and liabilities, approximated their fair values at March 31, 2017 and December 31, 2016, due to their short-term maturities. Our fair value assessment incorporates a variety of considerations, including the short-term duration of the instruments and an evaluation of counterparty credit risk. Cash equivalents totaling $0.01 million and $60.0 million consisting of short-term money market deposits and commercial paper were included in the Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, respectively.
We maintain cash deposits with various counterparties in support of our hedging and trading activities. These deposits are required by counterparties as collateral and cannot be offset against the fair value of open contracts except in the event of default. Certain of our commodity derivative contracts under master netting arrangements include both asset and liability positions. We have elected to offset the fair value amounts recognized for multiple similar derivative instruments executed with the same counterparty under the column "Netting Adjustments" below; however, fair value amounts by hierarchy level are presented on a gross basis in the tables below. See Note 13, Crude Oil and Refined Product Risk Management, for further discussion of master netting arrangements.

11

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following tables represent our assets and liabilities for our commodity hedging contracts measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, and the basis for that measurement:
 
Carrying Value at March 31, 2017
 
Fair Value Measurement Using
 
Netting Adjustments
 
Recorded Value at March 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(In thousands)
Gross financial assets:
 
 
 
 
 
 
 
 
 
 
 
Other current assets
$
9,412


$


$
9,412


$


$
(3,588
)

$
5,824

Other assets
1,251




1,251




(101
)

1,150

Gross financial liabilities:
 

 

 

 




Accrued liabilities
(13,044
)



(13,044
)



3,677


(9,367
)
Other long-term liabilities
(12
)



(12
)



12



 
$
(2,393
)
 
$

 
$
(2,393
)
 
$

 
$

 
$
(2,393
)
 
Carrying Value at December 31, 2016
 
Fair Value Measurement Using
 
Netting Adjustments
 
Recorded Value at December 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(In thousands)
Gross financial assets:
 
 
 
 
 
 
 
 
 
 
 
Other current assets
$
18,929


$


$
18,929


$


$
(5,280
)

$
13,649

Other assets
677




677




(669
)

8

Gross financial liabilities:
 

 

 

 




Accrued liabilities
(17,547
)



(17,547
)



6,720


(10,827
)
Other long-term liabilities








(771
)

(771
)
 
$
2,059

 
$

 
$
2,059

 
$

 
$

 
$
2,059

Carrying amounts of commodity hedging contracts reflected as financial assets are included in both current and non-current other assets in the Condensed Consolidated Balance Sheets. Carrying amounts of commodity hedging contracts reflected as financial liabilities are included in both accrued and other long-term liabilities in the Condensed Consolidated Balance Sheets. Fair value adjustments referred to as credit valuation adjustments ("CVA") are included in the carrying amounts of commodity hedging contracts. CVAs are intended to adjust the fair value of counterparty contracts as a function of a counterparty's credit rating and reflect the credit quality of each counterparty to arrive at contract fair values.
Commodity hedging contracts designated as Level 3 financial assets consisted of jet fuel crack spread swaps. Ultra-low sulfur diesel ("ULSD") pricing has had a strong historical correlation to jet fuel crack spread swaps. We estimate the fair value of our Level 3 instruments based on the differential between quoted market settlement prices on ULSD futures and quoted market settlement prices on jet fuel futures for settlement dates corresponding to each of our outstanding Level 3 jet fuel crack spread swaps. As quoted prices for similar assets or liabilities in an active market are available, we reclassify the underlying financial asset or liability and designate them as Level 2 prior to final settlement.

12

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table presents the changes in fair value of our Level 3 assets and liabilities, excluding goodwill (all related to commodity price swap contracts) for the three months ended March 31, 2016. As of March 31, 2017, we had no outstanding commodity price swap contracts.
 
Three Months Ended
 
March 31,
 
2016
 
(In thousands)
Liability balance at beginning of period
$
(5,756
)
Change in fair value
186

Fair value of trades entered into during the period

Fair value reclassification from Level 3 to Level 2
1,612

Liability balance at end of period
$
(3,958
)
As of March 31, 2017 and December 31, 2016, the carrying amount and estimated fair value of our debt was as follows:
 
March 31,
2017
 
December 31,
2016
 
(In thousands)
Western obligations:
 
 
 
Carrying amount
$
1,253,375

 
$
1,256,000

Fair value
1,269,012

 
1,277,956

NTI obligations:
 
 
 
Carrying amount
$
370,980

 
$
349,980

Fair value
384,979

 
363,542

WNRL obligations:
 
 
 
Carrying amount
$
320,300

 
$
320,300

Fair value
345,800

 
345,050

The carrying amount of our debt is the amount reflected in the Condensed Consolidated Balance Sheets, including the current portion. The fair value of the debt was determined using Level 2 inputs.
There have been no transfers between assets or liabilities whose fair value is determined through the use of quoted prices in active markets (Level 1) and those determined through the use of significant other observable inputs (Level 2).
5. Inventories
Inventories were as follows:
 
March 31,
2017
 
December 31,
2016
 
(In thousands)
Refined products (1)
$
325,878

 
$
325,889

Crude oil and other raw materials
451,659

 
395,131

Lubricants
9,068

 
10,121

Retail store merchandise
42,369

 
40,848

Inventories
$
828,974

 
$
771,989

(1)
Includes $55.3 million and $50.5 million of inventory valued using the first-in, first-out ("FIFO") valuation method at March 31, 2017 and December 31, 2016, respectively.
Crude oil, refined product and other feedstock and blendstock inventories are carried at the lower of cost or market. Cost is determined principally under the LIFO valuation method to reflect a better matching of costs and revenues for refining inventories. Refined products inventories held by our refineries and SuperAmerica retail are valued under the LIFO valuation

13

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

method. Our refined product inventories for Southwest Retail, our Mid-Atlantic business and WNRL wholesale are valued using the FIFO inventory valuation method. Retail merchandise inventory is valued using the retail inventory method.
As of March 31, 2017 and December 31, 2016, refined products, crude oil and other raw materials valued under the LIFO method totaled 12.0 million barrels and 10.9 million barrels, respectively. At March 31, 2017 and December 31, 2016, the excess of the LIFO cost over the current cost of these crude oil, refined product and other feedstock and blendstock inventories was $145.0 million and $140.1 million, respectively.
During the three months ended March 31, 2017 and 2016, cost of products sold included net non-cash reductions in cost of products sold of $4.9 million and $23.0 million, respectively, from changes in our LIFO reserves.
In order to state our inventories at market values that were lower than our LIFO costs, we reduced the carrying values of our inventory through non-cash LCM inventory reserves of $39.8 million and $41.7 million at March 31, 2017 and December 31, 2016, respectively. The change in these reserves during the periods represent non-cash LCM recoveries that decreased cost of products sold by $1.9 million and $51.7 million for the three months ended March 31, 2017 and 2016, respectively.
Average LIFO cost per barrel of our refined products and crude oil and other raw materials inventories as of March 31, 2017 and December 31, 2016, were as follows:
 
March 31, 2017
 
December 31, 2016
 
Barrels
 
LIFO Cost
 
Average
LIFO
Cost Per
Barrel
 
Barrels
 
LIFO Cost
 
Average
LIFO
Cost Per
Barrel
 
(In thousands, except cost per barrel)
Refined products
4,371

 
$
302,427

 
$
69.19

 
4,259

 
$
303,968

 
$
71.37

Crude oil and other
7,597

 
442,956

 
58.31

 
6,641

 
394,798

 
59.45

 
11,968

 
$
745,383

 
62.28

 
10,900

 
$
698,766

 
64.11

6. Equity Method Investment
We own a 17% common equity interest in Minnesota Pipe Line Company, LLC ("MPL"). The carrying value of this equity method investment was $104.3 million and $102.7 million at March 31, 2017 and December 31, 2016, respectively.
At March 31, 2017 and December 31, 2016, the carrying amount of the equity method investment was $21.0 million and $21.1 million, respectively, higher than the underlying net assets of the investee. We are amortizing this difference over the remaining life of MPL’s primary asset (the fixed asset life of the pipeline). There is no market for the common units of MPL and, accordingly, no quoted market price is available.
We received distributions from MPL during the three months ended March 31, 2017 of $4.1 million. We received no distributions during three months ended March 31, 2016. Equity income from MPL for the three months ended March 31, 2017 and 2016, was $5.8 million and $5.5 million, respectively. Equity income has been included in other, net in the accompanying Condensed Consolidated Statements of Operations.

14

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Property, Plant and Equipment, Net
Property, plant and equipment, net was as follows:
 
March 31,
2017
 
December 31,
2016
 
(In thousands)
Refinery facilities and related equipment
$
2,297,478

 
$
2,260,351

Pipelines, terminals and transportation equipment
603,544

 
560,478

Retail facilities and related equipment
342,547

 
333,187

Wholesale facilities and related equipment
52,222

 
52,284

Corporate
53,750

 
53,566

 
3,349,541

 
3,259,866

Accumulated depreciation
(1,167,072
)
 
(1,118,477
)
 
2,182,469

 
2,141,389

Construction in progress
179,922

 
223,093

Property, plant and equipment, net
$
2,362,391

 
$
2,364,482

Depreciation expense was $55.7 million and $51.6 million for the three months ended March 31, 2017 and 2016, respectively.
8. Intangible Assets, Net
Intangible assets, net was as follows:
 
March 31, 2017
 
December 31, 2016
 
Weighted- Average Amortization Period
(Years)
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
 
(In thousands)
 
 
Amortizable assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Licenses and permits
$
20,427

 
$
(15,703
)
 
$
4,724

 
$
20,427

 
$
(15,307
)
 
$
5,120

 
3.0
Customer relationships
7,172

 
(4,367
)
 
2,805

 
7,172

 
(4,234
)
 
2,938

 
5.3
Rights-of-way and other
8,607

 
(3,443
)
 
5,164

 
8,538

 
(3,242
)
 
5,296

 
4.8
 
36,206

 
(23,513
)
 
12,693

 
36,137

 
(22,783
)
 
13,354

 
 
Unamortizable assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Franchise rights and trademarks
50,500

 

 
50,500

 
50,500

 

 
50,500

 
 
Liquor licenses
19,958

 

 
19,958

 
19,958

 

 
19,958

 
 
Intangible assets, net
$
106,664

 
$
(23,513
)
 
$
83,151

 
$
106,595

 
$
(22,783
)
 
$
83,812

 
 
Intangible asset amortization expense for the three months ended March 31, 2017 and March 31, 2016, was $0.7 million based on estimated useful lives ranging from 1 to 35 years.
Estimated amortization expense for the indicated periods is as follows (in thousands):
Remainder of 2017
$
2,167

2018
2,887

2019
2,219

2020
1,274

2021
987

2022
782


15

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9. Long-Term Debt
Long-term debt was as follows:
 
March 31,
2017
 
December 31,
2016
 
(In thousands)
Western obligations:
 
 
 
Revolving Credit Facility due 2019
$

 
$

Term Loan - 5.25% Credit Facility due 2020
532,125

 
533,500

6.25% Senior Unsecured Notes due 2021
350,000

 
350,000

Term Loan - 5.50% Credit Facility due 2023
371,250

 
372,500

Total Western obligations
1,253,375

 
1,256,000

NTI obligations:
 
 
 
Revolving Credit Facility due 2019
21,000

 

7.125% Senior Secured Notes due 2020
349,980

 
349,980

Total NTI obligations
370,980

 
349,980

WNRL obligations:
 
 
 
Revolving Credit Facility due 2018
20,300

 
20,300

7.5% Senior Notes due 2023
300,000

 
300,000

Total WNRL obligations
320,300

 
320,300

Less unamortized discount, premium and debt issuance costs
41,430

 
43,975

Long-term debt
1,903,225

 
1,882,305

Current portion of long-term debt
(10,500
)
 
(10,500
)
Long-term debt, net of current portion
$
1,892,725

 
$
1,871,805

As of March 31, 2017, annual maturities of long-term debt for the remainder of 2017 are $7.9 million. For 2018, 2019, 2020 and 2021, long-term debt maturities are $30.8 million, $31.5 million, $872.0 million and $355.0 million, respectively. Thereafter, total long-term debt maturities are $647.5 million.
Interest and debt expense were as follows:
 
Three Months Ended
 
March 31,
 
2017
 
2016
 
(In thousands)
Contractual interest:
 
 
 
Western obligations
$
18,465

 
$
12,052

NTI obligations
6,866

 
6,914

WNRL obligations
6,128

 
6,705

 
31,459

 
25,671

Amortization of loan fees
2,552

 
1,911

Amortization of original issuance discount
282

 

Other interest expense (income)
1,296

 
(176
)
Capitalized interest
(1,854
)
 
(725
)
Interest and debt expense
$
33,735

 
$
26,681

We amortize original issue discounts and financing fees using the effective interest method over the respective term of the debt. Our creditors have no recourse to the assets owned by either of NTI or WNRL, and the creditors of NTI and WNRL have no recourse to our assets or those of our other subsidiaries.

16

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Tesoro Merger
In anticipation of the merger with Western, Tesoro has incurred additional indebtedness to redeem or repay in full, as applicable, the outstanding debt of Western Refining and certain of its subsidiaries. Following completion of the Tesoro Merger, WNRL's 7.5% Senior Notes and any amounts outstanding under its revolving credit facility are expected to remain outstanding.
Western Obligations
Revolving Credit Facility
On May 27, 2016, we entered into the Second Amendment to the Third Amended and Restated Revolving Credit Agreement (the "Western 2019 Revolving Credit Facility"). The Revolving Credit Amendment amended the Western 2019 Revolving Credit Facility by, among other things, (i) permitting us to incur up to $500.0 million of additional secured indebtedness secured on a pari passu basis with the loans under the Western 2020 Term Loan Credit Facility (in the form of incremental term loans or bonds secured on a pari passu basis with the term loans) beyond what was permitted under the Western 2019 Revolving Credit Facility and (ii) modifying several triggers and thresholds based on borrowing availability under the Western 2019 Revolving Credit Facility.
On October 2, 2014, we entered into the Third Amended and Restated Revolving Credit Agreement. Lenders committed $900.0 million, all of which will mature on October 2, 2019. The commitments under the Western 2019 Revolving Credit Facility may be increased in the future to $1.4 billion, subject to certain conditions (including the agreement of financial institutions, in their sole discretion, to provide such additional commitments). The amended terms of the agreement include revised borrowing rates. Borrowings can be either base rate loans plus a margin ranging from 0.50% to 1.00% or LIBOR loans plus a margin ranging from 1.50% to 2.00%, subject to adjustment based upon the average excess availability. The Western 2019 Revolving Credit Facility also provides for a quarterly commitment fee ranging from 0.25% to 0.375% per annum, subject to adjustment based upon the average utilization ratio, and letter of credit fees ranging from 1.50% to 2.00% per annum payable quarterly, subject to adjustment based upon the average excess availability. Borrowing availability under the Western 2019 Revolving Credit Facility is tied to the amount of our and our restricted subsidiaries' eligible accounts receivable and inventory. The Western 2019 Revolving Credit Facility is guaranteed, on a joint and several basis, by certain of our subsidiaries and will be guaranteed by certain newly acquired or formed subsidiaries, subject to certain limited exceptions. The Western 2019 Revolving Credit Facility is secured by our cash and cash equivalents, accounts receivable and inventory. The Western 2019 Revolving Credit Facility contains certain covenants, including, but not limited to, limitations on debt, investments and dividends and the maintenance of a minimum fixed charge coverage ratio in certain circumstances.
As of and during the three month period ended March 31, 2017, we had no direct borrowings under the Western 2019 Revolving Credit Facility, with availability of $385.2 million at March 31, 2017. This availability is net of $97.9 million in outstanding letters of credit.
Term Loan Credit Agreement - 5.25%
On November 12, 2013, we entered into a term loan credit agreement (the "Western 2020 Term Loan Credit Facility"). The Western 2020 Term Loan Credit Facility provides for loans of $550.0 million, matures on November 12, 2020, and provides for quarterly principal payments of $1.4 million until September 30, 2020, with the remaining balance then outstanding due on the maturity date. On May 27, 2016, the Company entered into a third amendment of the Western 2020 Term Loan Credit Facility. The revised terms under the amendment provide for additional capacity to make restricted payments including dividends and repurchase of the Company’s outstanding common stock, inclusion of equity interests of master limited partnership subsidiaries as “replacement assets” for purposes of asset sale mandatory prepayment and changes to the use of proceeds of the incremental term loan available under the Term Loan. The third amendment also increased the incremental availability under the Western 2020 Term Loan Credit Facility from $200.0 million, prior to the amendment, to $700.0 million.
Following the third amendment, the Western 2020 Term Loan Credit Facility bears interest at a rate based either on the base rate (as defined in the Western 2020 Term Loan Credit Facility) plus 2.25% or the LIBOR Rate (as defined in the Western 2020 Term Loan Credit Facility) plus 4.25% (subject to a LIBOR Rate floor of 1.00%). The current interest rate based on these criteria is 5.25%. Our effective rate of interest, including contractual interest and amortization of loan fees, for the Western 2020 Term Loan Credit Facility was 5.80% as of March 31, 2017.
The Western 2020 Term Loan Credit Facility is secured by the El Paso and Gallup refineries and the equity of NT InterHoldCo LLC, a wholly-owned subsidiary of Western, and is fully and unconditionally guaranteed on a joint and several basis by certain of Western's material wholly-owned subsidiaries. The Western 2020 Term Loan Credit Facility contains

17

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

customary restrictive covenants including limitations on debt, investments and dividends and does not contain any financial maintenance covenants.
6.25% Senior Unsecured Notes
On March 25, 2013, we entered into an indenture (the "Western 2021 Indenture") for the issuance of $350.0 million in aggregate principal amount of 6.25% Senior Unsecured Notes due 2021 (the "Western 2021 Senior Unsecured Notes"). The Western 2021 Senior Unsecured Notes are guaranteed on a senior unsecured basis by certain of our wholly-owned domestic restricted subsidiaries. We pay interest on the Western 2021 Senior Unsecured Notes semi-annually in arrears on April 1 and October 1 of each year. The Western 2021 Senior Unsecured Notes mature on April 1, 2021. The effective rate of interest, including contractual interest and amortization of loan fees, for the Western 2021 Senior Unsecured Notes was 6.52% as of March 31, 2017.
The Western 2021 Indenture contains covenants that limit our ability to, among other things: pay dividends or make other distributions in respect of our capital stock or make other restricted payments; make certain investments; sell certain assets; incur additional debt or issue certain preferred shares; create liens on certain assets to secure debt; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; restrict dividends or other payments from restricted subsidiaries; and enter into certain transactions with our affiliates. The Western 2021 Indenture also provides for events of default that if any of them occur would permit or require the principal, premium, if any, and interest on all the then outstanding Western 2021 Senior Unsecured Notes to be due and payable immediately.
Term Loan Credit Agreement - 5.50%
On June 23, 2016, as an incremental supplement to the Western 2020 Term Loan Credit Facility, we incurred $500.0 million in new term debt that matures on June 23, 2023 (the "Western 2023 Term Loan Credit Facility"). The proceeds from the Western 2023 Term Loan Credit Facility were net of original issue discount and other fees totaling $17.0 million. We used these proceeds to partially fund the cash portion of the NTI Merger consideration. The Western 2023 Term Loan Credit Facility provides for quarterly principal payments of $1.3 million payable on the last business day of each March, June, September and December, with the remaining principal amount due on June 23, 2023. The Western 2023 Term Loan Credit Facility is secured by both the El Paso and Gallup refineries and by the equity of NT InterHoldCo LLC and is fully and unconditionally guaranteed on a joint and several basis by certain of Western's material wholly-owned subsidiaries. The Western 2023 Term Loan Credit Facility bears interest at a rate based either on the base rate plus 3.50% or the LIBOR Rate plus 4.50% (subject to a LIBOR Rate floor of 1.00%). On December 29, 2016, we made a non-mandatory prepayment of $125.0 million under our Western 2023 Term Loan Credit Facility. The effective rate of interest, including contractual interest and amortization of original issue discount and other loan fees, for the Western 2023 Term Loan Credit Facility was 6.30% as of March 31, 2017.
NTI Obligations
Revolving Credit Facility
On September 29, 2014, certain subsidiaries of NTI entered into the Amended and Restated Revolving Credit Agreement (the "NTI Revolving Credit Facility"), increasing the aggregate principal amount available prior to the amendment and restatement from $300.0 million to $500.0 million. The NTI Revolving Credit Facility, which matures on September 29, 2019, incorporates a borrowing base tied to eligible accounts receivable and inventory and provides for up to $500.0 million for the issuance of letters of credit and up to $45.0 million for swing line loans. The NTI Revolving Credit Facility may be increased up to a maximum aggregate principal amount of $750.0 million, subject to certain conditions (including the agreement of financial institutions, in their sole discretion, to provide such additional commitments).
Obligations under the NTI Revolving Credit Facility are secured by substantially all of NTI’s assets. Indebtedness under the NTI Revolving Credit Facility is recourse to its general partner, Northern Tier Energy GP LLC ("NTI LLC"), and certain of its subsidiaries that are borrowers thereunder and is guaranteed by NTI and certain of its subsidiaries. Borrowings under the NTI Revolving Credit Facility bear interest at either (a) a base rate plus an applicable margin (ranging between 0.50% and 1.00%) or (b) a LIBOR rate plus an applicable margin (ranging between 1.50% and 2.00%), in each case subject to adjustment based upon the average historical excess availability. In addition to paying interest on outstanding borrowings, NTI is also required to pay a quarterly commitment fee ranging from 0.250% to 0.375% subject to adjustment based upon the average utilization ratio and letter of credit fees ranging from 1.50% to 2.00% subject to adjustment based upon the average historical excess availability. The NTI Revolving Credit Facility contains certain covenants, including but not limited to, limitations on debt, investments and dividends and the maintenance of a minimum fixed charge coverage ratio in certain circumstances.

18

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

At March 31, 2017, the availability under the NTI Revolving Credit Facility was $266.8 million. This availability is net of $21.0 million in direct borrowings and $44.9 million in outstanding letters of credit. The effective rate of interest, including contractual interest and amortization of loan fees, for the NTI Revolving Credit Facility was 5.51% as of March 31, 2017.
7.125% Secured Notes
On November 8, 2012, NTI LLC and Northern Tier Finance Corporation (together with NTI LLC, the "NTI 2020 Notes Issuers"), issued $275.0 million in aggregate principal amount of 7.125% senior secured notes due 2020 (the "NTI 2020 Secured Notes"). NTI increased the principal amount of the NTI 2020 Secured Notes in September 2014, by an additional $75.0 million in principal value at a premium of $4.2 million. This additional offering was issued under the same indenture as the existing NTI 2020 Secured Notes and the new notes issued have the same terms as the existing notes. The offering generated cash proceeds of $79.2 million including an issuance premium of $4.2 million. The issuance premium will be amortized to interest expense over the remaining life of the notes. On October 17, 2016, NTI commenced a tender offer to repurchase for cash up to $195.0 million aggregate principal amount of the NTI 2020 Secured Notes. Notes totaling $0.02 million were tendered for redemption. The effective rate of interest, including contractual interest and amortization of debt premium and of loan fees, for the NTI 2020 Secured Notes was 6.91% as of March 31, 2017.
The obligations under the NTI 2020 Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by NTI and on a senior secured basis by (i) all of NTI LLC’s restricted subsidiaries that borrow, or guarantee obligations, under the NTI Revolving Credit Facility or any other indebtedness of NTI LLC or another subsidiary of NTI LLC that guarantees the NTI 2020 Secured Notes and (ii) all other material wholly-owned domestic subsidiaries of NTI LLC. The indenture governing the NTI 2020 Secured Notes contains covenants that limit or restrict dividends or other payments from restricted subsidiaries. Indebtedness under the NTI 2020 Secured Notes is guaranteed by NTI and certain of its subsidiaries.
WNRL Obligations
Revolving Credit Facility
On October 16, 2013, WNRL entered into a $300.0 million senior secured revolving credit facility (the "WNRL Revolving Credit Facility"). On September 15, 2016, in connection with the St. Paul Park Logistics Transaction, WNRL entered into an agreement to increase the total commitment of the WNRL Revolving Credit Facility (the "Amendment") to $500.0 million. WNRL has the ability to increase the total commitment of the WNRL Revolving Credit Facility by up to $150.0 million for a total facility size of up to $650.0 million, subject to receiving increased commitments from lenders and to the satisfaction of certain conditions. The WNRL Revolving Credit Facility includes a $25.0 million sub-limit for standby letters of credit and a $10.0 million sub-limit for swing line loans. Obligations under the WNRL Revolving Credit Facility and certain cash management and hedging obligations are guaranteed by all of WNRL's subsidiaries and, with certain exceptions, will be guaranteed by any formed or acquired subsidiaries. Obligations under the WNRL Revolving Credit Facility are secured by a first priority lien on substantially all of WNRL's and its subsidiaries' significant assets. The WNRL Revolving Credit Facility will mature on October 16, 2018. Borrowings under the WNRL Revolving Credit Facility bear interest at either a base rate plus an applicable margin ranging from 0.75% to 1.75%, or at LIBOR plus an applicable margin ranging from 1.75% to 2.75%. The applicable margin will vary based upon WNRL's Consolidated Total Leverage Ratio, as defined in the WNRL Revolving Credit Facility.
In addition to the increased facility size, the Amendment amended the WNRL Revolving Credit Facility by, among other things, (a) adding an anti-cash hoarding provision and (b) permitting WNRL to increase the total leverage ratio permitted thereunder from 4.50:1.00 to 5.00:1.00 following any material permitted acquisition through the last day of the second full fiscal quarter following such acquisition. The incremental commitments established by the Amendment benefit from the same covenants, events of default, guarantees and security as the existing commitments under the WNRL Revolving Credit Facility.
On October 30, 2015, WNRL borrowed $145.0 million under the WNRL Revolving Credit Facility to partially fund the purchase of the TexNew Mex Pipeline System from Western. During the year ended December 31, 2016, we repaid these direct borrowings using the net proceeds generated from our equity offering during the second quarter of 2016 and from cash-on-hand. On September 15, 2016, to partially fund the purchase of the St. Paul Park Logistics Assets, WNRL borrowed $20.3 million under the WNRL Revolving Credit Facility.
The WNRL Revolving Credit Facility contains covenants that limit or restrict WNRL's ability to make cash distributions. WNRL is required to maintain certain financial ratios that are tested on a quarterly basis for the immediately preceding four quarter period. At March 31, 2017, the availability under the WNRL Revolving Credit Facility was $479.0 million, net of $20.3 million in direct borrowings and $0.7 million in outstanding letters of credit. WNRL had no swing line borrowings outstanding under the WNRL Revolving Credit Facility as of March 31, 2017. The interest rate for the borrowings under the

19

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

WNRL Revolving Credit Facility was 4.75% as of March 31, 2017. The effective rate of interest, including contractual interest and amortization of loan fees, for the WNRL Revolving Credit Facility was 3.75% as of March 31, 2017.
7.5% Senior Notes
On February 11, 2015, WNRL entered into an indenture (the “WNRL Indenture”) among WNRL, WNRL Finance Corp., a Delaware corporation and wholly-owned subsidiary of the Partnership (“Finance Corp.” and together with the Partnership, the “Issuers”), the Guarantors named therein and U.S. Bank National Association, as trustee (the “Trustee”) under which the Issuers issued $300.0 million in aggregate principal amount of 7.5% Senior Notes due 2023. The Partnership will pay interest on the 7.5% Senior Notes semi-annually in cash in arrears on February 15 and August 15 of each year, beginning on August 15, 2015. The 7.5% Senior Notes will mature on February 15, 2023. WNRL used the proceeds from the notes to repay the full balance due under the WNRL Revolving Credit Facility on February 11, 2015. The effective rate of interest, including contractual interest and amortization of loan fees, for the 7.5% Senior Notes was 7.78% as of March 31, 2017.
The WNRL Indenture contains covenants that limit WNRL’s and its restricted subsidiaries’ ability to, among other things, (i) incur, assume or guarantee additional indebtedness or issue preferred units, (ii) create liens to secure indebtedness, (iii) pay distributions on equity securities, repurchase equity securities or redeem subordinated indebtedness, (iv) make investments, (v) restrict distributions, loans or other asset transfers from the Partnership’s restricted subsidiaries, (vi) consolidate with or merge with or into, or sell substantially all of the Partnership’s properties to, another person, (vii) sell or otherwise dispose of assets, including equity interests in subsidiaries and (viii) enter into transactions with affiliates. These covenants are subject to a number of important limitations and exceptions. The WNRL Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all the then outstanding 7.5% Senior Notes to be due and payable immediately.
10. Equity
Changes to equity during the three months ended March 31, 2017, were as follows:
 
Western Shareholders' Equity
 
Non-controlling Interest
 
Total Equity
 
(In thousands)
Balance at December 31, 2016
$
1,696,860

 
$
600,100

 
$
2,296,960

Net income
11,568

 
9,428

 
20,996

Other comprehensive loss, net of tax
(44
)
 

 
(44
)
Dividends
(42,543
)
 

 
(42,543
)
Stock-based compensation
(2,725
)
 
(96
)
 
(2,821
)
Distributions to non-controlling interests

 
(12,629
)
 
(12,629
)
Balance at March 31, 2017
$
1,663,116

 
$
596,803

 
$
2,259,919

Changes to equity during the three months ended March 31, 2016, were as follows:
 
Western Shareholders' Equity
 
Non-controlling Interest
 
Total Equity
 
(In thousands)
Balance at December 31, 2015
$
1,299,297

 
$
1,646,609

 
$
2,945,906

Net income
30,538

 
9,047

 
39,585

Dividends
(35,601
)
 

 
(35,601
)
Stock-based compensation
328

 
4,657

 
4,985

Tax deficiency from stock-based compensation
(328
)
 

 
(328
)
Distributions to non-controlling interests

 
(28,747
)
 
(28,747
)
Treasury stock purchases
(75,000
)
 

 
(75,000
)
Balance at March 31, 2016
$
1,219,234

 
$
1,631,566

 
$
2,850,800


20

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Share Issuance
Pursuant to the NTI Merger Agreement, we issued 17.1 million shares of Western common stock including 11.6 million treasury shares on June 23, 2016. See Note 21, Acquisitions, for further discussion of the NTI Merger.
Effective upon the closing of the Tesoro Merger, each share of our common stock will be converted into and become exchangeable for, at the election of the holder of each share of our common stock, either (a) $37.30 in cash or (b) 0.4350 shares of Tesoro common stock, in each case without interest, subject to the terms and conditions. See Note 23, Tesoro Merger, for further discussion of the Tesoro Merger.
Share Repurchase Programs
Our board of directors has periodically approved various share repurchase programs authorizing us to repurchase up to $200 million of our outstanding common stock, per program. The September 2015 share repurchase program expired on December 31, 2016.
Dividends
Under the Tesoro Merger Agreement, we have agreed that, until the completion of the Tesoro Merger, we will not declare, set aside, make or pay any dividend or other distribution in respect of any of our capital stock, except for regular quarterly cash dividends to the holders of shares of our common stock in an amount not in excess of $0.38 per share.
The table below summarizes our 2017 cash dividend declarations, payments and scheduled payments:
 
Declaration Date
 
Record Date
 
Payment Date
 
Dividend per Common Share
 
Total Payment
(In thousands)
First quarter
January 4
 
January 18
 
February 2
 
$
0.38

 
$
41,305

Second quarter (1)
April 13
 
April 26
 
May 11
 
0.38

 

Total
 
 
 
 
 
 
 
 
$
41,305

(1)
The second quarter 2017 cash dividend of $0.38 per common share will result in an estimated aggregate payment of $41.4 million.
WNRL Distributions
The table below summarizes WNRL's 2017 quarterly distribution declarations, payments and scheduled payments:
Declaration Date
 
Record Date
 
Payment Date
 
Distribution per Common and Subordinated Unit
January 31, 2017
 
February 13, 2017
 
March 1, 2017
 
$
0.4375

April 28, 2017
 
May 9, 2017
 
May 23, 2017
 
0.4525

Total
 
$
0.8900

In addition to its quarterly distributions, WNRL paid incentive distributions of $2.1 million and $0.8 million for the three months ended March 31, 2017 and 2016, respectively, to Western as its general partner and holder of its incentive distribution rights.
11. Income Taxes
Compared to the federal statutory rate of 35%, our effective tax rates for the three months ended March 31, 2017 and 2016, were 20.6% and 32.0%, respectively. The effective tax rates for the three months ended March 31, 2017 and 2016, were lower than the statutory rate primarily due to the reduction of taxable income associated with the non-controlling interests in NTI and WNRL. As of June 23, 2016, all of NTI's taxable income became subject to income taxes at the Western consolidated level.
We are subject to examination by the Internal Revenue Service for tax years ended December 31, 2013, or after and by various state and local taxing jurisdictions for tax years ended December 31, 2012, or after.
We believe that it is more likely than not that the benefit from certain state net operating loss ("NOL") carryforwards related to the Yorktown refinery will not be realized. Accordingly, a valuation allowance of $17.0 million was previously provided against the deferred tax assets relating to these NOL carryforwards at March 31, 2017. There was no change in the valuation allowance for the Yorktown NOL carryforwards from December 31, 2016.

21

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

As of March 31, 2017, we have recorded a liability of $50.3 million for unrecognized tax benefits, of which $13.4 million would affect our effective tax rate if recognized. There was a decrease of $5.5 million in our unrecognized tax benefits for the three months ended March 31, 2017. We believe that it is reasonably possible that a decrease of up to $2.1 million in unrecognized tax benefits, resulting from the expiration of statutes of limitations in various tax jurisdictions, may be necessary within the coming year. We also recognized $0.5 million and $0.2 million in interest and penalties for three months ended March 31, 2017 and 2016, respectively.
12. Retirement Plans
We fully recognize the obligations associated with our retiree healthcare and other postretirement plans and single-employer defined benefit cash balance plan in our financial statements.
Pensions
The net periodic benefit cost associated with our cash balance plan for the three months ended March 31, 2017 and 2016, was $0.04 million and $0.6 million, respectively.
Postretirement Obligations
The net periodic benefit cost associated with our postretirement medical benefit plans for the three months ended March 31, 2017 and 2016, was $0.001 million and $0.03 million, respectively.
Our benefit obligation at December 31, 2016, for our postretirement medical benefit plans was $5.0 million. We fund our medical benefit plans on an as-needed basis.
The following table presents cumulative changes in other comprehensive income related to our benefit plans included as a component of equity for the periods presented, net of income tax. The related expenses are included in direct operating expenses in the Condensed Consolidated Statements of Operations.
 
Three Months Ended
 
March 31,
 
2017
 
2016
 
(In thousands)
Beginning of period balance
$
1,226

 
$
651

Amortization of net prior service cost
(73
)
 

Reclassification of loss to income
1

 

Income tax
28

 

End of period balance
$
1,182

 
$
651

Defined Contribution Plans
Western sponsors defined contribution plans under which Western, NTI and WNRL participants may contribute a percentage of their eligible compensation to various investment choices offered by these plans. For the three months ended March 31, 2017 and 2016, we expensed $6.2 million and $4.6 million, respectively, in connection with these plans.
13. Crude Oil and Refined Product Risk Management
We enter into crude oil forward contracts primarily to facilitate the supply of crude oil to our refineries. During the three months ended March 31, 2017, we entered into net forward, fixed-price contracts to physically receive and deliver crude oil that qualify as normal purchases and normal sales and are exempt from derivative reporting requirements.
We use crude oil and refined products futures, swap contracts or options to mitigate the change in value for a portion of our LIFO inventory volumes subject to market price fluctuations and swap contracts to fix the margin on a portion of our future gasoline and distillate production. The physical volumes are not exchanged; these contracts are net settled with cash. These hedging activities do not qualify for hedge accounting treatment.
The fair value of these contracts is reflected in the Condensed Consolidated Balance Sheets and the related net gain or loss is recorded within cost of products sold in the Condensed Consolidated Statements of Operations. Quoted prices for similar assets or liabilities in active markets (Level 2) are considered to determine the fair values of the majority of the contracts for the purpose of marking to market the hedging instruments at each period end.

22

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following tables summarize our economic hedging activity recognized within cost of products sold for the three months ended March 31, 2017 and 2016, and open commodity hedging positions as of March 31, 2017 and December 31, 2016:
 
Three Months Ended
 
March 31,
 
2017
 
2016
 
(In thousands)
Economic hedging results
 
 
 
Realized hedging gain, net
$
39,787

 
$
17,803

Unrealized hedging loss, net
(4,452
)
 
(12,483
)
Total hedging gain, net
$
35,335

 
$
5,320

 
March 31,
2017
 
December 31,
2016
 
(In thousands)
Open commodity hedging instruments (barrels)
 
 
 
Crude oil differential swaps, net long positions
1,369

 
2,124

Crude oil futures, net short positions
(1,647
)
 
(1,703
)
Refined product price and crack spread swaps, net short positions
(2,419
)
 
(6,632
)
Total open commodity hedging instruments, net short positions
(2,697
)
 
(6,211
)
 
 
 
 
Fair value of outstanding contracts, net
 
 
 
Other current assets
$
5,824

 
$
13,649

Other assets
1,150

 
8

Accrued liabilities
(9,367
)
 
(10,827
)
Other long-term liabilities

 
(771
)
Fair value of outstanding contracts - unrealized gain (loss), net
$
(2,393
)
 
$
2,059

Offsetting Assets and Liabilities
Western's derivative financial instruments are subject to master netting arrangements to manage counterparty credit risk associated with derivatives; however, Western does not offset the fair value amounts recorded for derivative instruments under these agreements in the Condensed Consolidated Balance Sheets. We have posted or received margin collateral with various counterparties in support of our hedging and trading activities. The margin collateral posted or received is required by counterparties as collateral deposits and cannot be offset against the fair value of open contracts except in the event of default.

23

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table presents offsetting information regarding Western's commodity hedging contracts as of March 31, 2017 and December 31, 2016:
 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheet
As of March 31, 2017
 
 
 
(In thousands)
Financial assets:
 
 
 
 
 
Current assets
$
9,412

 
$
(3,588
)
 
$
5,824

Other assets
1,251

 
(101
)
 
1,150

Financial liabilities:
 
 
 
 
 
Accrued liabilities
(13,044
)
 
3,677

 
(9,367
)
Other long-term liabilities
(12
)
 
12

 

 
$
(2,393
)
 
$

 
$
(2,393
)
 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheet
As of December 31, 2016
 
 
 
(In thousands)
Financial assets:
 
 
 
 
 
Current assets
$
18,929

 
$
(5,280
)
 
$
13,649

Other assets
677

 
(669
)
 
8

Financial liabilities:
 
 
 
 
 
Accrued liabilities
(17,547
)
 
6,720

 
(10,827
)
Other long-term liabilities

 
(771
)
 
(771
)
 
$
2,059

 
$

 
$
2,059

Our commodity hedging activities are initiated within guidelines established by management and approved by our board of directors. Due to mark-to-market accounting during the term of the various commodity hedging contracts, significant unrealized, non-cash net gains and losses could be recorded in our results of operations. Additionally, we may be required to collateralize any mark-to-market losses on outstanding commodity hedging contracts.
As of March 31, 2017, we had the following outstanding crude oil and refined product hedging instruments that were entered into as economic hedges. Settlement prices for our distillate crack spread swaps range from $15.18 to $16.67 per contract. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels):
 
Notional Contract Volumes by Year of Maturity
 
2017
 
2018
Inventory positions (futures and swaps):
 
 
 
Crude oil differential swaps, net long positions
1,369

 

Crude oil futures, net short positions
(1,647
)
 

Distillate - net long positions
225

 

Refined products - net short positions
(1,214
)
 

Natural gas futures - net long positions
221

 

Refined product positions (crack spread swaps):
 
 
 
Distillate - net short positions
(225
)
 
(1,200
)
Unleaded gasoline - net short positions
(225
)
 


24

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

14. Stock-Based Compensation
Tesoro Merger
Effective upon the closing of the Tesoro Merger, each of the outstanding RSUs that were granted prior to December 31, 2016 will vest and be settled in cash. Each of the outstanding phantom stock awards under the NTI LTIP and 123,570 RSUs granted on January 18, 2017 will be automatically converted into the right to acquire or receive benefits measured by the value of the number of shares of Tesoro common stock, rounded down to the nearest whole number, equal to the number of shares of our common stock subject to such award immediately prior to the effective time of the First Tesoro Merger multiplied by the exchange ratio. See Note 23, Tesoro Merger, for additional information.
Western Incentive Plans
The Western Refining 2006 Long-Term Incentive Plan (the "2006 LTIP") and the Amended and Restated 2010 Incentive Plan of Western Refining (the "2010 Incentive Plan") allow for restricted share unit awards ("RSUs") among other forms of awards. As of March 31, 2017, there were 19,856 and 2,336,531 shares of common stock reserved for future grants under the 2006 LTIP and the 2010 Incentive Plan, respectively. Awards granted under both plans vest over a scheduled vesting period of either one, three or five years and their market value at the date of the grant is amortized over the vesting period on a straight-line basis.
As of March 31, 2017, there were 594,318 unvested RSUs outstanding. We recorded stock compensation of $2.1 million and $1.0 million for the three months ended March 31, 2017 and 2016, respectively, which is included in selling, general and administrative expenses.
As of March 31, 2017, the aggregate grant date fair value of outstanding RSUs was $19.2 million. The aggregate intrinsic value of outstanding RSUs was $20.8 million. The unrecognized compensation cost of unvested RSUs was $17.1 million. Unrecognized compensation costs for RSUs will be recognized over a weighted-average period of 2.3 years.
The tax deficiency related to the RSUs that vested during the three months ended March 31, 2016, was $0.3 million using a statutory blended rate of 38.1%. The aggregate grant date fair value of the RSUs that vested during the three months ended March 31, 2016, was $3.2 million. The related aggregate intrinsic value of these RSUs was $2.4 million at the vesting date.
The following table summarizes our RSU activity for the three months ended March 31, 2017:
 
Number
of Units
 
Weighted Average
Grant Date
Fair Value
Not vested at December 31, 2016
658,506

 
$
32.25

Awards granted
123,570

 
35.24

Awards vested
(187,758
)
 
34.11

Awards forfeited

 

Not vested at March 31, 2017
594,318

 
32.28

Amended and Restated Northern Tier Energy LP 2012 Long-Term Incentive Plan
Effective upon the closing of the NTI Merger, Western adopted and assumed NTI's equity compensation plan and amended and renamed the plan as the Amended and Restated Northern Tier Energy LP 2012 Long-Term Incentive Plan ("NTI LTIP"). Modifications to the NTI LTIP include, among other things, a change to the unit of equity from an NTI common unit to a share of Western common stock. The amendment changes the administrator of the NTI LTIP from the board of directors of NTI's general partner to Western's board of directors or its applicable committee. Consistent with the terms of the NTI Merger Agreement, all unvested equity awards at the time of the NTI Merger were exchanged for Western phantom stock awards and performance cash awards under the NTI LTIP.
We incurred equity-based compensation expense of $3.0 million and $4.6 million for the three months ended March 31, 2017 and 2016, respectively.
The NTI LTIP provides, among other awards, for grants of stock options, restricted stock, phantom stock, dividend equivalent rights, stock appreciation rights and other awards that derive their value from the market price of Western's common stock. As of March 31, 2017, there was 448,043 common share equivalents reserved for future grants under the NTI LTIP.

25

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We determined the fair value of the phantom stock based on the closing price of Western common stock on the grant date. We amortize the estimated fair value of the phantom stock on a straight-line basis over the scheduled vesting periods of individual awards.
The aggregate grant date fair value of non-vested phantom stock outstanding as of March 31, 2017, was $7.3 million. The aggregate intrinsic value of such phantom stock was $12.6 million. Total unrecognized compensation cost related to unvested phantom stock totaled $4.6 million as of March 31, 2017, that is expected to be recognized over a weighted-average period of 1.5 years.
A summary of our phantom stock award activity under the NTI LTIP for the three months ended March 31, 2017, is set forth below:
 
Number of Phantom Stock
 
Weighted Average
Grant Date
Fair Value
Not vested at December 31, 2016
662,372

 
$
20.25

Awards granted

 

Awards vested
(298,744
)
 
20.25

Awards forfeited
(10,858
)
 
20.25

Not vested at March 31, 2017
352,770

 
20.25

Western Refining Logistics, LP 2013 Long-Term Incentive Plan
The Western Refining Logistics, LP 2013 Long-Term Incentive Plan (the "WNRL LTIP") provides, among other awards, for grants of phantom units and distribution equivalent rights. As of March 31, 2017, there were 4,075,073 phantom units reserved for future grants under the WNRL LTIP.
The fair value of the phantom units is determined based on the closing price of WNRL common units on the grant date. The estimated fair value of the phantom units is amortized on a straight-line basis over the scheduled vesting periods of individual awards. WNRL incurred unit-based compensation expense of $0.6 million and $0.5 million for the three months ended March 31, 2017 and 2016, respectively.
The aggregate grant date fair value of non-vested phantom units outstanding as of March 31, 2017, was $6.6 million. The aggregate intrinsic value of such phantom units was $6.4 million. Total unrecognized compensation cost related to unvested phantom units totaled $6.2 million as of March 31, 2017, that is expected to be recognized over a weighted-average period of 2.3 years.
A summary of WNRL's phantom unit award activity for the three months ended March 31, 2017, is set forth below:
 
Number of Phantom Units
 
Weighted Average
Grant Date
Fair Value
Not vested at December 31, 2016
285,155

 
$
26.42

Awards granted
52,654

 
24.70

Awards vested
(86,012
)
 
26.45

Awards forfeited

 

Not vested at March 31, 2017
251,797

 
26.05

15. Earnings per Share
We follow the provisions related to the accounting treatment of certain participating securities for the purpose of determining earnings per share. These provisions address share-based payment awards that have not vested and that contain nonforfeitable rights to dividend equivalents and state that they are participating securities and should be included in the computation of earnings per share pursuant to the two-class method.
Diluted earnings per common share includes the effects of potentially dilutive shares that consist of unvested RSUs and phantom stock. These awards are non-participating securities due to the forfeitable nature of their associated dividend

26

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

equivalent rights, prior to vesting and we do not consider the RSUs or phantom stock in the two-class method when calculating earnings per share.
The computation of basic and diluted earnings per share under the two-class method is presented as follows:
 
Three Months Ended
 
March 31,
 
2017
 
2016
 
(In thousands, except per share data)
Basic earnings per common share:
 
 
 
Allocation of earnings:
 
 
 
Net income attributable to Western Refining, Inc.
$
11,568

 
$
30,538

Distributed earnings
(42,543
)
 
(35,601
)
Undistributed income (loss) attributable to Western Refining, Inc.
$
(30,975
)
 
$
(5,063
)
Weighted-average number of common shares outstanding
108,669

 
92,078

Basic earnings per common share:
 
 
 
Distributed earnings per share
$
0.39

 
$
0.39

Undistributed earnings (loss) per share
(0.29
)
 
(0.05
)
Basic earnings per common share
$
0.10

 
$
0.34

 
 
 
 
Diluted earnings per common share:
 
 
 
Net income attributable to Western Refining, Inc.
$
11,568

 
$
30,538

Weighted-average diluted common shares outstanding
109,155

 
92,144

Diluted earnings per common share
$
0.10

 
$
0.33

The computation of the weighted average number of diluted shares outstanding is presented below:
 
Three Months Ended
 
March 31,
 
2017
 
2016
 
(In thousands)
Weighted-average number of common shares outstanding
108,669

 
92,078

Restricted share units and phantom stock
486

 
66

Weighted-average number of diluted shares outstanding
109,155

 
92,144

A shareholder's interest in our common stock could become diluted as a result of vestings of RSUs and phantom stock. In calculating our fully diluted earnings per common share, we consider the impact of RSUs and phantom stock that have not vested. We include unvested awards in our diluted earnings calculation when the trading price of our common stock equals or exceeds the per share grant price.

27

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

16. Cash Flows
Supplemental Cash Flow Information
Supplemental disclosures of cash flow information were as follows:
 
Three Months Ended
 
March 31,
 
2017
 
2016
 
(In thousands)
Non-cash operating activities were as follows:
 
 
 
Income taxes paid
$
9,130

 
$
11,215

Interest paid, excluding amounts capitalized
26,811

 
20,676

Non-cash investing activities were as follows:
 
 
 
Assets acquired through capital lease obligations
$
12,089

 
$
328

Accrued capital expenditures
24,321

 
46,045

Transfer of capital spares from fixed assets to other assets

 
699

Non-cash financing activities were as follows:
 
 
 
Distributions accrued on unvested NTI equity awards
$

 
$
3,964

17. Leases and Other Commitments
We have commitments under various operating leases with initial terms greater than one year for retail convenience stores, office space, warehouses, cardlocks, railcars and other facilities, some of which have renewal options and rent escalation clauses. These leases have terms that will expire on various dates through 2040. We expect that in the normal course of business, these leases will be renewed or replaced by other leases. Certain of our lease agreements provide for the fair value purchase of the leased asset at the end of the lease. Rent expense for operating leases that provide for periodic rent escalations or rent holidays over the term of the lease and for renewal periods that are reasonably assured at the inception of the lease are recognized on a straight-line basis over the term of the lease.
In the normal course of business, we also have long-term commitments to purchase products and services, such as natural gas, electricity, water and transportation services for use by our refineries and logistic assets at market-based rates. We are also party to various refined product and crude oil supply and exchange agreements.
Under a sulfuric acid regeneration and sulfur gas processing agreement with Veolia North America, Inc. (“Veolia”), Veolia owns and operates two sulfuric acid regeneration units on property we lease to Veolia within our El Paso refinery. Our annual estimated cost for processing sulfuric acid and sulfur gas under this agreement is $15.7 million through March of 2028.
In November 2007, we entered into a ten-year lease agreement for office space in downtown El Paso, Texas. In December 2007, we entered into an eleven-year lease agreement for an office building in Tempe, Arizona. The building centralized our operational and administrative offices in the Phoenix area.
We are party to 47 capital leases, with initial terms of 20 years, expiring in 2025 through 2037. The current portion of our capital lease obligation of $1.3 million and $1.3 million is included in accrued liabilities and the non-current portion of $65.9 million and $54.2 million is included in lease financing obligations in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, respectively. The capital lease obligations include a deferred gain of $0.2 million. These capital leases were discounted using annual rates from 5.00% to 16.66%. Total remaining interest related to these leases was $56.9 million and $40.0 million at March 31, 2017 and December 31, 2016, respectively. Average annual payments, including interest, for the next five years are $7.0 million with the remaining $90.9 million due through 2037.

28

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table presents our future minimum lease commitments under capital leases and non-cancelable operating leases that have lease terms of one year or more (in thousands) as of March 31, 2017:
 
Operating
 
Capital
Remaining 2017
$
40,747

 
$
4,976

2018
52,509

 
6,722

2019
47,269

 
6,854

2020
42,420

 
7,067

2021
43,284

 
7,238

2022 and thereafter
305,646

 
90,932

Total minimum lease payments
$
531,875

 
123,789

Less amount that represents interest
 
 
56,876

Present value of net minimum capital lease payments
 
 
$
66,913

Total rental expense was $17.6 million and $17.7 million for the three months ended March 31, 2017 and March 31, 2016, respectively. Contingent rentals and subleases were not significant in any period.
18. Commitments and Contingencies
Environmental Matters
Similar to other petroleum refiners, our operations are subject to extensive and periodically changing federal and state environmental regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. Many of these regulations are becoming increasingly stringent and the cost of compliance can be expected to increase over time. Our policy is to accrue environmental and clean-up related costs of a non-capital nature when it is probable that a liability has been incurred and the amount can be reasonably estimated. Such estimates may be subject to revision in the future as regulations and other conditions change.
Periodically, we receive communications from various federal, state and local governmental authorities asserting violations of environmental laws and/or regulations. These governmental entities may also propose or assess fines or require corrective action for these asserted violations. We intend to respond in a timely manner to all such communications and to take appropriate corrective action. We do not anticipate that any such matters currently asserted will have a material impact on our financial condition, results of operations or cash flows. As of March 31, 2017 and December 31, 2016, we had consolidated environmental accruals of $12.8 million and $13.8 million, respectively.
El Paso Refinery
Prior spills, releases and discharges of petroleum or hazardous substances have impacted the groundwater and soils in certain areas at and adjacent to our El Paso refinery. We are currently remediating, in conjunction with Chevron U.S.A., Inc. ("Chevron"), these areas in accordance with certain agreed administrative orders with the Texas Commission on Environmental Quality (the "TCEQ"). Pursuant to our purchase of the north side of the El Paso refinery from Chevron, Chevron retained responsibility to remediate its solid waste management units in accordance with its Resource Conservation Recovery Act ("RCRA") permit that Chevron has fulfilled. Chevron also retained control of and liability for certain groundwater remediation responsibilities that are ongoing.
In May 2000, we entered into an Agreed Order with the TCEQ for remediation of the south side of our El Paso refinery property. We purchased a non-cancelable Pollution and Legal Liability and Clean-Up Cost Cap Insurance policy that covers environmental clean-up costs related to contamination that occurred prior to December 31, 1999, including the costs of the Agreed Order activities. The insurance provider assumed responsibility for all environmental clean-up costs related to the Agreed Order up to $20.0 million, of which $6.5 million remained as of March 31, 2017. In addition, a subsidiary of Chevron is obligated under a settlement agreement to pay 60% of any Agreed Order environmental clean-up costs that exceed the $20.0 million policy coverage.
El Paso 2017 EPA RMP Order. In February 2017, we received from the U.S. Environmental Protection Agency ("EPA") a draft administrative order with a proposed penalty of $0.2 million to settle alleged violations of the Risk Management Plan regulations noted during an EPA inspection of the El Paso refinery in February 2015. We are negotiating the draft order with

29

WESTERN REFINING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

EPA and expect to enter into a settlement. The draft settlement does not contain requirements for groundwater clean-up or capital expenditure.
Four Corners Refineries
Four Corners 2005 Consent Agreements. In July 2005, as part of the EPA Initiative, Giant Industries, Inc., our wholly-owned subsidiary, reached an administrative settlement with the New Mexico Environment Department (the "NMED") and the EPA in the form of consent agreements that resolved certain alleged violations of air quality regulations at the Gallup and Bloomfield refineries in the Four Corners area of New Mexico. In January 2009 and June 2012, we and the NMED agreed to amendments of the 2005 administrative settlement (the "2005 NMED Amended Agreement") that altered certain deadlines and allowed for alternative air pollution controls.
We incurred $50.8 million in total capital expenditures between 2009 and 2013 to address the requirements of the 2005 NMED Amended Agreement. These capital expenditures were primarily for installation of emission controls on the heaters, boilers and Fluid Catalytic Cracking Unit ("FCCU") and for reducing sulfur in fuel gas to reduce emissions of sulfur dioxide, NOx and particulate matter from our Gallup refinery. During the first quarter of 2016, we completed the capital expenditures required by the 2005 NMED Amended Agreement to implement one or more FCCU emission offset projects prior to the end of 2017. We incurred $0.1 million for the three months ended March 31, 2017 and $0.1 million and $1.9 million, respectively, for the years ended December 31, 2015 and 2014, to implement an FCC emission offset project. We paid penalties between 2009 and 2012 totaling $2.7 million. For 2017, we have budgeted capital projects specifically designed to address our compliance with the 2005 NMED Amended Agreement regarding air emissions from waste handling at our Gallup refinery.
Bloomfield 2007 NMED Remediation Order. In July 2007, we received a final administrative compliance order from the NMED alleging that releases of contaminants and hazardous substances that have occurred at the Bloomfield refinery over the course of its operations prior to June 1, 2007, have resulted in soil and groundwater contamination. Among other things, the order requires that we investigate the extent of such releases, perform interim remediation measures and implement corrective measures. Prior to July 2007, with the approval of the NMED and the New Mexico Oil Conservation Division, we placed into operation certain remediation measures that remain operational.
Gallup 2017 EPA RCRA Order: In February 2017, we received from the EPA a draft administrative order with a propose