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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - ANDEAVORandv2q201710-qex321.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - ANDEAVORandv2q201710-qex322.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - ANDEAVORandv2q201710-qex312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - ANDEAVORandv2q201710-qex311.htm


 

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

FORM 10‑Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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__________

Commission File Number 1‑3473

ANDEAVOR
(Exact name of registrant as specified in its charter)
Delaware
andvlogoprimarycolorrgb.jpg
95‑0862768
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
 
 
19100 Ridgewood Pkwy, San Antonio, Texas 78259-1828
(Address of principal executive offices) (Zip Code)
210-626-6000
(Registrant’s telephone number, including area code)

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. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). 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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
þ
 
Accelerated filer
o
 
 
Non-accelerated filer
o (Do not check if a smaller reporting company)
 
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). Yes o No þ

There were 156,901,569 shares of the registrant’s Common Stock outstanding at August 4, 2017.
 


TABLE OF CONTENTS
 
 

ANDEAVOR
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017

 
 
 
 
 
 
 
 
 
 
NOTE 2 - ACQUISITIONS AND DIVESTITURES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

This Quarterly Report on Form 10-Q (including documents incorporated by reference herein) contains statements with respect to our expectations or beliefs as to future events. These types of statements are “forward-looking” and subject to uncertainties. See “Important Information Regarding Forward-Looking Statements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2.

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FINANCIAL STATEMENTS

PART I - FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS

ANDEAVOR
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In millions, except per share amounts)
Revenues (a)
$
7,849

 
$
6,285

 
$
14,487

 
$
11,386

Costs and Expenses
 
 
 
 
 
 
 
Cost of sales (excluding the lower of cost or market inventory valuation adjustment) (a)
6,217

 
5,023

 
11,643

 
8,889

Lower of cost or market inventory valuation adjustment
209

 
(363
)
 
209

 
(216
)
Operating expenses
739

 
602

 
1,393

 
1,213

General and administrative expenses
248

 
94

 
384

 
176

Depreciation and amortization expenses
240

 
210

 
466

 
422

(Gain) loss on asset disposals and impairments
(22
)
 
1

 
(21
)
 
5

Operating Income
218

 
718

 
413

 
897

Interest and financing costs, net
(87
)
 
(60
)
 
(176
)
 
(120
)
Equity in earnings of equity method investments
3

 
3

 
3

 
5

Other income, net
9

 
25

 
11

 
32

Earnings Before Income Taxes
143

 
686

 
251

 
814

Income tax expense
56

 
237

 
77

 
267

Net Earnings from Continuing Operations
87

 
449

 
174

 
547

Earnings from discontinued operations, net of tax

 

 

 
11

Net Earnings
87

 
449

 
174

 
558

Less: Net earnings from continuing operations attributable to noncontrolling interest
47

 
31

 
84

 
71

Net Earnings Attributable to Andeavor
$
40

 
$
418

 
$
90

 
$
487

 
 
 
 
 
 
 
 
Net Earnings Attributable to Andeavor
 
 
 
 
 
 
 
Continuing operations
$
40

 
$
418

 
$
90

 
$
476

Discontinued operations

 

 

 
11

Total
$
40

 
$
418

 
$
90

 
$
487

Net Earnings per Share - Basic
 
 
 
 
 
 
 
Continuing operations
$
0.31

 
$
3.50

 
$
0.73

 
$
3.98

Discontinued operations

 

 

 
0.09

Total
$
0.31

 
$
3.50

 
$
0.73

 
$
4.07

Weighted average common shares outstanding - Basic
130.8

 
119.5

 
124.0

 
119.5

Net Earnings per Share - Diluted
 
 
 
 
 
 
 
Continuing operations
$
0.31

 
$
3.47

 
$
0.72

 
$
3.94

Discontinued operations

 

 

 
0.09

Total
$
0.31

 
$
3.47

 
$
0.72

 
$
4.03

Weighted average common shares outstanding - Diluted
131.7

 
120.6

 
125.0

 
120.8

 
 
 
 
 
 
 
 
Dividends per Share
$
0.55

 
$
0.50

 
$
1.10

 
$
1.00

Supplemental Information
 
 
 
 
 
 
 
(a)    Includes excise taxes collected by our Marketing segment
$
153

 
$
148

 
$
287

 
$
290

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

 
 
June 30, 2017 |  3

FINANCIAL STATEMENTS
 
 

ANDEAVOR
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
June 30,
2017
 
December 31,
2016
 
(In millions, except share data)
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents (Logistics: $31 and $688, respectively)
$
1,061

 
$
3,295

Receivables, net of allowance for doubtful accounts
1,391

 
1,108

Inventories, net
3,075

 
2,640

Prepayments and other current assets
508

 
371

Total Current Assets
6,035

 
7,414

Property, Plant and Equipment, Net (Logistics: $4,420 and $3,444, respectively)
14,143

 
9,976

Goodwill (Logistics: $127 and $117, respectively)
3,202

 
190

Acquired Intangibles, Net (Logistics: $1,054 and $947, respectively)
1,621

 
1,277

Other Noncurrent Assets, Net (Logistics: $402 and $414, respectively)
2,028

 
1,541

Total Assets
$
27,029

 
$
20,398

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
2,445

 
$
2,032

Current maturities of debt
478

 
465

Other current liabilities
1,230

 
1,057

Total Current Liabilities
4,153

 
3,554

Deferred Income Taxes
2,088

 
1,428

Debt, Net of Unamortized Issuance Costs (Logistics: $4,092 and $4,053, respectively)
7,164

 
6,468

Other Noncurrent Liabilities
1,201

 
821

Total Liabilities
14,606

 
12,271

Commitments and Contingencies (Note 9)
 
 
 
Equity
 
 
 
Andeavor Stockholders’ Equity
 
 
 
Common stock, par value $0.162/3; authorized 300,000,000 shares (200,000,000 in 2016); 200,004,789 shares issued (159,474,572 in 2016)
33

 
27

Additional paid-in capital
4,929

 
1,473

Retained earnings
6,397

 
6,437

Treasury stock, 41,446,523 common shares (42,574,625 in 2016), at cost
(2,293
)
 
(2,284
)
Accumulated other comprehensive loss, net of tax
(188
)
 
(188
)
Total Andeavor Stockholders’ Equity
8,878

 
5,465

Noncontrolling Interest
3,545

 
2,662

Total Equity
12,423

 
8,127

Total Liabilities and Equity
$
27,029

 
$
20,398


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

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FINANCIAL STATEMENTS

ANDEAVOR
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)

 
Six Months Ended June 30,
 
2017
 
2016
 
(In millions)
Cash Flows From (Used In) Operating Activities
 
 
 
Net earnings
$
174

 
$
558

Adjustments to reconcile net earnings to net cash from operating activities:
 
 
 
Depreciation and amortization expenses
466

 
422

Lower of cost or market inventory valuation adjustment
209

 
(216
)
Amortization of debt issuance costs and discounts
10

 
8

Gain on asset disposals and improvements
(21
)
 
(12
)
Stock-based compensation expense
34

 
8

Deferred income taxes
50

 
91

Turnaround and branding charges
(311
)
 
(226
)
Equity in earnings of equity method investments, net of distributions
13

 
10

Other operating activity
(6
)
 
(3
)
Changes in current assets and current liabilities
(4
)
 
22

Changes in noncurrent assets and noncurrent liabilities
156

 
(34
)
Net cash from operating activities
770

 
628

Cash Flows From (Used In) Investing Activities
 
 
 
Capital expenditures
(539
)
 
(426
)
Acquisitions, net of cash
(938
)
 
(394
)
Proceeds from asset sales
44

 
18

Other investing activities
(15
)
 
(4
)
Net cash used in investing activities
(1,448
)
 
(806
)
Cash Flows From (Used In) Financing Activities
 
 
 
Borrowings under revolving credit agreements
764

 
600

Repayments on revolving credit agreements
(514
)
 
(666
)
Proceeds from debt offering

 
701

Repayments of debt
(1,636
)
 
(253
)
Dividend payments
(130
)
 
(121
)
Net proceeds from issuance of Andeavor Logistics LP common units
281

 
334

Distributions by Andeavor Logistics LP to noncontrolling interest
(133
)
 
(98
)
Purchases of common stock
(148
)
 
(100
)
Taxes paid related to net share settlement of equity awards
(31
)
 
(24
)
Other financing activities
(9
)
 
(16
)
Net cash from (used in) financing activities
(1,556
)
 
357

Increase (Decrease) in Cash and Cash Equivalents
(2,234
)
 
179

Cash and Cash Equivalents, Beginning of Period
3,295

 
942

Cash and Cash Equivalents, End of Period
$
1,061

 
$
1,121


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


 
 
June 30, 2017 |  5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 1 – BASIS OF PRESENTATION

ORGANIZATION
 
Effective August 1, 2017, Tesoro Corporation changed its name to Andeavor. As used in this report, the terms “Andeavor,” the “Company,” “we,” “us” or “our” may refer to Andeavor, one or more of its consolidated subsidiaries or all of them taken as a whole. The words “we,” “us” or “our” generally include Andeavor Logistics LP (“Andeavor Logistics”) (formerly Tesoro Logistics LP) and Western Refining Logistics, LP (“WNRL”), publicly-traded limited partnerships, and their subsidiaries as consolidated subsidiaries of Andeavor with certain exceptions where there are transactions or obligations between Andeavor Logistics, WNRL and Andeavor or its other subsidiaries.
 
WESTERN REFINING. On June 1, 2017, pursuant to the Agreement and Plan of Merger, dated as of November 16, 2016 (the “Merger Agreement”), by and among Western Refining, Inc. (“Western Refining”), the Company, our wholly-owned subsidiaries Tahoe Merger Sub 1, Inc. and Tahoe Merger Sub 2, LLC, Tahoe Merger Sub 1 was merged with and into Western Refining, with Western Refining surviving such merger as a wholly-owned subsidiary of the Company (the “Merger” or the “Western Refining Acquisition”). As a result of the Merger, we obtained Western Refining’s 53% ownership interest in WNRL. Thus, these condensed consolidated financial statements reflect the operations, financial position and cash flows associated with Western Refining, WNRL and their related subsidiaries with all intercompany transactions eliminated upon consolidation.

WNRL is a publicly-traded master limited partnership that owns and operates logistic assets consisting of pipeline and gathering, terminalling, storage and transportation assets and provides services to our Refining segment. The majority of WNRL's logistics assets are integral to the operations of our El Paso, Gallup and St. Paul Park refineries. It also owns a wholesale business that operates primarily in the Southwest United States and includes the operations of several bulk petroleum distribution plants and a fleet of crude oil, asphalt and refined product delivery trucks. It distributes commercial wholesale petroleum products primarily in Arizona, Colorado, Nevada, New Mexico and Texas.
 
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

PRINCIPLES OF CONSOLIDATION. These interim condensed consolidated financial statements and notes hereto of Andeavor and its subsidiaries have been prepared by management without audit according to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results for the periods presented. Such adjustments are of a normal recurring nature, unless otherwise disclosed. The consolidated balance sheet at December 31, 2016 has been condensed from the audited consolidated financial statements at that date. We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). However, certain information and notes normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the SEC’s rules and regulations. Management believes that the disclosures presented herein are adequate to present the information fairly. The accompanying condensed consolidated financial statements and notes should be read in conjunction with the Andeavor and Western Refining Annual Reports on Form 10-K for the year ended December 31, 2016.
 
BASIS OF PRESENTATION. We are required under U.S. GAAP to make estimates and assumptions that affect the reported amounts and disclosures of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We review our estimates on an ongoing basis. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of results for the full year. Certain prior year balances have been aggregated or disaggregated in order to conform to the current year presentation.
 
The consolidated statements of comprehensive income for the six months ended June 30, 2017 have been omitted, as there was no material change to accumulated other comprehensive income for the six months ended June 30, 2017. For the six months ended June 30, 2016, accumulated other comprehensive income decreased $10 million, net of tax, due to the recognition of a settlement loss for one of our executive retirement plans and remeasurement of the pension liability.
 
CONDENSED CONSOLIDATING FINANCIAL INFORMATION. Andeavor’s senior notes and its revolving credit facility (the “Revolving Credit Facility”) were fully and unconditionally and jointly and severally guaranteed by certain of our subsidiaries. Andeavor Logistics, in which we had a 33% ownership interest as of June 30, 2017, and other subsidiaries did not guarantee these obligations. Pursuant to the terms of the Revolving Credit Facility and the indentures governing the Andeavor senior notes, any guarantees on our obligations were subject to release if the Company satisfactorily achieved an investment grade rating from either Moody’s Investors Service or S&P Global Ratings, as the Company already had achieved such rating from Fitch Ratings, Inc. On June 5, 2017, S&P Global Ratings raised its corporate credit and senior unsecured debt rating on the Company to BBB- from BB+, with a stable outlook. As a result, the guarantees of the Andeavor senior notes and Revolving Credit Facility were released upon the discharge of the terms of the Andeavor senior notes and Revolving Credit Facility agreements. The Company is now exempt from disclosing condensed consolidating financial information in accordance with Rule 3-10 of Regulation S-X, as enacted under the Securities Act of 1933.
 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

VARIABLE INTEREST ENTITIES. Our condensed consolidated financial statements include two variable interest entities, Andeavor Logistics and WNRL, which together comprise our Logistics segment. For variable interest entity reporting purposes, we aggregate these entities based on the similarity of their operations. For parenthetical purposes on the consolidated statement of financial position, balances do not include Andeavor’s basis in WNRL. Andeavor Logistics is a publicly traded limited partnership that we formed to own, operate, develop and acquire logistics assets. Its assets are integral to the success of our refining and marketing operations and are used to gather crude oil and natural gas, process natural gas, and distribute, transport and store crude oil and refined products. Andeavor Logistics provides us and third parties with various terminal distribution, storage, pipeline transportation, natural gas liquids processing, trucking and petroleum-coke handling services under long-term, fee-based commercial agreements, many of which contain minimum volume commitments. We do not provide financial or equity support through any liquidity arrangements or financial guarantees to Andeavor Logistics.
 
Tesoro Logistics GP, LLC (“TLGP”), our wholly-owned subsidiary, serves as the general partner of Andeavor Logistics. We held an approximate 33% and 34% interest in Andeavor Logistics at June 30, 2017 and December 31, 2016, respectively, including the general partner interest (approximately 2% at both June 30, 2017 and December 31, 2016) and all of the incentive distribution rights. As the general partner of Andeavor Logistics, we have the sole ability to direct the activities of Andeavor Logistics that most significantly impact its performance, and therefore we consolidate Andeavor Logistics. We are also considered to be the primary beneficiary for accounting purposes and are Andeavor Logistics’ largest customer. In the event Andeavor Logistics incurs a loss, our operating results will reflect Andeavor Logistics’ loss, net of intercompany eliminations. Under our various long-term, fee-based commercial agreements with Andeavor Logistics, transactions with us accounted for 49% of Andeavor Logistics’ total revenues for both the three and six months ended June 30, 2017, respectively, and 57% of Andeavor Logistics’ total revenues for both the three and six months ended June 30, 2016.
 
As of June 30, 2017, we owned a 53% interest in WNRL. Western Refining Logistics GP, LLC (“WGP”), our wholly-owned subsidiary, serves as the general partner of WNRL and has the sole ability to direct the activities that most significantly impact WNRL's economic performance, and therefore we consolidate WNRL. All intercompany transactions with WNRL are eliminated upon consolidation. We are WNRL’s primary logistics customer and a significant wholesale customer through our Marketing segment. WNRL generates revenues by charging tariffs and fees for transporting petroleum products and crude oil though its pipelines by charging fees for terminalling refined products and other hydrocarbons, and storing and providing other services at its storage tanks and terminals. Additionally, WNRL sells various finished petroleum products to us and other third-party customers. We accounted for 36% of WNRL’s total revenues for the period of June 1, 2017 through June 30, 2017 under our long-term agreements with WNRL. These agreements contain minimum volume commitments. Each agreement has fees that are indexed for inflation and provides us with options to renew for two additional five-year terms. In addition to commercial agreements, we are also party to an omnibus agreement with WNRL that among other things provides for reimbursement to us for various general and administrative services provided to WNRL. We are also party to an operational services agreement with WNRL, under which we are reimbursed for personnel services provided by us in support of WNRL's operations of its pipelines, terminals and storage facilities. We do not provide financial or equity support through any liquidity arrangements and/or debt guarantees to WNRL.
 
DISCONTINUED OPERATIONS. On September 25, 2013, we completed the sale of all of our interest in Tesoro Hawaii, LLC, which operated a 94 thousand barrels per day Hawaii refinery, retail sites and associated logistics assets (the “Hawaii Business”). The sale of the Hawaii Business was subject to an earn-out provision based on the annual gross margin (as defined in sale agreement) in the three annual periods beginning with the year ended December 31, 2014 and ending with the year ended December 31, 2016. Additionally, we retained liability for certain regulatory improvements required at the Hawaii refinery and tank replacement efforts at certain retail sites. The results of operations for this business have been presented as discontinued operations in the condensed statements of consolidated operations. There were no earnings or loss recorded for the three and six months ended June 30, 2017 and there were no revenues for the three and six months ended June 30, 2016. However, we recorded $17 million in pre-tax earnings ($11 million after-tax) primarily related to the earn-out provision of the sale during the six months ended June 30, 2016. No gain or loss was recorded for the three months ended June 30, 2016. Cash flows used in discontinued operations were $6 million for the six months ended June 30, 2017 and cash flows from discontinued operations were $12 million for the six months ended June 30, 2016. Unless otherwise noted, the information in the notes to the condensed consolidated financial statements relates to our continuing operations.

NEW ACCOUNTING STANDARDS AND DISCLOSURES
 
REVENUE RECOGNITION. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”) and has since amended the standard with ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date”, ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing”, and ASU 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients”. These standards replace existing revenue recognition rules with a single comprehensive model to use in accounting for revenue arising from contracts with customers. We are required to adopt ASU 2014-09 on January 1, 2018. We expect to transition to the new standard under the modified retrospective transition method, whereby a cumulative effect adjustment will be recognized upon adoption, if applicable, and the guidance will be applied prospectively.
 

 
 
June 30, 2017 |  7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We are progressing through our implementation plan and continue to evaluate the impact of the standard’s revenue recognition model on our contracts with customers in the Marketing, Logistics and Refining segments along with our business processes, accounting systems, controls and financial statement disclosures. Additionally, we have commenced our assessment of the standard’s impact on Western Refining and WNRL following the Western Refining Acquisition. While we have made substantial progress in our review and documentation of the impact of the standard on our revenue agreements, we continue to assess the impact in certain areas where industry consensus continues to be formed such as agreements with terms that include non-cash consideration and other unique considerations. We do not expect the standard to have a material impact to the amount or timing of revenues recognized for substantially all of our revenue arrangements in the Marketing and Refining segments, although we do expect some impact on presentation and disclosures in our financial statements relating to Logistics segment for contracts that include minimum volume commitments with claw back provisions, or where revenue is based on non-cash consideration. In addition, we will make an election to present our Marketing segment revenues net of excise taxes, consistent with our current presentation of Refining and Logistics segment revenues.
 
INVENTORY. In July 2015, the FASB issued ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory” (“ASU 2015-11”), which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test for inventories determined by methods other than last-in-first-out (“LIFO”) and the retail inventory method, which remain subject to existing impairment models. We adopted ASU 2015-11 as of January 1, 2017, which resulted in changes to how we perform our lower of cost or market tests for inventory. These changes did not have an impact on our financial statements.
 
LEASES. In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), which amends existing accounting standards for lease accounting and adds additional disclosures about leasing arrangements. Under the new guidance, lessees are required to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either a financing lease or operating lease, with classification affecting the pattern of expense recognition in the income statement and presentation of cash flows in the statement of cash flows. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods. Early adoption is permitted and modified retrospective application is required, however, we do not intend to early adopt the standard. While it is early in our assessment of the impacts from this standard, we expect that the recognition of right-of-use assets and lease liabilities not currently reflected in our balance sheet could have a material impact on total assets and liabilities. Additionally, we expect the presentation changes required for amounts currently reflected in our statement of operations to impact certain financial statement line items. We cannot estimate the impact on our business processes, accounting systems, controls and financial statement disclosures due to the implementation of this standard given the preliminary stage of our assessment.
 
CREDIT LOSSES. In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which amends guidance on the impairment of financial instruments. The ASU requires the estimation of credit losses based on expected losses and provides for a simplified accounting model for purchased financial assets with credit deterioration. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim reporting periods within those annual reporting periods. Early adoption is permitted for annual reporting periods beginning after December 15, 2018. While we are still evaluating the impact of ASU 2016-13, we do not expect the adoption of this standard to have a material impact on our financial statements.
 
DEFINITION OF A BUSINESS. In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business” (“ASU 2017-01”), which revises the definition of a business and assists in the evaluation of when a set of transferred assets and activities is a business. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017, and should be applied prospectively. Early adoption is permitted under certain circumstances. At this time, we are evaluating the potential impact of this standard on our financial statements, including the reporting requirements for transactions between entities under common control, and whether we will early adopt this standard in 2017.
 
GOODWILL. In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which eliminates the second step from the goodwill impairment test that requires goodwill impairments to be measured as the amount that a reporting unit’s carrying amount of goodwill exceeded its implied fair value of goodwill. Instead, an entity can perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount with any impairment being limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied on a prospective basis. As permitted under ASU 2017-04, we have elected to early adopt this standard for our 2017 goodwill impairment tests to be performed as of November 1, 2017. The adoption of this standard is not expected to have a material impact on our financial statements.
 
PENSION AND POSTRETIREMENT COSTS. In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), which requires the current service-cost component of net benefit costs to be presented similarly with other current compensation costs for related employees on the condensed statement of consolidated operations, and stipulates that only the service cost component of net benefit costs is eligible for capitalization. The Company will present other components of net benefit costs elsewhere on the condensed statement of consolidated operations. ASU 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted in the first quarter of 2017 only. The amendments to the presentation of the condensed statement of consolidated operations in this update should be applied retrospectively while the change in capitalized benefit cost is to be applied prospectively. We have evaluated the impact of this standard on our financial statements and determined there will be no impact

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

to net earnings, but it is expected to have an immaterial impact on other line items such as operating income. We have elected not to early adopt and will implement when the standard becomes effective.
 
SHARE-BASED COMPENSATION. In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which provides guidance about which changes to the terms or conditions of a share-based payment awarded require an entity to apply modification accounting. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The amendments in ASU 2017-09 are to be applied prospectively to an award modified on or after the adoption date, consequently the impact will be dependent on whether we modify any share-based payment awards and the nature of such modifications. The adoption of this standard is not expected to have a material impact on our financial statements.
 
NOTE 2 – ACQUISITIONS AND DIVESTITURES
 
WESTERN REFINING, INC. ACQUISITION
 
On June 1, 2017, we completed the Western Refining Acquisition. Under the terms of the Merger Agreement, the shareholders of Western Refining elected cash consideration of $37.30 per share up to the maximum aggregate cash election of $405 million with each remaining Western Refining share being exchanged for 0.4350 shares of the Company. This resulted in the issuance of 42,617,738 of our shares, which was comprised of 39,499,524 newly issued shares of common stock and 3,118,214 shares of treasury stock. Based on our $83.25 per share closing stock price on June 1, 2017, the aggregate value of consideration paid to Western Refining shareholders was $4.0 billion, including approximately $3.6 billion of our stock and approximately $424 million of cash, including cash payable upon accelerated vesting of Western Refining equity awards. The cash portion of the purchase price, along with the settlement of $1.6 billion of certain Western Refining debt and other transaction related costs, was funded using cash on hand and $575 million of funds drawn on the Revolving Credit Facility, the capacity of which increased to $3.0 billion following the Merger.
 
We accounted for the Western Refining Acquisition using the acquisition method of accounting, which requires, among other things, that assets acquired at their fair values and liabilities assumed be recognized on the balance sheet as of the acquisition date. The purchase price allocation for the Western Refining Acquisition is preliminary and has been allocated based on estimated fair values of the assets acquired and liabilities assumed at the acquisition date, pending the completion of an independent valuation and other information as it becomes available to us. We expect that, as we obtain more information, the preliminary purchase price allocation disclosed below may change. The purchase price allocation adjustments can be made through the end of Andeavor’s measurement period, which is not to exceed one year from the acquisition date.
 
PRELIMINARY ACQUISITION DATE PURCHASE PRICE ALLOCATION (in millions)

Cash
$
159

Receivables
499

Inventories
807

Prepayments and Other Current Assets
213

Property, Plant and Equipment (a)
3,390

Goodwill
3,001

Acquired Intangibles
258

Other Noncurrent Assets
158

Accounts Payable
(701
)
Accrued Liabilities
(326
)
Current Portion of Long-term Debt
(12
)
Deferred Income Taxes
(586
)
Debt
(2,073
)
Other Noncurrent Liabilities
(88
)
Noncontrolling Interest
(719
)
Total purchase price
$
3,980


(a)
Estimated useful lives ranging from 3 to 28 years have been assumed based on the preliminary valuation.
 
GOODWILL. Andeavor evaluated several factors that contributed to the amount of goodwill presented above. These factors include the acquisition of an existing integrated refining, marketing and logistics business located in areas with access to cost-advantaged feedstocks with an assembled workforce that cannot be duplicated at the same costs by a new entrant. Further, the Western Refining Acquisition provides a platform for future growth through operating efficiencies Andeavor expects to gain from the application of best practices across the combined company and an ability to realize synergies from the geographic diversification

 
 
June 30, 2017 |  9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

of Andeavor’s business and rationalization of general and administrative costs. The amount of goodwill by reportable segment is as follows: Refining $1.9 billion, Logistics $1.0 billion and Marketing $84 million. Based on information evaluated to date, we estimate approximately $2.1 billion of the $3.0 billion in goodwill resulting from the tax-free Merger with Western Refining to be non-deductible for tax purposes. As a result of prior acquisitions, Western Refining has tax-deductible goodwill, in which we received carryover basis, providing tax deductibility for an estimated $0.9 billion of the $3.0 billion in goodwill that otherwise would not be deductible.

PROPERTY, PLANT AND EQUIPMENT. The fair value of property, plant and equipment is $3.4 billion. This preliminary fair value is based on a valuation using a combination of the income, cost and market approaches. The useful lives are based on similar assets at Andeavor.

ACQUIRED INTANGIBLE ASSETS. We estimated the fair value of the acquired identifiable intangible assets at $258 million. This fair value is based on a preliminary valuation completed for the business enterprise, along with the related tangible assets, using a combination of the income method, cost method and comparable market transactions. We recognized intangible assets associated with customer relationships, trade names and favorable leases, all of which will be amortized over a definite-life. We also recognized an intangible asset of approximately $38 million related to liquor licenses, which have an indefinite life. We considered the assets' history, accounting by Western Refining, our plans for the continued use and marketing of the assets, and how a market participant would use the assets in determining whether the intangible assets have an indefinite or definite life. We amortize acquired intangibles with finite lives on a straight-line basis over an estimated weighted average useful life of 15 years, and we include the amortization in depreciation and amortization expenses on our condensed statement of consolidated operations. The gross carrying value of our finite life intangibles acquired from the Western Refining Acquisition was $220 million and the accumulated amortization was $1 million as of June 30, 2017. Amortization expense is expected to be approximately $15 million per year for the next five years. We have not yet finalized our valuation estimate and related evaluation of the useful lives; accordingly, future amortization of intangible assets related to customer relationships may be revised.
 
CONTINGENCIES. We assumed environmental, legal and asset retirement obligation liabilities of approximately $23 million in the Western Refining Acquisition. The fair value of these liabilities is preliminary, pending the completion of an independent valuation and other information as it becomes available to us.

INTERESTS IN WNRL AND MINNESOTA PIPE LINE COMPANY. With the Western Refining Acquisition, we acquired a controlling interest in WNRL. The fair value of the non-controlling interest in WNRL is based on the share price, shares outstanding and the percent of public unitholders of WNRL on June 1, 2017. Additionally, we acquired a 17% common equity interest in Minnesota Pipe Line Company, LLC (“MPL”). We are accounting for our investment in MPL under the equity method of accounting given our ability to exercise significant influence over MPL.

ACQUISITION COSTS. We recognized acquisition costs related to the Western Refining Acquisition of $61 million and $68 million in general and administrative expenses for the three and six months ended June 30, 2017, respectively. Additionally, we recognized $48 million of severance costs, of which $41 million was due to the change of control and $7 million of expected severance and retention payments in future periods. We had $7 million recognized in accrued liabilities remaining to be paid.

WESTERN REFINING REVENUES AND NET EARNINGS. For the period from June 1, 2017 through June 30, 2017, we recognized $831 million in revenues and $32 million of net loss related to the business acquired. The net loss for this period includes an allocation of the lower of cost or market adjustment related to Western Refining’s post-Merger operations along with related acquisition and severance costs.

PRO FORMA FINANCIAL INFORMATION. The following unaudited pro forma information combines the historical operations of Tesoro and Western Refining, giving effect to the merger and related transactions as if they had been consummated on January 1, 2016, the beginning of the earliest period presented.

PRO FORMA CONSOLIDATED REVENUES AND CONSOLIDATED NET EARNINGS (in millions)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
9,591

 
$
8,426

 
$
18,581

 
$
15,010

Net earnings (a)
215

 
565

 
360

 
637


(a)
While many recurring adjustments impact the pro forma figures presented, the increase in pro forma net earnings compared to our net earnings presented on the condensed statements of consolidated operations for both the three months and six months ended June 30, 2017 include a significant non-recurring adjustment removing acquisition and integration costs from 2017 and reflects these costs in the first quarter of 2016, the period the acquisition was assumed to be completed for pro forma purposes.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

NORTH DAKOTA GATHERING AND PROCESSING ASSETS ACQUISITION
 
On January 1, 2017, Andeavor Logistics acquired crude oil, natural gas and produced water gathering systems and two natural gas processing facilities from Whiting Oil and Gas Corporation, GBK Investments, LLC and WBI Energy Midstream, LLC (the "North Dakota Gathering and Processing Assets") for total consideration of approximately $705 million, including payments for working capital adjustments. The North Dakota Gathering and Processing Assets include crude oil, natural gas and produced water gathering pipelines, natural gas processing and fractionation capacity in the Sanish and Pronghorn fields of the Williston Basin in North Dakota. This acquisition was immaterial to our condensed consolidated financial statements.
 
DIVESTITURES
 
On June 2, 2017, pursuant to our consent decree with the state of Alaska associated with our acquisition of certain terminalling and storage assets in Alaska during 2016, Andeavor Logistics sold one of its existing Alaska products terminals (“Alaska Terminal”). The sale of the Alaska Terminal resulted in a $25 million gain on sale being recognized in our condensed consolidated statement of operations for both the three and six months ended June 30, 2017. The Alaska Terminal divestiture did not have an impact on our Logistics segment’s operations.
 
NOTE 3 – INVENTORIES
 
COMPONENTS OF INVENTORIES (in millions)

 
June 30,
2017
 
December 31,
2016
Domestic crude oil and refined products (a)
$
2,911

 
$
2,099

Foreign subsidiary crude oil (b)
35

 
310

Materials and supplies (a)
227

 
149

Oxygenates and by-products
62

 
81

Merchandise (a)
49

 
1

Less: Lower of cost or market reserve
(209
)
 

Total Inventories
$
3,075

 
$
2,640

 
(a)
Increase primarily related to Western Refining Acquisition. See Note 2.
(b)
In April 2017, our pipeline and storage lease in Panama terminated.
 
We recorded a lower of cost or market reserve adjustment of $209 million at June 30, 2017 for our crude oil, refined products, oxygenates and by-product inventories to adjust the carrying value of our inventories to reflect replacement costs at the reporting date. We reverse any lower of cost or market reserve in the subsequent period because the inventories are sold or used and then perform a complete lower of cost or market assessment of ending inventories at the end of each reporting period to determine if a reserve is required. At December 31, 2016, prior to changes in our lower of cost or market test following the effectiveness of ASU 2015-11, the replacement cost of our crude oil and refined product inventories exceeded carrying value, both in the aggregate, by approximately $107 million.
 
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
 
PROPERTY, PLANT AND EQUIPMENT (in millions)

 
June 30,
2017
 
December 31,
2016
Refining (a)
$
10,169

 
$
8,067

Logistics (a)
6,011

 
4,059

Marketing (a)
1,208

 
934

Corporate
523

 
412

Property, Plant and Equipment, at Cost
17,911

 
13,472

Accumulated depreciation
(3,768
)
 
(3,496
)
Property, Plant and Equipment, Net
$
14,143

 
$
9,976

 
(a)
Increase primarily related to Western Refining Acquisition. See Note 2.
 

 
 
June 30, 2017 |  11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We capitalize interest as part of the cost of major projects during the construction period. Capitalized interest totaled $12 million and $6 million for the three months ended June 30, 2017 and 2016, respectively, and $22 million and $12 million for the six months ended June 30, 2017 and 2016, respectively, and is recorded as a reduction to net interest and financing costs in our condensed statements of consolidated operations.

NOTE 5 – DERIVATIVE INSTRUMENTS
 
In the ordinary course of business, our profit margins, earnings and cash flows are impacted by the timing, direction and overall change in pricing for commodities used throughout our operations. We use non-trading derivative instruments to manage our exposure to the following:

price risks associated with the purchase or sale of feedstocks, refined products and energy supplies related to our refineries, terminals, marketing fuel inventory and customers;
price risks associated with inventories above or below our target levels;
future emission credit requirements; and
exchange rate fluctuations on our purchases of Canadian crude oil.
 
Our accounting for derivative instruments depends on whether the underlying commodity will be used or sold in the normal course of business. For contracts where the crude oil or refined products are expected to be used or sold in the normal course of business, we apply the normal purchase normal sale exception and follow the accrual method of accounting. All other derivative instruments are recorded at fair value using mark-to-market accounting.
 
Our derivative instruments can include forward purchase and sale contracts (“Forward Contracts”), exchange-traded futures (“Futures Contracts”), over-the-counter swaps, including those cleared on an exchange (“Swap Contracts”), options (“Options”), and over-the-counter options (“OTC Option Contracts”). Forward Contracts are agreements to buy or sell the commodity at a predetermined price at a specified future date. Futures Contracts are standardized agreements, traded on a futures exchange, to buy or sell the commodity at a predetermined price at a specified future date. Options provide the right, but not the obligation to buy or sell the commodity at a specified price in the future. Swap Contracts and OTC Option Contracts require cash settlement for the commodity based on the difference between a contracted fixed or floating price and the market price on the settlement date. Certain of these contracts require cash collateral to be received or paid if our asset or liability position, respectively, exceeds specified thresholds. We believe that we have minimal credit risk with respect to our counterparties.
 
The following table presents the fair value of our derivative instruments as of June 30, 2017 and December 31, 2016. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements including cash collateral on deposit with, or received from, brokers. We offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of offset exists. As a result, the asset and liability amounts below will not agree with the amounts presented in our condensed consolidated balance sheets.
 
DERIVATIVE ASSETS AND LIABILITIES (in millions)

 
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet Location
June 30,
2017
 
December 31,
2016
 
June 30,
2017
 
December 31,
2016
Commodity Futures Contracts
Prepayments and other current assets
$
756

 
$
821

 
$
724

 
$
871

Commodity Swap Contracts
Prepayments and other current assets
15

 
11

 
9

 
13

Commodity Swap Contracts
Receivables
5

 

 

 

Commodity Swap Contracts
Payables

 

 
1

 
2

Commodity Options Contracts
Prepayments and other current assets

 
1

 

 

Commodity Forward Contracts
Receivables
8

 
6

 

 

Commodity Forward Contracts
Accounts payable

 

 
5

 
2

Total Gross Mark-to-Market Derivatives
784

 
839

 
739

 
888

Less: Counterparty Netting and Cash Collateral (a)
(731
)
 
(744
)
 
(725
)
 
(832
)
Total Net Fair Value of Derivatives
$
53

 
$
95

 
$
14

 
$
56

 
(a)
Certain of our derivative contracts, under master netting arrangements, include both asset and liability positions. We offset both the fair value amounts and any related cash collateral amounts recognized for multiple derivative instruments executed with the same counterparty when there is a legally enforceable right and an intention to settle net or simultaneously. As of June 30, 2017 our counterparties had

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

provided cash collateral of $6 million related to our unrealized derivative positions. As of December 31, 2016, we had provided cash collateral amounts of $88 million related to our unrealized derivative positions. Cash collateral amounts are netted with mark-to-market derivative assets.
 
GAINS (LOSSES) ON MARK-TO-MARKET DERIVATIVES (in millions)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Commodity Contracts
$
92

 
$
(82
)
 
$
120

 
$
(44
)
Foreign Currency Forward Contracts

 

 

 
1

Total Gain (Loss) on Mark-to-Market Derivatives
$
92

 
$
(82
)
 
$
120

 
$
(43
)
 
INCOME STATEMENT LOCATION OF GAINS (LOSSES) ON MARK-TO-MARKET DERIVATIVES (in millions)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
1

 
$
(20
)
 
$
9

 
$
(5
)
Cost of sales
91

 
(62
)
 
111

 
(39
)
Other income, net

 

 

 
1

Total Gain (Loss) on Mark-to-Market Derivatives
$
92

 
$
(82
)
 
$
120

 
$
(43
)
 
OPEN LONG (SHORT) POSITIONS
 
OUTSTANDING COMMODITY AND OTHER CONTRACTS (units in thousands)

 
Contract Volumes by Year of Maturity
 
Unit of Measure
Mark-to-Market Derivative Instrument
2017
 
2018
 
2019
 
Crude oil, refined products and blending products:
 
 
 
 
 
 
 
Swap Contracts - long
3,931
 
367
 
 
Barrels
Futures Contracts - long
7,193
 
864
 
 
Barrels
Options - short
(274)
 
 
 
Barrels
Forward Contracts - long
2,045
 
 
 
Barrels
Carbon emissions credits:
 
 
 
 
 
 
 
Futures Contracts - long
50
 
 
 
Tons
Corn:
 
 
 
 
 
 
 
Futures Contracts - long
545
 
20
 
 
Bushels
 
At June 30, 2017, we had open Forward Contracts to purchase CAD $5 million that were settled on July 24, 2017.
 
NOTE 6 – FAIR VALUE MEASUREMENTS
 
We classify financial assets and liabilities according to the fair value hierarchy. Financial assets and liabilities classified as level 1 instruments are valued using quoted prices in active markets for identical assets and liabilities. Level 2 instruments are valued using quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices, such as liquidity, that are observable for the asset or liability. Our level 2 instruments include derivatives valued using market quotations from independent price reporting agencies, third-party brokers and commodity exchange price curves that are corroborated with market data. Level 3 instruments are valued using significant unobservable inputs that are not supported by sufficient market activity. We do not have any financial assets or liabilities classified as level 3 at June 30, 2017 or December 31, 2016.
 
Our financial assets and liabilities measured at fair value on a recurring basis include derivative instruments. Additionally, our financial liabilities include obligations for Renewable Identification Numbers (“RINs”) and cap-and-trade emission credits for the state of California (together with RINs, our “Environmental Credit Obligations”). See Note 5 for further information on our derivative instruments. Amounts presented below for Environmental Credit Obligations represent the estimated fair value amount at each balance sheet date for which we do not have sufficient RINs and California cap-and-trade credits to satisfy our obligations to the U.S. Environmental Protection Agency and the state of California, respectively.

 
 
June 30, 2017 |  13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE (in millions)

 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral (a)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts
$
751

 
$
5

 
$

 
$
(722
)
 
$
34

Commodity Swap Contracts

 
20

 

 
(9
)
 
11

Commodity Forward Contracts

 
8

 

 

 
8

Total Assets
$
751

 
$
33

 
$

 
$
(731
)
 
$
53

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts
$
723

 
$
1

 
$

 
$
(716
)
 
$
8

Commodity Swap Contracts

 
10

 

 
(9
)
 
1

Commodity Forward Contracts

 
5

 

 

 
5

Environmental Credit Obligations

 
217

 

 

 
217

Total Liabilities
$
723

 
$
233

 
$

 
$
(725
)
 
$
231

 
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral (a)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts
$
821

 
$

 
$

 
$
(733
)
 
$
88

Commodity Swap Contracts

 
11

 

 
(11
)
 

Commodity Options Contracts
1

 

 

 

 
1

Commodity Forward Contracts

 
6

 

 

 
6

Total Assets
$
822

 
$
17

 
$

 
$
(744
)
 
$
95

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts
$
870

 
$
1

 
$

 
$
(821
)
 
$
50

Commodity Swap Contracts

 
15

 

 
(11
)
 
4

Commodity Forward Contracts

 
2

 

 

 
2

Environmental Credit Obligations

 
79

 

 

 
79

Total Liabilities
$
870

 
$
97

 
$

 
$
(832
)
 
$
135

 
(a)
Certain of our derivative contracts, under master netting arrangements, include both asset and liability positions. We offset both the fair value amounts and any related cash collateral amounts recognized for multiple derivative instruments executed with the same counterparty when there is a legally enforceable right and an intention to settle net or simultaneously. As of June 30, 2017, our counterparties had provided cash collateral of $6 million related to our unrealized derivative positions. As of December 31, 2016, we had provided cash collateral amounts of $88 million related to our unrealized derivative positions. Cash collateral amounts are netted with mark-to-market derivative assets.
 
We believe the carrying value of our other financial instruments, including cash and cash equivalents, receivables, accounts payable and certain accrued liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including the short-term duration of the instruments and the expected continued insignificance of bad debt expense, which includes an evaluation of counterparty credit risk. The borrowings under our Revolving Credit Facility, the Andeavor Logistics senior secured revolving credit agreement (the “Andeavor Logistics Revolving Credit Facility”), the secured Andeavor Logistics drop down credit facility (the “Andeavor Logistics Dropdown Credit Facility”) and the WNRL revolving credit facility (the “WNRL Revolving Credit Facility”), which include variable interest rates, approximate fair value. The fair value of our fixed rate debt is based on prices from recent trade activity and is categorized in level 2 of the fair value hierarchy. The carrying value and fair value of our debt were approximately $7.7 billion and $8.1 billion as of June 30, 2017, respectively, and $7.0 billion and $7.3 billion at December 31, 2016, respectively. These carrying and fair values of our debt do not consider the unamortized issuance costs, which are netted against our total debt.
 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

NOTE 7 – DEBT

DEBT BALANCE, NET OF CURRENT MATURITIES AND UNAMORTIZED ISSUANCE COSTS (in millions)

 
June 30,
2017
 
December 31,
2016
Total debt (a)
$
7,715

 
$
7,042

Unamortized issuance costs and premiums (b)
(73
)
 
(109
)
Current maturities
(478
)
 
(465
)
Debt, Net of Current Maturities and Unamortized Issuance Costs (c)
$
7,164

 
$
6,468

 
(a)
Total debt related to Andeavor Logistics, which is non-recourse to Andeavor, except for TLGP, was $3.8 billion and $4.1 billion at June 30, 2017 and December 31, 2016, respectively. Total debt related to WNRL, which is non-recourse to Andeavor, except for WGP, was $320 million at June 30, 2017.
(b)
Includes premium of $26 million related to the incremental fair value of the WNRL Revolving Credit Facility upon acquisition.
(c)
Increase primarily related to borrowings on our Revolving Credit Facility for the Western Refining Acquisition and WNRL’s outstanding debt. See Note 2.
 
AVAILABLE CAPACITY UNDER CREDIT FACILITIES (in millions)

 
Total
Capacity
 
Amount Borrowed as of June 30, 2017
 
Outstanding
Letters of Credit
 
Available Capacity
 
Weighted Average Interest Rate
 
Expiration
Andeavor Revolving Credit Facility (a)
$
3,000

 
$
575

 
$
46

 
$
2,379

 
2.56
%
 
September 30, 2020
Andeavor Logistics Revolving Credit Facility
600

 
50

 

 
550

 
3.31
%
 
January 29, 2021
Andeavor Logistics Dropdown Credit Facility
1,000

 

 

 
1,000

 
%
 
January 29, 2021
WNRL Revolving Credit Facility
500

 
20

 
1

 
479

 
3.08
%
 
October 16, 2018
Letter of Credit Facilities
975

 

 

 
975

 
 
 
 
Total Credit Facilities
$
6,075

 
$
645

 
$
47

 
$
5,383

 
 
 
 
 
(a)
The $3.0 billion Andeavor Revolving Credit Facility total capacity includes the additional $1.0 billion related to the incremental revolver, as defined in Note 12 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016, which was used to fund amounts required for the acquisition of Western Refining and certain other specified uses in connection with the transaction.
 
WESTERN REFINING ACQUISITION FINANCING. On June 1, 2017, to finance the approximately $424 million in total cash consideration, $1.6 billion repayment of certain Western Refining and Northern Tier Energy LP (“NTI”) indebtedness and fees and expenses related to the Western Refining Acquisition, we borrowed $575 million under our Revolving Credit Facility and utilized cash on hand, including the proceeds from the 4.750% Senior Notes due 2023 and the 5.125% Senior Notes due 2026 we issued in December 2016. Included in the $1.6 billion of debt payments were Western Refining’s $532 million Term Loan - 5.25% Credit Facility due 2020, $350 million of 6.25% Senior Unsecured Notes due 2021, $371 million Term Loan - 5.50% Credit Facility due 2023 and NTI’s $350 million of 7.125% Senior Secured Notes due 2020 along with approximately $45 million to pay down the outstanding credit facilities at Western Refining and NTI at June 1, 2017. The Western Refining and NTI revolving credit facilities were terminated upon completion of the Merger. We paid premiums of approximately $23 million in paying off the Western Refining and NTI senior notes, which were included in the fair value due to the change of control triggering event of these debt instruments at acquisition. The WNRL revolving credit facility and senior notes remained following the acquisition, see details below.

Following the completion of the Merger, our Revolving Credit Facility increased in capacity from $2.0 billion to $3.0 billion in accordance with the amendment entered into in December 2016. For more details, see Note 12 of our Annual Report on Form 10-K for the year ended December 31, 2016.
 
WNRL REVOLVING CREDIT FACILITY. On June 1, 2017, in connection with the Merger, we consolidated WNRL and its $500 million senior secured WNRL Revolving Credit Facility, which WNRL originally entered into on October 16, 2013. This credit facility expires on October 16, 2018. The total commitment of the WNRL Revolving Credit Facility is $500 million, but WNRL has the ability to increase the total commitment up to $150 million for a total facility size of up to $650 million, subject to receiving increased commitments from lenders and to the satisfaction of certain conditions. The WNRL Revolving Credit Facility includes a $25 million sub-limit for standby letters of credit and a $10 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

 
 
June 30, 2017 |  15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 significant assets of WNRL and its subsidiaries. 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. The effective rate of the WNRL Revolving Credit Facility was 3.49% at June 30, 2017. 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.
 
WNRL SENIOR NOTES. WNRL has $300 million of 7.5% senior notes (the “WNRL Senior Notes”), which WNRL originally entered into on February 11, 2015 and mature on February 11, 2023. The fair value of these notes at June 1, 2017 was $326 million and is reflected in our preliminary acquisition date purchase price allocation, see Note 2 for more details. WNRL and WNRL Finance Corp., a Delaware corporation and 100% owned subsidiary of WNRL, issued the WNRL Senior Notes along with the guarantors named therein and U.S. Bank National Association, as trustee. WNRL pays interest on the WNRL Senior Notes semi-annually in cash in arrears on February 15 and August 15 of each year. The WNRL Senior Notes contain 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 WNRL’s restricted subsidiaries, (vi) consolidate with or merge with or into, or sell substantially all of the WNRL’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 Senior Notes also provide for events of default, which, if any of them occur, would permit or require the principal, premium, if any, and interest on all the then outstanding WNRL Senior Notes to be due and payable immediately.
 
NOTE 8 – BENEFIT PLANS
 
COMPONENTS OF PENSION AND OTHER POSTRETIREMENT BENEFIT EXPENSE (INCOME) (in millions)

 
Pension Benefits
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
13

 
$
12

 
$
26

 
$
23

Interest cost
8

 
7

 
16

 
15

Expected return on plan assets
(7
)
 
(7
)
 
(14
)
 
(14
)
Recognized net actuarial loss
6

 
5

 
11

 
10

Recognized curtailment loss and settlement cost

 

 

 
5

Net Periodic Benefit Expense
$
20

 
$
17

 
$
39

 
$
39

 
 
 
 
 
 
 
 
 
Other Postretirement Benefits
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$

 
$
1

 
$
1

 
$
2

Interest cost
1

 

 
1

 
1

Amortization of prior service credit
(9
)
 
(9
)
 
(17
)
 
(18
)
Recognized net actuarial loss
1

 
1

 
2

 
2

Net Periodic Benefit Income
$
(7
)
 
$
(7
)
 
$
(13
)
 
$
(13
)

WESTERN REFINING BENEFIT PLANS. We assumed all of Western Refining’s existing defined contribution and benefit plans as a result of the Merger. All benefits remain within their respective Western Refining and subsidiaries’ plans. The impact of these benefit plans are immaterial to our financial statements as a whole.


16 | 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

NOTE 9 – COMMITMENTS AND CONTINGENCIES
 
We are incurring and expect to continue to incur expenses for environmental remediation liabilities at a number of currently and previously owned or operated refining, pipeline, terminal and retail properties. Additionally, in the ordinary course of business, we may become party to lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. The outcome of these matters cannot always be predicted accurately, but we will accrue liabilities for these matters if the amount is probable and can be reasonably estimated. Other than as described in (i) Part II, Item 1 of this Report or (ii) our Annual Report on Form 10-K for the year ended December 31, 2016 or our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, we do not have any other material outstanding lawsuits, administrative proceedings or governmental investigations.

TAX. We are subject to federal, state and foreign tax laws and regulations. We are also subject to audits by federal, state and foreign taxing authorities in the normal course of business. It is possible that tax audits could result in claims against us in excess of recorded liabilities. However, we believe that resolution of any such claim(s) would not have a material impact on our liquidity, financial position or results of operations.

Newly enacted tax laws and regulations, and changes in existing tax laws and regulations, could result in increased expenditures in the future. For instance, upon a transfer of assets to Andeavor Logistics, Andeavor historically has received a distribution of cash from partnership debt used to finance the transaction. This distribution has historically been treated as non-taxable loan proceeds to the extent of Andeavor’s 100% indemnity of such loan. New Federal Income Tax Regulations in effect for leveraged partnership transactions occurring on or after January 3, 2017, will reduce the amount treated as non-taxable loan proceeds to that portion equal to Andeavor’s partnership profit sharing ratio in Andeavor Logistics. This could result in a taxable gain being recognized by Andeavor in a period when no such gain is recognized in the financial statements, causing an increase in the current portion of income tax expense.

NOTE 10 – STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE

CHANGES TO EQUITY (in millions)

 
Andeavor
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total Equity
Balance at December 31, 2016 (a)
$
5,465

 
$
2,662

 
$
8,127

Issuance of shares for Western Refining Acquisition (b)
3,548

 

 
3,548

Net earnings
90

 
84

 
174

Purchases of common stock
(148
)
 

 
(148
)
Dividend payments
(130
)
 

 
(130
)
Net effect of amounts related to equity-based compensation
33

 
5

 
38

Taxes paid related to net share settlement of equity awards
(30
)
 
(1
)
 
(31
)
Net proceeds from issuance of Andeavor Logistics common units (c)
(1
)
 
282

 
281

Distributions to noncontrolling interest

 
(133
)
 
(133
)
Noncontrolling interest acquired from Western Refining

 
719

 
719

Consideration for Western Refining related to stock awards
8

 

 
8

Transfers to (from) Andeavor paid-in capital related to:
 
 
 
 
 
Andeavor Logistics’ issuance of common units
45

 
(73
)
 
(28
)
Equity issuance costs related to the Western Refining Acquisition
(3
)
 

 
(3
)
Other
1

 

 
1

Balance at June 30, 2017 (a)(d)
$
8,878

 
$
3,545

 
$
12,423

 
(a)
We have 5.0 million shares of preferred stock authorized with no par value per share. No shares of preferred stock were outstanding as of June 30, 2017 and December 31, 2016.
(b)
We issued 42,617,738 shares for the Western Refining Acquisition, comprised of 39,499,524 newly issued shares of common stock and 3,118,214 shares of treasury stock, resulting in an increase to amounts recorded for common stock of $7 million and additional paid-in capital of $3.4 billion along with a decrease in treasury stock of $169 million.
(c)
Andeavor Logistics sold 5,000,000 of its common units at a price of $56.19 per unit on February 27, 2017 and used the net proceeds to repay borrowings outstanding under the Andeavor Logistics Revolving Credit Facility.
(d)
During a special stockholder meeting on March 24, 2017, Andeavor stockholders approved, among other things, the issuance of shares of Andeavor common stock in connection with the Merger and an amendment to Andeavor’s restated certificate of incorporation increasing authorized shares from 200 million to 300 million.


 
 
June 30, 2017 |  17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

EARNINGS PER SHARE
 
We compute basic earnings per share by dividing net earnings attributable to Andeavor stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share include the effects of potentially dilutive shares outstanding during the period.
 
SHARE CALCULATIONS (in millions)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Weighted average common shares outstanding
130.8

 
119.5

 
124.0

 
119.5

Common stock equivalents
0.9

 
1.1

 
1.0

 
1.3

Total Diluted Shares
131.7

 
120.6

 
125.0

 
120.8

 
Potentially dilutive common stock equivalents are excluded from the calculation of diluted earnings per share if the effect of including such securities in the calculation would have been anti-dilutive. Anti-dilutive securities were 0.4 million for both the three months ended June 30, 2017 and 2016, respectively, and 0.3 million for both the six months ended June 30, 2017 and 2016, respectively.
 
SHARE REPURCHASES
 
We are authorized by our Board of Directors (the “Board”) to purchase shares of our common stock in open market transactions at our discretion. The Board’s authorization has no time limit and may be suspended or discontinued at any time. Purchases of our common stock can also be made to offset the dilutive effect of stock-based compensation awards and to meet our obligations under employee benefit and compensation plans, including the exercise of stock options and vesting of restricted stock and to fulfill other stock compensation requirements. During the six months ended June 30, 2017 and 2016, we repurchased approximately 1.6 million and 1.3 million shares of our common stock for approximately $148 million and $100 million, respectively.
 
CASH DIVIDENDS
 
We paid cash dividends totaling $65 million and $130 million for the three and six months ended June 30, 2017, respectively, based on a $0.55 per share quarterly cash dividend on common stock. We paid cash dividends totaling $61 million and $121 million for the three and six months ended June 30, 2016, respectively, based on a $0.50 per share quarterly cash dividend on common stock. On August 7, 2017, our Board declared a cash dividend of $0.59 per share payable on September 15, 2017 to shareholders of record on August 31, 2017.
 
NOTE 11 – STOCK-BASED COMPENSATION
 
STOCK-BASED COMPENSATION EXPENSE (BENEFIT) (in millions)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Stock appreciation rights (a)
$

 
$
(2
)
 
$

 
$
(15
)
Performance share awards (b)
3

 
2

 
8

 
4

Market stock units (c)
7

 
7

 
14

 
14

Other stock-based awards (d)
20

 
4

 
22

 
5

Total Stock-Based Compensation Expense
$
30

 
$
11

 
$
44

 
$
8

 
(a)
We had $6 million recorded in other current liabilities associated with our stock appreciation rights (“SARs”) awards at December 31, 2016. There were no SARs outstanding at June 30, 2017. We paid cash of $4 million to settle 0.1 million SARs that were exercised during the six months ended June 30, 2017 and $20 million to settle 0.3 million SARs that were exercised during the six months ended June 30, 2016.
(b)
We granted 0.1 million market condition performance share awards at a weighted average grant date fair value of $118.09 per share under the amended and restated 2011 Long-Term Incentive Plan (“2011 Plan”) during the six months ended June 30, 2017.
(c)
We granted 0.4 million market stock units at a weighted average grant date fair value of $107.43 per unit under the 2011 Plan during the six months ended June 30, 2017.
(d)
We have aggregated expense for certain award types as they are not considered significant, including awards issued by Andeavor Logistics. During the three and six months ended June 30, 2017, we recognized expense of $17 million related to pre-existing Western Refining, NTI and WNRL awards due to accelerated recognition required upon change-in-control on June 1, 2017. WNRL’s phantom units are the only pre-existing awards that have not been settled or converted to Andeavor awards. These Western Refining, NTI and WNRL awards were converted to Andeavor shares. See Note 2.

 
The income tax effect recognized in the income statement for stock-based compensation was a benefit of $13 million and $6 million for the three months ended June 30, 2017 and 2016, respectively, and $33 million and $18 million for the six months ended June 30, 2017 and 2016, respectively. Included in the tax benefits were $3 million of excess tax benefits from exercises and vestings for both the three months ended June 30, 2017 and 2016, and $17 million and $16 million for the six months ended June 30, 2017 and 2016, respectively. The reduction in current taxes payable recognized from tax deductions resulting from exercises and vestings under all of our stock-based compensation arrangements totaled $7 million and $6 million for the three months ended June 30, 2017 and 2016, respectively, and $32 million and $36 million for the six months ended June 30, 2017 and 2016, respectively.

All outstanding equity awards from Western Refining and NTI stock-based compensation plans were converted to Andeavor shares but remain under their respective Western Refining and NTI plans.
 
NOTE 12 – OPERATING SEGMENTS

The Company’s revenues are derived from three operating segments: Marketing, Logistics and Refining. These results include the contribution from Western Refining for the period of June 1, 2017 to June 30, 2017. We evaluate the performance of our segments based primarily on segment operating income. Segment operating income includes those revenues and expenses that are directly attributable to management of the respective segment. The Marketing and Logistics segments include transactions with our Refining segment. The Logistics segment results for the three and six months ended June 30, 2017, includes the contribution from (i) Andeavor Logistics and (ii) WNRL for the period of June 1, 2017 to June 30, 2017. Corporate general and administrative and depreciation expenses are excluded from segment operating income.

SEGMENT INFORMATION RELATED TO CONTINUING OPERATIONS

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In millions)
Revenues
 
 
 
 
 
 
 
Marketing:
 
 
 
 
 
 
 
Fuel (a)
$
4,712

 
$
4,077

 
$
8,795

 
$
7,375

Merchandise
71

 
6

 
77

 
12

Other
21

 
16

 
36

 
30

Logistics:
 
 
 
 
 
 
 
Gathering and processing
250

 
150

 
495

 
312

Terminalling and transportation
192

 
143

 
367

 
281

Wholesale (b)
165

 

 
165

 

Refining:
 
 
 
 
 
 
 
Refined products
6,658

 
5,508

 
12,470

 
9,793

Crude oil resales and other
391

 
242

 
635

 
453

Intersegment sales
(4,611
)
 
(3,857
)
 
(8,553
)
 
(6,870
)
Total Revenues
$
7,849

 
$
6,285

 
$
14,487

 
$
11,386

Segment Operating Income
 
 
 
 
 
 
 
Marketing
236

 
161

 
369

 
388

Logistics (c)
167

 
118

 
317

 
237

Refining (c)
45

 
527

 
79

 
434

Total Segment Operating Income
448

 
806

 
765

 
1,059

Corporate and unallocated costs
(228
)
 
(88
)
 
(350
)
 
(162
)
Elimination and other costs
(2
)
 

 
(2
)
 

Operating Income
218

 
718

 
413

 
897

Interest and financing costs, net
(87
)
 
(60
)
 
(176
)
 
(120
)
Equity in earnings of equity method investments
3

 
3

 
3

 
5

Other income, net
9

 
25

 
11

 
32

Earnings Before Income Taxes
$
143

 
$
686

 
$
251

 
$
814


18 | 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In millions)
Depreciation and Amortization Expenses
 
 
 
 
 
 
 
Marketing
$
14

 
$
12

 
$
27

 
$
24

Logistics (c)
68

 
46

 
126

 
92

Refining (c)
153

 
146

 
301

 
294

Corporate
7

 
6

 
14

 
12

Intersegment eliminations
(2
)
 

 
(2
)
 

Total Depreciation and Amortization Expenses
$
240

 
$
210

 
$
466

 
$
422

Capital Expenditures
 
 
 
 
 
 
 
Marketing
$
7

 
$
6

 
$
13

 
$
19

Logistics (c)
49

 
60

 
94

 
120

Refining (c)
154

 
119

 
286

 
219

Corporate
57

 
24

 
100

 
39

Total Capital Expenditures
$
267

 
$
209

 
$
493

 
$
397



(a)
Federal and state motor fuel excise taxes on sales by our Marketing segment at retail sites where we own the inventory are included in both revenues and cost of sales in our condensed statements of consolidated operations. These taxes totaled $153 million and $148 million for the three months ended June 30, 2017 and 2016, respectively, and $287 million and $290 million for the six months ended June 30, 2017 and 2016, respectively.
(b)
Wholesale business obtained in the Western Refining Acquisition.
(c)
When Andeavor Logistics acquires certain assets from our Refining segment (the “Predecessors”), the associated liabilities and results of operations of the Predecessors, as applicable, are recast as if the assets were owned by Andeavor Logistics for all periods presented. Adjusted for the historical results of the Predecessors.

IDENTIFIABLE ASSETS RELATED TO CONTINUING OPERATIONS
(in millions; intersegment balances have been eliminated)

 
June 30,
2017
 
December 31,
2016
Marketing (a)
$
1,889

 
$
1,295

Logistics (a)
8,832

 
5,759

Refining (a)
15,280

 
10,350

Corporate
1,028

 
2,994

Total Assets (a)
$
27,029

 
$
20,398


(a)
Increase primarily related to Western Refining Acquisition. See Note 2.


 
 
June 30, 2017 |  19

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Those statements in this section that are not historical in nature should be deemed forward-looking statements that are inherently uncertain. See “Important Information Regarding Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. This section should be read in conjunction with Management’s Discussion and Analysis of Financial Condition, Results of Operations and Glossary of Terms in our Annual Report on Form 10-K for the year ended December 31, 2016.

BUSINESS OVERVIEW

We are the leading integrated refining, marketing and logistics company in our strategic foot print and are driven to create value by operating an integrated business model. Our diversified and integrated portfolio of assets and operations provides us with strong growth opportunities across our value chains.

On June 1, 2017, we acquired Western Refining, Inc. (“Western Refining”) and controlling interest in Western Refining Logistics LP (“WNRL”) (the “Western Refining Acquisition” or the “Merger”). This transformational acquisition provides:
three retail and convenience store brands (Giant®, SUPERAMERICA® and Howdy’s®) to serve a broader customer base and regional preferences;
an extensive and complementary logistics network with access to advantaged crude oil basins, including the Permian Basin; and
three refineries located in Texas, New Mexico and Minnesota with a total refining capacity of approximately 262 thousand barrels per day (“Mbpd”).
The Western Refining Acquisition aligns with our Strategic Priorities as we drive to world class operational efficiencies and effectiveness, deliver value through optimizing our value chains and improving our financial discipline. Additionally, it furthers the transformation we have undergone since 2010.

In 2010, the majority of our operating income was generated through our Refining segment with only a small portion attributable to our previous retail segment, and we did not have significant third party logistics operations. However, in recent years, we have successfully implemented strategies to drive operational productivity improvements, organic growth and portfolio enhancing acquisitions. Identifying new value creation opportunities to grow the Company is core to our strategy. Our focused execution of this strategy has resulted in a transformation of the Company into a highly integrated, well
 
diversified marketing, logistics and refining business. As of 2017, our Marketing segment continues to expand at a steady rate and Andeavor Logistics LP (“Andeavor Logistics”) has grown significantly resulting in each having a larger and more balanced contribution to our operating results. We believe our integrated business model coupled with our Guiding Principles and Strategic Priorities will position us to create leading value for our investors.

OUR CULTURE

GUIDING PRINCIPLES. Underpinning our strategy and goal execution for all of our businesses is a high performing culture where employees lead according to our Guiding Principles and have the opportunity to make a difference. These Guiding Principles are as follows:

CORE VALUES – We act individually and collectively with the highest level of integrity and we are steadfast in our commitment to safety, health and the environment.
EXCEPTIONAL PEOPLE – We employ the best people and develop our capabilities and leadership to realize our objectives.
SHARED PURPOSE – Everyone clearly understands and owns our vision, strategy, how they fit and what they are expected to contribute.
POWERFUL COLLABORATION – We leverage the power of collaboration and our individual and collective expertise to create value and competitive advantage.
SUPERIOR EXECUTION – We pursue and deliver our objectives with energy, passion and a sense of urgency to deliver industry-leading results.

STRATEGIC PRIORITIES. By following our Guiding Principles, we aim to achieve our Strategic Priorities outlined below. In addition, we take a principles-based approach to conducting our business, seeking to create shared value for key stakeholders including employees, communities, business partners, government and the environment.

20 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

STRATEGIC PRIORITIES
 
 
 
 
 
 
 
 
 
 
OPERATIONAL EFFICIENCY & EFFECTIVENESS
continuously improving safety, compliance, reliability, system improvements and cost leadership
 
 
 
 
 
 
 
 
 
 
 
 
 
HIGH PERFORMING CULTURE

fostering a culture that is committed to building leadership at all levels of the organization and across our value chain with employees from diverse backgrounds and experiences while being firmly grounded in our guiding principles
 
 
 
 
 
 
 
 
 
 
VALUE CHAIN OPTIMIZATION
enhancing margin capture through our supply and trading activities, optimization of our integrated businesses and customer focus
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FINANCIAL DISCIPLINE
maintaining a strong financial position by exercising capital discipline and focusing on a balanced use of free cash flow
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
VALUE-DRIVEN GROWTH
extending our capabilities and growing earnings through growth in our logistics and marketing businesses and other strategic opportunities accretive to shareholder value
 
 
 
 
 
 
 
 
 
 
 
 
 


OUR STRATEGY AND GOALS

Execution of our strategy and the achievement of our goals across our business segments is driven by our commitment to our Guiding Principles and Strategic Priorities. The following discussion outlines how we create value in each of our business segments and across our integrated businesses.

MARKETING. Our marketing operations provide a secure and ratable offtake of gasoline and diesel production from our refineries and allow us to enhance our margin capture as refined product moves through the value chain. We are driving growth and improvements in our Marketing segment by focusing on higher value, branded distribution channels, adding new retail sites to our network and implementing store improvements to enhance our convenience store position.

With the closing of the Western Refining Acquisition, we have added 544 stores to our branded network, including 457 company-owned, company-operated stores, bringing our total store count to 3,073 stores. These stores will further drive volumes through higher-value, branded channels thus maximizing capture of margin downstream within the value chain.

LOGISTICS. Our Logistics segment includes assets that establish a market position that helps to minimize our transportation costs as well as maximize our overall performance by focusing on a stable, fee-based business. We achieve value by optimizing our existing asset base, pursuing organic expansion opportunities and growing through strategic acquisitions across three business lines: Gathering and Processing, Terminalling and Transportation and Wholesale.

Additionally, our ownership in Andeavor Logistics and WNRL creates value to our shareholders through the lower cost of capital, our receipt of quarterly distributions, including amounts attributable to our incentive distribution rights, and through the sale of logistics assets to Andeavor Logistics. For example, we received $71 million and $59 million in distributions from Andeavor Logistics during the three months ended June 30, 2017 (“2017 Quarter”) and 2016 (“2016 Quarter”), respectively, and $148 million and $109 million in distributions
 
from Andeavor Logistics during the six months ended June 30, 2017 (“2017 Period”) and 2016 (“2016 Period”), respectively.

During the quarter, Andeavor indicated it had authorized management to work with the board of directors and management of Andeavor Logistics to consider and begin to negotiate a merger of Andeavor Logistics and WNRL and changes to the capital structure of Andeavor Logistics with respect to the incentive distribution rights (“IDRs”).

After evaluating many options related to the IDRs, both Andeavor and Andeavor Logistics’ preferred approach is to pursue a buy-in in exchange for common units. The transactions require approval of the board of directors of all three companies as well as the conflicts committees of both Andeavor Logistics and WNRL.

REFINING. In our Refining segment, our strategy focuses on:
driving operational excellence enabling asset
availability in excess of 97%;
maintaining strict operating cost discipline;
enhancing capital efficiency through superior execution; and
maximizing capital productivity through process optimization including our ability to access regionally advantaged crude oil.

To meet our strategic objectives, we invest in high return capital projects designed to enhance our feedstock flexibility, improve our yields and lower our costs. In addition to the above strategies and goals, we aim to execute on our strategic priorities to further create value for our shareholders through the achievement of annual improvements to operating income and the capturing of synergies associated with the Western Refining Acquisition.


 
 
June 30, 2017 |  21

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

IMPROVEMENTS TO OPERATING INCOME. Our plans, as presented in November 2016, are to deliver $475 to $575 million of improvements to operating income during 2017, which is comprised of $395 to $475 million of growth and productivity and $80 to $100 million of higher throughput and other operational improvements. These improvements consist of $45 to $70 million in Marketing, $125 to $150 million in Logistics and $305 to $355 million in Refining. In addition to these improvements, we outlined market assumptions for 2017, which have not changed, and include fuel margins of 11 to 14 cents per gallon in our Marketing segment and an Tesoro Index of $12 to $14 per throughput barrel in our Refining segment. All of these improvements exclude any expected synergies from the Western acquisition.

Through the first half of the year, the Company has delivered approximately 50% to 55% of the improvements.
 
Estimated Marketing and Logistics improvements are trending above their ranges, however, estimated Refining and throughput improvements are trending slightly below the range.

SYNERGIES. Concurrent with the closing of the Western Refining Acquisition, we outlined expected synergies of $350 to $425 million on an annual basis with this run rate expected to be achieved by June 2019, the second year following the closing of the transaction. This includes approximately $120 to $160 million from value chain optimization, $130 to $140 million from operational improvements and $100 to $125 million from corporate efficiencies. Andeavor estimates it has realized approximately $80 million in annual synergies as of August 8, 2017, consisting primarily of approximately $70 million of Corporate Efficiencies and the remainder in Value Chain Optimization and Operational Improvements.

Our goals are focused on these Strategic Priorities and, thus far, we have accomplished the following in 2017:
 
 
Operational
Efficiency &
Effectiveness
 
Value Chain Optimization
 
Financial
Discipline
 
Value
Driven
Growth
 
High Performing Culture
SAFETY. Our Anacortes refinery received the “Gold Distinguished Safety Award” from the Amer