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EX-32.2 - EXHIBIT 32.2 - ANDEAVORandv3q201710-qex322.htm
EX-32.1 - EXHIBIT 32.1 - ANDEAVORandv3q201710-qex321.htm
EX-31.2 - EXHIBIT 31.2 - ANDEAVORandv3q201710-qex312.htm
EX-31.1 - EXHIBIT 31.1 - ANDEAVORandv3q201710-qex311.htm
EX-10.3 - EXHIBIT 10.3 - ANDEAVORandv3q201710-qex103.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 September 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
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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 155,997,314 shares of the registrant’s Common Stock outstanding at November 3, 2017.
 


TABLE OF CONTENTS
 
 

ANDEAVOR
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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.

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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In millions, except per share amounts)
Revenues (a)
$
9,836

 
$
6,544

 
$
24,323

 
$
17,930

Costs and Expenses
 
 
 
 
 
 
 
Cost of materials and other (excluding items shown separately below) (a)
7,750

 
5,236

 
19,393

 
14,125

Lower of cost or market inventory valuation adjustment
(209
)
 
(20
)
 

 
(236
)
Operating expenses (excluding depreciation and amortization)
899

 
648

 
2,292

 
1,861

Depreciation and amortization expenses
273

 
211

 
739

 
633

General and administrative expenses
168

 
107

 
552

 
283

(Gain) loss on asset disposals and impairments
1

 
2

 
(20
)
 
7

Operating Income
954

 
360

 
1,367

 
1,257

Interest and financing costs, net
(97
)
 
(70
)
 
(273
)
 
(190
)
Equity in earnings of equity method investments
11

 
7

 
14

 
12

Other income (expense), net
(1
)
 

 
10

 
32

Earnings Before Income Taxes
867

 
297

 
1,118

 
1,111

Income tax expense
274

 
95

 
351

 
362

Net Earnings from Continuing Operations
593

 
202

 
767

 
749

Earnings (loss) from discontinued operations, net of tax
8

 
(1
)
 
8

 
10

Net Earnings
601

 
201

 
775

 
759

Less: Net earnings from continuing operations attributable to noncontrolling interest
42

 
32

 
126

 
103

Net Earnings Attributable to Andeavor
$
559

 
$
169

 
$
649

 
$
656

 
 
 
 
 
 
 
 
Net Earnings (Loss) Attributable to Andeavor
 
 
 
 
 
 
 
Continuing operations
$
551

 
$
170

 
$
641

 
$
646

Discontinued operations
8

 
(1
)
 
8

 
10

Total
$
559

 
$
169

 
$
649

 
$
656

Net Earnings (Loss) per Share - Basic
 
 
 
 
 
 
 
Continuing operations
$
3.52

 
$
1.44

 
$
4.75

 
$
5.43

Discontinued operations
0.05

 
(0.01
)
 
0.06

 
0.08

Total
$
3.57

 
$
1.43

 
$
4.81

 
$
5.51

Weighted average common shares outstanding - Basic
156.6

 
118.2

 
135.0

 
119.1

Net Earnings (Loss) per Share - Diluted
 
 
 
 
 
 
 
Continuing operations
$
3.49

 
$
1.43

 
$
4.71

 
$
5.37

Discontinued operations
0.05

 
(0.01
)
 
0.06

 
0.08

Total
$
3.54

 
$
1.42

 
$
4.77

 
$
5.45

Weighted average common shares outstanding - Diluted
157.8

 
119.3

 
136.1

 
120.4

 
 
 
 
 
 
 
 
Dividends per Share
$
0.59

 
$
0.55

 
$
1.69

 
$
1.55

Supplemental Information
 
 
 
 
 
 
 
(a)    Includes excise taxes collected by our Marketing segment
$
191

 
$
146

 
$
478

 
$
436

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

 
 
September 30, 2017 |  3

FINANCIAL STATEMENTS
 
 

ANDEAVOR
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
September 30,
2017
 
December 31,
2016
 
(In millions, except share data)
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents (Logistics: $38 and $688, respectively)
$
528

 
$
3,295

Receivables, net of allowance for doubtful accounts
1,649

 
1,108

Inventories, net
3,791

 
2,640

Prepayments and other current assets
577

 
371

Total Current Assets
6,545

 
7,414

Property, Plant and Equipment, Net (Logistics: $4,422 and $3,444, respectively)
14,410

 
9,976

Goodwill (Logistics: $127 and $117, respectively)
3,339

 
190

Acquired Intangibles, Net (Logistics: $1,041 and $947, respectively)
1,605

 
1,277

Other Noncurrent Assets, Net (Logistics: $392 and $414, respectively)
1,987

 
1,541

Total Assets
$
27,886

 
$
20,398

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
2,830

 
$
2,032

Current maturities of debt
28

 
465

Other current liabilities
1,593

 
1,057

Total Current Liabilities
4,451

 
3,554

Deferred Income Taxes
2,200

 
1,428

Debt, Net of Unamortized Issuance Costs (Logistics: $4,079 and $4,053, respectively)
7,633

 
6,468

Other Noncurrent Liabilities
992

 
821

Total Liabilities
15,276

 
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); 200,069,543 shares issued (159,474,572 in 2016)
33

 
27

Additional paid-in capital
4,943

 
1,473

Retained earnings
6,864

 
6,437

Treasury stock, 44,074,654 common shares (42,574,625 in 2016), at cost
(2,547
)
 
(2,284
)
Accumulated other comprehensive loss, net of tax
(188
)
 
(188
)
Total Andeavor Stockholders’ Equity
9,105

 
5,465

Noncontrolling Interest
3,505

 
2,662

Total Equity
12,610

 
8,127

Total Liabilities and Equity
$
27,886

 
$
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)

 
Nine Months Ended September 30,
 
2017
 
2016
 
(In millions)
Cash Flows From (Used In) Operating Activities
 
 
 
Net earnings
$
775

 
$
759

Adjustments to reconcile net earnings to net cash from operating activities:
 
 
 
Depreciation and amortization expenses
739

 
633

Lower of cost or market inventory valuation adjustment

 
(236
)
Amortization of debt issuance costs and discounts
15

 
12

(Gain) loss on asset disposals and impairments
(20
)
 
7

Gain related to Hawaii Business
(13
)
 
(17
)
Stock-based compensation expense
52

 
21

Deferred income taxes
170

 
182

Turnaround expenditures
(418
)
 
(232
)
Marketing branding costs
(41
)
 
(46
)
Equity in earnings of equity method investments, net of distributions
11

 
14

Other operating activity
(8
)
 
3

Changes in current assets and current liabilities
(85
)
 
52

Changes in noncurrent assets and noncurrent liabilities
24

 
49

Net cash from operating activities
1,201

 
1,201

Cash Flows From (Used In) Investing Activities
 
 
 
Capital expenditures
(902
)
 
(623
)
Acquisitions, net of cash
(1,120
)
 
(412
)
Proceeds from asset sales
49

 
18

Other investing activities

 
(3
)
Net cash used in investing activities
(1,973
)
 
(1,020
)
Cash Flows From (Used In) Financing Activities
 
 
 
Borrowings under revolving credit agreements
1,354

 
761

Repayments on revolving credit agreements
(659
)
 
(666
)
Proceeds from debt offering

 
701

Repayments of debt
(2,090
)
 
(258
)
Dividend payments
(223
)
 
(186
)
Net proceeds from issuance of Andeavor Logistics LP common units
284

 
364

Distributions by Logistics to noncontrolling interest
(218
)
 
(155
)
Purchases of common stock
(400
)
 
(242
)
Taxes paid related to net share settlement of equity awards
(33
)
 
(25
)
Other financing activities
(10
)
 
(30
)
Net cash from (used in) financing activities
(1,995
)
 
264

Increase (Decrease) in Cash and Cash Equivalents
(2,767
)
 
445

Cash and Cash Equivalents, Beginning of Period
3,295

 
942

Cash and Cash Equivalents, End of Period
$
528

 
$
1,387


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


 
 
September 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), a publicly-traded limited partnership, and Western Refining Logistics, LP (“WNRL”), a limited partnership, 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 controlling 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 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.
 
WNRL MERGER AND IDR BUY-IN. Effective October 30, 2017, Andeavor Logistics closed its merger with WNRL (the “WNRL Merger”) exchanging all outstanding common units of WNRL with units of Andeavor Logistics. WNRL public unitholders received 0.5233 units of Andeavor Logistics for each WNRL unit held while Andeavor effectively received 0.4639 units as certain units held by Andeavor’s subsidiaries were canceled in the transaction. The combined effective exchange ratio for the WNRL Merger was 0.4921 units of Andeavor Logistics for every unit of WNRL. Concurrently with the closing of the WNRL Merger, WNRL GP Merger Sub LLC, a direct, wholly owned subsidiary of Andeavor Logistics merged with and into Western Refining Logistics GP, LLC (“WNRL General Partner”) with WNRL General Partner being the surviving entity and becoming a wholly owned subsidiary of Andeavor Logistics. Both WNRL General Partner and Tesoro Logistics GP, LLC (“TLGP”) are indirectly owned by Andeavor and as a result, Andeavor controls both WNRL and Andeavor Logistics.
 
The closing of the WNRL Merger was conditioned upon, among other things, the adoption and effectiveness of the Second Amended and Restated Agreement of Limited Partnership of Andeavor Logistics LP, pursuant to which, simultaneously with the closing of the Merger: (i) the incentive distribution rights in Andeavor Logistics (the “IDRs”) held by TLGP were canceled (the “IDR Exchange”), (ii) the general partner interests in Andeavor Logistics held by TLGP were converted into a non-economic general partner interest in Andeavor Logistics (together with the IDR Exchange, the “IDR/GP Transaction”) and (iii) Andeavor and its affiliates, including TLGP, agreed to increase and extend existing waivers on distributions to Andeavor and its affiliates by $60 million to an aggregate of $160 million between 2017 and 2019. As consideration for the IDR/GP Transaction, TLGP was issued 78.0 million common units in Andeavor Logistics simultaneously with the closing of the WNRL Merger, resulting in an approximate 59% ownership interest in Andeavor Logistics.
 
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

6 | 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

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 nine months ended September 30, 2017 have been omitted, as there was no material change to accumulated other comprehensive income for the nine months ended September 30, 2017. For the nine months ended September 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.

COST CLASSIFICATIONS. Cost of materials and other includes the purchase cost of commodities sold within our Refining and Logistics segments along with the cost of inbound transportation and distribution costs incurred to transport product to our customers, gains and losses related to our commodity hedging activities and the cost of merchandise sold through our Marketing segment. Additionally, lower of cost or market valuation adjustments impact our cost of materials and other but are separately presented in our statements of consolidated operations.

Operating expenses is comprised of direct and indirect operating costs. Direct operating expenses reflect costs incurred for direct labor, repairs and maintenance, outside services, chemicals and catalysts, utility costs, including the purchase of electricity and natural gas used by our facilities, property taxes, environmental compliance costs related to current period operations, rent expense and other direct operating expenses incurred in the production of refined products sold through our Marketing or Refining segments or the provision of services in our Logistics segment. Indirect operating expense represents allocated labor and other administrative costs for centralized personnel that influence our underlying operations, environmental remediation costs unrelated to current period operations, and other costs that are related, but not directly, to our segment operations.

OPERATING EXPENSES (in millions)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Direct operating expenses
$
865

 
$
610

 
$
2,197

 
$
1,750

Indirect operating expenses
34

 
38

 
95

 
111

Operating expenses (excluding depreciation and amortization)
$
899

 
$
648

 
$
2,292

 
$
1,861


Depreciation and amortization expenses consist of the depreciation and amortization of property, plant and equipment, turnaround expenditures, marketing branding costs and intangible assets related to our operating segments along with our corporate operations. General and administrative expenses represent costs that are not directly or indirectly related to or otherwise are not allocated to our marketing, logistics or refining operations. Cost of materials and other, any lower of cost or market valuation adjustments, direct operating expenses incurred across our operating segments, and depreciation and amortization expenses recognized by our Marketing, Logistics and Refining segments (refer to amounts disclosed in Note 12) constitute costs of revenue as defined by U.S. GAAP.

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 September 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.

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 fair value 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.


 
 
September 30, 2017 |  7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 September 30, 2017 and December 31, 2016, respectively, including the general partner interest (approximately 2% at both September 30, 2017 and December 31, 2016) and all of the incentive distribution rights. Through our ownership of 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 nine months ended September 30, 2017, respectively, and 60% and 58% of Andeavor Logistics’ total revenues for the three and nine months ended September 30, 2016, respectively.

As of September 30, 2017, we owned a 52% interest in WNRL. WNRL General Partner, 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 38% and 37% of WNRL’s total revenues for the three months ended September 30, 2017 and the period of June 1, 2017 through September 30, 2017, respectively. Our long-term agreements with WNRL 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 revenues for the three and nine months ended September 30, 2017 and 2016. We recorded $13 million in pre-tax earnings ($8 million after-tax) during the three and nine months ended September 30, 2017 primarily related to lower than expected costs related to the regulatory improvements we remain obligated to make at the Hawaii refinery. We recorded a loss for the three months ended September 30, 2016 of $1 million both before and after tax. We recorded $16 million in pre-tax earnings ($10 million after-tax) primarily related to the earn-out provision of the sale during the nine months ended September 30, 2016. Cash flows used in discontinued operations were $17 million for the nine months ended September 30, 2017 and cash flows from discontinued operations were $2 million for the nine months ended September 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 will 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.

We are progressing through our implementation plan and have substantially completed our assessment of expected impacts on our financial statements, business processes, accounting systems and controls, including the evaluation of the recently acquired Western Refining and WNRL businesses. We are currently implementing changes to our processes and controls for impacted areas and are in the process of drafting the initial adoption disclosures and ongoing disclosure requirements. 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. However, we do expect some impact on presentation and disclosures in our financial statements relating to the Logistics segment for contracts that include non-cash consideration or for which the principal versus agent assessment results in a different conclusion under the new rules. In addition, we will make an election to present our Marketing segment revenues net of excise taxes, consistent with our current presentation of certain Marketing and Refining segment revenues.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

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 consolidated 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. As permitted under ASU 2017-01, we have elected to early adopt this standard as of September 30, 2017 and will apply the new guidance to applicable transactions prospectively. We do not expect the adoption of this standard to have a material impact on our financial statements.

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 to net earnings, but it is expected to have an immaterial impact on other line items such as operating income. We did not elect to early adopt and will implement the changes in presentation 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.

DERIVATIVES AND HEDGING. In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), which amends and simplifies existing guidance in order to

 
 
September 30, 2017 |  9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. While we are still evaluating the impact of ASU 2017-12, we do not expect the adoption of this standard 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.

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
805

Prepayments and Other Current Assets
212

Property, Plant and Equipment (a)
3,365

Goodwill
3,063

Acquired Intangibles
258

Other Noncurrent Assets
161

Accounts Payable
(701
)
Accrued Liabilities
(328
)
Current Portion of Long-term Debt
(12
)
Deferred Income Taxes
(602
)
Debt
(2,092
)
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 of Andeavor’s business and rationalization of general and administrative costs. The amount of goodwill by reportable segment is as follows: Marketing $95 million, Logistics $1.0 billion and Refining $2.0 billion. Based on information evaluated to date, we estimate approximately $2.1 billion of the $3.1 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 $1.0 billion of the $3.1 billion in goodwill that otherwise would not be deductible.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

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 has 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 16 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 $5 million as of September 30, 2017. Amortization expense is expected to be approximately $14 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 $22 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 $2 million and $70 million in general and administrative expenses for the three and nine months ended September 30, 2017, respectively. Additionally, we recognized $57 million of severance costs for the nine months ended September 30, 2017, of which $43 million was due to the change of control and $14 million to expected severance and retention payments. We had $22 million recognized in accrued liabilities remaining to be paid.

WESTERN REFINING REVENUES AND NET EARNINGS. For the period from June 1, 2017 through September 30, 2017, we recognized $3.5 billion in revenues and $161 million of net earnings related to the business acquired. The net earnings for this period include related acquisition and severance costs.

PRO FORMA FINANCIAL INFORMATION. The following unaudited pro forma information combines the historical operations of Andeavor 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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
Revenues
$
8,637

 
$
28,417

 
$
23,647

Net earnings (a)
276

 
961

 
913


(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 the nine months ended September 30, 2017 includes 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.

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

 
 
September 30, 2017 |  11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 the nine months ended September 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)

 
September 30,
2017
 
December 31,
2016
Domestic crude oil and refined products
$
3,408

 
$
2,099

Foreign subsidiary crude oil (a)
51

 
310

Materials and supplies
222

 
149

Oxygenates and by-products
63

 
81

Merchandise
47

 
1

Total Inventories
$
3,791

 
$
2,640


(a)
In April 2017, our pipeline and storage lease in Panama terminated.

The replacement cost of our crude oil and refined product inventories accounted for using the LIFO costing method exceeded carrying value by approximately $463 million at September 30, 2017. 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)

 
September 30,
2017
 
December 31,
2016
Marketing
$
1,307

 
$
934

Logistics
6,061

 
4,059

Refining
10,361

 
8,067

Corporate
575

 
412

Property, Plant and Equipment, at Cost
18,304

 
13,472

Accumulated depreciation
(3,894
)
 
(3,496
)
Property, Plant and Equipment, Net
$
14,410

 
$
9,976


We capitalize interest as part of the cost of major projects during the construction period. Capitalized interest totaled $11 million and $8 million for the three months ended September 30, 2017 and 2016, respectively, and $33 million and $20 million for the nine months ended September 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;

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

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 September 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
September 30,
2017
 
December 31,
2016
 
September 30,
2017
 
December 31,
2016
Commodity Futures Contracts
Prepayments and other current assets
$
763

 
$
821

 
$
826

 
$
871

Commodity Swap Contracts
Prepayments and other current assets
31

 
11

 
34

 
13

Commodity Swap Contracts
Receivables
3

 

 

 

Commodity Swap Contracts
Accounts payable

 

 
5

 
2

Commodity Options Contracts
Prepayments and other current assets
3

 
1

 
1

 

Commodity Forward Contracts
Receivables
13

 
6

 

 

Commodity Forward Contracts
Accounts payable

 

 
8

 
2

Total Gross Mark-to-Market Derivatives
813

 
839

 
874

 
888

Less: Counterparty Netting and Cash Collateral (a)
(661
)
 
(744
)
 
(781
)
 
(832
)
Total Net Fair Value of Derivatives
$
152

 
$
95

 
$
93

 
$
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 September 30, 2017 and December 31, 2016, we had provided cash collateral amounts of $120 million and $88 million, respectively, related to our unrealized derivative positions. Cash collateral amounts are netted with mark-to-market derivative assets.


 
 
September 30, 2017 |  13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

GAINS (LOSSES) ON MARK-TO-MARKET DERIVATIVES (in millions)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Commodity Contracts
$
(90
)
 
$
19

 
$
30

 
$
(25
)
Foreign Currency Forward Contracts

 

 

 
1

Total Gain (Loss) on Mark-to-Market Derivatives
$
(90
)
 
$
19

 
$
30

 
$
(24
)

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
(1
)
 
$
10

 
$
8

 
$
5

Cost of materials and other
(89
)
 
9

 
22

 
(30
)
Other income, net

 

 

 
1

Total Gain (Loss) on Mark-to-Market Derivatives
$
(90
)
 
$
19

 
$
30

 
$
(24
)

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:
 
 
 
 
 
 
 
Futures Contracts - short
(1,989)
 
 
(64)
 
Barrels
Swap Contracts - long
1,319
 
5,459
 
 
Barrels
Futures Contracts - long
 
1,184
 
 
Barrels
Swap Contracts - short
 
 
(349)
 
Barrels
Options - long
16
 
3,875
 
 
Barrels
Forwards - long
2,161
 
 
 
Barrels
Corn:
 
 
 
 
 
 
 
Futures Contracts - long
300
 
30
 
 
Bushels

At September 30, 2017, we had open Forward Contracts to purchase CAD $5 million that were settled on October 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 September 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.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE (in millions)

 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral (a)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts
$
763

 
$

 
$

 
$
(637
)
 
$
126

Commodity Swap Contracts

 
34

 

 
(24
)
 
10

Commodity Options Contracts
3

 

 

 

 
3

Commodity Forward Contracts

 
13

 

 

 
13

Total Assets
$
766

 
$
47

 
$

 
$
(661
)
 
$
152

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts
$
826

 
$

 
$

 
$
(757
)
 
$
69

Commodity Swap Contracts

 
39

 

 
(24
)
 
15

Commodity Options Contracts
1

 

 

 

 
1

Commodity Forward Contracts

 
8

 

 

 
8

Environmental Credit Obligations

 
149

 

 

 
149

Total Liabilities
$
827

 
$
196

 
$

 
$
(781
)
 
$
242


 
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 September 30, 2017 and December 31, 2016, we had provided cash collateral amounts of $120 million and $88 million, respectively, 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 September 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.


 
 
September 30, 2017 |  15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 - DEBT

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

 
September 30,
2017
 
December 31,
2016
Total debt (a)
$
7,730

 
$
7,042

Unamortized issuance costs and premiums (b)
(69
)
 
(109
)
Current maturities
(28
)
 
(465
)
Debt, Net of Current Maturities and Unamortized Issuance Costs (c)
$
7,633

 
$
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 September 30, 2017 and December 31, 2016, respectively. Total debt related to WNRL, which is non-recourse to Andeavor, except for WNRL General Partner, was $320 million at September 30, 2017.
(b)
Includes premium of $25 million related to the incremental fair value of the WNRL senior notes 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 September 30, 2017
 
Outstanding
Letters of Credit
 
Available Capacity as of September 30, 2017
 
Weighted Average Interest Rate
 
Expiration
Andeavor Revolving Credit Facility (a)
$
3,000

 
$
1,035

 
$
11

 
$
1,954

 
2.75
%
 
September 30, 2020
Andeavor Logistics Revolving Credit Facility
600

 
35

 

 
565

 
3.49
%
 
January 29, 2021
Andeavor Logistics Dropdown Credit Facility
1,000

 

 

 
1,000

 
%
 
January 29, 2021
WNRL Revolving Credit Facility
500

 
20

 
1

 
479

 
3.24
%
 
October 16, 2018
Letter of Credit Facilities
775

 

 

 
775

 
 
 
 
Total Credit Facilities
$
5,875

 
$
1,090

 
$
12

 
$
4,773

 
 
 
 

(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 was set to expire on October 16, 2018. The total commitment of the WNRL Revolving Credit Facility was $500 million, but WNRL had 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 included 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 were guaranteed by all of WNRL's

16 | 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

subsidiaries and, with certain exceptions, would have been guaranteed by any formed or acquired subsidiaries. Obligations under the WNRL Revolving Credit Facility were secured by a first priority lien on substantially all significant assets of WNRL and its subsidiaries. Borrowings under the WNRL Revolving Credit Facility did 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 varied 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 3.50% at September 30, 2017. The WNRL Revolving Credit Facility contained covenants that limited or restricted WNRL's ability to make cash distributions. WNRL was required to maintain certain financial ratios that are tested on a quarterly basis for the immediately preceding four quarter period. In connection with the WNRL Merger, all amounts outstanding were repaid with borrowings on the Andeavor Logistics Revolving Credit Facility and the WNRL Revolving Credit Facility was terminated.

WNRL SENIOR NOTES. WNRL had $300 million of 7.5% senior notes (the “WNRL Senior Notes”), which WNRL originally entered into on February 11, 2015 and were set to mature on February 11, 2023. The fair value of these notes at June 1, 2017 was $326 million and was 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 paid 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 contained covenants that limited 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 were subjected to a number of important limitations and exceptions. The WNRL Senior Notes also provided for events of default, which, if any of them occur, would have permitted or required the principal, premium, if any, and interest on all the then outstanding WNRL Senior Notes to be due and payable immediately. In connection with the WNRL Merger, all WNRL Senior Notes were repaid with borrowings on the Andeavor Logistics Revolving Credit Facility.

ANDEAVOR DEBT REPAYMENTS. On September 27, 2017, we redeemed all of our outstanding 4.250% Senior Notes due 2017 for approximately $459 million, including $9 million of accrued interest, by borrowing on the Andeavor Revolving Credit Facility.

NOTE 8 - BENEFIT PLANS

COMPONENTS OF PENSION AND OTHER POSTRETIREMENT BENEFIT EXPENSE (INCOME) (in millions)

 
Pension Benefits
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
13

 
$
11

 
$
39

 
$
34

Interest cost
8

 
8

 
24

 
23

Expected return on plan assets
(7
)
 
(6
)
 
(21
)
 
(20
)
Recognized net actuarial loss
5

 
4

 
16

 
14

Recognized curtailment loss and settlement cost

 

 

 
5

Net Periodic Benefit Expense
$
19

 
$
17

 
$
58

 
$
56

 
 
 
 
 
 
 
 
 
Other Postretirement Benefits
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
1

 
$

 
$
2

 
$
2

Interest cost
1

 
1

 
2

 
2

Amortization of prior service credit
(8
)
 
(8
)
 
(25
)
 
(26
)
Recognized net actuarial loss

 
1

 
2

 
3

Net Periodic Benefit Income
$
(6
)
 
$
(6
)
 
$
(19
)
 
$
(19
)

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 is immaterial to our financial statements.


 
 
September 30, 2017 |  17

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, (ii) our Annual Report on Form 10-K for the year ended December 31, 2016 or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017, or (iii) Western Refining’s Annual Report on Form 10-K for the year ended December 31, 2016 or its 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.

TIOGA, NORTH DAKOTA CRUDE OIL PIPELINE RELEASE. In September 2013, Andeavor Logistics responded to the release of crude oil in a rural field northeast of Tioga, North Dakota (the “Crude Oil Pipeline Release”). In February 2017, Andeavor Logistics settled the Notice of Violation issued in March 2015 by the North Dakota Department of Health (“NDDOH”). The NDDOH had alleged violations of water pollution regulations as a result of the Crude Oil Pipeline Release. During the third quarter of 2017, Andeavor Logistics recognized an incremental charge of $19 million to amounts previously recognized for estimated costs to complete its remediation and closure activities along with long-term monitoring. The ultimate resolution of the matter does not have a material impact on our liquidity, financial position, or results of operations.

TAX. We are subject to federal, state and foreign tax laws and regulations. Newly enacted tax laws and regulations, and changes in existing tax laws and regulations, could result in increased or decreased expenditures in the future. 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.

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
649

 
126

 
775

Purchases of common stock
(400
)
 

 
(400
)
Dividend payments
(223
)
 

 
(223
)
Net effect of amounts related to equity-based compensation
48

 
7

 
55

Taxes paid related to net share settlement of equity awards
(32
)
 
(1
)
 
(33
)
Net proceeds from issuance of Andeavor Logistics common units (c)
(1
)
 
285

 
284

Distributions to noncontrolling interest

 
(218
)
 
(218
)
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

 
(74
)
 
(29
)
Equity issuance costs related to the Western Refining Acquisition
(3
)
 

 
(3
)
Other
1

 
(1
)
 

Balance at September 30, 2017 (a)(d)
$
9,105

 
$
3,505

 
$
12,610


(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 September 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.

18 | 
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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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Weighted average common shares outstanding
156.6

 
118.2

 
135.0

 
119.1

Common stock equivalents
1.2

 
1.1

 
1.1

 
1.3

Total Diluted Shares
157.8

 
119.3

 
136.1

 
120.4


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 and 0.3 million for the three and nine months ended September 30, 2016, respectively. There were no anti-dilutive securities for the three months ended September 30, 2017 and less than 0.1 million for the nine months ended September 30, 2017.

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 nine months ended September 30, 2017 and 2016, we repurchased approximately 4.2 million and 3.2 million shares of our common stock for approximately $400 million and $250 million, respectively.

CASH DIVIDENDS

We paid cash dividends totaling $93 million and $223 million for the three and nine months ended September 30, 2017, respectively, based on a $0.59 per share and $0.55 per share quarterly cash dividend on common stock in the third and first two quarters, respectively. We paid cash dividends totaling $65 million and $186 million for the three and nine months ended September 30, 2016, respectively, based on a $0.55 per share and $0.50 per share quarterly cash dividend on common stock in the third and first two quarters, respectively. On November 8, 2017, our Board declared a cash dividend of $0.59 per share payable on December 15, 2017 to shareholders of record on November 30, 2017.

NOTE 11 - STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION EXPENSE (BENEFIT) (in millions)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Market stock units (a)
$
8

 
$
7

 
$
22

 
$
21

Performance share awards (b)
3

 
3

 
11

 
7

Stock appreciation rights (c)

 
1

 

 
(14
)
Other stock-based awards (d)
6

 
2

 
28

 
7

Total Stock-Based Compensation Expense
$
17

 
$
13

 
$
61

 
$
21


(a)
We granted 0.4 million market stock units at a weighted average grant date fair value of $107.43 per unit under the amended and restated 2011 Long-Term Incentive Plan (“2011 Plan”) during the nine months ended September 30, 2017.
(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 2011 Plan during the nine months ended September 30, 2017.
(c)
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 September 30, 2017. We paid cash of $4 million to settle 0.1 million SARs that were exercised during the nine months ended September 30, 2017 and $21 million to settle 0.3 million SARs that were exercised during the nine months ended September 30, 2016.
(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 nine months ended September 30, 2017, we recognized expense of $4 million and $21 million primarily related to pre-existing Western Refining, NTI and WNRL awards due to accelerated recognition required upon change-in-control on June

 
 
September 30, 2017 |  19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1, 2017. These Western Refining and NTI awards were converted to Andeavor shares on June 1, 2017. WNRL awards were converted to Andeavor Logistics units on the effective merger date of October 30, 2017. See Note 2.

The income tax effect recognized in the income statement for stock-based compensation was a benefit of $7 million and $5 million for the three months ended September 30, 2017 and 2016, respectively, and $40 million and $23 million for the nine months ended September 30, 2017 and 2016, respectively. Included in the tax benefits were $1 million of excess tax benefits from exercises and vestings for the three months ended September 30, 2017, and $18 million and $16 million for the nine months ended September 30, 2017 and 2016, respectively. There were no excess tax benefits from exercises and vestings for the three months ended September 30, 2016. The reduction in current taxes payable recognized from tax deductions resulting from exercises and vestings under all of our stock-based compensation arrangements totaled $3 million and $1 million for the three months ended September 30, 2017 and 2016, respectively, and $35 million and $37 million for the nine months ended September 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 September 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 nine months ended September 30, 2017 include the contribution from (i) Andeavor Logistics and (ii) WNRL for the period of June 1, 2017 to September 30, 2017. Corporate general and administrative and depreciation expenses are excluded from segment operating income.


20 | 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 

SEGMENT INFORMATION RELATED TO CONTINUING OPERATIONS

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In millions)
Revenues
 
 
 
 
 
 
 
Marketing:
 
 
 
 
 
 
 
Fuel (a)
$
5,635

 
$
4,118

 
$
14,430

 
$
11,493

Merchandise
197

 
7

 
274

 
19

Other
32

 
16

 
68

 
46

Logistics:
 
 
 
 
 
 
 
Terminalling and transportation
222

 
157

 
589

 
438

Gathering and processing
279

 
151

 
764

 
463

Wholesale (b)
583

 

 
758

 

Refining:
 
 
 
 
 
 
 
Refined products
8,551

 
5,641

 
21,021

 
15,434

Crude oil resales and other
457

 
257

 
1,092

 
710

Intersegment sales
(6,120
)
 
(3,803
)
 
(14,673
)
 
(10,673
)
Total Revenues
$
9,836

 
$
6,544

 
$
24,323

 
$
17,930

Segment Operating Income
 
 
 
 
 
 
 
Marketing
175

 
273

 
544

 
661

Logistics (c)
164

 
127

 
481

 
364

Refining (c)
762

 
58

 
841

 
492

Total Segment Operating Income
1,101

 
458

 
1,866

 
1,517

Corporate and unallocated costs
(158
)
 
(98
)
 
(508
)
 
(260
)
Intersegment eliminations
11

 

 
9

 

Operating Income
954

 
360

 
1,367

 
1,257

Interest and financing costs, net
(97
)
 
(70
)
 
(273
)
 
(190
)
Equity in earnings of equity method investments
11

 
7

 
14

 
12

Other income (expense), net
(1
)
 

 
10

 
32

Earnings Before Income Taxes
$
867

 
$
297

 
$
1,118

 
$
1,111

Depreciation and Amortization Expenses
 
 
 
 
 
 
 
Marketing
$
18

 
$
12

 
$
45

 
$
36

Logistics (c)
83

 
47

 
209

 
139

Refining (c)
173

 
146

 
474

 
440

Corporate
6

 
6

 
20

 
18

Intersegment eliminations
(7
)
 

 
(9
)
 

Total Depreciation and Amortization Expenses
$
273

 
$
211

 
$
739

 
$
633

Capital Expenditures
 
 
 
 
 
 
 
Marketing
$
18

 
$
3

 
$
31

 
$
22

Logistics (c)
59

 
61

 
153

 
181

Refining (c)
264

 
134

 
550

 
353

Corporate
57

 
29

 
157

 
68

Total Capital Expenditures
$
398

 
$
227

 
$
891

 
$
624


(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 materials and other in our condensed statements of consolidated operations. These taxes totaled $191 million and $146 million for the three months ended September 30, 2017 and 2016, respectively, and $478 million and $436 million for the nine months ended September 30, 2017 and 2016, respectively.
(b)
Wholesale business obtained in the Western Refining Acquisition.

 
 
September 30, 2017 |  21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(c)
When Andeavor Logistics acquires certain assets or businesses from Andeavor (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)

 
September 30,
2017
 
December 31,
2016
Marketing
$
2,223

 
$
1,295

Logistics
8,862

 
5,759

Refining
16,316

 
10,350

Corporate
485

 
2,994

Total Assets
$
27,886

 
$
20,398



22 | 
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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 marketing, logistics and refining company in our strategic footprint 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 a 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 strengthening our financial position. 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 strategies and the execution of our goals 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.

 
 
September 30, 2017 |  23

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 added 544 stores to our branded network, including 457 company-operated stores, and along with other strategic acquisitions increased our store count to over 3,100 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: Terminalling and Transportation, Gathering and Processing 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 $94 million and $65 million in distributions from Andeavor Logistics and WNRL (since our acquisition) during the three months ended September 30, 2017 (“2017 Quarter”) and 2016 (“2016 Quarter”), respectively, and $242 million and $174 million in distributions from Andeavor Logistics
 
and WNRL during the nine months ended September 30, 2017 (“2017 Period”) and 2016 (“2016 Period”), respectively.

Effective October 30, 2017, Andeavor Logistics completed its $1.7 billion merger with WNRL (the “WNRL Merger”) exchanging all outstanding common units of WNRL with units of Andeavor Logistics. WNRL public unitholders received 0.5233 units of Andeavor Logistics for each WNRL unit held while Andeavor effectively received 0.4639 units as certain units held by Andeavor’s subsidiaries were canceled in the transaction. The combined effective exchange ratio for the WNRL Merger was 0.4921 units of Andeavor Logistics for every unit of WNRL. Concurrently with the closing of the WNRL Merger, WNRL GP Merger Sub LLC, a direct, wholly owned subsidiary of Andeavor Logistics merged with and into Western Refining Logistics GP, LLC (“WNRL General Partner”) with WNRL General Partner being the surviving entity and becoming a wholly owned subsidiary of Andeavor Logistics. Both WNRL General Partner and Tesoro Logistics GP, LLC (“TLGP”) are indirectly owned by us and as a result, we control both WNRL and Andeavor Logistics. See Note 1 for further discussion of the WNRL Merger.

Immediately following the closing of the WNRL Merger, Andeavor and Andeavor Logistics completed its IDR Buy-In transaction whereby Andeavor Logistics issued 78.0 million Andeavor Logistics common units to Andeavor in exchange for the cancellation of Andeavor Logistics’ IDRs and the conversion of its economic general partner interest into a non-economic general partner interest. The total value of the IDR Buy-In represents $3.6 billion in value based on Andeavor Logistics’ closing unit price of $45.90 on October 30, 2017.

On November 8, 2017, Andeavor Logistics acquired logistics assets located in Anacortes, Washington (the “Anacortes Logistics Assets”) from a subsidiary of Andeavor for total consideration of $445 million. The Anacortes Logistics Assets include 3.9 million barrels of crude oil, feedstock and refined products storage at Andeavor’s Anacortes Refinery, the Anacortes marine terminal with approximately 73 thousand barrels per day of feedstock and refined product throughput, a manifest rail facility with approximately 4 thousand barrels of

24 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

throughput and crude oil and refined products pipelines with approximately 111 thousand barrels per day of throughput combined.

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.

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 a 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 third quarter 2017, the Company has delivered approximately 75% to 85% of the improvements.

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 achieved approximately $110 million in annual run-rate synergies through third quarter 2017, consisting primarily of approximately $85 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 American Fuel & Petrochemical Manufacturers. Our Salt Lake City refinery achieved two years with zero process safety incidents.
 
ü
 
 
 
 
 
 
 
ü
WESTERN REFINING ACQUISITION. On June 1, 2017, we completed the previously announced acquisition of Western Refining for approximately $4.0 billion.
 
 
 
ü
 
ü
 
ü
 
 
WNRL MERGER. On October 30, 2017, Andeavor Logistics closed the merger with WNRL on a unit-for-unit exchange. In conjunction with the merger, all of WNRL’s outstanding senior notes and revolving credit facility were refinanced.
 
ü
 
ü
 
ü
 
 
 
 
IDR BUY-IN. Andeavor Logistics issued 78.0 million common units to Andeavor in exchange for the cancellation of its IDRs and the conversion of its economic general partner interest into a non-economic general partner interest, representing a $3.6 billion total value based on a $45.90 closing unit price.
 
 
 
 
 
ü
 
 
 
 
NORTH DAKOTA LOGISTICS ACQUISITION. On January 1, 2017, Andeavor Logistics completed its previously announced acquisition of crude oil, natural gas and produced water gathering pipelines and two processing facilities in the Bakken Region of North Dakota for $705 million.
 
 
 
ü
 
 
 
ü
 
 
JOINT DEVELOPMENT AGREEMENT.  On May 24, 2017, we announced our joint development agreement with EP Energy Corporation to fund oil and natural gas development in the Uinta Basin of Utah. We also entered into a multi-year Crude Oil Supply Agreement with EP Energy Corporation for yellow and black waxy crude oil to supply our Salt Lake City Refinery.
 
ü
 
ü
 
ü
 
 
 
 

 
 
September 30, 2017 |  25

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

 
 
Operational
Efficiency &
Effectiveness
 
Value Chain Optimization
 
Financial
Discipline
 
Value
Driven
Growth
 
High Performing Culture
ANACORTES LOGISTICS ASSETS. On November 8, 2017, Andeavor Logistics acquired logistics assets located in Anacortes, Washington from Andeavor.
 
 
 
ü
 
 
 
ü
 
 
RETURNING CAPITAL TO SHAREHOLDERS. We purchased 4.2 million shares of our common stock and paid $1.69 per share in dividends, returning $623 million in the first nine months of 2017.
 
 
 
 
 
ü
 
 
 
 
INVESTMENT GRADE. Providing for incremental operational and financial flexibility and lower cost of debt:
-    We received investment grade ratings from Fitch, S&P and Moody’s; and
-    Andeavor Logistics received investment grade ratings from Fitch and S&P.
 
 
 
 
 
ü
 
 
 
 
MEXICO OPERATIONS. We entered into a new wholesale marketing agreement to supply transportation fuels and launched the ARCO brand in northwest Mexico. We also reached a definitive agreement with Petróleos Mexicanos (Pemex) to utilize logistics assets to support this operation in the region.
 
 
 
ü
 
 
 
ü
 
 
MARKETING ACQUISITION. We acquired 39 retail stores primarily in Northern California to strengthen our value chain and to further grow our Marketing business.
 
 
 
ü
 
 
 
ü
 
 
PROJECT PERMITS. We received the permits and began construction for both the Los Angeles Refinery Integration and Compliance Project and the Anacortes Isomerization Project.
 
 
 
ü
 
 
 
ü
 
ü
DICKINSON REFINERY. We received a grant from the North Dakota Industrial Commission to begin processing renewable feedstocks into diesel allowing the refinery to retrofit its existing diesel hydrotreater to be able to co-process up to 16,800 gallons per day of renewable feedstocks.
 
ü
 
 
 
 
 
 
 
ü
ANDEAVOR LOGISTICS EQUITY ISSUANCE. On February 21, 2017, Andeavor Logistics and TLGP issued 5.0 million common units at a price of $56.19 per common unit receiving net proceeds of approximately $281 million.
 
 
 
 
 
ü
 
 
 
 

 
 
 

26 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

A discussion and analysis of the factors contributing to our results of operations is presented below. The accompanying condensed consolidated financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance.

ITEMS IMPACTING COMPARABILITY

During the 2017 Quarter, we revised the title of certain of our financial statement line items to avoid any misperception that the amounts included are equivalent to financial information presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The underlying financial information has not changed from what we have previously disclosed. See our discussion under “Non-GAAP Measures” for additional information amount the financial measures we use to analyze our operations.

On June 1, 2017, we closed the Western Refining Acquisition. Our results include the operations from Western Refining for the period of June 1, 2017 to September 30, 2017 and thus prior periods may not be comparable. With the Western Refining Acquisition, we have updated our segments to reflect the results and operations of Western Refining and WNRL. Our Marketing segment reflects our expanded marketing business that, combined with Western Refining, now consists of expanded wholesale marketing operations and over 3,100 retail stores marketed under multiple well-known fuel brands including ARCO®, SUPERAMERICA®, Shell®, Exxon®, Mobil®, Conoco®, Tesoro®, USA GasolineTM and Giant®. Our renamed Logistics segment includes the combined results of Andeavor Logistics and WNRL. We now report the Logistics segment’s results for the combined Terminalling and Transportation, Gathering and Processing and Wholesale business lines. Our Refining segment reports the results of our refining system that now consists of ten refineries in the western United States with a combined capacity of approximately 1.2 million barrels per day. The Refining segment includes the results from Andeavor’s existing Refining segment and Western’s Refining segment, excluding third-party wholesale marketing operations that are now reported in our Marketing segment.

The Logistics segment’s financial and operational data presented include the historical results of all assets acquired from Andeavor prior to the acquisition dates. The acquisitions from Andeavor were transfers between entities under common control. Accordingly, the financial information contained herein has been retrospectively adjusted to include the historical results of the assets acquired from Andeavor prior to the effective date of each acquisition for all periods presented and do not include revenue for transactions with Andeavor. The Logistics segment’s financial data is derived from the combined financial results of the Logistics segment’s predecessor (the “Predecessor”). We refer to the Predecessor and, prior to each acquisition date, the acquisitions from Andeavor collectively, as “Predecessors.”

 
MARKET OVERVIEW

The markets in which we operate are subject to market volatility through the price of crude oil and other feedstocks we acquire for refining and the price we can sell our refined products through our Marketing, Logistics and Refining segments. Refinery disruptions, planned maintenance, changing logistical infrastructure and healthy domestic macroeconomic conditions continue to influence all portions of our business. Refined product values and crude oil prices are generally set by the global market balances. However, refined product demand trends and crude oil supplies in the U.S. and globally have a significant impact on our business.

REFINED PRODUCTS. Globally, crude and product inventory levels have declined from last year. However, continued improvement in global macro-economic factors remains supportive to healthy refined product demand. In the markets in which we operate, refined product fundamentals in the third quarter were within seasonal levels for the first part of the quarter, but domestic refined product supply declined sharply in the second half of the quarter as Gulf Coast refineries were impacted by Hurricane Harvey. This resulted in significant draws on refined product stock leading to overall U.S. gasoline and distillate inventories near the five-year average. Additionally, we continue to see attractive export opportunities for refined products to Latin America due to their persistent low refinery utilization rates.

LOGISTICS. During the third quarter, the spot prices of the commodities our Logistics segment handles increased, including crude oil, refined products and natural gas liquids (“NGLs”), while natural gas was relatively stable. Prior to Hurricane Harvey, U.S. refiners were running at record utilization rates. With overall U.S. crude stock levels falling within the five-year range combined with improved global fundamentals, the price of West Texas Intermediate (“WTI”) crude rose over $5 per barrel in the quarter. Despite a flat rig count in the third quarter, the U.S. oil and gas drilling landscape remains healthy due to premium locational drilling and increased well performance. Domestic crude production exhibited material growth versus the prior quarter even with a number of hurricane related production shut-ins. The higher price environment has improved shale economics and U.S. crude production is expected to grow year over year. Additionally, growing export opportunities are providing an incentive for U.S. refiners to maximize production of gasoline and diesel. These factors create a positive outlook for U.S. oil, gas and refined product throughput volumes, however, regional impacts may differ.

REFINING MARGINS. Refining margins in the third quarter were within seasonal norms for the first half of the quarter as high overall U.S. gasoline stock levels weighed on West Coast product balances. However, the second half of the quarter had higher than seasonal refining margins as Gulf Coast refineries were impacted by Hurricane Harvey, increasing the demand to replenish refined product inventory levels. The market prices for crude oil and other feedstocks continued to experience significant volatility during the quarter. After starting near $48 per barrel in the beginning of the third quarter, the price of Brent crude oil (“Brent”) reached a high of $59 per barrel near the end of the quarter. The changes in the supply and demand of crude oil and refined products from inventory levels

 
 
September 30, 2017 |  27

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

and impacts from weather and other natural disasters have significant impacts on the crack spreads that drive our refining margins.

As a performance benchmark and a comparison with other industry participants, we have utilized the West Coast and Mid-Continent crack spreads. The crack spread is a measure of the difference between market prices for crude oil and refined products and is a commonly used proxy within the industry to estimate or identify trends in refining margins. Crack spreads can fluctuate significantly over time as a result of market conditions and supply and demand balances. The West Coast 321 crack spread is calculated using 3 barrels of Alaska North Slope crude oil (“ANS”) producing 2 barrels of Los Angeles CARB gasoline and 1 barrel of Los Angeles CARB diesel. The Mid-Continent 321 crack spread is calculated using 3 barrels of WTI crude oil producing 2 barrels of Group 3 gasoline and 1 barrel of Group 3 diesel.

West Coast and Mid Continent crack spreads both increased during the 2017 Quarter and the 2017 Period compared to last year. The U.S. West Coast crack spread averaged $20.86 per barrel in the 2017 Quarter and $18.80 per barrel in the 2017 Period compared to $15.68 per barrel in the 2016 Quarter and $16.74 in the 2016 Period. The Mid-Continent crack spread averaged $25.64 per barrel in the 2017 Quarter and $21.15 per barrel in the 2017 Period compared to $19.18 per barrel in the 2016 Quarter and $16.94 in the 2016 Period.

Our actual refining margins differ from these crack spreads based on the actual slate of crude oil we run at our refineries and the products we produce. The global commodity markets for crude oil and refined products are subject to significant volatility resulting in rapidly changing prices and margin environments. Our refineries process a variety of crude oils that are sourced from around the world. The slate of crude oil we process can vary over time as a result of changes in market prices and shipping rates. Additionally, our refining margin is impacted by the changing crude oil price differentials, which is the difference between the benchmark crude oils, WTI and Brent crude oil, and the actual crude oil we run at our refineries. We may experience financial risk associated with price volatility of crude oil and refined products, and we may utilize financial hedge instruments to help mitigate such risks where possible.

NON-GAAP MEASURES

During the 2017 Quarter, we expanded our listing of certain “non-GAAP” performance measures our management uses to analyze operating segment performance and non-GAAP financial measures to evaluate past performance and prospects for the future to supplement our GAAP financial information presented in accordance with U.S. GAAP. These financial and operational non-GAAP measures are important factors in assessing our operating results and profitability and include:

EBITDA—U.S. GAAP-based net earnings before interest, income taxes, and depreciation and amortization expenses;
Fuel margin—calculated as the difference between total marketing revenues and marketing cost of fuels and other;
 
Fuel margin per gallon—calculated as the fuel margin divided by our total fuel sales volumes in gallons;
Merchandise margin—calculated as the difference between merchandise sales and purchases of merchandise;
Merchandise margin percentage—calculated as merchandise margin divided by merchandise sales;
Average margin on NGL sales per barrel—calculated as the difference between the NGL sales revenues and the amounts recognized as NGL expenses divided by our NGL sales volumes in barrels presented in Mbpd multiplied by 1,000 and multiplied by the number of days in the period, (92 days for both the 2017 Quarter and 2016 Quarter, 273 days for the 2017 Period and 274 days for the 2016 Period);
Average wholesale fuel sales margin per gallon—calculated as the difference between total wholesale fuel revenues and wholesale cost of fuel and other divided by our total wholesale fuel sales volumes in gallons;
Refining margin—calculated as the difference between total refining revenues minus total cost of materials and other;
Refining margin per throughput barrel—calculated as refining margin divided by our total refining throughput in barrels multiplied by 1,000 and multiplied by the number of days in the period as stated above; and
Manufacturing costs (excluding depreciation and amortization) per throughput barrel—calculated as manufacturing costs divided by our total refining throughput in barrels multiplied by 1,000 and multiplied by the number of days in the period as stated above. Manufacturing costs represent direct operating expenses incurred by our Refining segment for the production of refined products.

We present these measures because we believe they may help investors, analysts, lenders and ratings agencies analyze our results of operations and liquidity in conjunction with our U.S. GAAP results, including but not limited to:
our operating performance as compared to other publicly traded companies in the refining, logistics and marketing industries, without regard to historical cost basis or financing methods;
our ability to incur and service debt and fund capital expenditures; and
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

Management also uses these measures to assess internal performance. Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures.


28 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

2017 3RD QUARTER VERSUS 2016 3RD QUARTER

HIGHLIGHTS (in millions)

andv3q2017_chart-36493.jpgandv3q2017_chart-37793.jpgandv3q2017_chart-39069.jpg
(a)    See “Non-GAAP Reconciliations” section below for further information regarding these non-GAAP measures.
 
PERCENTAGE OF SEGMENT OPERATING INCOME BY OPERATING SEGMENT

andv3q2017_chart-40433.jpgandv3q2017_chart-42076.jpg
 
OPERATING INCOME RECONCILIATION BY SEGMENT (in millions)

andv3q2017_chart-43504.jpg

 
 
September 30, 2017 |  29

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

OVERVIEW. Our net earnings of $601 million ($3.54 per diluted share) for the 2017 Quarter increased compared to $201 million ($1.42 per diluted share) for the 2016 Quarter driven by a $594 million increase in operating income to $1.0 billion and an increase in EBITDA of $668 million to $1.2 billion compared to the 2016 Quarter. These increases were primarily driven by improved operating results in our Refining and Logistics segments, aided by the Western Refining Acquisition, but were partially offset by a decrease in operating income for our Marketing segment and higher corporate costs.

SEGMENT RESULTS. Refer to our detailed discussion of each segment’s operating and financial results contained in this section.

CORPORATE COSTS. General and administrative expenses increased $61 million in the 2017 Quarter compared to the 2016 Quarter largely due to the inclusion of Western Refining, recognition of integration and acquisition costs associated with the Western Refining Acquisition and higher
 
costs associated with our Enterprise Resource Planning project.

INTEREST AND FINANCING COSTS. Interest and financing costs of $97 million in the 2017 Quarter were higher than the $70 million incurred in the 2016 Quarter due to the impact of Andeavor’s 4.75% Senior Notes Due 2023 and 5.125% Senior Notes Due 2026 that were issued in connection with the Merger as well as Andeavor Logistics’ 5.25% Senior Notes due 2025, all of which were issued subsequent to the 2016 Quarter.

INCOME TAXES. Our income tax expense totaled $274 million in the 2017 Quarter compared to $95 million in the 2016 Quarter primarily due to higher pre-tax earnings during the 2017 Quarter. The combined federal and state effective income tax rate was 32% during both the 2017 Quarter and 2016 Quarter, respectively.


2017 YEAR TO DATE PERIOD VERSUS 2016 YEAR TO DATE PERIOD

HIGHLIGHTS (in millions)

andv3q2017_chart-47972.jpgandv3q2017_chart-49134.jpgandv3q2017_chart-50093.jpg
(a)    See “Non-GAAP Reconciliations” section below for further information regarding these non-GAAP measures.

PERCENTAGE OF SEGMENT OPERATING INCOME BY OPERATING SEGMENT

andv3q2017_chart-51212.jpgandv3q2017_chart-52385.jpg

30 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS


OPERATING INCOME RECONCILIATION BY SEGMENT (in millions)

andv3q2017_chart-53647.jpg
OVERVIEW. Our net earnings of $775 million ($4.77 per diluted share) for the 2017 Period increased compared to $759 million ($5.45 per diluted share) for the 2016 Period due to the $110 million increase in operating income to $1.4 billion and an increase in EBITDA of $194 million to $2.1 billion compared to the same period in 2016. These increases were primarily driven by improved operating results in our Refining and Logistics segments, aided by the Western Refining Acquisition, but were partially offset by a decrease in operating income for our Marketing segment and higher corporate costs.
 
SEGMENT RESULTS. Refer to our detailed discussion of each segment’s operating and financial results contained in this section.
 
CORPORATE COSTS. General and administrative expenses increased $269 million in the 2017 Period compared to the 2016 Period largely due to the inclusion of Western Refining, $100 million of integration costs and $70 million of acquisition costs associated with the Western Refining Acquisition. Included in the integration costs were $57 million of severance and equity payouts, of which $43 million was due
 
to the change of control and $14 million to expected severance and retention payments. Also contributing to the increase in corporate costs were training and data conversion costs associated with our Enterprise Resource Planning project.
 
INTEREST AND FINANCING COSTS. Interest and financing costs of $273 million in the 2017 Period were higher than the $190 million incurred in the 2016 Period due to the impact of Andeavor’s 4.75% Senior Notes Due 2023 and 5.125% Senior Notes Due 2026 that were issued in connection with the Merger as well as Andeavor Logistics’ 5.25% Senior Notes due 2025, all of which were issued subsequent to the 2016 Period.
 
INCOME TAXES. Our income tax expense totaled $351 million in the 2017 Period compared to $362 million in the 2016 Period. The combined federal and state effective income tax rate was 31% and 33% during the 2017 Period and 2016 Period, respectively. The 2017 Period effective income tax rate was lower due to an increased domestic manufacturing activities deduction benefit and other miscellaneous non-recurring items.

 
 
 

 
 
September 30, 2017 |  31

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

SEGMENT RESULTS OF OPERATIONS
andv_marketinga02.jpg MARKETING SEGMENT

We sell convenience store products and gasoline and diesel fuel in the central and western U.S. through Retail, Branded, and Unbranded channels. Our Retail business is made up of company-owned or leased properties offering fuel and convenience store products. Site operations include company-operated stores and third party-operated stores (multi-site operators (“MSO”)). The Branded business is comprised primarily of fuel sales through long-term contracts with Jobbers and Dealers utilizing one of the many successful brands in our portfolio. Our Retail and Branded channels primarily use the ARCO®, SUPERAMERICA®, Shell®, and Mobil® brands for fuel sales and SUPERAMERICA®, Giant®, and ampm® brands for convenience stores. Capturing this brand value results in higher fuel margins for our Marketing segment. Our Unbranded business includes fuel sales through agreements with third-party distributors/operators without an associated fuel brand. The combined use of these channels provides both income from merchandise sales through convenience stores as well as a profitable outlet for the majority of the fuel produced by our refineries. In addition to added profitability, our Marketing business enables our refineries to run optimally, which lowers overall operating costs per barrel.

 
OPERATIONAL DATA AND RESULTS. Management uses fuel margin per gallon and merchandise margin to compare results to other companies in the industry. There are a variety of ways to calculate fuel margin per gallon and merchandise margin; different companies may calculate them in different ways. See the previous section entitled “Non-GAAP Measures” for further information on how these measures are calculated. Merchandise margin is frequently used in the convenience store industry to measure operating results related to merchandise sales. With the Marketing assets in the Western Refining Acquisition, we are reporting fuel margin for our Retail and Branded operations as well as our Unbranded operations. Investors and analysts may use these metrics to help analyze and compare companies in the industry on the basis of operating performance. These financial measures should not be considered alternatives to revenues, segment operating income or any other measures of financial performance presented in accordance with U.S. GAAP. Fuel margin and fuel margin per gallon include the effect of intersegment purchases from the Refining segment.


NUMBER OF RETAIL AND BRANDED STORES (at end of period)

andv3q2017_chart-59362.jpg
(a)
457 company operated stores and 87 jobber/dealer operated stores were obtained in the Western Refining Acquisition.


32 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

2017 3RD QUARTER VERSUS 2016 3RD QUARTER
 
HIGHLIGHTS

andv3q2017_chart-01883.jpgandv3q2017_chart-03995.jpgandv3q2017_chart-05383.jpg
(a)    See “Non-GAAP Reconciliations” section below for further information regarding these non-GAAP measures.

MARKETING SEGMENT OPERATING DATA AND RESULTS (dollars in millions)

 
Three Months Ended September 30,
 
2017
 
2016
Revenues
$
5,864

 
$
4,141

Expenses
 
 
 
Cost of fuels and other (excluding items shown separately below)
5,503

 
3,778

Operating expenses (excluding depreciation and amortization)
164

 
73

Depreciation and amortization expense
18

 
12

Selling, general and administrative expenses
4

 
5

Segment Operating Income
$
175

 
$
273

 
 
 
 
Fuel Sales (millions of gallons)
Retail
500

 
304

Branded
884

 
872

Total Retail and Branded
1,384

 
1,176

Unbranded
1,399

 
1,135

Total Fuel Sales
2,783

 
2,311

 
 
 
 
Fuel Margin (a)
Retail and Branded fuel margin
$
267

 
$
298

Unbranded fuel margin
13

 
46

Total Fuel Margin
$
280

 
$
344

 
 
 
 
Merchandise Margin (a)
$
54

 
$
3

 
 
 
 
Fuel Margin (¢/gallon) (a)
Retail and Branded Fuel Margin

19.3
¢
 

25.3
¢
Unbranded Fuel Margin

0.9
¢
 

4.1
¢
Total Fuel Margin

10.0
¢
 

14.9
¢
 
 
 
 
Merchandise Margin % (a)
27.6
%
 
35.1
%
 
 
OVERVIEW. Operating income decreased $98 million to $175 million for the 2017 Quarter compared to the 2016 Quarter primarily due to weaker fuel margins in all sales channels. Partially offsetting this decrease was additional income from the Western Refining Acquisition on June 1, 2017.
 
RETAIL AND BRANDED. Fuel margin decreased $31 million to $267 million during the 2017 Quarter compared to the 2016 Quarter as normally strong fuel margins for the third quarter were negatively impacted in the 2017 Quarter by rising spot prices. This impact more than offset the increased portfolio size acquired from the Western Refining business. Increased fuel sales of 208 million gallons and an increase of 657 additional stores positively contributed to the fuel margin in the 2017 Quarter, including 544 stores acquired in the Western Refining Acquisition, continued organic branded jobber/dealer growth of 74 stores and the 39 acquired stores primarily in Northern California.
 
UNBRANDED. Fuel margin decreased $33 million to $13 million during the 2017 Quarter compared to the 2016 Quarter as weaker margins were partially offset by higher fuel sales from the Western Refining Acquisition.
 
MERCHANDISE MARGIN. Merchandise margin increased $51 million to $54 million during the 2017 Quarter compared to the 2016 Quarter primarily reflecting the Western Refining Acquisition. However, this also resulted in a decrease in merchandise margin to 27.6% for the 2017 Quarter compared to 35.1% for the 2016 Quarter primarily due to the relative size and product mix of the acquired business.

(a)    See section “Non-GAAP Reconciliations” below for further information regarding this non-GAAP measure.


 
 
September 30, 2017 |  33

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

2017 YEAR TO DATE PERIOD VERSUS 2016 YEAR TO DATE PERIOD
 
HIGHLIGHTS
andv3q2017_chart-06677.jpgandv3q2017_chart-08907.jpgandv3q2017_chart-11219.jpg
(a)    See “Non-GAAP Reconciliations” section below for further information regarding these non-GAAP measures.

MARKETING SEGMENT OPERATING DATA AND RESULTS (dollars in millions)

 
Nine Months Ended September 30,
 
2017
 
2016
Revenues
$
14,772

 
$
11,558

Expenses
 
 
 
Cost of fuels and other (excluding items shown separately below)
13,834

 
10,625

Operating expenses (excluding depreciation and amortization)
334

 
221

Depreciation and amortization expense
45

 
36

Selling, general and administrative expenses
14

 
12

Loss on asset disposals
1

 
3

Segment Operating Income
$
544

 
$
661

 
 
 
 
Fuel Sales (millions of gallons)
Retail
1,131

 
887

Branded
2,558

 
2,527

Total Retail and Branded
3,689

 
3,414

Unbranded
3,575

 
3,284

Total Fuel Sales
7,264

 
6,698

 
 
 
 
Fuel Margin (a)
Retail and Branded fuel margin
$
738

 
$
838

Unbranded fuel margin
62

 
42

Total Fuel Margin
$
800

 
$
880

 
 
 
 
Merchandise Margin (a)
$
77

 
$
7

 
 
 
 
Fuel Margin (¢/gallon) (a)
Retail and Branded Fuel Margin

20.0
¢
 

24.6
¢
Unbranded Fuel Margin

1.7
¢
 

1.3
¢
Total Fuel Margin

11.0
¢
 

13.2
¢
 
 
 
 
Merchandise Margin % (a)
28.0
%
 
35.4
%
 

OVERVIEW. Operating income decreased $117 million to $544 million during the 2017 Period compared to the 2016 Period primarily due to weaker fuel margins partially offset by additional income from the Western Refining Acquisition on June 1, 2017.
 
RETAIL AND BRANDED. Fuel margin decreased $100 million to $738 million during the 2017 Period compared to the 2016 Period as inclement weather along the west coast negatively impacted the first part of the 2017 Period and rising spot prices during the last part negatively impacted margins. These impacts more than offset margin contributions from the Western Refining Acquisition. Volumes increased 275 million gallons primarily attributable to growth in our network from the Western Refining and Northern California acquisitions as well as organic growth in our branded network.
 
UNBRANDED. Fuel margin increased $20 million to $62 million during the 2017 Period compared to the 2016 Period driven by a steady margin environment and contributions from the Western Refining Acquisition. Higher fuel sales of 291 million gallons were largely attributable to the Western Refining Acquisition.
 
MERCHANDISE MARGIN. The Western Refining Acquisition primarily led to our merchandise margin increasing $70 million to $77 million during the 2017 Period compared to the 2016 Period. This also resulted in a decrease in merchandise margin percentage to 28.0% for the 2017 Period compared to 35.4% for the 2016 Period due to the product mix of the acquired business.

(a)    See “Non-GAAP Reconciliations” section below for further information regarding this non-GAAP measure.
 
 
 

34 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

andx_transporta04.jpg andxterminallinga03.jpg andx_gatheringa04.jpg andx_processinga03.jpg LOGISTICS SEGMENT

Our Logistics segment operates across three business lines: Terminalling and Transportation, Gathering and Processing and Wholesale. A significant portion of the assets within this segment are integral to the success of our refining and marketing operations. These business lines generate revenue by charging fees for gathering crude oil, natural gas, and water, for terminalling, transporting and storing crude oil and refined products in terminals and storage tanks, processing and fractionating NGLs and the sale of fuel through wholesale commercial contracts. The supply of and demand for crude oil, natural gas and refined petroleum products in the regions that our Logistics segment serves bear significant influence on its results of operations.

OPERATIONAL DATA AND RESULTS. Several operating metrics are used by management to evaluate performance and efficiency and compare profitability to other companies in the industry. These metrics include:

Average terminalling revenue per barrel—calculated as total terminalling revenue divided by total terminalling throughput;
Average pipeline transportation revenue per barrel—calculated as total pipeline transportation revenue divided by total pipeline transportation throughput;
 
Average margin on NGL sales per barrel—calculated as the difference between the NGL sales revenues and the amounts recognized as NGL expense divided by our NGL sales volumes;
Average gas gathering and processing revenue per Million British thermal units (“MMBtu”)—calculated as total gathering and processing fee-based revenue divided by total gas gathering throughput;
Average crude oil and water gathering revenue per barrel—calculated as total crude oil and water gathering fee-based revenue divided by total crude oil and water gathering throughput; and
Average wholesale fuel sales margin per gallon—calculated as the difference between the fuel sales and the costs associated with the fuel sales divided by total fuel sales volumes.
Investors and analysts use these financial measures to help analyze and compare companies in the industry on the basis of operating performance. These financial measures should not be considered as an alternative to segment operating income, revenues and operating expenses or any other measure of financial performance presented in accordance with U.S. GAAP.




 
 
September 30, 2017 |  35

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

2017 3RD QUARTER VERSUS 2016 3RD QUARTER

HIGHLIGHTS (in millions)

andv3q2017_chart-59494.jpgandv3q2017_chart-01518.jpg
LOGISTICS SEGMENT VOLUMETRIC DATA

andv3q2017_chart-02806.jpgandv3q2017_chart-04939.jpgandv3q2017_chart-07189.jpg
andv3q2017_chart-09668.jpgandv3q2017_chart-11521.jpgandv3q2017_chart-13522.jpg
(a)
Volumes represent barrels sold under Andeavor Logistics’ keep-whole arrangements, net barrels retained under its percent of proceeds (“POP”) arrangements and other associated products.
(b)
Fuel sales represent the Wholesale business obtained in the Western Refining Acquisition.


36 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

LOGISTICS SEGMENT OPERATING RESULTS (in millions, except per barrel and per MMBtu amounts)

 
Three Months Ended September 30,
 
2017
 
2016 (a)
Revenues
 
 
 
Terminalling and Transportation
 
 
 
Terminalling
$
188

 
$
125

Pipeline transportation
34

 
32

Gathering and Processing
 
 
 
NGL sales (b)
90

 
24

Gas gathering and processing
85

 
67

Crude oil and water gathering
67

 
33

Pass-thru and other revenue
37

 
27

Wholesale
 
 
 
Fuel sales (c)
565

 

Other wholesale
18

 

Total Revenues (d)
1,084

 
308

Costs and Expenses
 
 
 
Terminalling and Transportation
 
 
 
Operating expenses (excluding depreciation and amortization) (e)
65

 
48

Gathering and Processing
 
 
 
NGL expense (excluding items shown separately below) (b)
64

 
1

Operating expenses (excluding depreciation and amortization) (e)
100

 
58

Wholesale
 
 
 
Cost of fuel and other (excluding items shown separately below)
554

 

Operating expenses (excluding depreciation and amortization) (e)
19

 

Depreciation and amortization expenses
83

 
47

General and administrative expenses (f)
34

 
25

Loss on asset disposals
1

 
2

Segment Operating Income
$
164

 
$
127

Average terminalling revenue per barrel
$
1.19

 
$
1.31

Average pipeline transportation revenue per barrel
$
0.40

 
$
0.38

Average margin on NGL sales per barrel (b)(g)
$
38.30

 
$
38.71

Average gas gathering and processing revenue per MMBtu
$
0.96

 
$
0.82

Average crude oil and water gathering revenue per barrel
$
2.19

 
$
1.71

Average wholesale fuel sales margin per gallon (c)(g)
$
0.03

 
$

 

OVERVIEW. Operating income increased $37 million to $164 million for the 2017 Quarter compared to 2016 Quarter primarily due to the acquisitions in the second half of 2016 of certain terminalling and storage assets owned by Andeavor (the “Alaska Storage and Terminalling Assets”) and certain terminalling and storage assets (“the Northern California Terminalling and Storage Assets”), crude oil, natural gas and produced water gathering systems and two natural gas processing facilities acquired from Whiting Oil and Gas Corporation, GBK Investments, LLC and WBI Energy Midstream, LLC (the "North Dakota Gathering and Processing Assets") in January 2017, and from the operations obtained in the Western Refining Acquisition.

TERMINALLING AND TRANSPORTATION. The Terminalling and Transportation revenues, net of operating expenses, increased $48 million, or 44%, primarily due to higher revenues associated with new commercial terminalling and storage agreements executed with our Refining segment in connection with the Northern California Terminalling and Storage Assets and the Alaska Storage and Terminalling Assets acquisitions in the second half of 2016. Also contributing to the increase were higher marine terminalling revenues driven by higher refinery utilization and contribution from the operations obtained in the Western Refining Acquisition. The increase was partially offset by higher operating expenses, particularly related to the Alaska Storage and Terminalling Assets.

GATHERING AND PROCESSING. The Gathering and Processing revenues, net of NGL expense and operating expenses, increased $23 million, or 25%, in the 2017 Quarter compared to the 2016 Quarter. Revenues increased across the natural gas gathering and processing systems and crude oil and water gathering systems primarily due to the acquisition of the North Dakota Gathering and Processing Assets, the impact from the operations obtained in the Western Refining Acquisition and expanded capabilities on our existing Logistics assets. The increase was partially offset by a decline in revenues resulting from lower natural gas volumes in the Rockies Region in the 2017 Quarter, incremental operating expenses primarily associated with the acquisitions and $19 million in estimated costs to complete remediation and closure activities along with long-term monitoring in Tioga, North Dakota.

WHOLESALE. The Wholesale revenues, net of the cost of fuel and operating expenses, are the results of operations obtained in the Western Refining Acquisition on June 1, 2017.

(a)
Adjusted to include the historical results of the Predecessors. Refer to “Items Impacting Comparability” for further discussion.
(b)
For the 2017 Quarter, Logistics had 21.1 Mbpd of gross NGL sales under POP and keep-whole arrangements, of which Logistics retained 7.0 Mbpd. The difference between gross sales barrels and barrels retained is reflected in NGL expense due to the gross presentation required for the POP arrangements associated with the North Dakota Gathering and Processing Assets.

 
 
September 30, 2017 |  37

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

(c)
Fuel sales represent the Wholesale business obtained in the Western Refining Acquisition.
(d)
Logistics revenues from services provided to Andeavor were $461 million and $184 million for the 2017 Quarter and the 2016 Quarter, respectively. These amounts are eliminated upon consolidation.
(e)
Logistics segment operating expenses include amounts billed by Andeavor for services provided to Logistics under various operational contracts. Amounts billed by Andeavor totaled $49 million and $38 million for the 2017 Quarter and the 2016 Quarter, respectively. The net amounts billed include reimbursements of $7 million and $3 million for the 2017 Quarter and the 2016 Quarter, respectively. These amounts are eliminated upon consolidation. Logistics third-party operating expenses related to the transportation of crude oil and refined products related to Andeavor’s sale of those refined products during the ordinary course of business are reclassified to cost of materials and other upon consolidation.
(f)
Logistics segment general and administrative expenses include amounts charged by Andeavor for general and administrative services provided to Logistics under various operational and administrative contracts. These amounts totaled $23 million and $19 million for the 2017 Quarter and the 2016 Quarter, respectively, and are eliminated upon consolidation. Logistics segment third-party general and administrative expenses are reclassified to cost of materials and other as it relates to Andeavor’s sale of refined products in our condensed statements of consolidated operations upon consolidation.
(g)
See “Non-GAAP Reconciliations” section below for further information regarding this non-GAAP measure.

2017 YEAR TO DATE PERIOD VERSUS 2016 YEAR TO DATE PERIOD

HIGHLIGHTS (in millions)

andv3q2017_chart-14987.jpgandv3q2017_chart-16369.jpg
LOGISTICS SEGMENT VOLUMETRIC DATA

andv3q2017_chart-18677.jpgandv3q2017_chart-20781.jpgandv3q2017_chart-22713.jpg
andv3q2017_chart-24747.jpgandv3q2017_chart-26465.jpgandv3q2017_chart-27499.jpg
(a)
Volumes represent barrels sold under Andeavor Logistics’ keep-whole arrangements, net barrels retained under its POP arrangements and other associated products.
(b)
Fuel sales represent the Wholesale business obtained in the Western Refining Acquisition.

38 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

LOGISTICS SEGMENT OPERATING RESULTS (in millions, except per barrel and per MMBtu amounts)

 
Nine Months Ended September 30,
 
2017
 
2016 (a)
Revenues
 
 
 
Terminalling and Transportation
 
 
 
Terminalling
$
492

 
$
345

Pipeline transportation
97

 
93

Gathering and Processing
 
 
 
NGL sales (b)
254

 
78

Gas gathering and processing
252

 
198

Crude oil and water gathering
147

 
100

Pass-thru and other revenue (c)
111

 
87

Wholesale
 
 
 
Fuel sales (d)
730

 

Other wholesale
28

 

Total Revenues (e)
2,111

 
901

Costs and Expenses
 
 
 
Terminalling and Transportation
 
 
 
Operating expenses (excluding depreciation and amortization) (f)
174

 
143

Gathering and Processing
 
 
 
NGL expense (excluding items shown separately below) (b) (c)
179

 
2

Operating expenses (excluding depreciation and amortization) (f)
259

 
179

Wholesale
 
 
 
Cost of fuel and other (excluding items shown separately below)
716

 

Operating expenses (excluding depreciation and amortization) (f)
29

 

Depreciation and amortization expenses
209

 
139

General and administrative expenses (g)
89

 
71

(Gain) loss on asset disposals
(25
)
 
3

Segment Operating Income
$
481

 
$
364

Average terminalling revenue per barrel
$
1.34

 
$
1.25

Average pipeline transportation revenue per barrel
$
0.40

 
$
0.39

Average margin on NGL sales per barrel (b)(e)(h)
$
38.27

 
$
36.48

Average gas gathering and processing revenue per MMBtu
$
0.97

 
$
0.82

Average crude oil and water gathering revenue per barrel
$
1.89

 
$
1.73

Average wholesale fuel sales margin per gallon (d)(h)
$
0.03

 
$

 

OVERVIEW. Operating income increased $117 million to $481 million for the 2017 Period compared to the same period in 2016 primarily due to the acquisitions of the Alaska Storage and Terminalling Assets and the Northern California Terminalling and Storage Assets acquired from Andeavor in the second half of 2016, the North Dakota Gathering and Processing Assets in January 2017 and from the operations obtained in the Western Refining Acquisition during the 2017 Period. The 2017 Period also reflects a $25 million gain on the sale of a refined products terminal in Alaska.

TERMINALLING AND TRANSPORTATION. The Terminalling and Transportation revenues, net of operating expenses, increased $120 million, or 41%, primarily due to higher revenues associated with new commercial terminalling and storage agreements executed with our Refining segment in connection with the Northern California Terminalling and Storage Assets and the Alaska Storage and Terminalling Assets acquisitions in the second half of 2016. Also contributing to the increase were four months of contributions from the operations obtained in the Western Refining Acquisition and higher marine terminalling revenues driven by higher refinery utilization. The increase in revenues were partially offset by higher operating expenses, particularly related to the Alaska Storage and Terminalling Assets and the Western Refining Acquisition.

GATHERING AND PROCESSING. The Gathering and Processing revenues, net of NGL expense and operating expenses, increased $44 million, or 16%, in the 2017 Period compared to the 2016 Period. Revenues increased across the natural gas gathering and processing systems and crude oil and water gathering systems due primarily to the acquisition of the North Dakota Gathering and Processing Assets and expanded capabilities on our existing Logistics assets. Also contributing to the increase were four months of contributions from the operations obtained in the Western Refining Acquisition. The increases were partially offset by a decline in revenues resulting from lower natural gas volumes in the Rockies Region, lower volumes and margins from our Refining segment due to the Mandan refinery undergoing a turnaround, incremental operating expenses primarily associated with the acquisitions and estimated costs to complete remediation and closure activities along with long-term monitoring in Tioga, North Dakota.
 
WHOLESALE. The Wholesale revenues, net of cost of fuel sales and operating expenses, are the results of operations obtained in the Western Refining Acquisition on June 1, 2017.

 
(a)
Adjusted to include the historical results of the Predecessors. Refer to “Items Impacting Comparability” for further discussion.
(b)
For the 2017 Period, Logistics had 21.0 Mbpd of gross NGL sales under POP and keep-whole arrangements, of which Logistics retained 7.3 Mbpd. The difference between gross sales barrels and barrels retained is reflected in NGL expense resulting from the gross presentation required for the POP arrangements associated with the North Dakota Gathering and Processing Assets.

 
 
September 30, 2017 |  39

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

(c)
Included in NGL expense for the 2017 Period were approximately $2 million of costs related to crude oil volumes obtained in connection with the acquisition of the North Dakota Gathering and Processing Assets. The corresponding revenues were recognized in pass-thru and other revenue. As such, the calculation of the average margin on NGL sales per barrel excludes this amount.
(d)
Fuel sales represent the Wholesale business obtained in the Western Refining Acquisition.
(e)
Logistics segment revenues from services provided to Andeavor were $935 million and $521 million for the 2017 Period and the 2016 Period, respectively. These amounts are eliminated upon consolidation.
(f)
Logistics operating expenses include amounts billed by Andeavor for services provided to Logistics under various operational contracts. Amounts billed by Andeavor totaled $132 million and $107 million for the 2017 Period and the 2016 Period, respectively. The net amounts billed include reimbursements of $12 million for both the 2017 and 2016 Periods. These amounts are eliminated upon consolidation. Logistics third-party operating expenses related to the transportation of crude oil and refined products related to Andeavor’s sale of those refined products during the ordinary course of business are reclassified to cost of materials and other upon consolidation.
(g)
Logistics general and administrative expenses include amounts charged by Andeavor for general and administrative services provided under various operational and administrative contracts. These amounts totaled $62 million and $52 million for the 2017 Period and the 2016 Period, respectively, and are eliminated upon consolidation. Logistics third-party general and administrative expenses are reclassified to cost of materials and other as it relates to Andeavor’s sale of refined products in our condensed statements of consolidated operations upon consolidation.
(h)
See “Non-GAAP Reconciliations” section below for further information regarding this non-GAAP measure.

 
 
 

40 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

andvrefininga02.jpg REFINING SEGMENT
 
We currently own and operate ten petroleum refineries located in the western and mid-continent United States and sell transportation fuels to a wide variety of customers. Our refineries produce the majority of the transportation fuels that we sell. We purchase crude oil and other feedstocks from domestic and foreign sources, including the Middle East, South America, western Africa, Canada and other locations either in the spot market or through term agreements with renewal provisions. Our Marketing segment, including its branded retail network, provides a committed outlet for the majority of the gasoline produced by our refineries; however, we also sell gasoline and gasoline blendstocks, jet fuel, diesel fuel, heavy fuel oils and residual products in bulk and opportunistically export refined products to certain foreign markets.
 
Results from our Refining segment are highly volatile and subject to many factors that are beyond our control. Revenue is not a good proxy for financial performance as the key driver of revenue is the underlying price per barrel of crude oil. Refining margin, refinery throughputs, crack spreads and crude oil differentials are more useful metrics to measure the performance of the Refining segment.

The refining margin is the difference between the prices of all refined products sold and the costs incurred for crude oil and other feedstocks used to produce refined products, including the cost of transportation and distribution paid to Andeavor Logistics, WNRL and third parties at contractual rates. The market for crude oil and products is affected by changes in economic conditions and supply and demand balance. Product values and crude oil prices are set by the market and are outside of our control. When evaluating the markets in which we operate, we utilize the U.S. Energy Information Administration and other industry sources to gather supply, demand, utilization, import and export information to forecast and monitor market conditions for our operating regions. We focus on the western and mid-continent U.S., where the majority of our operations are located.

 
Refining utilization is a key metric used by management to evaluate refining operational performance. High utilization allows for efficient operations and lower costs per barrel.

REFINING UTILIZATION (a)
andv3q2017_chart-01626.jpg
andv3q2017_chart-03668.jpg

(a)
Andeavor has a total refining capacity of 1,157 Mbpd for 2017 following the Merger. Prior to the Merger, Andeavor had a total refining capacity of 895 Mbpd following the acquisition of the Dickinson refinery in June 2016 and 875 Mbpd beforehand.

OPERATIONAL DATA AND RESULTS. Various operating metrics are used by management to evaluate performance and efficiency and to compare profitability to other companies in the industry. These measures include:
Refining Margin;
Refining Margin per barrel of throughput; and
Manufacturing costs before depreciation and amortization expense (“Manufacturing Costs”) per throughput barrel.
 
See the previous section entitled “Non-GAAP Measures” for further information on how these measures are calculated. Investors and analysts use these financial measures to help analyze and compare companies in the industry on the basis of operating performance. These financial measures should not be considered alternatives to segment operating income, revenues, costs of sales and operating expenses or any other measure of financial performance presented in accordance with U.S. GAAP.

 
 
September 30, 2017 |  41

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

2017 3RD QUARTER VERSUS 2016 3RD QUARTER

HIGHLIGHTS

andv3q2017_chart-05104.jpgandv3q2017_chart-06047.jpgandv3q2017_chart-08490.jpg
(a)    See “Non-GAAP Reconciliations” section below for further information regarding these non-GAAP measures.

REFINING THROUGHPUT (Mbpd)

andv3q2017_chart-11700.jpg
(a)
We define heavy crude oil as crude oil with an American Petroleum Institute gravity of 24 degrees or less.

YIELD (Mbpd)

andv3q2017_chart-14132.jpg
REFINED PRODUCT SALES (a) (Mbpd)

andv3q2017_chart-17211.jpg

(a)
Sources of total refined product sales include refined products manufactured at our refineries and refined products purchased from third parties. Total refined product sales include sales of manufactured and purchased refined products. Refined product sales include all sales through our Marketing segment as well as in bulk markets and exports through our Refining segment.


42 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

REFINING SEGMENT OPERATING DATA AND RESULTS (in millions, except per barrel amounts)


 
Three Months Ended September 30,
 
2017
 
2016
Refining Revenues
 
 
 
Refined products (a)
$
8,551

 
$
5,641

Crude oil resales and other
457

 
257

Total Revenues
9,008

 
5,898

Refining Cost of Materials and Expenses
Cost of materials and other (excluding items shown separately below)
7,633

 
5,189

LCM
(209
)
 
(20
)
Operating expenses (excluding depreciation and amortization):
 
 
 
Manufacturing costs (b)
529

 
412

Other operating expenses
118

 
113

Total operating expenses
647

 
525

Depreciation and amortization expenses
173

 
146

General and administrative expenses
2

 

Segment Operating Income
$
762

 
$
58

Refining margin (c)
$
1,584

 
$
729

Refining margin per throughput barrel (c)
$
15.09

 
$
9.08

Manufacturing costs (excluding depreciation and amortization) per throughput barrel (b)(c)
$
5.03

 
$
5.11


(a)
Refined product sales include intersegment sales to our Marketing segment of $4.2 billion and $3.6 billion for the 2017 Quarter and the 2016 Quarter, respectively.
(b)
Manufacturing costs represent direct operating expenses incurred by our Refining segment for the production of refined products.
(c)
See “Non-GAAP Reconciliations” section below for further information regarding this non-GAAP measure.
 


OVERVIEW. Operating income for our Refining segment increased $704 million to $762 million during the 2017 Quarter compared to the 2016 Quarter due to a more favorable refining margin environment as U.S. refineries were impacted by Hurricane Harvey. Additionally, the 2017 and 2016 Quarters had positive impacts of $209 million and $20 million, respectively, related to the impacts of the lower of cost or market (“LCM”) adjustments. Partially offset by higher manufacturing costs primarily due to higher energy costs and operating expenses related to the Western Refining Acquisition.

CALIFORNIA REGION. Refining margin increased $188 million in the 2017 Quarter to $641 million, or $13.37 per barrel, compared to the 2016 Quarter of $453 million, or $9.24 per barrel, primarily due to the impacts of the LCM in each respective quarter. LCM for the 2017 Quarter positively impacted refining margin by $98 million compared to a positive impact in the 2016 Quarter of $10 million. The favorable margin environment also contributed to the increase. These increases were partially offset by a refining throughput decrease for the region by 12 Mbpd to 521 Mbpd for the 2017 Quarter and a manufacturing costs increase in the 2017 Quarter to $5.95 per barrel compared to $5.79 per barrel due to the fluctuation in throughput resulting from extended planned maintenance at our Martinez refinery.

PACIFIC NORTHWEST REGION. Refining margin increased $156 million in the 2017 Quarter to $282 million, or $15.03 per barrel, compared to the 2016 Quarter of $126 million, or $7.17 per barrel, primarily due to the favorable margin environment as well as impacts of the LCM in each respective quarter. LCM for the 2017 Quarter positively impacted refining margin by $46 million compared to a positive impact in the 2016 Quarter of $8 million. In addition, refining throughput increased for the region by 13 Mbpd to 204 Mbpd for the 2017 Quarter and manufacturing costs decreased in the 2017 Quarter to $3.46 per barrel compared to $3.87 per barrel due to the fluctuation in throughput.

MID-CONTINENT REGION. Refining margin increased $511 million in the 2017 Quarter to $661 million, or $17.27 per barrel, compared to the 2016 Quarter of $150 million, or $10.94 per barrel due to the results from the operations from the Western Refining Acquisition for 2017 Quarter, which led to a significant increase in refining throughput for the region of 267 Mbpd to 416 Mbpd for the 2017 Quarter. In addition, LCM for the 2017 Quarter positively impacted refining margin by $65 million compared to a positive impact in the 2016 Quarter of $2 million, partially offset by manufacturing costs increasing in the 2017 Quarter to $4.68 per barrel compared to $4.27 per barrel driven by the Western Refining Acquisition.

 
 
September 30, 2017 |  43

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

REFINING SEGMENT OPERATING RESULTS BY REGION (dollars in millions, except per barrel amounts)

 
Three Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
California
(Martinez and
Los Angeles)
 
Pacific Northwest
 (Washington and Alaska)
 
Mid-Continent
(North Dakota, Utah, Minnesota, New Mexico and Texas)
Revenues 
 
 
 
 
 
 
 
 
 
 
 
Refined products
$
4,128

 
$
3,680

 
$
1,306

 
$
1,146

 
$
3,117

 
$
815

Crude oil resales and other
75

 
55

 
52

 
89

 
330

 
113

Total Revenues
4,203

 
3,735

 
1,358

 
1,235

 
3,447

 
928

Refining Cost of Materials and Expenses
 
 
 
 
 
 
 
 
Cost of materials and other (excluding items shown separately below)
3,660

 
3,292

 
1,122

 
1,117

 
2,851

 
780

LCM
(98
)
 
(10
)
 
(46
)
 
(8
)
 
(65
)
 
(2
)
Operating expenses (excluding depreciation and amortization):
 
 
 
 
 
 
 
 
 
 
 
Manufacturing costs (a)
285

 
285

 
65

 
69

 
179

 
58

Other operating expenses
66

 
55

 
21

 
15

 
31

 
43

Total operating expenses
351

 
340

 
86

 
84

 
210

 
101

Depreciation and amortization expenses
98

 
92

 
26

 
25

 
49

 
29

General and administrative expenses
1

 
(1
)
 

 
1

 
1

 

Operating Income
$
191

 
$
22

 
$
170

 
$
16

 
$
401

 
$
20

Refining throughput (Mbpd)
521

 
533

 
204

 
191

 
416

 
149

Refining margin (b)
$
641

 
$
453

 
$
282

 
$
126

 
$
661

 
$
150

Refining margin per throughput barrel (b)
$
13.37

 
$
9.24

 
$
15.03

 
$
7.17

 
$
17.27

 
$
10.94

Manufacturing costs (excluding depreciation and amortization) per throughput barrel (a)(b)
$
5.95

 
$
5.79

 
$
3.46

 
$
3.87

 
$
4.68

 
$
4.27

 
(a)    Manufacturing costs represent direct operating expenses incurred by our Refining segment for the production of refined products.
(b)    See “Non-GAAP Reconciliations” section below for further information regarding this non-GAAP measure.


44 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

2017 YEAR TO DATE PERIOD VERSUS 2016 YEAR TO DATE PERIOD

HIGHLIGHTS

andv3q2017_chart-19730.jpgandv3q2017_chart-21661.jpgandv3q2017_chart-23710.jpg
(a)    See section “Non-GAAP Measures” below for further information regarding these non-GAAP measures.

REFINING THROUGHPUT (Mbpd)

andv3q2017_chart-25173.jpg
(a)
We define heavy crude oil as crude oil with an American Petroleum Institute gravity of 24 degrees or less.

YIELD (Mbpd)

andv3q2017_chart-26592.jpg
REFINED PRODUCT SALES (a) (Mbpd)

andv3q2017_chart-32312.jpg
(a)
Sources of total refined product sales include refined products manufactured at our refineries and refined products purchased from third parties. Total refined product sales include sales of manufactured and purchased refined products. Refined product sales include all sales through our Marketing segment as well as in bulk markets and exports through our Refining segment.

 
 
September 30, 2017 |  45

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

REFINING SEGMENT OPERATING DATA AND RESULTS (in millions, except per barrel amounts)


 
Nine Months Ended September 30,
 
2017
 
2016
Refining Revenues
 
 
 
Refined products (a)
$
21,021

 
$
15,434

Crude oil resales and other
1,092

 
710

Total Revenues
22,113

 
16,144

Refining Cost of Materials and Expense
Cost of materials and other (excluding items shown separately below)
19,060

 
13,965

LCM

 
(236
)
Operating expenses (excluding depreciation and amortization):
 
 
 
Manufacturing costs (b)
1,410

 
1,172

Other operating expenses
317

 
307

Total operating expenses
1,727

 
1,479

Depreciation and amortization expenses
474

 
440

General and administrative
7

 
4

Loss on asset disposals and impairments
4

 

Segment Operating Income
$
841

 
$
492

Refining margin (c)
$
3,053

 
$
2,415

Refining margin per throughput barrel (c)
$
11.72

 
$
10.75

Manufacturing costs (excluding depreciation and amortization) per throughput barrel (b)(c)
$
5.41

 
$
5.22


(a)
Refined product sales include intersegment sales to our Marketing segment of $11.9 billion and $10.2 billion for the 2017 Period and the 2016 Period, respectively.
(b)
Manufacturing costs represent direct operating expenses incurred by our Refining segment for the production of refined products.
(c)
See “Non-GAAP Reconciliations” section below for further information regarding this non-GAAP measure.


 


OVERVIEW. Operating income for our Refining segment increased $349 million to $841 million during the 2017 Period compared to the 2016 Period due to the results from the operations from the Western Refining Acquisition for the 2017 Period and a favorable refining margin environment. Partially offsetting this increase was the impact of the 2016 LCM adjustment. The 2017 Period had no LCM adjustment, but the 2016 Period had a positive impact to the refining margin of $236 million. In addition, manufacturing costs were higher primarily due to the Western Refining Acquisition.

CALIFORNIA REGION. Refining margin increased $43 million in the 2017 Period to $1.6 billion, or $11.59 per barrel, compared to the 2016 Period of $1.6 billion, or $11.54 per barrel, primarily due to an increase in refining throughput for the region of 13 Mbpd to 517 Mbpd for the 2017 Period. Partially offsetting this impact was the change in the LCM. There was no LCM for the 2017 Period compared to a positive impact to refining margin in the 2016 Period of $154 million. In addition, manufacturing costs increased in the 2017 Period to $6.17 per barrel compared to $5.97 per barrel driven by higher energy prices and the timing of maintenance expenses.

PACIFIC NORTHWEST REGION. Refining margin increased $92 million in the 2017 Period to $483 million, or $9.46 per barrel, compared to the 2016 Period of $391 million, or $8.02 per barrel, primarily due to a more favorable margin environment and an increase in refining throughput for the region of 9 Mbpd to 187 Mbpd for the 2017 Period. Partially offsetting this increase was the LCM. There was no LCM for the 2017 Period compared to a positive impact to the refining margin in the 2016 Period of $60 million. In addition, manufacturing costs increased in the 2017 Period to $4.02 per barrel compared to $3.87 per barrel driven by higher energy prices and unplanned maintenance expenses.

MID-CONTINENT REGION. Refining margin increased in the 2017 Period to $934 million, or $13.68 per barrel, compared to the 2016 Period of $431 million, or $11.40 per barrel primarily due to the results from the operations from the Western Refining Acquisition for four months of 2017, which led to a significant increase in refining throughput for the region of 112 Mbpd to 250 Mbpd for the 2017 Period. Partially offsetting this impact was the change in the LCM. There was no LCM for the 2017 Period compared to a positive impact to the refining margin in the 2016 Period of $22 million. In addition, manufacturing costs increased in the 2017 Period to $4.89 per barrel compared to $4.21 per barrel in the 2016 Period driven by the Western Refining Acquisition.



46 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

REFINING SEGMENT OPERATING RESULTS BY REGION (dollars in millions, except per barrel amounts)

 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
California
(Martinez and
Los Angeles)
 
Pacific Northwest
 (Washington and Alaska)
 
Mid-Continent
(North Dakota, Utah, Minnesota, New Mexico and Texas)
Revenues 
 
 
 
 
 
 
 
 
 
 
 
Refined products
$
12,100

 
$
10,358

 
$
3,572

 
$
2,934

 
$
5,349

 
$
2,142

Crude oil resales and other
296

 
157

 
170

 
175

 
626

 
378

Total Revenues
12,396

 
10,515

 
3,742

 
3,109

 
5,975

 
2,520

Refining Cost of Materials and Expenses
 
 
 
 
 
 
 
 
 
 
Cost of materials and other (excluding items shown separately below)
10,760

 
9,076

 
3,259

 
2,778

 
5,041

 
2,111

LCM

 
(154
)
 

 
(60
)
 

 
(22
)
Operating expenses (excluding depreciation and amortization):
 
 
 
 
 
 
 
 
 
 
 
Manufacturing costs (a)
871

 
823

 
205

 
190

 
334

 
159

Other operating expenses
181

 
141

 
59

 
43

 
77

 
123

Total operating expenses
1,052

 
964

 
264

 
233

 
411

 
282

Depreciation and amortization expenses
285

 
280

 
80

 
69

 
109

 
91

General and administrative expenses
5

 
3

 

 
1

 
2

 

Loss on asset disposals and impairments
4

 

 

 

 

 

Operating Income
$
290

 
$
346

 
$
139

 
$
88

 
$
412

 
$
58

Refining throughput (Mbpd)
517

 
504

 
187

 
178

 
250

 
138

Refining margin (b)
$
1,636

 
$
1,593

 
$
483

 
$
391

 
$
934

 
$
431

Refining margin per throughput barrel (b)
$
11.59

 
$
11.54

 
$
9.46

 
$
8.02

 
$
13.68

 
$
11.40

Manufacturing costs (excluding depreciation and amortization) per throughput barrel (a)(b)
$
6.17

 
$
5.97

 
$
4.02

 
$
3.87

 
$
4.89

 
$
4.21


(a)    Manufacturing costs represent direct operating expenses incurred by our Refining segment for the production of refined products.
(b)    See “Non-GAAP Reconciliations” section below for further information regarding this non-GAAP measure.

 
 
 


 
 
September 30, 2017 |  47

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

CAPITAL RESOURCES AND LIQUIDITY

OVERVIEW

Our capital resources and liquidity are impacted by changes in the price of crude oil and refined products, availability of trade credit, market uncertainty and a variety of additional factors beyond our control. These factors include the level of consumer demand for transportation fuels, weather conditions, fluctuations in seasonal demand, governmental regulations, geo-political conditions and overall market and global economic conditions. See “Important Information Regarding Forward-Looking Statements” for further information related to risks and other factors. Future capital expenditures, as well as borrowings under our credit agreements and other sources of capital, may be affected by these conditions.
 
CAPITALIZATION
 
CAPITAL STRUCTURE (in millions)

 
September 30,
2017
 
December 31,
2016
Debt, including current maturities:
 
 
 
Andeavor
 
 
 
Credit Facility
$
1,035

 
$

Senior Notes
2,375

 
2,825

Term Loan Facility
57

 
64

Capital Lease Obligations and Other
129

 
44

Andeavor Debt
3,596

 
2,933

Andeavor Logistics
 
 
 
Credit Facilities
35

 
330

Senior Notes
3,770

 
3,770

Capital Lease Obligations and Other
9

 
9

Andeavor Logistics Debt
3,814

 
4,109

WNRL
 
 
 
Credit Facilities
20

 

Senior Notes
300

 

WNRL Debt
320

 

Total Debt
7,730

 
7,042

Unamortized Issuance Costs and Premiums (a)
(69
)
 
(109
)
Debt, Net of Unamortized Issuance Costs
7,661

 
6,933

Total Equity
12,610

 
8,127

Total Capitalization
$
20,271

 
$
15,060


 

CREDIT FACILITIES OVERVIEW

Our primary sources of liquidity are cash flows from operations with additional sources available under borrowing capacity from our revolving lines of credit. We ended the 2017 Quarter with $528 million of cash and cash equivalents. As of September 30, 2017, there was $1.0 billion of borrowings under the Andeavor revolving credit facility (the “Revolving Credit Facility”), $35 million in borrowings under the Andeavor Logistics secured revolving credit agreement (the “Andeavor Logistics Revolving Credit Facility”), $20 million in borrowings under the WNRL secured revolving credit agreement (the “WNRL Revolving Credit Facility”), and no borrowings under the secured Andeavor Logistics dropdown credit facility (the “Andeavor Logistics Dropdown Credit Facility”). During the 2017 Period, we paid the balance, approximately $45 million, of Western Refining’s revolving credit facilities upon acquisition. In connection with the WNRL Merger, amounts outstanding on the WNRL Revolving Credit Facility and WNRL’s senior notes were repaid through borrowings on the Andeavor Logistics Revolving Credit Facility. We believe available capital resources will be adequate to meet our capital expenditure, working capital, debt service and planned acquisition requirements.

(a)
The unamortized issuance costs for Andeavor Logistics were $48 million and $55 million as of September 30, 2017 and December 31, 2016, respectively. The incremental fair value of the WNRL senior notes was $25 million, which is reflected in the $69 million presented above and will be amortized over the life of the senior notes.


48 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

AVAILABLE CAPACITY UNDER CREDIT FACILITIES (in millions)

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

 
$
1,035

 
$
11

 
$
1,954

 
2.75
%
 
September 30, 2020
Andeavor Logistics Revolving Credit Facility
600

 
35

 

 
565

 
3.49
%
 
January 29, 2021
Andeavor Logistics Dropdown Credit Facility
1,000

 

 

 
1,000

 
%
 
January 29, 2021
WNRL Revolving Credit Facility
500

 
20

 
1

 
479

 
3.24
%
 
October 16, 2018
Letter of Credit Facilities
775

 

 

 
775

 
 
 
 
Total Credit Facilities
$
5,875

 
$
1,090

 
$
12

 
$
4,773

 
 
 
 

(a)
The $3.0 billion Andeavor Revolving Credit Facility total capacity includes the additional $1.0 billion related to the incremental revolving facility.

REVOLVING CREDIT FACILITIES EXPENSES AND FEES

Credit Facility
30 Day Eurodollar (LIBOR) Rate at September 30, 2017
 
Eurodollar Margin
 
Base Rate
 
Base Rate Margin
 
Commitment Fee
(unused portion)
Andeavor Revolving Credit Facility ($3.0 billion)
1.23%
 
1.50%
 
4.25%
 
0.50%
 
0.225%
Andeavor Logistics Revolving Credit Facility ($600 million)
1.23%
 
2.25%
 
4.25%
 
1.25%
 
0.375%
Andeavor Logistics Dropdown Credit Facility ($1.0 billion)
1.23%
 
2.26%
 
4.25%
 
1.26%
 
0.375%
WNRL Revolving Credit Facility ($500 million)
1.23%
 
2.00%
 
4.25%
 
1.00%
 
0.300%

COVENANTS. The Andeavor Revolving Credit Facility, Andeavor senior notes, Andeavor Logistics Revolving Credit Facility, Andeavor Logistics Dropdown Credit Facility, Andeavor Logistics senior notes, WNRL Revolving Credit Facility, and WNRL senior notes include certain negative, affirmative and financial covenants that may limit or restrict the ability of Andeavor, Andeavor Logistics, WNRL and their subsidiaries to:

pay dividends and make other distributions with respect to our capital stock and purchase, redeem or retire our capital stock;
enter into certain hedging agreements;
incur additional indebtedness;
sell assets unless the proceeds from those sales are used to repay debt or are reinvested in our business;
incur liens on assets to secure certain debt;
engage in certain business activities;
make certain payments and distributions from our subsidiaries;
engage in certain investments, mergers or consolidations and transfers of assets; and
enter into non-arm’s length transactions with affiliates.

Following S&P Global Ratings raising Andeavor’s corporate credit and senior unsecured issue ratings in June 2017 to “BBB-” with a stable outlook from “BB+”, a number of these covenants as it relates to Andeavor debt either no longer apply or have become less restrictive and the facility became
 
unsecured. We do not believe that the limitations related to the remaining covenants will restrict our ability to pay dividends (distributions for Andeavor Logistics and WNRL) or repurchase stock under our current programs. We also have financial covenants that require Andeavor Logistics and WNRL to maintain certain interest coverage and leverage ratios. There were no changes to the covenants for Andeavor Logistics and WNRL during the 2017 Quarter. We were in compliance with our debt covenants as of and for the nine months ended September 30, 2017.

ANDEAVOR LOGISTICS INVESTMENT GRADE CREDIT RATING. In February 2017, Fitch Ratings assigned a first-time Long-Term Issuer Default Rating of BBB- to Andeavor Logistics, and S&P Global Ratings raised the corporate credit and senior unsecured issue ratings for Andeavor Logistics to "BBB-" with a stable outlook on October 31, 2017. As a result, Andeavor Logistics achieved an investment grade credit rating.

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. We can repurchase our common stock to offset the dilutive effect of stock-based compensation awards and to meet our obligations under employee benefit and compensation plans.

 
 
September 30, 2017 |  49

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

During the nine months ended September 30, 2017 and 2016, we repurchased approximately 4.2 million and 3.2 million shares of our common stock for approximately $400 million and $250 million, respectively. We have approximately $1.7 billion remaining under our authorized programs as of September 30, 2017.

CASH DIVIDENDS

We paid cash dividends totaling $223 million during the 2017 Period based on a $0.59 per share and $0.55 per share quarterly cash dividend on common stock in the third and first two quarters, respectively and $186 million for the 2016 Period based on a $0.55 per share and $0.50 per share quarterly cash dividend on common stock in the third and first two quarters, respectively. On November 8, 2017, our Board declared a cash dividend of $0.59 per share payable on December 15, 2017 to shareholders of record on November 30, 2017.

CASH FLOW SUMMARY

Working capital (excluding cash) increased $1.0 billion in the 2017 Period primarily due to the acquisition of Western Refining as well as timing of inventory balances due to seasonality.

COMPONENTS OF OUR CASH FLOWS (in millions)

 
Nine Months Ended September 30,
 
2017
 
2016
Cash Flows From (Used in):
 
 
 
Operating activities
$
1,201

 
$
1,201

Investing activities
(1,973
)
 
(1,020
)
Financing activities
(1,995
)
 
264

Increase (Decrease) in Cash and Cash Equivalents
$
(2,767
)
 
$
445


OPERATING ACTIVITIES. Net cash from operating activities remained relatively flat at $1.2 billion during the 2017 Period compared to the 2016 Period.

INVESTING ACTIVITIES. The net cash used in investing activities of $2.0 billion for the 2017 Period increased $953 million compared to $1.0 billion in the 2016 Period. This increase was primarily due to the North Dakota Gathering and Processing Assets acquisition by Andeavor Logistics, our Western Refining Acquisition and higher capital expenditures. The 2016 Period included our acquisitions of Great Northern Midstream LLC, the Dickinson refinery and assets from Flint Hills Resources.

FINANCING ACTIVITIES. Net cash from financing activities during the 2016 Period totaled $264 million compared to $2.0 billion used in the 2017 Period. The $2.3 billion increase in cash used was primarily attributable to $1.6 billion in repayments of debt related to the Western Refining Acquisition along with the $701 million of debt offering proceeds in the 2016 Period. Purchases of common stock were higher and proceeds from issuance of Andeavor Logistics common units were lower
 
in the 2017 Period. Partially offsetting these uses in cash was increased funding from credit facilities, mostly attributable to funding for the Western Refining Acquisition.

CAPITAL EXPENDITURES

In our Annual Report on Form 10-K for the year ended December 31, 2016, we had expected capital expenditures at Andeavor for the year ended December 31, 2017 to be $870 million comprising of growth, maintenance and regulatory expenditures of $325 million, $455 million and $90 million, respectively. However, in conjunction with the Merger, we have updated our expectations for capital expenditures for the year ended December 31, 2017. Andeavor now anticipates full year 2017 capital expenditures to be approximately $1.3 billion, consisting of approximately $1.1 billion at Andeavor and $245 million at Andeavor Logistics, which now includes WNRL. The revised capital expenditure estimate reflects changes in our funding strategy for the Los Angeles Pipeline Interconnect System and the Conan Crude Oil Gathering Pipeline System.

During the quarter, Andeavor announced that it has received sufficient commitments from third party shippers to warrant construction of the Conan Crude Oil Gathering Pipeline system in the Delaware Basin. The gathering system will be approximately 130 miles in length and transport crude oil from origins in Lea County, New Mexico and Loving County, Texas to a terminal to be constructed in Loving County, Texas, where the gathering system interconnects with long-haul pipeline carriers. The system is under construction and is expected to begin commercial service in mid-2018. The estimated capital investment for the first phase of the gathering system is approximately $225 million of which $75 million is expected to be spent in 2017. This project is expected to be offered to Andeavor Logistics upon completion in 2018.

TURNAROUNDS AND BRANDING CHARGES

We updated our planned turnaround and branding charges expenditures and the refinery locations that have scheduled turnarounds due to the Western Refining Acquisition from our plan outlined since our Annual Report on Form 10-K for the year ended December 31, 2016. Turnarounds and branding charges as disclosed in our 10-K were $360 million and $100 million, respectively. We now expect approximately $540 million in turnaround expenditures with no changes to branding charges.

OFF-BALANCE SHEET ARRANGEMENTS

We have not entered into any transactions, agreements or other contractual arrangements that would result in off-balance sheet liabilities other than our leasing arrangements described in Note 15 of our Annual Report on Form 10-K for the year ended December 31, 2016.

ENVIRONMENTAL LIABILITIES

We are subject to extensive federal, state and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment and may require us to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites, install additional controls or make other modifications to certain emission sources, equipment or facilities. See further discussion in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.

50 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

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 store properties. We have accrued liabilities totaling $213 million and $227 million at September 30, 2017 and December 31, 2016, respectively, including $24 million and $22 million for Andeavor Logistics, respectively. See Note 9 in Part I Item 1 for information regarding the Tioga environmental matter.

Other than as described in Part II, Item 1 of this Report, no material developments occurred with respect to proceedings previously reported in our Annual Report on Form 10-K for the year ended December 31, 2016 or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017.

 
OTHER MATTERS

In the ordinary course of business, we become party to lawsuits, administrative proceedings and governmental investigations, including regulatory, environmental and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters. We have not established accruals for these matters unless a loss is probable, and the amount of loss is currently estimable. We assumed all contractual obligations of Western Refining in the Western Refining Acquisition.

IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This report (including information incorporated by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact, including without limitation statements regarding our business strategy and goals, and expectations regarding refining margins, revenues, cash flows, capital expenditures, turnaround expenses, other financial items, growth, acquisitions, our market position, future operations, margins and profitability, are forward-looking statements. Forward-looking statements may be identified by use of the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar terms and phrases. Although we believe our assumptions concerning future events are reasonable, a number of risks, uncertainties and other factors could cause actual results and trends to differ materially from those projected, including, but not limited to:

the constantly changing margin between the price we pay for crude oil and other refinery feedstocks as well as renewable identification numbers (“RINs”) and environmental credits, and the prices at which we are able to sell refined products;
changes in the expected value of and benefits derived from acquisitions and capital projects, including any inability to successfully integrate acquisitions or realize expected synergies;
changes in global economic conditions on our business, especially in California, and the business of our suppliers, customers, business partners and credit lenders;
changes in fuel and utility costs for our facilities;
changes in the cost or availability of third-party vessels, pipelines and other means of transporting crude oil feedstocks and refined products;
regulatory and other requirements concerning the transportation of crude oil, particularly from the Bakken area;
changes in the carrying costs of our inventory;
the timing and extent of changes in commodity prices and underlying demand for our refined products, natural gas and NGLs;
the availability and costs of crude oil, other refinery feedstocks, refined products and RINs;
changes in our cash flow from operations;
direct or indirect effects on our business resulting from actual or threatened terrorist incidents, cyber-security breaches or acts of war;
 
weather conditions, earthquakes or other natural disasters affecting our operations or the areas in which our refined products are marketed;
actions of customers and competitors;
state and federal environmental, economic, health and safety, energy and other policies and regulations, including those related to climate change and any changes therein, and any legal or regulatory investigations, delays in obtaining necessary approvals and permits, compliance costs or other factors beyond our control;
adverse rulings, judgments, or settlements in litigation or other legal or tax matters, including unexpected environmental remediation costs in excess of any reserves;
operational hazards inherent in refining operations and in transporting and storing crude oil and refined products;
changes in our credit profile;
changes in capital requirements or in execution of planned capital projects;
disruptions due to equipment interruption or failure at our facilities or third-party facilities;
seasonal variations in demand for refined products and natural gas;
risks related to labor relations and workplace safety;
political developments; and
the factors described in greater detail under “Competition” and “Risk Factors” in Items 1 and 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, and our other filings with the SEC.

All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events or otherwise.


 
 
September 30, 2017 |  51

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

NON-GAAP RECONCILIATIONS

RECONCILIATION OF NET EARNINGS TO EBITDA (in millions)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net Earnings
$
601

 
$
201

 
$
775

 
$
759

Add back:
 
 
 
 
 
 
 
Interest and financing costs, net
97

 
70

 
273

 
190

Income tax expense
274

 
95

 
351

 
362

Depreciation and amortization expenses
273

 
211

 
739

 
633

EBITDA
$
1,245

 
$
577

 
$
2,138

 
$
1,944



52 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

FUEL MARGIN AND MERCHANDISE MARGIN CALCULATION (dollars in millions, except cents per gallon and percent)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Segment Operating Income
$
175

 
$
273

 
$
544

 
$
661

Add back:
 
 
 
 
 
 
 
Operating expenses
164

 
73

 
334

 
221

Depreciation and amortization expenses
18

 
12

 
45

 
36

General and administrative expenses
4

 
5

 
14

 
12

Loss on asset disposals

 

 
1

 
3

Marketing Margin
$
361

 
$
363

 
$
938

 
$
933

 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Retail and Branded fuel sales
$
3,074

 
$
2,315

 
$
8,074

 
$
6,637

Unbranded fuel sales
2,561

 
1,803

 
6,356

 
4,856

Total fuel sales
5,635

 
4,118

 
14,430

 
11,493

Merchandise
197

 
7

 
274

 
19

Other sales
32

 
16

 
68

 
46

Total Revenues
5,864

 
4,141

 
14,772

 
11,558

Cost of Fuel and Other (excluding depreciation and amortization)
 
 
 
 
 
 
 
Retail and Branded fuel costs
2,807

 
2,017

 
7,336

 
5,799

Unbranded fuel costs
2,548

 
1,757

 
6,294

 
4,814

Total fuel costs
5,355

 
3,774

 
13,630

 
10,613

Purchases of merchandise
143

 
4

 
197

 
12

Other costs
5

 

 
7

 

Total Cost of Fuel and Other
5,503

 
3,778

 
13,834

 
10,625

Marketing Margin
 
 
 
 
 
 
 
Retail and Branded fuel margin
267

 
298

 
738

 
838

Unbranded fuel margin
13

 
46

 
62

 
42

Total fuel margin
280

 
344

 
800

 
880

Merchandise margin
54

 
3

 
77

 
7

Other margin
27

 
16

 
61

 
46

Marketing Margin
$
361

 
$
363

 
$
938

 
$
933

Merchandise Margin Percentage (a)
27.6
%
 
35.1
%
 
28.0
%
 
35.4
%
Fuel Sales (millions of gallons)
 
 
 
 
 
 
 
Retail and Branded fuel sales
1,384

 
1,176

 
3,689

 
3,414

Unbranded fuel sales
1,399

 
1,135

 
3,575

 
3,284

Total Fuel Sales
2,783

 
2,311

 
7,264

 
6,698

 
 
 
 
 
 
 
 
Retail and Branded Fuel Margin (¢/gallon) (a)
19.3
¢
 
25.3
¢
 
20.0
¢
 
24.6
¢
Unbranded Fuel Margin (¢/gallon) (a)
0.9
¢
 
4.1
¢
 
1.7
¢
 
1.3
¢
Total Fuel Margin (¢/gallon) (a)
10.0
¢
 
14.9
¢
 
11.0
¢
 
13.2
¢

(a)
Amounts may not recalculate due to rounding of dollar and volume information.


 
 
September 30, 2017 |  53

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

AVERAGE MARGIN ON NGL SALES PER BARREL CALCULATION (in millions, except per barrel amounts)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Segment Operating Income
$
164

 
$
127

 
$
481

 
$
364

Add back:
 
 
 
 
 
 
 
Cost of fuel and other
554

 

 
716

 

Operating expenses
184

 
106

 
462

 
322

Depreciation and amortization expenses
83

 
47

 
209

 
139

General and administrative expenses
34

 
25

 
89

 
71

(Gain) loss on asset disposals and impairments
1

 
2

 
(25
)
 
3

Other commodity purchases (a)

 

 
2

 

Subtract:
 
 
 
 
 
 
 
Terminalling revenues
(188
)
 
(125
)
 
(492
)
 
(345
)
Pipeline transportation revenues
(34
)
 
(32
)
 
(97
)
 
(93
)
Gas gathering and processing revenues
(85
)
 
(67
)
 
(252
)
 
(198
)
Crude oil gathering revenues
(67
)
 
(33
)
 
(147
)
 
(100
)
Pass-thru and other revenues
(37
)
 
(27
)
 
(111
)
 
(87
)
Fuel sales
(565
)
 

 
(730
)
 

Other wholesale revenues
(18
)
 

 
(28
)
 

Margin on NGL Sales
$
26

 
$
23

 
$
77

 
$
76

Divided by Total Volumes for the Period:
 
 
 
 
 
 
 
NGLs sales volumes (Mbpd)
7.0

 
6.8

 
7.3

 
7.7

Number of days in the period
92

 
92

 
273

 
274

Total volumes for the period (thousands of barrels)
648.5

 
630.1

 
1,979.8

 
2,109.0

Average Margin on NGL Sales per Barrel (b)
$
38.30

 
$
38.71

 
$
38.27

 
$
36.48


(a)
Included in the NGL expense for the nine months ended September 30, 2017 was approximately $2 million of costs related to crude oil volumes obtained and immediately sold in connection with the North Dakota Gathering and Processing Assets acquisition.
(b)
Amounts may not recalculate due to rounding of dollar and volume information.


54 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

AVERAGE WHOLESALE FUEL SALES MARGIN PER GALLON CALCULATION (in millions, except per gallon amounts)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Segment Operating Income
$
164

 
$
127

 
$
481

 
$
364

Add back:
 
 
 
 
 
 
 
NGL expense
64

 
1

 
179

 
2

Operating expenses
184

 
106

 
462

 
322

Depreciation and amortization expenses
83

 
47

 
209

 
139

General and administrative expenses
34

 
25

 
89

 
71

(Gain) Loss on asset disposals and impairments
1

 
2

 
(25
)
 
3

Subtract:
 
 
 
 
 
 
 
Terminalling revenues
(188
)
 
(125
)
 
(492
)
 
(345
)
Pipeline transportation revenues
(34
)
 
(32
)
 
(97
)
 
(93
)
NGL sales
(90
)
 
(24
)
 
(254
)
 
(78
)
Gas gathering and processing revenues
(85
)
 
(67
)
 
(252
)
 
(198
)
Crude oil gathering revenues
(67
)
 
(33
)
 
(147
)
 
(100
)
Pass-thru and other revenues
(37
)
 
(27
)
 
(111
)
 
(87
)
Other wholesale revenues
(18
)
 

 
(28
)
 

Wholesale Fuel Sales Margin
$
11

 
$

 
$
14

 
$

Divided by Total Volumes for the Period:
 
 
 
 
 
 
 
Fuel sales volumes (millions of gallons)
320

 

 
421

 

Average Wholesale Fuel Sales Margin per Gallon (a)
$
0.03

 
$

 
$
0.03

 
$


(a)
Amounts may not recalculate due to rounding of dollar and volume information.

REFINING MARGIN PER THROUGHPUT BARREL CALCULATION (in millions, except per barrel amounts)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Segment Operating Income
$
762

 
$
58

 
$
841

 
$
492

Add back:
 
 
 
 
 
 
 
Manufacturing costs (excluding depreciation and amortization)
529

 
412

 
1,410

 
1,172

Other operating expenses (excluding depreciation and amortization)
118

 
113

 
317

 
307

Depreciation and amortization expenses
173

 
146

 
474

 
440

General and administrative expenses
2

 

 
7

 
4

Loss on asset disposals and impairments

 

 
4

 

Refining Margin
$
1,584

 
$
729

 
$
3,053

 
$
2,415

Divided by Total Volumes:
 
 
 
 
 
 
 
Total refining throughput (Mbpd)
1,141

 
874

 
954

 
819

Number of days in the period
92

 
92

 
273

 
274

Total volumes for the period (millions of barrels) (a)
104.9

 
80.4

 
260.5

 
224.5

Refining Margin per Throughput Barrel (a)
$
15.09

 
$
9.08

 
$
11.72

 
$
10.75


(a)
Amounts may not recalculate due to rounding of dollar and volume information.


 
 
September 30, 2017 |  55

MANAGEMENT’S DISCUSSION AND ANALYSIS
 

REFINING MARGIN PER THROUGHPUT BARREL CALCULATION BY REGION (in millions, except per barrel amounts)

 
California
(Martinez and
Los Angeles)
 
Pacific Northwest (Washington and Alaska)
 
Mid-Continent (North Dakota, Utah, Minnesota, New Mexico and Texas)
 
Three Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Segment Operating Income
$
191

 
$
22

 
$
170

 
$
16

 
$
401

 
$
20

Add back:
 
 
 
 
 
 
 
 
 
 
 
Manufacturing costs (excluding depreciation and amortization)
285

 
285

 
65

 
69

 
179

 
58

Other operating expenses (excluding depreciation and amortization)
66

 
55

 
21

 
15

 
31

 
43

Depreciation and amortization expenses
98

 
92

 
26

 
25

 
49

 
29

General and administrative expenses
1

 
(1
)
 

 
1

 
1

 

Refining Margin
$
641

 
$
453

 
$
282

 
$
126

 
$
661

 
$
150

Divided by Total Volumes:
 
 
 
 
 
 
 
 
 
 
 
Total refining throughput (Mbpd)
521

 
533

 
204

 
191

 
416

 
149

Number of days in the period
92

 
92

 
92

 
92

 
92

 
92

Total volumes for the period (millions of barrels) (a)
47.9

 
49.1

 
18.7

 
17.6

 
38.3

 
13.7

Refining Margin per Throughput Barrel (a)
$
13.37

 
$
9.24

 
$
15.03

 
$
7.17

 
$
17.27

 
$
10.94


(a)    Amounts may not recalculate due to rounding of dollar and volume information.

REFINING MARGIN PER THROUGHPUT BARREL CALCULATION BY REGION (in millions, except per barrel amounts)

 
California
(Martinez and
Los Angeles)
 
Pacific Northwest (Washington and Alaska)
 
Mid-Continent (North Dakota, Utah, Minnesota, New Mexico and Texas)
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Segment Operating Income
$
290

 
$
346

 
$
139

 
$
88

 
$
412

 
$
58

Add back:
 
 
 
 
 
 
 
 
 
 
 
Manufacturing costs (excluding depreciation and amortization)
871

 
823

 
205

 
190

 
334

 
159

Other operating expenses (excluding depreciation and amortization)
181

 
141

 
59

 
43

 
77

 
123

Depreciation and amortization expenses
285

 
280

 
80

 
69

 
109

 
91

General and administrative expenses
5

 
3

 

 
1

 
2

 

Loss on asset disposals and impairments
4

 

 

 

 

 

Refining Margin
$
1,636

 
$
1,593

 
$
483

 
$
391

 
$
934

 
$
431

Divided by Total Volumes:
 
 
 
 
 
 
 
 
 
 
 
Total refining throughput (Mbpd)
517

 
504

 
187

 
178

 
250

 
138

Number of days in the period
273

 
274

 
273

 
274

 
273

 
274

Total volumes for the period (millions of barrels) (a)
141.2

 
137.8

 
51.0

 
48.9

 
68.3

 
37.8

Refining Margin per Throughput Barrel (a)
$
11.59

 
$
11.54

 
$
9.46

 
$
8.02

 
$
13.68

 
$
11.40

 
(a)    Amounts may not recalculate due to rounding of dollar and volume information.


56 | 
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MANAGEMENT’S DISCUSSION AND ANALYSIS

MANUFACTURING COSTS (EXCLUDING DEPRECIATION AND AMORTIZATION) PER THROUGHPUT BARREL
CALCULATION (in millions, except per barrel amounts)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Total Refining Segment operating expenses (excluding depreciation and amortization)
$
647

 
$
525

 
$
1,727

 
$
1,479

Subtract:
 
 
 
 
 
 
 
Other operating expenses (excluding depreciation and amortization)
(118
)
 
(113
)
 
(317
)
 
(307
)
Manufacturing Costs (excluding depreciation and amortization)
$
529

 
$
412

 
$
1,410

 
$
1,172

Divided by Total Volumes:
 
 
 
 
 
 
 
Total refining throughput (Mbpd)
1,141

 
874

 
954

 
819

Number of days in the period
92

 
92

 
273

 
274

Total volumes for the period (millions of barrels)
104.9

 
80.4

 
260.5

 
224.5

Manufacturing Costs (excluding depreciation and amortization) per Throughput Barrel (a)
$
5.03

 
$
5.11

 
$
5.41

 
$
5.22


(a)    Amounts may not recalculate due to rounding of dollar and volume information.

MANUFACTURING COSTS (EXCLUDING DEPRECIATION AND AMORTIZATION) PER THROUGHPUT BARREL CALCULATION BY REGION (in millions, except per barrel amounts)

 
California
(Martinez and
Los Angeles)
 
Pacific Northwest (Washington and Alaska)
 
Mid-Continent (North Dakota, Utah, Minnesota, New Mexico and Texas)
 
Three Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Total operating expenses
$
351

 
$
340

 
$
86

 
$
84

 
$
210

 
$
101

Subtract:
 
 
 
 
 
 
 
 
 
 
 
Other operating expenses (excluding depreciation and amortization)
(66
)
 
(55
)
 
(21
)
 
(15
)
 
(31
)
 
(43
)
Manufacturing Costs (excluding depreciation and amortization)
$
285

 
$
285

 
$
65

 
$
69

 
$
179

 
$
58

Divided by Total Volumes:
 
 
 
 
 
 
 
 
 
 
 
Total refining throughput (Mbpd)
521

 
533

 
204

 
191

 
416

 
149

Number of days in the period
92

 
92

 
92

 
92

 
92

 
92

Total volumes for the period (millions of barrels) (a)
47.9

 
49.1

 
18.7

 
17.6

 
38.3

 
13.7

Manufacturing Costs (excluding depreciation and amortization) per Throughput Barrel (a)
$
5.95

 
$
5.79

 
$
3.46

 
$
3.87

 
$
4.68

 
$
4.27


(a)    Amounts may not recalculate due to rounding of dollar and volume information.

 
 
September 30, 2017 |  57

MANAGEMENT’S DISCUSSION AND ANALYSIS
 


MANUFACTURING COSTS (EXCLUDING DEPRECIATION AND AMORTIZATION) PER THROUGHPUT BARREL
CALCULATION BY REGION (in millions, except per barrel amounts)

 
California
(Martinez and
Los Angeles)
 
Pacific Northwest (Washington and Alaska)
 
Mid-Continent (North Dakota, Utah, Minnesota, New Mexico and Texas)
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Total operating expenses
$
1,052

 
$
964

 
$
264

 
$
233

 
$
411

 
$
282

Subtract:
 
 
 
 
 
 
 
 
 
 
 
Other operating expenses (excluding depreciation and amortization)
(181
)
 
(141
)
 
(59
)
 
(43
)
 
(77
)
 
(123
)
Manufacturing Costs (excluding depreciation and amortization)
$
871

 
$
823

 
$
205

 
$
190

 
$
334

 
$
159

Divided by Total Volumes:
 
 
 
 
 
 
 
 
 
 
 
Total refining throughput (Mbpd)
517

 
504

 
187

 
178

 
250

 
138

Number of days in the period
273

 
274

 
273

 
274

 
273

 
274

Total volumes for the period (millions of barrels) (a)
141.2

 
137.8

 
51.0

 
48.9

 
68.3

 
37.8

Manufacturing Costs (excluding depreciation and amortization) per Throughput Barrel (a)
$
6.17

 
$
5.97

 
$
4.02

 
$
3.87

 
$
4.89

 
$
4.21

 
(a)
Amounts may not recalculate due to rounding of dollar and volume information.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our market risks as of and for the nine months ended September 30, 2017 from the risks discussed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 4.
CONTROLS AND PROCEDURES

Our disclosure controls and procedures are designed to provide reasonable assurance that the information that we are required to disclose in reports we file under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), is accumulated and appropriately communicated to management. There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the third quarter of 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We carried out an evaluation required by Rule 13a-15(b) of the Exchange Act, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures at the end of the reporting period. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the reporting period.

We acquired Western Refining on June 1, 2017, and its total assets and revenues constituted 30.6% and 14.2%, respectively, of our consolidated total assets and revenues as shown on our consolidated financial statements as of and for the nine months ended September 30, 2017. We will exclude Western Refining’s internal control over financial reporting from the scope of management’s 2017 annual assessment of the effectiveness of our disclosure controls and procedures. This exclusion is in accordance with the general guidance issued by the Staff of the SEC that an assessment of a recent business combination may be omitted from management's report on internal control over financial reporting in the first year of consolidation.



58 | 
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LEGAL PROCEEDINGS AND RISK FACTORS

PART II — OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

In the ordinary course of business, we may become party to lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. The information below describes new proceedings or material developments in proceedings that (i) we previously reported in our Annual Report on Form 10-K for the year ended December 31, 2016 or our Quarterly Report on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017 or (ii) Western Refining previously reported in its Annual Report on Form 10-K for the year ended December 31, 2016 or its Quarterly Report on Form 10-Q for the quarter ended March 31, 2017. Although we cannot provide assurance, we believe that an adverse resolution of such proceedings would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.

2010 WASHINGTON REFINERY FIRE. On September 18th, 2017, the Board of Industrial Insurance Appeals’ (“BIIA”) granted the Washington State Department of Labor & Industries’ (“L&I”) and the United Steel Workers’ (“USW”) petitions for review of the BIIA Judge’s June 8, 2017 proposed decision and order. The proposed decision and order vacated the entire citation issued to our Washington Refinery by L&I after the 2010 naptha hydrotreater unit fire and L&I and the USW appealed. L&I issued the citation in October 2010 with an assessed fine of approximately a $2 million after its investigation of the incident. We appealed the citation in January 2011 as we disagree with L&I’s characterizations of operations at the refinery and believe, based on available evidence and scientific reviews, that many of the agency’s conclusions are mistaken. In separate September 2013, November 2013 and February 2015 orders, the BIIA Judge granted partial summary judgment in our favor rejecting 33 of the original 44 allegations in the citation as lacking legal or evidentiary support. The hearing on the remaining 11 allegations concluded in July 2016. We cannot currently estimate the final amount or timing of the resolution of this matter.

MERGER-RELATED LITIGATION. As described in Western Refining’s Annual Report on Form 10-K for the year ended December 31, 2016, on August 24, 2016, an alleged Northern Tier Energy LP (“NTI”) unitholder filed a purported class action complaint in the Arizona District Court, against Western Refining, NTI, certain members of the board of directors of NTI’s general partner and other parties involved with Western Refining’s acquisition of NTI, challenging the adequacy of disclosures made in connection with the acquisition. On July 19, 2017, the case was transferred to the Delaware District Court pursuant to a forum selection clause. The case has been voluntarily dismissed by the plaintiff.

ITEM 1A.
RISK FACTORS

There have been no significant changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

PURCHASES BY ANDEAVOR OF ITS COMMON STOCK

Period
Total Number of
Shares
Purchased (a)
 
Average Price
Paid
per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b)
 
Approximate Dollar
Value of Shares that May
Yet Be Purchased Under the Plans or Programs (in Millions) (b)
July 2017
1,683,238

 
$
96.07

 
1,673,802

 
$
1,797

August 2017
941,373

 
$
97.99

 
930,565

 
$
1,706

September 2017
3,520

 
$
101.58

 

 
$
1,706

Total
2,628,131

 
 
 
2,604,367

 
 

(a)
Includes 23,764 shares acquired from employees during the third quarter of 2017 to satisfy tax withholding obligations in connection with the vesting of performance share awards, market stock units and restricted stock issued to them.
(b)
Our Board of Directors (“Board”) authorized a $1.0 billion share repurchase program on July 30, 2014. On October 28, 2015, our Board approved a new $1.0 billion share repurchase program to become effective upon the full completion of the previous $1.0 billion of share repurchases authorized. On November 16, 2016, the Board approved an additional $1.0 billion of share repurchases.


 
 
September 30, 2017 |  59

EXHIBITS
 
 

ITEM 6.
EXHIBITS

(a) Exhibits
 
 
 
 
Incorporated by Reference (File No. 1-3473, unless otherwise indicated)
Exhibit Number
 
Description of Exhibit
 
Form
 
Exhibit
 
Filing Date
‡ 2.1
 
 
8-K
 
2.1
 
11/18/2016
 
 
 
 
 
 
 
 
 
‡ 2.2
 
 
8-K
 
2.1
 
08/14/2017
 
 
 
 
 
 
 
 
 
2.3
 
 
8-K
 
2.1
 
11/8/2017
 
 
 
 
 
 
 
 
 
3.1
 
 
8-K
 
3.1
 
8/1/2017
 
 
 
 
 
 
 
 
 
3.2
 
 
8-K
 
3.2
 
8/1/2017
 
 
 
 
 
 
 
 
 
10.1
 
 
8-K
 
10.1
 
08/14/2017
 
 
 
 
 
 
 
 
 
10.2
 
 
8-K
 
10.2
 
08/14/2017
 
 
 
 
 
 
 
 
 
*10.3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*31.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*31.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*32.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*32.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 

Certain schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the SEC on request.
*
Filed herewith.
**
Submitted electronically herewith.


60 | 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ANDEAVOR
 
 
 
Date:
November 9, 2017
/s/ STEVEN M. STERIN
 
 
Steven M. Sterin
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial Officer and Duly Authorized Officer)


 
 
September 30, 2017 |  61