|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
NOTE 1 – BASIS OF PRESENTATION
ORGANIZATION
Effective August 1, 2017, Tesoro Corporation changed its name to Andeavor. As used in this report, the terms “Andeavor,” the “Company,” “we,” “us” or “our” may refer to Andeavor, one or more of its consolidated subsidiaries or all of them taken as a whole. The words “we,” “us” or “our” generally include Andeavor Logistics LP (“Andeavor Logistics”) (formerly Tesoro Logistics LP) and Western Refining Logistics, LP (“WNRL”), publicly-traded limited partnerships, and their subsidiaries as consolidated subsidiaries of Andeavor with certain exceptions where there are transactions or obligations between Andeavor Logistics, WNRL and Andeavor or its other subsidiaries.
WESTERN REFINING.
On
June 1, 2017
, pursuant to the Agreement and Plan of Merger, dated as of
November 16, 2016
(the “Merger Agreement”), by and among Western Refining, Inc. (“Western Refining”), the Company, our wholly-owned subsidiaries Tahoe Merger Sub 1, Inc. and Tahoe Merger Sub 2, LLC, Tahoe Merger Sub 1 was merged with and into Western Refining, with Western Refining surviving such merger as a wholly-owned subsidiary of the Company (the “Merger” or the “Western Refining Acquisition”). As a result of the Merger, we obtained Western Refining’s
53%
ownership interest in WNRL. Thus, these condensed consolidated financial statements reflect the operations, financial position and cash flows associated with Western Refining, WNRL and their related subsidiaries with all intercompany transactions eliminated upon consolidation.
WNRL is a publicly-traded master limited partnership that owns and operates logistic assets consisting of pipeline and gathering, terminalling, storage and transportation assets and provides services to our Refining segment. The majority of WNRL's logistics assets are integral to the operations of our El Paso, Gallup and St. Paul Park refineries. It also owns a wholesale business that operates primarily in the Southwest United States and includes the operations of several bulk petroleum distribution plants and a fleet of crude oil, asphalt and refined product delivery trucks. It distributes commercial wholesale petroleum products primarily in Arizona, Colorado, Nevada, New Mexico and Texas.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION.
These interim condensed consolidated financial statements and notes hereto of Andeavor and its subsidiaries have been prepared by management without audit according to the rules and regulations of the Securities and Exchange Commission (“SEC”) and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results for the periods presented. Such adjustments are of a normal recurring nature, unless otherwise disclosed. The consolidated balance sheet at
December 31, 2016
has been condensed from the audited consolidated financial statements at that date. We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). However, certain information and notes normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the SEC’s rules and regulations. Management believes that the disclosures presented herein are adequate to present the information fairly. The accompanying condensed consolidated financial statements and notes should be read in conjunction with the Andeavor and Western Refining Annual Reports on Form 10-K for the year ended
December 31, 2016
.
BASIS OF PRESENTATION.
We are required under U.S. GAAP to make estimates and assumptions that affect the reported amounts and disclosures of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We review our estimates on an ongoing basis. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates. The results of operations for any interim period are not necessarily indicative of results for the full year. Certain prior year balances have been aggregated or disaggregated in order to conform to the current year presentation.
The consolidated statements of comprehensive income for the
six
months ended
June 30, 2017
have been omitted, as there was
no
material change to accumulated other comprehensive income for the
six
months ended
June 30, 2017
. For the
six
months ended
June 30, 2016
, accumulated other comprehensive income decreased
$10 million
, net of tax, due to the recognition of a settlement loss for one of our executive retirement plans and remeasurement of the pension liability.
CONDENSED CONSOLIDATING FINANCIAL INFORMATION.
Andeavor’s senior notes and its revolving credit facility (the “Revolving Credit Facility”) were fully and unconditionally and jointly and severally guaranteed by certain of our subsidiaries. Andeavor Logistics, in which we had a
33%
ownership interest as of
June 30, 2017
, and other subsidiaries did not guarantee these obligations. Pursuant to the terms of the Revolving Credit Facility and the indentures governing the Andeavor senior notes, any guarantees on our obligations were subject to release if the Company satisfactorily achieved an investment grade rating from either Moody’s Investors Service or S&P Global Ratings, as the Company already had achieved such rating from Fitch Ratings, Inc. On June 5, 2017, S&P Global Ratings raised its corporate credit and senior unsecured debt rating on the Company to BBB- from BB+, with a stable outlook. As a result, the guarantees of the Andeavor senior notes and Revolving Credit Facility were released upon the discharge of the terms of the Andeavor senior notes and Revolving Credit Facility agreements. The Company is now exempt from disclosing condensed consolidating financial information in accordance with Rule 3-10 of Regulation S-X, as enacted under the Securities Act of 1933.
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
VARIABLE INTEREST ENTITIES.
Our condensed consolidated financial statements include two variable interest entities, Andeavor Logistics and WNRL, which together comprise our Logistics segment. For variable interest entity reporting purposes, we aggregate these entities based on the similarity of their operations. For parenthetical purposes on the consolidated statement of financial position, balances do not include Andeavor’s basis in WNRL. Andeavor Logistics is a publicly traded limited partnership that we formed to own, operate, develop and acquire logistics assets. Its assets are integral to the success of our refining and marketing operations and are used to gather crude oil and natural gas, process natural gas, and distribute, transport and store crude oil and refined products. Andeavor Logistics provides us and third parties with various terminal distribution, storage, pipeline transportation, natural gas liquids processing, trucking and petroleum-coke handling services under long-term, fee-based commercial agreements, many of which contain minimum volume commitments. We do not provide financial or equity support through any liquidity arrangements or financial guarantees to Andeavor Logistics.
Tesoro Logistics GP, LLC (“TLGP”), our wholly-owned subsidiary, serves as the general partner of Andeavor Logistics. We held an approximate
33%
and
34%
interest in Andeavor Logistics at
June 30, 2017
and
December 31, 2016
, respectively, including the general partner interest (approximately
2%
at both
June 30, 2017
and
December 31, 2016
) and all of the incentive distribution rights. As the general partner of Andeavor Logistics, we have the sole ability to direct the activities of Andeavor Logistics that most significantly impact its performance, and therefore we consolidate Andeavor Logistics. We are also considered to be the primary beneficiary for accounting purposes and are Andeavor Logistics’ largest customer. In the event Andeavor Logistics incurs a loss, our operating results will reflect Andeavor Logistics’ loss, net of intercompany eliminations. Under our various long-term, fee-based commercial agreements with Andeavor Logistics, transactions with us accounted for
49%
of Andeavor Logistics’ total revenues for both the
three and six
months ended
June 30, 2017
, respectively, and
57%
of Andeavor Logistics’ total revenues for both the
three and six
months ended
June 30, 2016
.
As of
June 30, 2017
, we owned a
53%
interest in WNRL. Western Refining Logistics GP, LLC (“WGP”), our wholly-owned subsidiary, serves as the general partner of WNRL and has the sole ability to direct the activities that most significantly impact WNRL's economic performance, and therefore we consolidate WNRL. All intercompany transactions with WNRL are eliminated upon consolidation. We are WNRL’s primary logistics customer and a significant wholesale customer through our Marketing segment. WNRL generates revenues by charging tariffs and fees for transporting petroleum products and crude oil though its pipelines by charging fees for terminalling refined products and other hydrocarbons, and storing and providing other services at its storage tanks and terminals. Additionally, WNRL sells various finished petroleum products to us and other third-party customers. We accounted for
36%
of WNRL’s total revenues for the period of June 1, 2017 through
June 30, 2017
under our long-term agreements with WNRL. These agreements contain minimum volume commitments. Each agreement has fees that are indexed for inflation and provides us with options to renew for two additional five-year terms. In addition to commercial agreements, we are also party to an omnibus agreement with WNRL that among other things provides for reimbursement to us for various general and administrative services provided to WNRL. We are also party to an operational services agreement with WNRL, under which we are reimbursed for personnel services provided by us in support of WNRL's operations of its pipelines, terminals and storage facilities. We do not provide financial or equity support through any liquidity arrangements and/or debt guarantees to WNRL.
DISCONTINUED OPERATIONS.
On
September 25, 2013
, we completed the sale of all of our interest in Tesoro Hawaii, LLC, which operated a
94 thousand
barrels per day Hawaii refinery, retail sites and associated logistics assets (the “Hawaii Business”). The sale of the Hawaii Business was subject to an earn-out provision based on the annual gross margin (as defined in sale agreement) in the three annual periods beginning with the year ended December 31, 2014 and ending with the year ended December 31, 2016. Additionally, we retained liability for certain regulatory improvements required at the Hawaii refinery and tank replacement efforts at certain retail sites. The results of operations for this business have been presented as discontinued operations in the condensed statements of consolidated operations. There were
no
earnings or loss recorded for the
three and six
months ended
June 30, 2017
and there were
no
revenues for the
three and six
months ended
June 30, 2016
. However, we recorded
$17 million
in pre-tax earnings (
$11 million
after-tax) primarily related to the earn-out provision of the sale during the
six
months ended
June 30, 2016
. No gain or loss was recorded for the three months ended
June 30, 2016
. Cash flows used in discontinued operations were
$6 million
for the
six
months ended
June 30, 2017
and cash flows from discontinued operations were
$12 million
for the
six
months ended
June 30, 2016
. Unless otherwise noted, the information in the notes to the condensed consolidated financial statements relates to our continuing operations.
NEW ACCOUNTING STANDARDS AND DISCLOSURES
REVENUE RECOGNITION.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”) and has since amended the standard with ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date”, ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing”, and ASU 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients”. These standards replace existing revenue recognition rules with a single comprehensive model to use in accounting for revenue arising from contracts with customers. We are required to adopt ASU 2014-09 on January 1, 2018. We expect to transition to the new standard under the modified retrospective transition method, whereby a cumulative effect adjustment will be recognized upon adoption, if applicable, and the guidance will be applied prospectively.
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|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
We are progressing through our implementation plan and continue to evaluate the impact of the standard’s revenue recognition model on our contracts with customers in the Marketing, Logistics and Refining segments along with our business processes, accounting systems, controls and financial statement disclosures. Additionally, we have commenced our assessment of the standard’s impact on Western Refining and WNRL following the Western Refining Acquisition. While we have made substantial progress in our review and documentation of the impact of the standard on our revenue agreements, we continue to assess the impact in certain areas where industry consensus continues to be formed such as agreements with terms that include non-cash consideration and other unique considerations. We do not expect the standard to have a material impact to the amount or timing of revenues recognized for substantially all of our revenue arrangements in the Marketing and Refining segments, although we do expect some impact on presentation and disclosures in our financial statements relating to Logistics segment for contracts that include minimum volume commitments with claw back provisions, or where revenue is based on non-cash consideration. In addition, we will make an election to present our Marketing segment revenues net of excise taxes, consistent with our current presentation of Refining and Logistics segment revenues
.
INVENTORY.
In July 2015, the FASB issued ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory” (“ASU 2015-11”), which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test for inventories determined by methods other than last-in-first-out (“LIFO”) and the retail inventory method, which remain subject to existing impairment models. We adopted ASU 2015-11 as of January 1, 2017, which resulted in changes to how we perform our lower of cost or market tests for inventory. These changes did not have an impact on our financial statements.
LEASES.
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), which amends existing accounting standards for lease accounting and adds additional disclosures about leasing arrangements. Under the new guidance, lessees are required to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either a financing lease or operating lease, with classification affecting the pattern of expense recognition in the income statement and presentation of cash flows in the statement of cash flows. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods. Early adoption is permitted and modified retrospective application is required, however, we do not intend to early adopt the standard. While it is early in our assessment of the impacts from this standard, we expect that the recognition of right-of-use assets and lease liabilities not currently reflected in our balance sheet could have a material impact on total assets and liabilities. Additionally, we expect the presentation changes required for amounts currently reflected in our statement of operations to impact certain financial statement line items. We cannot estimate the impact on our business processes, accounting systems, controls and financial statement disclosures due to the implementation of this standard given the preliminary stage of our assessment.
CREDIT LOSSES.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which amends guidance on the impairment of financial instruments. The ASU requires the estimation of credit losses based on expected losses and provides for a simplified accounting model for purchased financial assets with credit deterioration. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim reporting periods within those annual reporting periods. Early adoption is permitted for annual reporting periods beginning after December 15, 2018. While we are still evaluating the impact of ASU 2016-13, we do not expect the adoption of this standard to have a material impact on our financial statements.
DEFINITION OF A BUSINESS.
In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business” (“ASU 2017-01”), which revises the definition of a business and assists in the evaluation of when a set of transferred assets and activities is a business. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017, and should be applied prospectively. Early adoption is permitted under certain circumstances. At this time, we are evaluating the potential impact of this standard on our financial statements, including the reporting requirements for transactions between entities under common control, and whether we will early adopt this standard in 2017.
GOODWILL.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which eliminates the second step from the goodwill impairment test that requires goodwill impairments to be measured as the amount that a reporting unit’s carrying amount of goodwill exceeded its implied fair value of goodwill. Instead, an entity can perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount with any impairment being limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied on a prospective basis. As permitted under ASU 2017-04, we have elected to early adopt this standard for our 2017 goodwill impairment tests to be performed as of November 1, 2017. The adoption of this standard is not expected to have a material impact on our financial statements.
PENSION AND POSTRETIREMENT COSTS.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), which requires the current service-cost component of net benefit costs to be presented similarly with other current compensation costs for related employees on the condensed statement of consolidated operations, and stipulates that only the service cost component of net benefit costs is eligible for capitalization. The Company will present other components of net benefit costs elsewhere on the condensed statement of consolidated operations. ASU 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted in the first quarter of 2017 only. The amendments to the presentation of the condensed statement of consolidated operations in this update should be applied retrospectively while the change in capitalized benefit cost is to be applied prospectively. We have evaluated the impact of this standard on our financial statements and determined there will be no impact
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|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
to net earnings, but it is expected to have an immaterial impact on other line items such as operating income. We have elected not to early adopt and will implement when the standard becomes effective.
SHARE-BASED COMPENSATION.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which provides guidance about which changes to the terms or conditions of a share-based payment awarded require an entity to apply modification accounting. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The amendments in ASU 2017-09 are to be applied prospectively to an award modified on or after the adoption date, consequently the impact will be dependent on whether we modify any share-based payment awards and the nature of such modifications. The adoption of this standard is not expected to have a material impact on our financial statements.
NOTE 2 – ACQUISITIONS AND DIVESTITURES
WESTERN REFINING, INC. ACQUISITION
On
June 1, 2017
, we completed the Western Refining Acquisition. Under the terms of the Merger Agreement, the shareholders of Western Refining elected cash consideration of
$37.30
per share up to the maximum aggregate cash election of
$405 million
with each remaining Western Refining share being exchanged for
0.4350
shares of the Company. This resulted in the issuance of
42,617,738
of our shares, which was comprised of
39,499,524
newly issued shares of common stock and
3,118,214
shares of treasury stock. Based on our
$83.25
per share closing stock price on
June 1, 2017
, the aggregate value of consideration paid to Western Refining shareholders was
$4.0 billion
, including approximately
$3.6 billion
of our stock and approximately
$424 million
of cash, including cash payable upon accelerated vesting of Western Refining equity awards. The cash portion of the purchase price, along with the settlement of
$1.6 billion
of certain Western Refining debt and other transaction related costs, was funded using cash on hand and
$575 million
of funds drawn on the Revolving Credit Facility, the capacity of which increased to
$3.0 billion
following the Merger.
We accounted for the Western Refining Acquisition using the acquisition method of accounting, which requires, among other things, that assets acquired at their fair values and liabilities assumed be recognized on the balance sheet as of the acquisition date. The purchase price allocation for the Western Refining Acquisition is preliminary and has been allocated based on estimated fair values of the assets acquired and liabilities assumed at the acquisition date, pending the completion of an independent valuation and other information as it becomes available to us. We expect that, as we obtain more information, the preliminary purchase price allocation disclosed below may change. The purchase price allocation adjustments can be made through the end of Andeavor’s measurement period, which is not to exceed one year from the acquisition date.
PRELIMINARY ACQUISITION DATE PURCHASE PRICE ALLOCATION (in millions)
|
|
|
|
|
|
|
|
Cash
|
$
|
159
|
|
|
Receivables
|
499
|
|
|
Inventories
|
807
|
|
|
Prepayments and Other Current Assets
|
213
|
|
|
Property, Plant and Equipment (a)
|
3,390
|
|
|
Goodwill
|
3,001
|
|
|
Acquired Intangibles
|
258
|
|
|
Other Noncurrent Assets
|
158
|
|
|
Accounts Payable
|
(701
|
)
|
|
Accrued Liabilities
|
(326
|
)
|
|
Current Portion of Long-term Debt
|
(12
|
)
|
|
Deferred Income Taxes
|
(586
|
)
|
|
Debt
|
(2,073
|
)
|
|
Other Noncurrent Liabilities
|
(88
|
)
|
|
Noncontrolling Interest
|
(719
|
)
|
|
Total purchase price
|
$
|
3,980
|
|
|
|
|
|
(a)
|
Estimated useful lives ranging from
3
to
28
years have been assumed based on the preliminary valuation.
|
GOODWILL.
Andeavor evaluated several factors that contributed to the amount of goodwill presented above. These factors include the acquisition of an existing integrated refining, marketing and logistics business located in areas with access to cost-advantaged feedstocks with an assembled workforce that cannot be duplicated at the same costs by a new entrant. Further, the Western Refining Acquisition provides a platform for future growth through operating efficiencies Andeavor expects to gain from the application of best practices across the combined company and an ability to realize synergies from the geographic diversification
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
of Andeavor’s business and rationalization of general and administrative costs. The amount of goodwill by reportable segment is as follows: Refining
$1.9 billion
, Logistics
$1.0 billion
and Marketing
$84 million
. Based on information evaluated to date, we estimate approximately
$2.1 billion
of the
$3.0 billion
in goodwill resulting from the tax-free Merger with Western Refining to be non-deductible for tax purposes. As a result of prior acquisitions, Western Refining has tax-deductible goodwill, in which we received carryover basis, providing tax deductibility for an estimated
$0.9 billion
of the
$3.0 billion
in goodwill that otherwise would not be deductible.
PROPERTY, PLANT AND EQUIPMENT.
The fair value of property, plant and equipment is
$3.4 billion
. This preliminary fair value is based on a valuation using a combination of the income, cost and market approaches. The useful lives are based on similar assets at Andeavor.
ACQUIRED INTANGIBLE ASSETS.
We estimated the fair value of the acquired identifiable intangible assets at
$258 million
. This fair value is based on a preliminary valuation completed for the business enterprise, along with the related tangible assets, using a combination of the income method, cost method and comparable market transactions. We recognized intangible assets associated with customer relationships, trade names and favorable leases, all of which will be amortized over a definite-life. We also recognized an intangible asset of approximately
$38 million
related to liquor licenses, which have an indefinite life. We considered the assets' history, accounting by Western Refining, our plans for the continued use and marketing of the assets, and how a market participant would use the assets in determining whether the intangible assets have an indefinite or definite life. We amortize acquired intangibles with finite lives on a straight-line basis over an estimated weighted average useful life of
15
years, and we include the amortization in depreciation and amortization expenses on our condensed statement of consolidated operations. The gross carrying value of our finite life intangibles acquired from the Western Refining Acquisition was
$220 million
and the accumulated amortization was
$1 million
as of
June 30, 2017
. Amortization expense is expected to be approximately
$15 million
per year for the next five years. We have not yet finalized our valuation estimate and related evaluation of the useful lives; accordingly, future amortization of intangible assets related to customer relationships may be revised.
CONTINGENCIES.
We assumed environmental, legal and asset retirement obligation liabilities of approximately
$23 million
in the Western Refining Acquisition. The fair value of these liabilities is preliminary, pending the completion of an independent valuation and other information as it becomes available to us.
INTERESTS IN WNRL AND MINNESOTA PIPE LINE COMPANY.
With the Western Refining Acquisition, we acquired a controlling interest in WNRL. The fair value of the non-controlling interest in WNRL is based on the share price, shares outstanding and the percent of public unitholders of WNRL on June 1, 2017. Additionally, we acquired a 17% common equity interest in Minnesota Pipe Line Company, LLC (“MPL”). We are accounting for our investment in MPL under the equity method of accounting given our ability to exercise significant influence over MPL.
ACQUISITION COSTS.
We recognized acquisition costs related to the Western Refining Acquisition of
$61 million
and
$68 million
in general and administrative expenses for the
three
and
six
months ended
June 30, 2017
, respectively.
Additionally, we recognized
$48 million
of severance costs, of which
$41 million
was due to the change of control and
$7 million
of expected severance and retention payments in future periods. We had
$7 million
recognized in accrued liabilities remaining to be paid.
WESTERN REFINING REVENUES AND NET EARNINGS.
For the period from June 1, 2017 through
June 30, 2017
, we recognized
$831 million
in revenues and
$32 million
of net
loss related to the business acquired. The net loss for this period includes an allocation of the lower of cost or market adjustment related to Western Refining’s post-Merger operations along with related acquisition and severance costs.
PRO FORMA FINANCIAL INFORMATION.
The following unaudited pro forma information combines the historical operations of Tesoro and Western Refining, giving effect to the merger and related transactions as if they had been consummated on January 1, 2016, the beginning of the earliest period presented.
PRO FORMA CONSOLIDATED REVENUES AND CONSOLIDATED NET EARNINGS (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Revenues
|
$
|
9,591
|
|
|
$
|
8,426
|
|
|
$
|
18,581
|
|
|
$
|
15,010
|
|
|
Net earnings (a)
|
215
|
|
|
565
|
|
|
360
|
|
|
637
|
|
|
|
|
|
(a)
|
While many recurring adjustments impact the pro forma figures presented, the increase in pro forma net earnings compared to our net earnings presented on the condensed statements of consolidated operations for both the three months and six months ended June 30, 2017 include a significant non-recurring adjustment removing acquisition and integration costs from 2017 and reflects these costs in the first quarter of 2016, the period the acquisition was assumed to be completed for pro forma purposes.
|
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
NORTH DAKOTA GATHERING AND PROCESSING ASSETS ACQUISITION
On
January 1, 2017
, Andeavor Logistics acquired crude oil, natural gas and produced water gathering systems and two natural gas processing facilities from Whiting Oil and Gas Corporation, GBK Investments, LLC and WBI Energy Midstream, LLC (the "North Dakota Gathering and Processing Assets") for total consideration of approximately
$705 million
, including payments for working capital adjustments. The North Dakota Gathering and Processing Assets include crude oil, natural gas and produced water gathering pipelines, natural gas processing and fractionation capacity in the Sanish and Pronghorn fields of the Williston Basin in North Dakota. This acquisition was immaterial to our condensed consolidated financial statements.
DIVESTITURES
On June 2, 2017, pursuant to our consent decree with the state of Alaska associated with our acquisition of certain terminalling and storage assets in Alaska during 2016, Andeavor Logistics sold one of its existing Alaska products terminals (“Alaska Terminal”). The sale of the Alaska Terminal resulted in a
$25 million
gain on sale being recognized in our condensed consolidated statement of operations for both the
three
and
six
months ended
June 30, 2017
. The Alaska Terminal divestiture did not have an impact on our Logistics segment’s operations.
NOTE 3 – INVENTORIES
COMPONENTS OF INVENTORIES (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Domestic crude oil and refined products (a)
|
$
|
2,911
|
|
|
$
|
2,099
|
|
|
Foreign subsidiary crude oil (b)
|
35
|
|
|
310
|
|
|
Materials and supplies (a)
|
227
|
|
|
149
|
|
|
Oxygenates and by-products
|
62
|
|
|
81
|
|
|
Merchandise (a)
|
49
|
|
|
1
|
|
|
Less: Lower of cost or market reserve
|
(209
|
)
|
|
—
|
|
|
Total Inventories
|
$
|
3,075
|
|
|
$
|
2,640
|
|
|
|
|
|
(a)
|
Increase primarily related to Western Refining Acquisition. See Note 2.
|
|
|
|
|
(b)
|
In April 2017, our pipeline and storage lease in Panama terminated.
|
We recorded a lower of cost or market reserve adjustment of
$209 million
at
June 30, 2017
for our crude oil, refined products, oxygenates and by-product inventories to adjust the carrying value of our inventories to reflect replacement costs at the reporting date. We reverse any lower of cost or market reserve in the subsequent period because the inventories are sold or used and then perform a complete lower of cost or market assessment of ending inventories at the end of each reporting period to determine if a reserve is required. At
December 31, 2016
, prior to changes in our lower of cost or market test following the effectiveness of ASU 2015-11, the replacement cost of our crude oil and refined product inventories exceeded carrying value, both in the aggregate, by approximately
$107 million
.
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Refining (a)
|
$
|
10,169
|
|
|
$
|
8,067
|
|
|
Logistics (a)
|
6,011
|
|
|
4,059
|
|
|
Marketing (a)
|
1,208
|
|
|
934
|
|
|
Corporate
|
523
|
|
|
412
|
|
|
Property, Plant and Equipment, at Cost
|
17,911
|
|
|
13,472
|
|
|
Accumulated depreciation
|
(3,768
|
)
|
|
(3,496
|
)
|
|
Property, Plant and Equipment, Net
|
$
|
14,143
|
|
|
$
|
9,976
|
|
|
|
|
|
(a)
|
Increase primarily related to Western Refining Acquisition. See Note 2.
|
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
We capitalize interest as part of the cost of major projects during the construction period. Capitalized interest totaled
$12 million
and
$6 million
for the
three
months ended
June 30, 2017
and
2016
, respectively, and
$22 million
and
$12 million
for the
six
months ended
June 30, 2017
and
2016
, respectively, and is recorded as a reduction to net interest and financing costs in our condensed statements of consolidated operations.
NOTE 5 – DERIVATIVE INSTRUMENTS
In the ordinary course of business, our profit margins, earnings and cash flows are impacted by the timing, direction and overall change in pricing for commodities used throughout our operations. We use non-trading derivative instruments to manage our exposure to the following:
|
|
|
|
•
|
price risks associated with the purchase or sale of feedstocks, refined products and energy supplies related to our refineries, terminals, marketing fuel inventory and customers;
|
|
|
|
|
•
|
price risks associated with inventories above or below our target levels;
|
|
|
|
|
•
|
future emission credit requirements; and
|
|
|
|
|
•
|
exchange rate fluctuations on our purchases of Canadian crude oil.
|
Our accounting for derivative instruments depends on whether the underlying commodity will be used or sold in the normal course of business. For contracts where the crude oil or refined products are expected to be used or sold in the normal course of business, we apply the normal purchase normal sale exception and follow the accrual method of accounting. All other derivative instruments are recorded at fair value using mark-to-market accounting.
Our derivative instruments can include forward purchase and sale contracts (“Forward Contracts”), exchange-traded futures (“Futures Contracts”), over-the-counter swaps, including those cleared on an exchange (“Swap Contracts”), options (“Options”), and over-the-counter options (“OTC Option Contracts”). Forward Contracts are agreements to buy or sell the commodity at a predetermined price at a specified future date. Futures Contracts are standardized agreements, traded on a futures exchange, to buy or sell the commodity at a predetermined price at a specified future date. Options provide the right, but not the obligation to buy or sell the commodity at a specified price in the future. Swap Contracts and OTC Option Contracts require cash settlement for the commodity based on the difference between a contracted fixed or floating price and the market price on the settlement date. Certain of these contracts require cash collateral to be received or paid if our asset or liability position, respectively, exceeds specified thresholds. We believe that we have minimal credit risk with respect to our counterparties.
The following table presents the fair value of our derivative instruments as of
June 30, 2017
and
December 31, 2016
. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements including cash collateral on deposit with, or received from, brokers. We offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of offset exists. As a result, the asset and liability amounts below will not agree with the amounts presented in our condensed consolidated balance sheets.
DERIVATIVE ASSETS AND LIABILITIES (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
Balance Sheet Location
|
June 30,
2017
|
|
December 31,
2016
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Commodity Futures Contracts
|
Prepayments and other current assets
|
$
|
756
|
|
|
$
|
821
|
|
|
$
|
724
|
|
|
$
|
871
|
|
|
Commodity Swap Contracts
|
Prepayments and other current assets
|
15
|
|
|
11
|
|
|
9
|
|
|
13
|
|
|
Commodity Swap Contracts
|
Receivables
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commodity Swap Contracts
|
Payables
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
|
Commodity Options Contracts
|
Prepayments and other current assets
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
Commodity Forward Contracts
|
Receivables
|
8
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
Commodity Forward Contracts
|
Accounts payable
|
—
|
|
|
—
|
|
|
5
|
|
|
2
|
|
|
Total Gross Mark-to-Market Derivatives
|
784
|
|
|
839
|
|
|
739
|
|
|
888
|
|
|
Less: Counterparty Netting and Cash Collateral (a)
|
(731
|
)
|
|
(744
|
)
|
|
(725
|
)
|
|
(832
|
)
|
|
Total Net Fair Value of Derivatives
|
$
|
53
|
|
|
$
|
95
|
|
|
$
|
14
|
|
|
$
|
56
|
|
|
|
|
|
(a)
|
Certain of our derivative contracts, under master netting arrangements, include both asset and liability positions. We offset both the fair value amounts and any related cash collateral amounts recognized for multiple derivative instruments executed with the same counterparty when there is a legally enforceable right and an intention to settle net or simultaneously. As of
June 30, 2017
our counterparties had
|
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
provided cash collateral of
$6 million
related to our unrealized derivative positions. As of
December 31, 2016
, we had provided cash collateral amounts of
$88 million
related to our unrealized derivative positions. Cash collateral amounts are netted with mark-to-market derivative assets.
GAINS (LOSSES) ON MARK-TO-MARKET DERIVATIVES (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Commodity Contracts
|
$
|
92
|
|
|
$
|
(82
|
)
|
|
$
|
120
|
|
|
$
|
(44
|
)
|
|
Foreign Currency Forward Contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Total Gain (Loss) on Mark-to-Market Derivatives
|
$
|
92
|
|
|
$
|
(82
|
)
|
|
$
|
120
|
|
|
$
|
(43
|
)
|
INCOME STATEMENT LOCATION OF GAINS (LOSSES) ON MARK-TO-MARKET DERIVATIVES (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Revenues
|
$
|
1
|
|
|
$
|
(20
|
)
|
|
$
|
9
|
|
|
$
|
(5
|
)
|
|
Cost of sales
|
91
|
|
|
(62
|
)
|
|
111
|
|
|
(39
|
)
|
|
Other income, net
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Total Gain (Loss) on Mark-to-Market Derivatives
|
$
|
92
|
|
|
$
|
(82
|
)
|
|
$
|
120
|
|
|
$
|
(43
|
)
|
OPEN LONG (SHORT) POSITIONS
OUTSTANDING COMMODITY AND OTHER CONTRACTS (units in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Volumes by Year of Maturity
|
|
Unit of Measure
|
|
Mark-to-Market Derivative Instrument
|
2017
|
|
2018
|
|
2019
|
|
|
Crude oil, refined products and blending products:
|
|
|
|
|
|
|
|
|
Swap Contracts - long
|
3,931
|
|
367
|
|
—
|
|
Barrels
|
|
Futures Contracts - long
|
7,193
|
|
864
|
|
—
|
|
Barrels
|
|
Options - short
|
(274)
|
|
—
|
|
—
|
|
Barrels
|
|
Forward Contracts - long
|
2,045
|
|
—
|
|
—
|
|
Barrels
|
|
Carbon emissions credits:
|
|
|
|
|
|
|
|
|
Futures Contracts - long
|
50
|
|
—
|
|
—
|
|
Tons
|
|
Corn:
|
|
|
|
|
|
|
|
|
Futures Contracts - long
|
545
|
|
20
|
|
—
|
|
Bushels
|
At
June 30, 2017
, we had open Forward Contracts to purchase CAD
$5 million
that were settled on
July 24, 2017
.
NOTE 6 – FAIR VALUE MEASUREMENTS
We classify financial assets and liabilities according to the fair value hierarchy. Financial assets and liabilities classified as level 1 instruments are valued using quoted prices in active markets for identical assets and liabilities. Level 2 instruments are valued using quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices, such as liquidity, that are observable for the asset or liability. Our level 2 instruments include derivatives valued using market quotations from independent price reporting agencies, third-party brokers and commodity exchange price curves that are corroborated with market data. Level 3 instruments are valued using significant unobservable inputs that are not supported by sufficient market activity. We do not have any financial assets or liabilities classified as level 3 at
June 30, 2017
or
December 31, 2016
.
Our financial assets and liabilities measured at fair value on a recurring basis include derivative instruments. Additionally, our financial liabilities include obligations for Renewable Identification Numbers (“RINs”) and cap-and-trade emission credits for the state of California (together with RINs, our “Environmental Credit Obligations”). See Note 5 for further information on our derivative instruments. Amounts presented below for Environmental Credit Obligations represent the estimated fair value amount at each balance sheet date for which we do not have sufficient RINs and California cap-and-trade credits to satisfy our obligations to the U.S. Environmental Protection Agency and the state of California, respectively.
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting and Collateral (a)
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
$
|
751
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
(722
|
)
|
|
$
|
34
|
|
|
Commodity Swap Contracts
|
—
|
|
|
20
|
|
|
—
|
|
|
(9
|
)
|
|
11
|
|
|
Commodity Forward Contracts
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
Total Assets
|
$
|
751
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
(731
|
)
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
$
|
723
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(716
|
)
|
|
$
|
8
|
|
|
Commodity Swap Contracts
|
—
|
|
|
10
|
|
|
—
|
|
|
(9
|
)
|
|
1
|
|
|
Commodity Forward Contracts
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
Environmental Credit Obligations
|
—
|
|
|
217
|
|
|
—
|
|
|
—
|
|
|
217
|
|
|
Total Liabilities
|
$
|
723
|
|
|
$
|
233
|
|
|
$
|
—
|
|
|
$
|
(725
|
)
|
|
$
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Netting and Collateral (a)
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
$
|
821
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(733
|
)
|
|
$
|
88
|
|
|
Commodity Swap Contracts
|
—
|
|
|
11
|
|
|
—
|
|
|
(11
|
)
|
|
—
|
|
|
Commodity Options Contracts
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Commodity Forward Contracts
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
Total Assets
|
$
|
822
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
(744
|
)
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
$
|
870
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(821
|
)
|
|
$
|
50
|
|
|
Commodity Swap Contracts
|
—
|
|
|
15
|
|
|
—
|
|
|
(11
|
)
|
|
4
|
|
|
Commodity Forward Contracts
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Environmental Credit Obligations
|
—
|
|
|
79
|
|
|
—
|
|
|
—
|
|
|
79
|
|
|
Total Liabilities
|
$
|
870
|
|
|
$
|
97
|
|
|
$
|
—
|
|
|
$
|
(832
|
)
|
|
$
|
135
|
|
|
|
|
|
(a)
|
Certain of our derivative contracts, under master netting arrangements, include both asset and liability positions. We offset both the fair value amounts and any related cash collateral amounts recognized for multiple derivative instruments executed with the same counterparty when there is a legally enforceable right and an intention to settle net or simultaneously. As of
June 30, 2017
, our counterparties had provided cash collateral of
$6 million
related to our unrealized derivative positions. As of
December 31, 2016
, we had provided cash collateral amounts of
$88 million
related to our unrealized derivative positions. Cash collateral amounts are netted with mark-to-market derivative assets.
|
We believe the carrying value of our other financial instruments, including cash and cash equivalents, receivables, accounts payable and certain accrued liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including the short-term duration of the instruments and the expected continued insignificance of bad debt expense, which includes an evaluation of counterparty credit risk. The borrowings under our Revolving Credit Facility, the Andeavor Logistics senior secured revolving credit agreement (the “Andeavor Logistics Revolving Credit Facility”), the secured Andeavor Logistics drop down credit facility (the “Andeavor Logistics Dropdown Credit Facility”) and the WNRL revolving credit facility (the “WNRL Revolving Credit Facility”), which include variable interest rates, approximate fair value. The fair value of our fixed rate debt is based on prices from recent trade activity and is categorized in level 2 of the fair value hierarchy. The carrying value and fair value of our debt were approximately
$7.7 billion
and
$8.1 billion
as of
June 30, 2017
, respectively, and
$7.0 billion
and
$7.3 billion
at
December 31, 2016
, respectively. These carrying and fair values of our debt do not consider the unamortized issuance costs, which are netted against our total debt.
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
NOTE 7 – DEBT
DEBT BALANCE, NET OF CURRENT MATURITIES AND UNAMORTIZED ISSUANCE COSTS (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Total debt (a)
|
$
|
7,715
|
|
|
$
|
7,042
|
|
|
Unamortized issuance costs and premiums (b)
|
(73
|
)
|
|
(109
|
)
|
|
Current maturities
|
(478
|
)
|
|
(465
|
)
|
|
Debt, Net of Current Maturities and Unamortized Issuance Costs (c)
|
$
|
7,164
|
|
|
$
|
6,468
|
|
|
|
|
|
(a)
|
Total debt related to Andeavor Logistics, which is non-recourse to Andeavor, except for TLGP, was
$3.8 billion
and
$4.1 billion
at
June 30, 2017
and
December 31, 2016
, respectively. Total debt related to WNRL, which is non-recourse to Andeavor, except for WGP, was
$320 million
at
June 30, 2017
.
|
|
|
|
|
(b)
|
Includes premium of
$26 million
related to the incremental fair value of the WNRL Revolving Credit Facility upon acquisition.
|
|
|
|
|
(c)
|
Increase primarily related to borrowings on our Revolving Credit Facility for the Western Refining Acquisition and WNRL’s outstanding debt. See Note 2.
|
AVAILABLE CAPACITY UNDER CREDIT FACILITIES (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capacity
|
|
Amount Borrowed as of June 30, 2017
|
|
Outstanding
Letters of Credit
|
|
Available Capacity
|
|
Weighted Average Interest Rate
|
|
Expiration
|
|
Andeavor Revolving Credit Facility (a)
|
$
|
3,000
|
|
|
$
|
575
|
|
|
$
|
46
|
|
|
$
|
2,379
|
|
|
2.56
|
%
|
|
September 30, 2020
|
|
Andeavor Logistics Revolving Credit Facility
|
600
|
|
|
50
|
|
|
—
|
|
|
550
|
|
|
3.31
|
%
|
|
January 29, 2021
|
|
Andeavor Logistics Dropdown Credit Facility
|
1,000
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
—
|
%
|
|
January 29, 2021
|
|
WNRL Revolving Credit Facility
|
500
|
|
|
20
|
|
|
1
|
|
|
479
|
|
|
3.08
|
%
|
|
October 16, 2018
|
|
Letter of Credit Facilities
|
975
|
|
|
—
|
|
|
—
|
|
|
975
|
|
|
|
|
|
|
Total Credit Facilities
|
$
|
6,075
|
|
|
$
|
645
|
|
|
$
|
47
|
|
|
$
|
5,383
|
|
|
|
|
|
|
|
|
|
(a)
|
The
$3.0 billion
Andeavor Revolving Credit Facility total capacity includes the additional
$1.0 billion
related to the incremental revolver, as defined in Note 12 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2016
, which was used to fund amounts required for the acquisition of Western Refining and certain other specified uses in connection with the transaction.
|
WESTERN REFINING ACQUISITION FINANCING.
On
June 1, 2017
, to finance the approximately
$424 million
in total cash consideration,
$1.6 billion
repayment of certain Western Refining and Northern Tier Energy LP (“NTI”) indebtedness and fees and expenses related to the Western Refining Acquisition, we borrowed
$575 million
under our Revolving Credit Facility and utilized cash on hand, including the proceeds from the 4.750% Senior Notes due 2023 and the 5.125% Senior Notes due 2026 we issued in December 2016. Included in the
$1.6 billion
of debt payments were Western Refining’s
$532 million
Term Loan - 5.25% Credit Facility due 2020,
$350 million
of 6.25% Senior Unsecured Notes due 2021,
$371 million
Term Loan - 5.50% Credit Facility due 2023 and NTI’s
$350 million
of 7.125% Senior Secured Notes due 2020 along with approximately
$45 million
to pay down the outstanding credit facilities at Western Refining and NTI at June 1, 2017. The Western Refining and NTI revolving credit facilities were terminated upon completion of the Merger. We paid premiums of approximately
$23 million
in paying off the Western Refining and NTI senior notes, which were included in the fair value due to the change of control triggering event of these debt instruments at acquisition. The WNRL revolving credit facility and senior notes remained following the acquisition, see details below.
Following the completion of the Merger, our Revolving Credit Facility increased in capacity from
$2.0 billion
to
$3.0 billion
in accordance with the amendment entered into in December 2016. For more details, see Note 12 of our Annual Report on Form 10-K for the year ended December 31, 2016.
WNRL REVOLVING CREDIT FACILITY.
On June 1, 2017, in connection with the Merger, we consolidated WNRL and its
$500 million
senior secured WNRL Revolving Credit Facility, which WNRL originally entered into on October 16, 2013. This credit facility expires on
October 16, 2018
. The total commitment of the WNRL Revolving Credit Facility is
$500 million
, but WNRL has the ability to increase the total commitment up to
$150 million
for a total facility size of up to
$650 million
, subject to receiving increased commitments from lenders and to the satisfaction of certain conditions. The WNRL Revolving Credit Facility includes a
$25 million
sub-limit for standby letters of credit and a
$10 million
sub-limit for swing line loans. Obligations under the WNRL Revolving Credit Facility and certain cash management and hedging obligations are guaranteed by all of WNRL's subsidiaries and, with certain
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
exceptions, will be guaranteed by any formed or acquired subsidiaries. Obligations under the WNRL Revolving Credit Facility are secured by a first priority lien on substantially all significant assets of WNRL and its subsidiaries. Borrowings under the WNRL Revolving Credit Facility bear interest at either a base rate plus an applicable margin ranging from
0.75%
to
1.75%
or at LIBOR plus an applicable margin ranging from
1.75%
to
2.75%
. The applicable margin will vary based upon WNRL's consolidated total leverage ratio, as defined in the WNRL Revolving Credit Facility. The effective rate of the WNRL Revolving Credit Facility was
3.49%
at June 30, 2017. The WNRL Revolving Credit Facility contains covenants that limit or restrict WNRL's ability to make cash distributions. WNRL is required to maintain certain financial ratios that are tested on a quarterly basis for the immediately preceding four quarter period.
WNRL SENIOR NOTES.
WNRL has
$300 million
of 7.5% senior notes (the “WNRL Senior Notes”), which WNRL originally entered into on February 11, 2015 and mature on
February 11, 2023
. The fair value of these notes at June 1, 2017 was
$326 million
and is reflected in our preliminary acquisition date purchase price allocation, see Note 2 for more details. WNRL and WNRL Finance Corp., a Delaware corporation and 100% owned subsidiary of WNRL, issued the WNRL Senior Notes along with the guarantors named therein and U.S. Bank National Association, as trustee. WNRL pays interest on the WNRL Senior Notes semi-annually in cash in arrears on February 15 and August 15 of each year. The WNRL Senior Notes contain covenants that limit WNRL’s and its restricted subsidiaries’ ability to, among other things: (i) incur, assume or guarantee additional indebtedness or issue preferred units, (ii) create liens to secure indebtedness, (iii) pay distributions on equity securities, repurchase equity securities or redeem subordinated indebtedness, (iv) make investments, (v) restrict distributions, loans or other asset transfers from the WNRL’s restricted subsidiaries, (vi) consolidate with or merge with or into, or sell substantially all of the WNRL’s properties to, another person, (vii) sell or otherwise dispose of assets, including equity interests in subsidiaries and (viii) enter into transactions with affiliates. These covenants are subject to a number of important limitations and exceptions. The WNRL Senior Notes also provide for events of default, which, if any of them occur, would permit or require the principal, premium, if any, and interest on all the then outstanding WNRL Senior Notes to be due and payable immediately.
NOTE 8 – BENEFIT PLANS
COMPONENTS OF PENSION AND OTHER POSTRETIREMENT BENEFIT EXPENSE (INCOME) (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Service cost
|
$
|
13
|
|
|
$
|
12
|
|
|
$
|
26
|
|
|
$
|
23
|
|
|
Interest cost
|
8
|
|
|
7
|
|
|
16
|
|
|
15
|
|
|
Expected return on plan assets
|
(7
|
)
|
|
(7
|
)
|
|
(14
|
)
|
|
(14
|
)
|
|
Recognized net actuarial loss
|
6
|
|
|
5
|
|
|
11
|
|
|
10
|
|
|
Recognized curtailment loss and settlement cost
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
Net Periodic Benefit Expense
|
$
|
20
|
|
|
$
|
17
|
|
|
$
|
39
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Service cost
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
Interest cost
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Amortization of prior service credit
|
(9
|
)
|
|
(9
|
)
|
|
(17
|
)
|
|
(18
|
)
|
|
Recognized net actuarial loss
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
Net Periodic Benefit Income
|
$
|
(7
|
)
|
|
$
|
(7
|
)
|
|
$
|
(13
|
)
|
|
$
|
(13
|
)
|
WESTERN REFINING BENEFIT PLANS.
We assumed all of Western Refining’s existing defined contribution and benefit plans as a result of the Merger. All benefits remain within their respective Western Refining and subsidiaries’ plans. The impact of these benefit plans are immaterial to our financial statements as a whole.
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
NOTE 9 – COMMITMENTS AND CONTINGENCIES
We are incurring and expect to continue to incur expenses for environmental remediation liabilities at a number of currently and previously owned or operated refining, pipeline, terminal and retail properties. Additionally, in the ordinary course of business, we may become party to lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. The outcome of these matters cannot always be predicted accurately, but we will accrue liabilities for these matters if the amount is probable and can be reasonably estimated. Other than as described in (i) Part II, Item 1 of this Report or (ii) our Annual Report on Form 10-K for the year ended
December 31, 2016
or our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, we do not have any other material outstanding lawsuits, administrative proceedings or governmental investigations.
TAX.
We are subject to federal, state and foreign tax laws and regulations. We are also subject to audits by federal, state and foreign taxing authorities in the normal course of business. It is possible that tax audits could result in claims against us in excess of recorded liabilities. However, we believe that resolution of any such claim(s) would not have a material impact on our liquidity, financial position or results of operations.
Newly enacted tax laws and regulations, and changes in existing tax laws and regulations, could result in increased expenditures in the future. For instance, upon a transfer of assets to Andeavor Logistics, Andeavor historically has received a distribution of cash from partnership debt used to finance the transaction. This distribution has historically been treated as non-taxable loan proceeds to the extent of Andeavor’s 100% indemnity of such loan. New Federal Income Tax Regulations in effect for leveraged partnership transactions occurring on or after January 3, 2017, will reduce the amount treated as non-taxable loan proceeds to that portion equal to Andeavor’s partnership profit sharing ratio in Andeavor Logistics. This could result in a taxable gain being recognized by Andeavor in a period when no such gain is recognized in the financial statements, causing an increase in the current portion of income tax expense.
NOTE 10 – STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE
CHANGES TO EQUITY (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andeavor
Stockholders’
Equity
|
|
Noncontrolling
Interest
|
|
Total Equity
|
|
Balance at December 31, 2016 (a)
|
$
|
5,465
|
|
|
$
|
2,662
|
|
|
$
|
8,127
|
|
|
Issuance of shares for Western Refining Acquisition (b)
|
3,548
|
|
|
—
|
|
|
3,548
|
|
|
Net earnings
|
90
|
|
|
84
|
|
|
174
|
|
|
Purchases of common stock
|
(148
|
)
|
|
—
|
|
|
(148
|
)
|
|
Dividend payments
|
(130
|
)
|
|
—
|
|
|
(130
|
)
|
|
Net effect of amounts related to equity-based compensation
|
33
|
|
|
5
|
|
|
38
|
|
|
Taxes paid related to net share settlement of equity awards
|
(30
|
)
|
|
(1
|
)
|
|
(31
|
)
|
|
Net proceeds from issuance of Andeavor Logistics common units (c)
|
(1
|
)
|
|
282
|
|
|
281
|
|
|
Distributions to noncontrolling interest
|
—
|
|
|
(133
|
)
|
|
(133
|
)
|
|
Noncontrolling interest acquired from Western Refining
|
—
|
|
|
719
|
|
|
719
|
|
|
Consideration for Western Refining related to stock awards
|
8
|
|
|
—
|
|
|
8
|
|
|
Transfers to (from) Andeavor paid-in capital related to:
|
|
|
|
|
|
|
Andeavor Logistics’ issuance of common units
|
45
|
|
|
(73
|
)
|
|
(28
|
)
|
|
Equity issuance costs related to the Western Refining Acquisition
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
Other
|
1
|
|
|
—
|
|
|
1
|
|
|
Balance at June 30, 2017 (a)(d)
|
$
|
8,878
|
|
|
$
|
3,545
|
|
|
$
|
12,423
|
|
|
|
|
|
(a)
|
We have
5.0 million
shares of preferred stock authorized with
no
par value per share.
No
shares of preferred stock were outstanding as of
June 30, 2017
and
December 31, 2016
.
|
|
|
|
|
(b)
|
We issued
42,617,738
shares for the Western Refining Acquisition, comprised of
39,499,524
newly issued shares of common stock and
3,118,214
shares of treasury stock, resulting in an increase to amounts recorded for common stock of
$7 million
and additional paid-in capital of
$3.4 billion
along with a decrease in treasury stock of
$169 million
.
|
|
|
|
|
(c)
|
Andeavor Logistics sold
5,000,000
of its common units at a price of
$56.19
per unit on
February 27, 2017
and used the net proceeds to repay borrowings outstanding under the Andeavor Logistics Revolving Credit Facility.
|
|
|
|
|
(d)
|
During a special stockholder meeting on March 24, 2017, Andeavor stockholders approved, among other things, the issuance of shares of Andeavor common stock in connection with the Merger and an amendment to Andeavor’s restated certificate of incorporation increasing authorized shares from
200 million
to
300 million
.
|
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
EARNINGS PER SHARE
We compute basic earnings per share by dividing net earnings attributable to Andeavor stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share include the effects of potentially dilutive shares outstanding during the period.
SHARE CALCULATIONS (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Weighted average common shares outstanding
|
130.8
|
|
|
119.5
|
|
|
124.0
|
|
|
119.5
|
|
|
Common stock equivalents
|
0.9
|
|
|
1.1
|
|
|
1.0
|
|
|
1.3
|
|
|
Total Diluted Shares
|
131.7
|
|
|
120.6
|
|
|
125.0
|
|
|
120.8
|
|
Potentially dilutive common stock equivalents are excluded from the calculation of diluted earnings per share if the effect of including such securities in the calculation would have been anti-dilutive. Anti-dilutive securities were
0.4 million
for both the
three
months ended
June 30, 2017
and
2016
, respectively, and
0.3 million
for both the
six
months ended
June 30, 2017
and
2016
, respectively.
SHARE REPURCHASES
We are authorized by our Board of Directors (the “Board”) to purchase shares of our common stock in open market transactions at our discretion. The Board’s authorization has no time limit and may be suspended or discontinued at any time. Purchases of our common stock can also be made to offset the dilutive effect of stock-based compensation awards and to meet our obligations under employee benefit and compensation plans, including the exercise of stock options and vesting of restricted stock and to fulfill other stock compensation requirements. During the
six
months ended
June 30, 2017
and
2016
, we repurchased approximately
1.6 million
and
1.3 million
shares of our common stock for approximately
$148 million
and
$100 million
, respectively.
CASH DIVIDENDS
We paid cash dividends totaling
$65 million
and
$130 million
for the
three and six
months ended
June 30, 2017
, respectively, based on a
$0.55
per share quarterly cash dividend on common stock. We paid cash dividends totaling
$61 million
and
$121 million
for the
three and six
months ended June 30, 2016, respectively, based on a
$0.50
per share quarterly cash dividend on common stock. On
August 7, 2017
, our Board declared a cash dividend of
$0.59
per share payable on
September 15, 2017
to shareholders of record on
August 31, 2017
.
NOTE 11 – STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION EXPENSE (BENEFIT) (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Stock appreciation rights (a)
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
Performance share awards (b)
|
3
|
|
|
2
|
|
|
8
|
|
|
4
|
|
|
Market stock units (c)
|
7
|
|
|
7
|
|
|
14
|
|
|
14
|
|
|
Other stock-based awards (d)
|
20
|
|
|
4
|
|
|
22
|
|
|
5
|
|
|
Total Stock-Based Compensation Expense
|
$
|
30
|
|
|
$
|
11
|
|
|
$
|
44
|
|
|
$
|
8
|
|
|
|
|
|
(a)
|
We had
$6 million
recorded in other current liabilities associated with our stock appreciation rights (“SARs”) awards at
December 31, 2016
. There were
no
SARs outstanding at
June 30, 2017
. We paid cash of
$4 million
to settle
0.1 million
SARs that were exercised during the
six
months ended
June 30, 2017
and
$20 million
to settle
0.3 million
SARs that were exercised during the
six
months ended
June 30, 2016
.
|
|
|
|
|
(b)
|
We granted
0.1 million
market condition performance share awards at a weighted average grant date fair value of
$118.09
per share under the amended and restated 2011 Long-Term Incentive Plan (“2011 Plan”) during the
six
months ended
June 30, 2017
.
|
|
|
|
|
(c)
|
We granted
0.4 million
market stock units at a weighted average grant date fair value of
$107.43
per unit under the 2011 Plan during the
six
months ended
June 30, 2017
.
|
|
|
|
|
(d)
|
We have aggregated expense for certain award types as they are not considered significant, including awards issued by Andeavor Logistics. During the
three
and
six
months ended
June 30, 2017
, we recognized expense of
$17 million
related to pre-existing Western Refining, NTI and WNRL awards due to accelerated recognition required upon change-in-control on June 1, 2017. WNRL’s phantom units are the only pre-existing awards that have not been settled or converted to Andeavor awards. These Western Refining, NTI and WNRL awards were converted to Andeavor shares. See Note 2.
|
The income tax effect recognized in the income statement for stock-based compensation was a benefit of
$13 million
and
$6 million
for the
three
months ended
June 30, 2017
and
2016
, respectively, and
$33 million
and
$18 million
for the
six
months ended
June 30, 2017
and
2016
, respectively. Included in the tax benefits were
$3 million
of excess tax benefits from exercises and vestings for both the
three
months ended
June 30, 2017
and
2016
, and
$17 million
and
$16 million
for the
six
months ended
June 30, 2017
and
2016
, respectively. The reduction in current taxes payable recognized from tax deductions resulting from exercises and vestings under all of our stock-based compensation arrangements totaled
$7 million
and
$6 million
for the
three
months ended
June 30, 2017
and
2016
, respectively, and
$32 million
and
$36 million
for the
six
months ended
June 30, 2017
and
2016
, respectively.
All outstanding equity awards from Western Refining and NTI stock-based compensation plans were converted to Andeavor shares but remain under their respective Western Refining and NTI plans.
NOTE 12 – OPERATING SEGMENTS
The Company’s revenues are derived from
three
operating segments: Marketing, Logistics and Refining. These results include the contribution from Western Refining for the period of June 1, 2017 to June 30, 2017. We evaluate the performance of our segments based primarily on segment operating income. Segment operating income includes those revenues and expenses that are directly attributable to management of the respective segment. The Marketing and Logistics segments include transactions with our Refining segment. The Logistics segment results for the three and six months ended June 30, 2017, includes the contribution from (i) Andeavor Logistics and (ii) WNRL for the period of June 1, 2017 to June 30, 2017. Corporate general and administrative and depreciation expenses are excluded from segment operating income.
SEGMENT INFORMATION RELATED TO CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(In millions)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Marketing:
|
|
|
|
|
|
|
|
|
Fuel (a)
|
$
|
4,712
|
|
|
$
|
4,077
|
|
|
$
|
8,795
|
|
|
$
|
7,375
|
|
|
Merchandise
|
71
|
|
|
6
|
|
|
77
|
|
|
12
|
|
|
Other
|
21
|
|
|
16
|
|
|
36
|
|
|
30
|
|
|
Logistics:
|
|
|
|
|
|
|
|
|
Gathering and processing
|
250
|
|
|
150
|
|
|
495
|
|
|
312
|
|
|
Terminalling and transportation
|
192
|
|
|
143
|
|
|
367
|
|
|
281
|
|
|
Wholesale (b)
|
165
|
|
|
—
|
|
|
165
|
|
|
—
|
|
|
Refining:
|
|
|
|
|
|
|
|
|
Refined products
|
6,658
|
|
|
5,508
|
|
|
12,470
|
|
|
9,793
|
|
|
Crude oil resales and other
|
391
|
|
|
242
|
|
|
635
|
|
|
453
|
|
|
Intersegment sales
|
(4,611
|
)
|
|
(3,857
|
)
|
|
(8,553
|
)
|
|
(6,870
|
)
|
|
Total Revenues
|
$
|
7,849
|
|
|
$
|
6,285
|
|
|
$
|
14,487
|
|
|
$
|
11,386
|
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
Marketing
|
236
|
|
|
161
|
|
|
369
|
|
|
388
|
|
|
Logistics (c)
|
167
|
|
|
118
|
|
|
317
|
|
|
237
|
|
|
Refining (c)
|
45
|
|
|
527
|
|
|
79
|
|
|
434
|
|
|
Total Segment Operating Income
|
448
|
|
|
806
|
|
|
765
|
|
|
1,059
|
|
|
Corporate and unallocated costs
|
(228
|
)
|
|
(88
|
)
|
|
(350
|
)
|
|
(162
|
)
|
|
Elimination and other costs
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
Operating Income
|
218
|
|
|
718
|
|
|
413
|
|
|
897
|
|
|
Interest and financing costs, net
|
(87
|
)
|
|
(60
|
)
|
|
(176
|
)
|
|
(120
|
)
|
|
Equity in earnings of equity method investments
|
3
|
|
|
3
|
|
|
3
|
|
|
5
|
|
|
Other income, net
|
9
|
|
|
25
|
|
|
11
|
|
|
32
|
|
|
Earnings Before Income Taxes
|
$
|
143
|
|
|
$
|
686
|
|
|
$
|
251
|
|
|
$
|
814
|
|
|
|
|
|
|
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(In millions)
|
|
Depreciation and Amortization Expenses
|
|
|
|
|
|
|
|
|
Marketing
|
$
|
14
|
|
|
$
|
12
|
|
|
$
|
27
|
|
|
$
|
24
|
|
|
Logistics (c)
|
68
|
|
|
46
|
|
|
126
|
|
|
92
|
|
|
Refining (c)
|
153
|
|
|
146
|
|
|
301
|
|
|
294
|
|
|
Corporate
|
7
|
|
|
6
|
|
|
14
|
|
|
12
|
|
|
Intersegment eliminations
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
Total Depreciation and Amortization Expenses
|
$
|
240
|
|
|
$
|
210
|
|
|
$
|
466
|
|
|
$
|
422
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
Marketing
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
13
|
|
|
$
|
19
|
|
|
Logistics (c)
|
49
|
|
|
60
|
|
|
94
|
|
|
120
|
|
|
Refining (c)
|
154
|
|
|
119
|
|
|
286
|
|
|
219
|
|
|
Corporate
|
57
|
|
|
24
|
|
|
100
|
|
|
39
|
|
|
Total Capital Expenditures
|
$
|
267
|
|
|
$
|
209
|
|
|
$
|
493
|
|
|
$
|
397
|
|
|
|
|
|
(a)
|
Federal and state motor fuel excise taxes on sales by our Marketing segment at retail sites where we own the inventory are included in both revenues and cost of sales in our condensed statements of consolidated operations. These taxes totaled
$153 million
and
$148 million
for the
three
months ended
June 30, 2017
and
2016
, respectively, and
$287 million
and
$290 million
for the
six
months ended
June 30, 2017
and
2016
, respectively.
|
|
|
|
|
(b)
|
Wholesale business obtained in the Western Refining Acquisition.
|
|
|
|
|
(c)
|
When Andeavor Logistics acquires certain assets from our Refining segment (the “Predecessors”), the associated liabilities and results of operations of the Predecessors, as applicable, are recast as if the assets were owned by Andeavor Logistics for all periods presented. Adjusted for the historical results of the Predecessors.
|
IDENTIFIABLE ASSETS RELATED TO CONTINUING OPERATIONS
(in millions; intersegment balances have been eliminated)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Marketing (a)
|
$
|
1,889
|
|
|
$
|
1,295
|
|
|
Logistics (a)
|
8,832
|
|
|
5,759
|
|
|
Refining (a)
|
15,280
|
|
|
10,350
|
|
|
Corporate
|
1,028
|
|
|
2,994
|
|
|
Total Assets (a)
|
$
|
27,029
|
|
|
$
|
20,398
|
|
|
|
|
|
(a)
|
Increase primarily related to Western Refining Acquisition. See Note 2.
|
