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Notes to Consolidated Financial Statements
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Note 1 - Organization and Basis of Presentation
Description and Nature of Business
Andeavor Logistics LP (“Andeavor Logistics” or the “Partnership”) is a growth-oriented Delaware limited partnership formed in December 2010 by Andeavor and its wholly-owned subsidiary, TLGP, our general partner, to own, operate, develop and acquire logistics and related assets and businesses. Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours” refer to Andeavor Logistics LP, one or more of its consolidated subsidiaries or all of them taken as a whole. Unless the context otherwise requires, references in this report to “Andeavor” or our “Sponsor” refer collectively to Andeavor for all activity through September 30, 2018, or Andeavor LLC, successor-by-merger to Andeavor effective October 1, 2018 and a wholly owned subsidiary of Marathon Petroleum Corporation, and any of Andeavor’s or Andeavor LLC’s subsidiaries, as applicable, other than Andeavor Logistics, its subsidiaries and its general partner. References in this report to “Marathon” or “MPC” refer to Marathon Petroleum Corporation, one or more of its consolidated subsidiaries, including Andeavor LLC, or all of them taken as a whole.
Our logistics assets are integral to the success of Marathon’s refining and marketing operations and are used to gather crude oil and to distribute, transport and store crude oil and refined products. We are a full service logistics company operating primarily in the western and mid-continent regions of the United States. We own and operate a network of crude oil, refined products and natural gas pipelines as well as operate crude oil and refined products truck and marine terminals and provide crude oil and refined product storage capacity. In addition, we own and operate bulk petroleum distribution facilities and natural gas processing and fractionation complexes. Our assets are categorized into the following segments: Terminalling and Transportation, Gathering and Processing, and Wholesale. See
Note 14
for additional information regarding our segments.
We generate revenues by charging fees for terminalling, transporting and storing crude oil and refined products, gathering crude oil and produced water, gathering and processing natural gas and selling fuel through wholesale commercial contracts. We are generally not directly exposed to commodity price risk with respect to any of the crude oil, natural gas, NGLs or refined products that we handle as part of our normal operations. However, we may be subject to limited commodity risk exposure due to pipeline loss allowance provisions in many of our pipeline gathering and transportation contracts and a nominal amount of condensate retained as part of our natural gas gathering services. For the NGLs that we handle under keep-whole agreements, the Partnership has a fee-based processing agreement with our Sponsor, which minimizes the impact of commodity price movement during the annual period subsequent to renegotiation of terms and pricing each year. We do not engage in the trading of crude oil, natural gas, NGLs or refined products; therefore we have minimal direct exposure to risks associated with commodity price fluctuations. However, these risks indirectly influence our activities and results of operations over the long-term through their effects on our customers’ operations. As part of the WNRL Merger, we acquired a wholesale fuel business that has exposure to commodity prices while the refined product is being transported but is mitigated by fixed margin contracts. In the years ended
December 31, 2018
,
2017
and
2016
,
67%
,
44%
and
51%
of our revenue, respectively, was derived from our Sponsor under various long-term, fee-based commercial agreements, the majority of which include minimum volume commitments, and from wholesale fuel sales to our Sponsor. QEP Resources accounted for
13%
of our total revenues in the year ended
December 31, 2016
. No single customer, other than our Sponsor, accounted for more than 10% of our total revenues for the years ended
December 31, 2018
and
2017
.
Our Terminalling and Transportation segment consists of the Northwest Pipeline System, which includes a regulated common carrier products pipeline running from Salt Lake City, Utah to Spokane, Washington and a jet fuel pipeline to the Salt Lake City International Airport; a regulated common carrier refined products pipeline system connecting Marathon’s Kenai refinery to our terminals in Anchorage, Alaska; tankage and related equipment at Marathon’s Kenai refinery; crude oil and refined products terminals and storage facilities in the western, southwest and midwestern U.S.; and storage facilities located at Marathon’s refineries. It also consists of marine terminals in California and in Washington; asphalt terminalling and processing services at our asphalt plant and terminal in El Paso, stand-alone asphalt terminals in the southwest as well as a
50%
interest in PNAC. The segment also includes a rail-car unloading facility in Washington; a manifest rail facility in Washington; an asphalt trucking operation and a petroleum coke handling and storage facility in Los Angeles; and other pipelines that transport products and crude oil from Marathon’s refineries to nearby facilities in Salt Lake City and Los Angeles.
Our Gathering and Processing segment includes crude oil, natural gas, NGLs and produced water gathering systems in the Bakken Shale/Williston Basin area of the Bakken Region, the Green River Basin, the Rockies Region, the Permian Basin System and the Four Corners System. It also consists of the Great Northern Midstream and Fryburg pipelines, crude trucking operations and gas processing and fractionation complexes.
Our Wholesale segment includes the operations of several bulk petroleum distribution plants and a fleet of refined product delivery trucks that distribute commercial wholesale petroleum products primarily in Arizona, Colorado, Nevada, New Mexico and Texas. The refined product trucking business delivers a significant portion of the volumes sold by our Wholesale segment.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of Andeavor Logistics and its subsidiaries. All intercompany accounts and transactions have been eliminated. We have evaluated subsequent events through the filing of this
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Notes to Consolidated Financial Statements
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Form 10-K. Any material subsequent events that occurred during this time have been properly recognized or disclosed in our financial statements. We have not reported comprehensive income due to the absence of items of other comprehensive income in the years presented.
In
2018
,
2017
and
2016
, we entered into various transactions with our Sponsor and our general partner, TLGP, pursuant to which we acquired from our Sponsor the following:
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gathering, storage and transportation assets in the Permian Basin; legacy Western Refining assets and associated crude terminals; the majority of our Sponsor’s remaining refining terminalling, transportation and storage assets; and equity method investments in ALRP, MPL and PNAC on August 6, 2018. In addition, the Conan Crude Oil Gathering System and LARIP were transferred at cost plus incurred interest;
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crude oil, feedstock and refined products storage, the Anacortes marine terminal, a manifest rail facility and crude oil and refined products pipelines located in Anacortes, Washington on November 8, 2017;
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logistic assets owned by WNRL, which consisted of pipelines, gathering, terminalling, storage, transportation and wholesale fuel distribution assets effective October 30, 2017;
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tankage, refined product storage, marine terminal terminalling and storage assets, pipelines, causeway and ancillary equipment located in Martinez, California (the “Northern California Terminalling and Storage Assets”) effective
November 21, 2016
; and
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all of the limited liability company interests in Tesoro Alaska Terminals, LLC, tankage, bulk tank farm, a truck rack and rail-loading facility, terminalling and other storage assets located in Kenai, Anchorage and Fairbanks, Alaska (the “Alaska Storage and Terminalling Assets”) completed in two stages on July 1, 2016 and September 16, 2016.
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These transactions are collectively referred to as “Acquisitions from our Sponsor” and the related assets, liabilities and results of the operations are collectively referred to as the “Predecessors.”
The Acquisitions from our Sponsor were transfers between entities under common control. As an entity under common control with our Sponsor, we record the assets that we acquired from our Sponsor on our consolidated balance sheet at our Sponsor’s historical basis instead of fair value. Transfers of businesses between entities under common control are accounted for as if the transfer occurred at the beginning of the period, and prior periods are retrospectively adjusted to furnish comparative information. Accordingly, the accompanying financial statements and related notes of Andeavor Logistics have been retrospectively adjusted to include the historical results of the assets acquired in the Acquisitions from our Sponsor prior to the effective date of each acquisition. The acquisition of logistics assets located in Anacortes, Washington in 2017 was immaterial to our consolidated financial statements. While this acquisition is a common control transaction, prior periods have not been retrospectively adjusted as these assets do not constitute a business in accordance with ASU 2017-01, “Clarifying the Definition of a Business”. See
Note 2
for additional information regarding the
2018
,
2017
and
2016
acquisitions.
The accompanying financial statements and related notes present the combined financial position, results of operations, cash flows and equity of our Predecessors at historical cost. The financial statements of our Predecessors have been prepared from the separate records maintained by our Sponsor and may not necessarily be indicative of the conditions that would have existed or the results of operations if our Predecessors had been operated as an unaffiliated entity. Other than WNRL and certain assets acquired from the 2018 Drop Down, our Predecessors did not record revenue for transactions with our Sponsor. Accordingly, the revenues in our Predecessors’ historical combined financial statements relate only to amounts received from third parties for these services.
Use of Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses reported and presented as of and for the periods ended. We review our estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include bank deposits and low-risk, short-term investments with original maturities of
three months
or less at the time of purchase. Cash equivalents are stated at cost, which approximates market value. We place our cash deposits and temporary cash investments with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit. We had
no
cash and cash equivalents held in money market funds.
Receivables
A portion of the Partnership’s accounts receivable is due from our Affiliates. Credit for non-affiliated customers is extended based on an evaluation of each customer’s financial condition and in certain circumstances, collateral, such as letters of credit or
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Notes to Consolidated Financial Statements
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guarantees, is required. Our allowance for doubtful accounts is based on various factors including current sales amounts, historical charge-offs and specific accounts identified as high risk. After reasonable efforts to collect the amounts have been exhausted, balances are deemed uncollectible and are charged against the allowance for doubtful accounts. Write-offs were immaterial in
2018
,
2017
and
2016
. We do not have any off-balance-sheet credit exposure related to our customers.
Property, Plant and Equipment
Property, plant and equipment are stated at the lower of historical cost less accumulated depreciation or fair value, if impaired. We capitalize all construction-related direct labor and material costs, as well as indirect construction costs. Indirect construction costs include general engineering and other allocated employee costs. Costs, including complete asset replacements and enhancements or upgrades that increase the original efficiency, productivity or capacity of property, plant and equipment, are also capitalized. The costs of repairs, minor replacements and maintenance projects that do not increase the original efficiency, productivity or capacity of property, plant and equipment are expensed as incurred. We capitalize interest as part of the cost of major projects during the construction period. Capitalized interest totaled
$13 million
,
$8 million
and
$6 million
for
2018
,
2017
and
2016
, respectively, and is recorded as a reduction to net interest and financing costs in our consolidated statements of operations.
We compute depreciation of property, plant and equipment using the straight-line method, based on the estimated useful life and salvage value of each asset. When assets are placed into service, we make estimates with respect to their useful lives that we believe are reasonable. However, factors such as maintenance levels, economic conditions impacting the demand for these assets and regulatory or environmental requirements could cause us to change our estimates, thus impacting the future calculation of depreciation. We depreciate leasehold improvements and property acquired under capital leases over the lesser of the lease term or the economic life of the asset. Depreciation expense totaled
$310 million
,
$262 million
and
$202 million
for
2018
,
2017
and
2016
, respectively.
When items of property, plant and equipment are sold or otherwise disposed of, any gains or losses are reported in net income. Gains on the disposal of property, plant and equipment are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when the assets are classified as held for sale.
Asset Retirement Obligations
We record AROs at fair value in the period in which we have a legal obligation to incur costs, whether by government action or contractual arrangement, to retire a tangible asset and can make a reasonable estimate of the fair value of the liability. AROs are calculated based on the present value of the estimated removal and other closure costs using our credit-adjusted risk-free rate given an estimated settlement date for the obligation. We estimate settlement dates by considering our past practice, industry practice, management’s intent and estimated economic lives. We cannot currently estimate the fair value for certain potential AROs primarily because we cannot estimate settlement dates (or range of dates) associated with these assets. These AROs include, but are not limited to, the removal or dismantlement of terminal facilities, pipelines and other buildings. AROs included in our consolidated balance sheets were
$10 million
and
$11 million
at
December 31, 2018
and
2017
, respectively.
Acquired Intangibles and Goodwill
Acquired intangibles are recorded at fair value as of the date acquired and consist of customer relationships obtained in connection with the acquisitions of WNRL, the North Dakota Gathering and Processing Assets, and Andeavor Field Services, LLC, (the “Rockies Natural Gas Business Acquisition”). The value for the identified customer relationships consists of cash flow expected from existing contracts and future arrangements from the existing customer base. We amortize acquired intangibles with finite lives on a straight-line basis over an estimated weighted average useful life of
31 years
and we include the amortization in depreciation and amortization expenses on our consolidated statements of operations.
Goodwill represents the amount the purchase price exceeds the fair value of net assets acquired in a business combination. We do not amortize goodwill or indefinite-lived intangible assets. The goodwill recorded for the acquisition of WNRL represents goodwill recognized by our Sponsor. Goodwill represents future organic growth opportunities, anticipated synergies and intangible assets that did not qualify for separate recognition. We are required, however, to review goodwill and indefinite-lived intangible assets for impairment annually, or more frequently if events or changes in business circumstances indicate that the asset might be impaired. In such circumstances, we record the impairment in loss on asset disposals and impairments in our consolidated statements of operations. We review the recorded value of goodwill for impairment on November 1
st
of each year, or sooner if events or changes in circumstances indicate the carrying amount may exceed fair value using qualitative and/or quantitative assessments at the reporting level. There were no impairments of goodwill during the years ended
December 31, 2018
,
2017
and
2016
.
Impairment of Long-Lived Assets
We review property, plant and equipment and other long-lived assets, including acquired intangibles with finite lives, for impairment whenever events or changes in business circumstances indicate the net book values of the assets may not be recoverable. Impairment is indicated when the undiscounted cash flows estimated to be generated by those assets are less than
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Notes to Consolidated Financial Statements
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the assets’ net book value. If this occurs, an impairment loss is recognized for the difference between the asset fair value and net book value. Factors that indicate potential impairment include: a significant decrease in the market value of the asset, operating or cash flow losses associated with the use of the asset and a significant change in the asset’s physical condition or use.
Equity Method Investments and Joint Ventures
For equity investments that are not required to be consolidated under the variable interest model, we evaluate the level of influence we are able to exercise over an entity’s operations to determine whether to use the equity method of accounting. We use equity method of accounting when we are able to have significant influence over an entity’s operations. Our judgment regarding the level of control over an equity method investment includes considering key factors such as our ownership interest, participation in policy-making and other significant decisions and material intercompany transactions. Amounts recognized for equity method investments are included in other noncurrent assets in our consolidated balance sheets and adjusted for our share of the net earnings or losses of the investee, which are presented separately in our statements of consolidated operations, capital contributions made and cash dividends received. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. An impairment loss is recorded in earnings in the current period to write down the carrying value of the investment to fair value if a decline in the value of an equity method investment is determined to be other than temporary. There were no impairments of our equity method investments during the years ended
December 31, 2018
,
2017
and
2016
.
Financial Instruments
Financial instruments including cash and cash equivalents, receivables, accounts payable and accrued liabilities are recorded at their carrying value. We believe the carrying value of these financial instruments approximates fair value. Our fair value assessment incorporates a variety of considerations, including the short-term duration of the instruments and the expected future insignificance of bad debt expense, which includes an evaluation of counterparty credit risk.
The fair value of our senior notes 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
$5.0 billion
and
$4.9 billion
at
December 31, 2018
, respectively, and were
$4.2 billion
and
$4.3 billion
at
December 31, 2017
, respectively. These carrying and fair values of our debt do not consider the unamortized issuance costs, which are netted against our total debt.
Income Taxes
We are a limited partnership and, with the exception of three of our subsidiaries, are not subject to federal or state income taxes. Our taxable income or loss is included in the federal and state income tax returns of our partners. Taxable income may vary substantially from income or loss reported for financial reporting purposes due to differences in the tax bases and financial reporting bases of assets and liabilities, and due to certain taxable income allocation requirements of the partnership agreement. We are unable to readily determine the net difference in the bases of our assets and liabilities for financial and tax reporting purposes because individual unitholders have different investment bases depending upon the timing and price of acquisition of their partnership units.
Contingencies
Environmental Matters
We are subject to federal, state and local laws and regulations governing environmental quality and pollution control. These laws and regulations require us to remove or remedy the effect of the disposal or release of specified substances at current and former operating sites. Our environmental liabilities are estimates using internal and third-party assessments and available information to date. It is possible these estimates will change as additional information becomes available.
We capitalize environmental expenditures that extend the life or increase the capacity of facilities as well as expenditures that prevent environmental contamination. We expense costs that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation. We record liabilities when environmental assessments and/or remedial efforts are probable and can be reasonably estimated. Cost estimates are based on the expected timing and the extent of remedial actions required by governing agencies, experience gained from similar sites for which environmental assessments or remediation have been completed, and the amount of our anticipated liability considering the proportional liability and financial abilities of other responsible parties. Certain of our environmental liabilities, specific to long-term monitoring costs we believe are fixed and determinable, are recorded on a discounted basis. Where the available information is sufficient to estimate the amount of liability, that estimate is used. Where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than another, the lower end of the range is used. Possible recoveries of some of these costs from other parties are not recognized in the financial statements until they become probable. Legal costs associated with environmental remediation are included as part of the estimated liability. The majority of our environmental liabilities are recorded on an undiscounted basis.
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Notes to Consolidated Financial Statements
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Legal Matters
In the ordinary course of business, we become party to lawsuits, administrative proceedings and governmental investigations. These matters may involve large or unspecified damages or penalties that may be sought from us and may require years to resolve. We record a liability related to a loss contingency attributable to such legal matters in other current liabilities or other noncurrent liabilities on our consolidated balance sheets, depending on the classification as current or noncurrent if we determine the loss to be both probable and estimable. The liability is recorded for an amount that is management’s best estimate of the loss, or when a best estimate cannot be made, the minimum loss amount of a range of possible outcomes.
Acquisitions
We use the acquisition method of accounting for the recognition of assets acquired and liabilities assumed with acquisitions at their estimated fair values as of the date of acquisition, with the exception of the Acquisitions from our Sponsor. As an entity under common control with our Sponsor, we record the assets that we acquired from our Sponsor on our consolidated balance sheet at our Sponsor’s historical basis instead of fair value. Any excess consideration transferred over the estimated fair values of the identifiable net assets acquired from third parties is recorded as goodwill. While we use our best estimates and assumptions to measure the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, not to exceed one year from the date of acquisition, any changes in the estimated fair values of the net assets recorded for the acquisitions will result in an adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Our acquisitions are discussed further in
Note 2
.
Revenue Recognition
See
Note 13
for details of how we recognize revenue. See below for further discussion on our adoption of ASC 606.
Reimbursements
Pursuant to the Amended Omnibus Agreement and Carson Assets Indemnity Agreement, our Sponsor reimburses the Partnership for pressure testing, required repairs and maintenance identified as a result of the first inspection of certain pipeline and tank assets subsequent to the Acquisitions from our Sponsor, as well as maintenance projects identified in the Amended Omnibus Agreement for which the costs were not known at the date of the Acquisitions from our Sponsor. These amounts are recorded as a reduction to operating expense during the period the costs are incurred. These amounts were
$15 million
,
$16 million
and
$17 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
In addition, our Sponsor reimburses the Partnership for capital projects identified in the Amended Omnibus Agreement. These amounts are recorded as a capital contribution by affiliate and were
$51 million
,
$34 million
and
$29 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Imbalances
We experience volume gains and losses, which we sometimes refer to as imbalances, within our pipelines, terminals and storage facilities due to pressure and temperature changes, evaporation and variances in meter readings and in other measurement methods. On our crude oil gathering and transportation system in North Dakota and Montana (the “High Plains System”), we retain
0.20%
of the crude oil shipped on our owned and operated common carrier pipelines in North Dakota and Montana and we bear any crude oil volume losses in excess of that amount. Under the Second Amended and Restated Master Terminalling Service Agreement, we retain
0.25%
of the refined products we handle at certain of our terminals for Marathon, and bear any refined product volume losses in excess of that amount. The value of any crude oil or refined product imbalance settlements resulting from these tariffs or contractual provisions is determined by using the monthly average market prices for the applicable commodity, less a specified discount. The Partnership measures volume losses annually for the terminals and pipelines in the Northwest Pipeline System. We retain
0.125%
of the distillates and
0.25%
of the other refined products we handle at our terminals on the Northwest Pipeline System and we bear any refined product volume losses in excess of those amounts. The value of any refined product losses is determined by using the annual average market price for the applicable commodity. Any settlements under tariffs or contractual provisions where we bear any crude oil or refined product volume losses are recognized in the period they are realized.
There are pipeline loss allowance provisions associated with the pipeline agreements acquired in the WNRL Merger. There is a
0.20%
pipeline loss allowance for the crude oil shipped on these pipeline systems. Each month we invoice our Sponsor for
0.20%
of the volume delivered to us by our Sponsor for the month as a volume loss at a price equal to that month's calendar day average for WTI crude oil, as quoted on the New York Mercantile Exchange, less
$8.00
per barrel. Following the end of the month, we calculate the actual volume loss and provide a credit to our Sponsor for the amount of actual volume loss at a price equal to the month's calendar day average for WTI crude oil, as quoted on the New York Mercantile Exchange, less
$8.00
per barrel.
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Notes to Consolidated Financial Statements
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For all of our other terminals, and under our other commercial agreements with our Sponsor, we have no obligation to measure volume losses and have no liability for physical losses.
The consolidated balance sheets also include offsetting natural gas imbalance receivables or payables resulting from differences in gas volumes received by customers and gas volumes delivered to interstate pipelines. Natural gas volumes owed to or by the Partnership that are subject to tariffs are valued at market index prices, as of the balance sheet dates, and are subject to cash settlement procedures. Other natural gas volumes owed to or by the Partnership are valued at our weighted average cost of natural gas as of the balance sheet dates and are settled in-kind.
Cost Classification
Cost of fuel and other includes the purchase cost of refined products sold within our Wholesale segment and the cost of inbound transportation and distribution costs incurred to transport product to our customers. NGL expense results from the cost of NGL purchases under our POP arrangements as well as the non-cash acquisition of replacement dry gas under our keep-whole arrangements associated with the acquired crude oil, natural gas and produced water gathering systems and two natural gas processing facilities from the North Dakota Gathering and Processing Assets.
Operating expenses are comprised of direct operating costs including 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 provision of services.
Depreciation and amortization expenses consist of the depreciation and amortization of property, plant and equipment, deferred charges 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 operations. Cost of fuel and other, NGL expense, direct operating expenses, and depreciation and amortization expenses recognized by our Terminalling and Transportation, Gathering and Processing, and Wholesale segments (refer to amounts disclosed in
Note 14
) constitute costs of revenue as defined by U.S. GAAP.
Unit-Based Compensation
Our general partner provides unit-based compensation to officers and non-employee directors for the Partnership, which includes service and performance phantom unit awards. The fair value of our service phantom unit awards on the date of grant is equal to the market price of our common units. We estimate the grant date fair value of performance phantom unit awards using a Monte Carlo simulation at the inception of the award. We amortize the fair value over the vesting period using the straight-line method. The phantom unit awards are settled in Andeavor Logistics common units. Expenses related to unit-based compensation are included in general and administrative expenses in our consolidated statements of operations. Total unit-based compensation expense totaled
$9 million
for the years ended
December 31, 2018
and
2017
and
$6 million
for the year ended
December 31, 2016
. The Partnership had
943,466
units available for future grants under the long-term incentive plan at
December 31, 2018
.
Net Earnings per Limited Partner Unit
Effective October 30, 2017, we closed the WNRL Merger. Prior to the WNRL Merger, we used the two-class method when calculating the net earnings per unit applicable to limited partners, because we had more than one participating security consisting of limited partner common units, general partner units and IDRs. Net earnings earned by the Partnership were allocated between the limited and general partners in accordance with our partnership agreement. However, as a result of the IDR/GP Transaction in October 2017, our general partner and its IDRs no longer participate in earnings or distributions. See
Note 2
for additional information regarding the WNRL Merger.
We base our calculation of net earnings per limited partner common unit on the weighted average number of common limited partner units outstanding during the period. Diluted net earnings per unit includes the effects of potentially dilutive units on our common units, which consist of unvested service and performance phantom units.
New Accounting Standards and Disclosures
Revenue Recognition
In May 2014, the FASB issued ASC 606 to replace existing revenue recognition rules with a single comprehensive model to use in accounting for revenue arising from contracts with customers. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services for an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, ASC 606 requires expanded disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
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Notes to Consolidated Financial Statements
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We adopted ASC 606 on January 1, 2018 utilizing the modified retrospective method. We recognized a
$17 million
reduction to the opening balance of partners’ equity as of January 1, 2018 for the cumulative effect adjustment related to contracts in process but not substantially complete as of that date. We reflected the aggregate impact of all modifications executed and effective as of January 1, 2018 in applying the new standard to these contracts. The cumulative effect adjustment is primarily related to the period over which revenue is recognized on contracts for which customers pay minimum throughput volume commitments and claw-back provisions apply. Additionally, upon the adoption of ASC 606, the gross versus net presentation of certain contractual arrangements and taxes has changed as further described in
Note 13
. The current period results and balances are presented in accordance with ASC 606, while comparative periods continue to be presented in accordance with the accounting standards in effect for those periods.
For the year ended
December 31, 2018
, we recorded lower revenues of
$2.6 billion
and lower costs and expenses of
$2.6 billion
for presentation impacts of applying ASC 606. These impacts were primarily associated with the netting of revenues and costs associated with our fuel purchase and supply arrangements, as further described in
Note 13
. We recorded lower revenues of
$6 million
primarily associated with minimum volume commitments during the year ended
December 31, 2018
as a result of applying the new standard. There were no material impacts during the period to the consolidated balance sheets or consolidated statement of consolidated cash flows, as a result of the adoption.
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”) to record virtually all leases on the balance sheet. The ASU also requires expanded disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. For lessors, this amended guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. We transitioned to the new guidance by recording leases on our balance sheet as of January 1, 2019. We evaluated the impact of this standard on our financial statements, disclosures, internal controls and accounting policies. This evaluation process included reviewing all forms of leases, performing a completeness assessment over the lease population and analyzing the practical expedients in order to determine the best path of implementing changes to existing processes and controls. We implemented a third-party supported lease accounting information system to account for our lease population in accordance with this new standard and established internal controls over the new system. We completed the design and testing of the new system and completed lease data loading and testing. We expect that adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for operating leases in the range of approximately
$115 million
to
$145 million
.
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 to early adopt ASU 2016-13 nor expect the adoption of this standard to have a material impact on our consolidated financial statements.
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, "Restricted Cash" (“ASU 2016-18”), which clarifies how restricted cash and restricted cash equivalents are presented in the statements of cash flows. The ASU requires that changes in restricted cash that result from transfers between cash, cash equivalents and restricted cash should not be presented as cash flow activities in the statements of cash flows. ASU 2016-18 was effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. We adopted ASU 2016-08 as of January 1, 2018 on a retrospective basis. Adoption of this standard resulted in an increase in cash and cash equivalents during the second quarter of 2017 of
$14 million
, but the restriction was released during the third quarter of 2017 as the cash was used to reinvest in assets used in our business and as a payment of debt. As a result, the adoption of this standard did not have an impact on our consolidated statement of cash flows for the year ended
December 31, 2018
.
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 statement of consolidated operations and stipulates that only the service cost component of net benefit cost is eligible for capitalization. Additionally, the Partnership will present other components of net benefit costs elsewhere on the consolidated statements of operations since these costs are allocated to the Partnership’s financial statements by Marathon. The amendments to the presentation of the consolidated statements of operations in this update should be applied retrospectively while the change in capitalized benefit cost is to be applied prospectively. We adopted ASU 2017-07 as of January 1, 2018. Adoption of the standard resulted in an increase to interest and financing costs of
$7 million
with a corresponding increase to other income of
$7 million
for the year ended
December 31, 2017
with
no
impact to net earnings. ASU 2017-07 does not impact the consolidated balance sheets or consolidated statements of cash flows.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Stock Compensation
In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include share-based payment awards to nonemployees and eliminates the classification differences for employee and nonemployee share-based payment awards. This guidance is effective for interim and annual periods beginning after December 15, 2018. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Note 2 - Acquisitions
2018 Acquisitions
2018 Drop Down
On August 6, 2018, we completed the 2018 Drop Down for total consideration of
$1.55 billion
comprised of
$300 million
in cash financed with borrowings under our Dropdown Credit Facility and
28,283,742
newly issued common units of the Partnership with a fair value of
$1.25 billion
. These assets include gathering, storage and transportation assets in the Permian Basin; legacy Western Refining assets and associated crude terminals; the majority of Andeavor's remaining refining terminalling, transportation and storage assets; and equity method investments in ALRP, MPL and PNAC. In addition, the Conan Crude Oil Gathering System and the LARIP were transferred at cost plus incurred interest. In conjunction with the 2018 Drop Down, we entered into additional commercial agreements with Marathon. See
Note 3
for further information regarding these agreements.
The 2018 Drop Down includes:
|
|
•
|
Crude oil and other feedstock storage tankage and refined product storage tankage at Marathon’s Mandan, Salt Lake City and Los Angeles refineries;
|
|
|
•
|
Rail terminals and truck racks at Marathon’s Mandan, Salt Lake City and Los Angeles refineries for the loading and unloading of various refined products from manifest and other railcars and trucks, respectively;
|
|
|
•
|
Interconnecting pipeline facilities in the Los Angeles area as well as other railroad tracks and adjoining lands;
|
|
|
•
|
Mesquite and Yucca truck unloading stations in New Mexico for the unloading of crude trucks and injection of crude into the TexNew Mex pipeline;
|
|
|
•
|
Mason East and Jackrabbit (“Wink”) truck unloading and injection stations in Texas that receive crude via the T-Station line and trucks for injection into the Kinder Morgan and Bobcat Pipeline;
|
|
|
•
|
The Jal storage, injection and rail unloading facility in New Mexico that stores and supplies natural gas liquids for use in Marathon’s El Paso refinery;
|
|
|
•
|
Natural gas liquid storage tankage, a rail and truck terminal for the loading and unloading of natural gas liquids from railcars and trucks as well as from the waterline at the Wingate facility in New Mexico;
|
|
|
•
|
Crude oil and other feedstock storage tankage at the Clearbrook terminal in Minnesota;
|
|
|
•
|
Bobcat Pipeline that transports crude oil between the Mason East Station and the Wink Station;
|
|
|
•
|
Benny Pipeline that delivers crude oil from the Conan terminal in Texas to a connection with gathering lines in New Mexico;
|
|
|
•
|
All of the issued and outstanding limited liability company interests in: (i) Tesoro Great Plains Midstream LLC, which owns BakkenLink Pipeline LLC, (ii) Andeavor MPL Holdings LLC, which holds the investment in MPL, (iii) Andeavor Logistics CD LLC, (iv) Western Refining Conan Gathering, LLC, which owns the Conan Crude Oil Gathering System, (v) Western Refining Delaware Basin Storage, LLC, (vi) Asphalt Terminals LLC, which holds the investment in PNAC, and (vii)
67%
of all of the issued and outstanding limited liability company interests in ALRP; and
|
|
|
•
|
Certain related real property interests.
|
SLC Core Pipeline System
On May 1, 2018, we completed our acquisition of the SLC Core Pipeline System (formerly referred to as the Wamsutter Pipeline System) from Plains All American Pipeline, L.P. for total consideration of
$180 million
. The system consists of pipelines that transport crude oil to another third-party pipeline system that supply Salt Lake City area refineries, including Marathon’s Salt Lake City refinery. We financed the acquisition using our Revolving Credit Facility. This acquisition is not material to our consolidated financial statements and its operating results are reported in our Terminalling and Transportation segment.
2017 Acquisitions
Anacortes Logistics Assets
On
November 8, 2017
, we acquired the Anacortes Logistics Assets from a subsidiary of our Sponsor for total consideration of
$445 million
. The Anacortes Logistics Assets include crude oil, feedstock and refined products storage at Marathon’s Anacortes Refinery, the Anacortes marine terminal with feedstock and refined product throughput, a manifest rail facility and crude oil and refined products pipelines. We paid
$445 million
, including
$400 million
of cash financed with borrowings on our revolving credit facilities and
$45 million
in common units issued to our Sponsor.
|
|
|
|
Notes to Consolidated Financial Statements
|
WNRL Merger
Effective October 30, 2017, we closed the WNRL Merger, exchanging all outstanding common units of WNRL for units of Andeavor Logistics, representing an equity value of
$1.7 billion
.
We accounted for the WNRL Merger as a common control transaction and, accordingly, inherited our Sponsor’s basis in WNRL’s net assets. Our Sponsor accounted for the acquisition of WNRL 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, or June 1, 2017, the date our Sponsor acquired WNRL. The purchase price allocation for the WNRL Merger has been allocated based on fair values of the assets acquired and liabilities assumed at the acquisition date. The allocation of the WNRL purchase price was final as of May 31, 2018. We recorded adjustments to the allocation to reduce property, plant and equipment and increase goodwill by
$55 million
during 2018.
Preliminary Acquisition Date Purchase Price Allocation (in millions)
|
|
|
|
|
Cash
|
$
|
22
|
|
Receivables
|
112
|
|
Inventories
|
11
|
|
Prepayments and Other Current Assets
|
25
|
|
Property, Plant and Equipment (a)
|
1,295
|
|
Goodwill
|
620
|
|
Acquired Intangibles
|
130
|
|
Other Noncurrent Assets
|
2
|
|
Accounts Payable
|
(167
|
)
|
Accrued Liabilities
|
(41
|
)
|
Debt
|
(347
|
)
|
Total purchase price
|
$
|
1,662
|
|
|
|
(a)
|
Estimated useful lives ranging from
3
to
22
years have been assumed based on the valuation.
|
Goodwill
We evaluated several factors that contributed to the amount of goodwill presented above. These factors include the acquisition of a logistics business located in advantageous areas where there is crude oil marketing capabilities and meaningful refining offtake with an assembled workforce that cannot be duplicated at the same costs by a new entrant. Further, the WNRL Merger provides a platform for future growth through operating efficiencies we expect to gain from the application of best practices across the combined company and an ability to realize synergies from the geographic diversification of Andeavor Logistics’ business and rationalization of general and administrative costs. We allocated
$374 million
,
$197 million
and
$49 million
of goodwill to the Gathering and Processing, Terminalling and Transportation, and Wholesale segments, respectively.
Property, Plant and Equipment
The fair value of property, plant and equipment is
$1.3 billion
. This 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 of the Partnership.
Acquired Intangible Assets
We estimated the fair value of the acquired identifiable intangible assets at
$130 million
. This fair value is based on a 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 of
$130 million
with third parties, all of which will be amortized on a straight-line basis over an estimated weighted average useful life of
15
years. The gross carrying value of our finite life intangibles acquired from the WNRL Merger was
$130 million
and the accumulated amortization was
$14 million
as of
December 31, 2018
. Amortization expense is expected to be approximately
$9 million
per year over the remaining useful life.
Acquisition Costs
We recognized acquisition costs related to the WNRL Merger of
$17 million
in general and administrative expenses and
$3 million
of severance costs for the year ended December 31, 2017.
WNRL Revenues and Net Earnings
For the years ended
December 31, 2018
and
2017
, we recognized
$415 million
and
$1.5 billion
, respectively, in revenues and
$115 million
and
$40 million
, respectively, of net earnings related to the business acquired. Revenues for 2018 were accounted for under ASC 606, further discussed in Notes 1 and 13. Net earnings for the year ended
December 31, 2017
included related acquisition and severance costs.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Pro Forma Financial Information
The unaudited pro forma information combines the historical operations of Andeavor Logistics and WNRL, giving effect to the WNRL Merger and related transactions as if they had been consummated on January 1, 2017. For the year ended
December 31, 2017
, the unaudited pro forma consolidated revenues and net earnings was
$4.3 billion
and
$403 million
, respectively. Pro forma net earnings for the year ended
December 31, 2017
includes a significant non-recurring adjustment to recognize the WNRL Merger acquisition and integration costs. We recognized acquisition costs related to the WNRL Merger of
$17 million
as well as
$3 million
of severance costs for the year ended
December 31, 2017
.
North Dakota Gathering and Processing Assets
On
January 1, 2017
, we acquired the North Dakota Gathering and Processing Assets for total consideration of
$705 million
, including payments for working capital amounts, funded with cash on-hand, which included borrowings under our Revolving Credit Facility. 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. With this acquisition, we expanded the assets in our Gathering and Processing segment located in the Williston Basin area of North Dakota to further grow our integrated, full-service logistics capabilities in support of third-party demand for crude oil, natural gas and water gathering services as well as natural gas processing services. In addition, this acquisition increases our capacity and capabilities while extending our crude oil, natural gas and water gathering and associated gas processing footprint to enhance overall basin logistics efficiencies.
2016 Acquisitions
Northern California Terminalling and Storage Assets
Effective
November 21, 2016
, we acquired certain terminalling and storage assets located in Martinez, California from subsidiaries of our Sponsor for total consideration of
$400 million
, comprised of
$360 million
in cash financed with borrowings under our Dropdown Credit Facility, and the issuance of our equity securities with a fair value of
$40 million
. The Northern California Terminalling and Storage Assets include crude oil, feedstock, and refined product storage capacity at Marathon’s Martinez Refinery along with the Avon marine terminal capable of handling feedstock and refined product throughput. The equity consideration was comprised of
860,933
units in the form of common units and
17,570
units in the form of general partner units.
Alaska Storage and Terminalling Assets
Effective
July 1, 2016
, we entered into an agreement to purchase certain terminalling and storage assets owned by our Sponsor for total consideration of
$444 million
, which was completed in two phases. On
July 1, 2016
, we completed the acquisition of the first phase consisting of tankage, related equipment and ancillary facilities used for the operations at our Sponsor’s Kenai Refinery. The second phase was completed on
September 16, 2016
and consisted of refined product terminals in Anchorage and Fairbanks. Consideration paid for the first phase was
$266 million
, comprised of
$240 million
in cash, financed with borrowings under the Dropdown Credit Facility, and the issuance of
162,375
general partner units and
390,282
common units to our Sponsor with a combined fair value of
$26 million
. Consideration paid for the second phase was
$178 million
, comprised of
$160 million
in cash, financed with borrowings under the Dropdown Credit Facility, and the issuance of
20,440
general partner units and
358,712
common units to our Sponsor with a combined fair value of
$18 million
.
|
|
|
|
Notes to Consolidated Financial Statements
|
Combined Consolidated Financial Information
As discussed further in Note 1, we refer to the historical results of the Alaska Storage and Terminalling Assets (phase 1 prior to July 1, 2016 and phase 2 from June 20, 2016 to September 16, 2016), Northern California Terminalling and Storage Assets (prior to November 21, 2016), WNRL (from June 1, 2017 to October 30, 2017) and the 2018 Drop Down (prior to August 6, 2018), collectively as our “Predecessors.” The following tables present our results of operations disaggregated to present results relating to the Partnership and the Predecessors for the assets acquired from our Sponsor and the total amounts included in our combined consolidated financial statements for the years ended
December 31, 2018
,
2017
and
2016
.
Reconciliation of Combined Financial Statements (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Combined
|
|
Andeavor Logistics LP
|
|
Predecessors
|
Revenues:
|
|
|
|
|
|
Fee-based:
|
|
|
|
|
|
Affiliate
|
$
|
1,309
|
|
|
$
|
1,288
|
|
|
$
|
21
|
|
Third-party
|
591
|
|
|
582
|
|
|
9
|
|
Product-based:
|
|
|
|
|
|
Affiliate
|
280
|
|
|
280
|
|
|
—
|
|
Third-party
|
200
|
|
|
200
|
|
|
—
|
|
Total Revenues
|
2,380
|
|
|
2,350
|
|
|
30
|
|
Costs and Expenses
|
|
|
|
|
|
NGL expense (exclusive of items shown separately below)
|
206
|
|
|
206
|
|
|
—
|
|
Operating expenses (exclusive of depreciation and amortization)
|
885
|
|
|
845
|
|
|
40
|
|
General and administrative expenses
|
121
|
|
|
112
|
|
|
9
|
|
Depreciation and amortization expenses
|
368
|
|
|
346
|
|
|
22
|
|
Loss on asset disposals and impairments
|
4
|
|
|
4
|
|
|
—
|
|
Operating Income (Loss)
|
796
|
|
|
837
|
|
|
(41
|
)
|
Interest and financing costs, net
|
(233
|
)
|
|
(229
|
)
|
|
(4
|
)
|
Equity in earnings of equity method investments
|
31
|
|
|
15
|
|
|
16
|
|
Other income, net
|
6
|
|
|
5
|
|
|
1
|
|
Net Earnings (Loss)
|
$
|
600
|
|
|
$
|
628
|
|
|
$
|
(28
|
)
|
Loss attributable to Predecessors
|
28
|
|
|
—
|
|
|
28
|
|
Net Earnings Attributable to Partners
|
628
|
|
|
628
|
|
|
—
|
|
Preferred unitholders’ interest in net earnings
|
(44
|
)
|
|
(44
|
)
|
|
—
|
|
Limited Partners’ Interest in Net Earnings
|
$
|
584
|
|
|
$
|
584
|
|
|
$
|
—
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Combined
|
|
Andeavor Logistics LP
|
|
Predecessors
|
Revenues:
|
|
|
|
|
|
Fee-based:
|
|
|
|
|
|
Affiliate
|
$
|
942
|
|
|
$
|
796
|
|
|
$
|
146
|
|
Third-party
|
656
|
|
|
647
|
|
|
9
|
|
Product-based:
|
|
|
|
|
|
Affiliate
|
489
|
|
|
213
|
|
|
276
|
|
Third-party
|
1,162
|
|
|
495
|
|
|
667
|
|
Total Revenues
|
3,249
|
|
|
2,151
|
|
|
1,098
|
|
Costs and Expenses
|
|
|
|
|
|
Cost of fuel and other (excluding items shown separately below)
|
1,244
|
|
|
330
|
|
|
914
|
|
NGL expense (exclusive of items shown separately below)
|
265
|
|
|
265
|
|
|
—
|
|
Operating expenses (exclusive of depreciation and amortization)
|
691
|
|
|
554
|
|
|
137
|
|
General and administrative expenses
|
158
|
|
|
121
|
|
|
37
|
|
Depreciation and amortization expenses
|
313
|
|
|
255
|
|
|
58
|
|
Gain on asset disposals and impairments
|
(25
|
)
|
|
(24
|
)
|
|
(1
|
)
|
Operating Income (Loss)
|
603
|
|
|
650
|
|
|
(47
|
)
|
Interest and financing costs, net
|
(330
|
)
|
|
(321
|
)
|
|
(9
|
)
|
Equity in earnings of equity method investments
|
22
|
|
|
10
|
|
|
12
|
|
Other income, net
|
11
|
|
|
10
|
|
|
1
|
|
Net Earnings (Loss)
|
$
|
306
|
|
|
$
|
349
|
|
|
$
|
(43
|
)
|
Loss attributable to Predecessors
|
43
|
|
|
—
|
|
|
43
|
|
Net Earnings Attributable to Partners
|
349
|
|
|
349
|
|
|
—
|
|
Preferred unitholders’ interest in net earnings
|
(3
|
)
|
|
(3
|
)
|
|
—
|
|
General partner’s interest in net earnings, including IDRs
|
(79
|
)
|
|
(79
|
)
|
|
—
|
|
Limited Partners’ Interest in Net Earnings
|
$
|
267
|
|
|
$
|
267
|
|
|
$
|
—
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Combined
|
|
Andeavor Logistics LP
|
|
Predecessors
|
Revenues:
|
|
|
|
|
|
Fee-based:
|
|
|
|
|
|
Affiliate
|
$
|
747
|
|
|
$
|
615
|
|
|
$
|
132
|
|
Third-party
|
819
|
|
|
502
|
|
|
317
|
|
Product-based:
|
|
|
|
|
|
Affiliate
|
100
|
|
|
100
|
|
|
—
|
|
Third-party
|
3
|
|
|
3
|
|
|
—
|
|
Total Revenues
|
1,669
|
|
|
1,220
|
|
|
449
|
|
Costs and Expenses
|
|
|
|
|
|
Cost of fuel and other (excluding items shown separately below)
|
316
|
|
|
—
|
|
|
316
|
|
NGL expense (exclusive of items shown separately below)
|
2
|
|
|
2
|
|
|
—
|
|
Operating expenses (exclusive of depreciation and amortization)
|
560
|
|
|
426
|
|
|
134
|
|
General and administrative expenses
|
106
|
|
|
94
|
|
|
12
|
|
Depreciation and amortization expenses
|
233
|
|
|
183
|
|
|
50
|
|
Loss on asset disposals and impairments
|
4
|
|
|
4
|
|
|
—
|
|
Operating Income (Loss)
|
448
|
|
|
511
|
|
|
(63
|
)
|
Interest and financing costs, net
|
(195
|
)
|
|
(196
|
)
|
|
1
|
|
Equity in earnings of equity method investments
|
13
|
|
|
13
|
|
|
—
|
|
Other income, net
|
11
|
|
|
11
|
|
|
—
|
|
Net Earnings (Loss)
|
$
|
277
|
|
|
$
|
339
|
|
|
$
|
(62
|
)
|
Loss attributable to Predecessors
|
62
|
|
|
—
|
|
|
62
|
|
Net Earnings Attributable to Partners
|
339
|
|
|
339
|
|
|
—
|
|
General partner’s interest in net earnings, including IDRs
|
(152
|
)
|
|
(152
|
)
|
|
—
|
|
Limited Partners’ Interest in Net Earnings
|
$
|
187
|
|
|
$
|
187
|
|
|
$
|
—
|
|
Divestitures
On June 2, 2017, due to our Sponsor’s consent decree with the state of Alaska associated with the acquisition of the Alaska Storage and Terminalling Assets, we sold one of our existing Alaska products terminals (“Alaska Terminal”) for
$28 million
. The sale resulted in a
$25 million
gain on sale in our consolidated statements of operations for the year ended December 31, 2017. The Alaska Terminal divestiture did not have a material impact on our operations.
Note 3 - Related-Party Transactions
Commercial Agreements
We have various long-term, fee-based commercial agreements with our Sponsor, under which we provide pipeline transportation, wholesale, trucking, terminal distribution and storage services to Marathon, and Marathon commits to provide us with minimum monthly throughput volumes of crude oil, refined products and other. If, in any calendar month, Marathon fails to meet its minimum volume commitments under these agreements, it will be required to pay us a shortfall payment. These shortfall payments may be applied as a credit against any amounts due above their minimum volume commitments for up to twelve months after the shortfall occurs. Each of these agreements has fees that are indexed annually for inflation or, in certain circumstances, allows for a quarterly rate adjustment based on a comparison of competitive rates.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Commercial Agreements with Marathon
|
|
|
|
|
|
|
|
|
|
|
Termination Provisions
|
Commercial Agreement
|
Initiation Date
|
Term Years
|
Renewals
|
Refinery Shutdown Notice Period (a)
|
Force Majeure
|
Amended Transportation Services Agreement (High Plains System)
|
Apr-11
|
10
|
2 x 5 years
|
12 months
|
Unilateral
|
Second Amended and Restated Master Terminalling Agreement
|
Apr-11
|
10
|
2 x 5 years
|
12 months
|
Unilateral
|
Salt Lake City Storage Agreement
|
Apr-11
|
10
|
2 x 5 years
|
12 months
|
Unilateral
|
Amended and Restated Transportation Services Agreement (Salt Lake City Short Haul Pipeline)
|
Apr-11
|
10
|
2 x 5 years
|
12 months
|
Unilateral
|
Amorco Terminal Use and Throughput Agreement (Martinez Marine)
|
Apr-12
|
10
|
2 x 5 years
|
12 months
|
Unilateral
|
Transportation Services Agreement (LAR Short Haul Pipelines)
|
Sep-12
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Amended Anacortes Track Use and Throughput Agreement
|
Nov-12
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Long Beach Storage Services Agreement
|
Dec-12
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Terminalling Services Agreement for Northwest Pipeline System
|
Jun-13
|
1
|
Year to year
|
N/A
|
Unilateral
|
Southern California Terminalling & Dedicated Services Agreement
|
Jun-13
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Amended Carson Storage Services Agreement
|
Jun-13
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Carson Tank Farm Storage Agreement
|
Jun-13
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Amended Terminalling, Transportation and Storage Services Agreement (WNRL)
|
Oct-13
|
10
|
2 x 5 years
|
12 months
|
Unilateral
|
Amended Pipeline and Gathering Services Agreement (WNRL)
|
Oct-13
|
10
|
2 x 5 years
|
12 months
|
Unilateral
|
Carson Coke Handling Service Agreement
|
Dec-13
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Amended and Restated Long Beach Berth Access Use and Throughput Agreement
|
Dec-13
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Long Beach Pipeline Throughput Agreement (b)
|
Dec-13
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Amended Transportation Services Agreement (SoCal Pipelines)
|
Dec-13
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Bakken Area Storage Hub Storage - TRMC Tanks
|
Apr-14
|
5
|
2 x 5 years
|
N/A
|
Unilateral
|
Terminalling & Dedicated Storage Services Agreement - Martinez
|
Jul-14
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Terminalling & Dedicated Storage Services Agreement - Anacortes
|
Jul-14
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
THPP Reversal Open Season Northbound Commitment
|
Sep-14
|
7
|
None
|
N/A
|
Unilateral
|
Tesoro Alaska Pipeline Throughput Agreement
|
Sep-14
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Amended Crude Oil Trucking Transportation Services Agreement (WNRL)
|
Oct-14
|
10
|
None
|
N/A
|
Unilateral
|
Fuel Distribution and Supply Agreement (WNRL)
|
Oct-14
|
10
|
None
|
N/A
|
Unilateral
|
Amended Product Supply Agreement (WNRL)
|
Oct-14
|
10
|
None
|
N/A
|
Unilateral
|
Keep-Whole Commodity Fee Agreement
|
Dec-14
|
5
|
1 year auto
|
90 days prior to expiration
|
Bilateral
|
Sale of Natural Gas
|
Oct-15
|
1 month
|
Evergreen
|
N/A
|
Bilateral
|
Amended Asphalt Trucking Services Agreement (WNRL)
|
Jan-16
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Green River Processing Crude Oil Sales Agreement
|
Feb-16
|
1
|
Evergreen
|
N/A
|
Bilateral
|
Tank #2030 Use, Storage and Throughput Agreement
|
Apr-16
|
6 months
|
6 months
|
N/A
|
Bilateral
|
Asphalt and Propane Rack Loading Services Agreement (Kenai)
|
May-16
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Kenai Storage Services Agreement
|
Jul-16
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
Termination Provisions
|
Commercial Agreement
|
Initiation Date
|
Term Years
|
Renewals
|
Refinery Shutdown Notice Period (a)
|
Force Majeure
|
Terminalling, Transportation and Storage Services Agreement (St. Paul Park)
|
Sep-16
|
10
|
2 x 5 years
|
12 months
|
Unilateral
|
Alaska Terminalling Services Agreement
|
Sep-16
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Martinez Storage Services Agreement
|
Nov-16
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Avon Marine Terminal Use and Throughput Agreement
|
Jan-17
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Belfield Crude & Oil Gathering
|
Jan-17
|
2
|
None
|
N/A
|
Unilateral
|
Amended Renewal Trucking Transportation Services Agreement
|
Apr-17
|
1
|
Evergreen
|
2 months prior to expiration
|
Unilateral
|
Transportation Services Agreement (Anacortes Short Haul Pipelines)
|
Nov-17
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Anacortes Manifest Rail Terminalling Services Agreement
|
Nov-17
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Anacortes Marine Terminal Operating Agreement
|
Nov-17
|
17
|
None
|
N/A
|
Unilateral
|
Storage Services Agreement - Anacortes II
|
Nov-17
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Product Transportation Agreement (TRMC, WRSW, WRCLP, SPPRC)
|
Jan-18
|
1
|
Evergreen
|
N/A
|
Unilateral
|
Plant Dedication Agreement (Robinson Lake and Belfield)
|
Apr-18
|
3
|
Month to month
|
N/A
|
Bilateral
|
Product Sales Agreement - Robinson Lake
|
Apr-18
|
3
|
N/A
|
N/A
|
Bilateral
|
Product Sales Agreement - Belfield
|
Apr-18
|
3
|
N/A
|
N/A
|
Bilateral
|
Product Sales Agreement Y-Grade - Robinson Lake
|
May-18
|
1 month
|
Month to month
|
N/A
|
Bilateral
|
SLC Core Crude Throughput
|
May-18
|
0.2
|
Evergreen
|
N/A
|
Unilateral
|
Truck Loading (H2S) Little Knife
|
Jun-18
|
6
|
None
|
N/A
|
Unilateral
|
Truck Unloading Facility Throughput Agreement (Stanley LACT)
|
Jun-18
|
3
|
None
|
N/A
|
Unilateral
|
Transportation Services Agreement (LAR Interconnecting Pipelines)
|
Aug-18
|
10
|
2 x 5 years
|
12 months
|
Unilateral
|
Amended Master Terminalling Services Agreement - Clearbrook, Fryburg, Jal, LAR, Mandan, Wingate
|
Aug-18
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Master Unloading and Storage Agreement (WNRL)
|
Aug-18
|
10
|
2 x 5 years
|
N/A
|
Unilateral
|
Amended Asphalt Terminalling, Transportation and Storage Services Agreement
|
Aug-18
|
10
|
2 x 5 years
|
30 days
|
Unilateral
|
Fryburg Terminal Services Agreement
|
Aug-18
|
2.6
|
1 month
|
N/A
|
Unilateral
|
Transloading Services Agreement - Salt Lake City Spur
|
Oct-18
|
3
|
None
|
N/A
|
Unilateral
|
Natural Gas Liquids Marketing Agreement
|
Oct-18
|
3
|
3 year extension with 60 days notice by AFS
|
N/A
|
Bilateral
|
|
|
(a)
|
Fixed minimum volumes remain in effect during routine turnarounds.
|
|
|
(b)
|
Agreement gives Marathon the option to renew for two five-year terms, or Marathon may modify the term of the agreements to a twenty-year term by providing notice in accordance with each agreement.
|
We charge fixed fees based on the total storage capacity of our assets under several of our agreements with Marathon. We recognized
$407 million
,
$277 million
and
$193 million
of revenue under these agreements where we were considered to be the lessor during the years ended
December 31, 2018
,
2017
and
2016
, respectively. Committed minimum payments for each of the five years following
December 31, 2018
, are expected to be approximately
$478 million
to
$530 million
per year and an aggregate
$1.5 billion
remaining after 2023.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Fourth Amended and Restated Omnibus Agreement
We entered into an omnibus agreement with our Sponsor at the closing of our Initial Offering. The agreement has been amended for each of the Acquisitions from our Sponsor and was amended and restated in connection with the 2018 Drop Down. The amendment increased the annual administrative fee payable by us to our Sponsor under the Amended Omnibus Agreement to
$17 million
as of
December 31, 2018
, for the provision of various general and administrative services, including executive management, legal, accounting, treasury, human resources, health, safety and environmental, information technology, certain insurance coverage, administration and other corporate services. In addition, we reimburse our Sponsor for all other direct or allocated costs and expenses incurred by Marathon or its affiliates on our behalf. On January 1, 2019, the Amended Omnibus Agreement was further amended to add Marathon Petroleum Company LP (“MPCLP”) as a party to the agreement and to make certain other related conforming changes to reflect MPCLP’s addition.
Under the Amended Omnibus Agreement, Marathon indemnifies us for certain matters, including known environmental, title and tax matters associated with the ownership of our assets at or before the closing of the Initial Offering and the subsequent acquisitions from our Sponsor, with certain exceptions that are covered by the Carson Assets Indemnity Agreement. With respect to assets that we acquired from our Sponsor, indemnification for unknown environmental and title liabilities is limited to pre-closing conditions identified prior to the earlier of the date that our Sponsor no longer controls our general partner or
five years
after the date of closing. The indemnification under the Initial Offering for unknown environmental matters expired on April 26, 2016. Under the Amended Omnibus Agreement, the aggregate annual deductible for each type of liability (unknown environmental liabilities or title matters) is
$1 million
as of
December 31, 2018
, before we are entitled to indemnification in any calendar year in consideration of Initial Offering assets and all subsequent acquisitions from our Sponsor, with the exception of the indemnifications for the acquisition of the six marketing and storage terminal facilities (the “Los Angeles Terminal Assets”) and the acquisition of the remaining logistics assets (the “Los Angeles Logistics Assets”) initially acquired by us as part of the Los Angeles acquisition in Southern California (the “Los Angeles Logistics Assets Acquisition”). In addition, with respect to the assets that we acquired from our Sponsor, we have agreed to indemnify Marathon for events and conditions associated with the ownership or operation of our assets that occur after the closing of the Initial Offering, and the subsequent acquisitions from our Sponsor, and for environmental liabilities related to our assets to the extent Marathon is not required to indemnify us for such liabilities. See
Note 10
for additional information regarding the Amended Omnibus Agreement.
Carson Assets Indemnity Agreement
We entered into the Carson Assets Indemnity Agreement at the closing of the Los Angeles Logistics Assets Acquisition effective December 6, 2013, establishing indemnification for certain matters including known and unknown environmental liabilities arising out of the use or operation of the Los Angeles Terminal Assets and the Los Angeles Logistics Assets prior to the respective acquisition dates.
Under the Carson Assets Indemnity Agreement, our Sponsor retained responsibility for remediation of known environmental liabilities due to the use or operation of the Los Angeles Terminal Assets and the Los Angeles Logistics Assets prior to the respective acquisition dates, and has indemnified us for any losses incurred by us arising out of those remediation obligations. The indemnification for unknown pre-closing remediation liabilities is limited to five years. However, with respect to Terminal 2 at the Long Beach marine terminal, which was included in the Los Angeles Logistics Assets Acquisition, the indemnification for unknown pre-closing remediation liabilities is limited to ten years. Indemnification of the Los Angeles Terminal Assets’ and the Los Angeles Logistics Assets’ environmental liabilities is not subject to a deductible. See
Note 10
for additional information regarding the Carson Assets Indemnity Agreement.
Keep-Whole Commodity Fee Agreement
Following the completion of the Rockies Natural Gas Business Acquisition, we began processing gas for certain producers under keep-whole processing agreements. Under a keep-whole agreement, a producer transfers title to the NGLs produced during gas processing, and the processor, in exchange, delivers to the producer natural gas with a BTU content equivalent to the NGLs removed. The operating margin for these contracts is typically determined by the spread between NGLs sales prices and the price paid to purchase the replacement natural gas (“Shrink Gas”). At that time, we entered into the Keep-Whole Commodity Agreement with our Sponsor. Under the Keep-Whole Commodity Agreement, our Sponsor pays us a processing fee for NGLs related to keep-whole agreements and delivers Shrink Gas to the producers on our behalf. We pay our Sponsor a marketing fee in exchange for assuming the commodity risk.
In February 2016, the parties entered into the First Amendment to the Keep-Whole Commodity Agreement (the “Keep-Whole Amendment”) that adjusted the contract to provide for a tiered pricing structure for different NGL production levels. The Keep-Whole Amendment continues to provide for annual purchase orders setting forth service fees for the base and incremental volumes; however, the Keep-Whole Amendment provides that the service fees payable for incremental volumes of natural gas liquids above 315,000 gallons per day shall be calculated with reference to the costs of (i) processing, (ii) conditioning, (iii) handling, (iv) fractionation, (v) storage, truck and rail loading at the Blacks Fork processing complex, and (vi) pipeline transportation fees on the MAPL pipeline system and fractionation fees at Mt. Belvieu, Texas for transportation and fractionation services provided to processors by MAPL, Cedar Bayou Fractionators, and Enterprise Products Partners L.P. for natural gas
|
|
|
|
Notes to Consolidated Financial Statements
|
liquids sold pursuant to the Keep-Whole Commodity Agreement. The pricing for both the base and incremental volumes are subject to revision each year.
Secondment Agreements
We entered into the Andeavor Secondment Agreement with Andeavor to govern the provision of seconded employees to or from Andeavor, the Partnership, and its subsidiaries, as applicable. On August 6, 2018, TLGP and certain of its indirect subsidiaries amended and restated the Andeavor Secondment Agreement. As amended and restated, the Amended Secondment Agreement incorporated the changes made in previous amendments into the body of the agreement and added WNRL and its affiliates as parties. The Andeavor Secondment Agreement also governed the use of certain facilities of the parties by the various entities. The services to be provided by such seconded employees, along with the fees for such services, were provided on the service schedules attached to the Andeavor Secondment Agreement. Specialized services and the use of various facilities, along with the fees for such services, will be provided for in service orders to be executed by parties requesting and receiving the service. For the years ended
December 31, 2018
,
2017
and
2016
, we charged our Sponsor
$8 million
,
$8 million
and
$5 million
, respectively, and our Sponsor charged us
$77 million
,
$29 million
and
$18 million
, respectively, pursuant to the Andeavor Secondment Agreement.
On January 30, 2019, TLGP and certain of its indirect subsidiaries entered into the 2019 Secondment Agreements with MPLS and MRLS. Under the 2019 Secondment Agreements, MPLS and MRLS will second certain employees to occupy positions within our business and organization and to conduct business on our behalf. While seconded by MPLS and MRLS to us, seconded employees will remain on the payroll of MPLS or MRLS, as the case may be, and will be eligible to participate in all MPLS or MRLS benefit plans that they would be eligible to participate in absent the secondment, but will work for and be under our general direction, supervision and control. We will reimburse MPLS or MRLS, as the case may be, for the payroll costs of the seconded employees, including base pay, bonuses and other incentive compensation plus a burden rate associated with benefits and other payroll costs for the portion of the employee’s time that is allocated to us. The 2019 Secondment Agreements are for a term of
10 years
, but may be sooner terminated by us, MPLS or MRLS upon
60 days
written notice. In connection with the entry into the 2019 Secondment Agreements, on January 30, 2019, our Sponsor entered into an agreement (the “Termination Agreement”) that terminated the Andeavor Secondment Agreement. The Termination Agreement had an effective date of January 1, 2019.
Summary of Affiliate Transactions
Summary of Revenue and Expense Transactions with Marathon, including Predecessors (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Revenues
|
$
|
1,589
|
|
|
$
|
1,431
|
|
|
$
|
847
|
|
Operating expenses (exclusive of depreciation and amortization) (a)
|
272
|
|
|
251
|
|
|
308
|
|
General and administrative expenses
|
98
|
|
|
101
|
|
|
80
|
|
|
|
(a)
|
Includes net imbalance settlement gains of
$12 million
and
$7 million
in the years ended
December 31, 2017
and
2016
, respectively. Due to the adoption of ASC 606 effective January 1, 2018, imbalance settlement gains of
$16 million
in the year ended
December 31, 2018
were included in revenues. Includes reimbursements primarily related to pressure testing and repairs and maintenance costs pursuant to the Amended Omnibus Agreement and the Carson Assets Indemnity Agreement of
$15 million
,
$16 million
and
$17 million
in the years ended
December 31, 2018
,
2017
and
2016
, respectively.
|
Predecessor Transactions
Related-party transactions of our Predecessors were settled through equity. The balance in receivables and accounts payable from affiliated companies represents the amount owed from or to Marathon related to certain affiliate transactions. Other than WNRL and certain assets acquired from the 2018 Drop Down, our Predecessors did not record revenue for transactions with Marathon.
Distributions
In accordance with our partnership agreement, our limited partner interests are entitled to receive quarterly distributions of available cash. We paid quarterly cash distributions to our Sponsor, including IDRs, totaling
$493 million
,
$336 million
and
$245 million
in
2018
,
2017
and
2016
, respectively. In connection with the IDR/GP Transaction, our general partner no longer holds IDRs.
On
January 25, 2019
, in accordance with our partnership agreement, we announced the declaration of a quarterly cash distribution, based on the results of the fourth quarter of
2018
, of
$1.03
per unit, of which
$146 million
was paid to Marathon on
February 14, 2019
, to unitholders of record on
February 5, 2019
.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Note 4 - Property, Plant and Equipment
Property, Plant and Equipment (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Depreciable Lives (Years) (a)
|
|
December 31,
|
|
|
2018
|
|
2017 (b)
|
Terminals and tankage
|
3 - 40
|
|
$
|
3,749
|
|
|
$
|
3,557
|
|
Pipelines
|
5 - 30
|
|
3,411
|
|
|
2,825
|
|
Land and leasehold improvements
|
3 - 29
|
|
297
|
|
|
282
|
|
Buildings and improvements
|
3 - 28
|
|
87
|
|
|
91
|
|
Other
|
1 - 28
|
|
82
|
|
|
142
|
|
Construction in progress
|
—
|
|
519
|
|
|
346
|
|
Property, Plant and Equipment, at Cost (c)
|
|
|
8,145
|
|
|
7,243
|
|
Accumulated depreciation (c)
|
|
|
(1,300
|
)
|
|
(994
|
)
|
Property, Plant and Equipment, Net
|
|
|
$
|
6,845
|
|
|
$
|
6,249
|
|
|
|
(a)
|
The above excludes assets not being depreciated.
|
|
|
(b)
|
Property, plant and equipment transferred to the Partnership in the 2018 Drop Down was recorded at historical costs. The Partnership recorded property, plant and equipment of
$948 million
and accumulated depreciation of
$112 million
as of December 31, 2017 in connection with the 2018 Drop Down.
|
|
|
(c)
|
Assets owned by us for which we are the lessor under operating leases were
$691 million
and
$643 million
before accumulated depreciation of
$224 million
and
$195 million
as of
December 31, 2018
and
2017
, respectively.
|
Note 5 - Acquired Intangibles and Goodwill
Acquired Intangibles
The acquired intangible assets, net of accumulated amortization, were
$1.1 billion
and
$1.2 billion
at
December 31, 2018
and
2017
, respectively, consisting of customer relationships associated with WNRL, the North Dakota Gathering and Processing Assets and the natural gas processing and gathering operations from the Rockies Natural Gas Business Acquisition. The value for the identified customer relationships consists of cash flows expected from existing contracts and future arrangements from the existing customer base. Accumulated amortization was
$156 million
and
$106 million
at
December 31, 2018
and
2017
, respectively. Amortization expense of acquired intangible assets was
$50 million
,
$46 million
and
$29 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. As of
December 31, 2018
, amortization expense is expected to be approximately
$50 million
per year through 2023.
Goodwill
Goodwill by Operating Segment (in millions)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017 (a)
|
Terminalling and Transportation (b) (c)
|
$
|
284
|
|
|
$
|
260
|
|
Gathering and Processing (b) (c)
|
718
|
|
|
607
|
|
Wholesale (b)
|
49
|
|
|
89
|
|
Goodwill
|
$
|
1,051
|
|
|
$
|
956
|
|
|
|
(a)
|
Adjusted to include the historical results of the Predecessors. See Note 1 for further discussion.
|
|
|
(b)
|
In connection with the finalization of the purchase price allocation associated with the WNRL Merger during 2018, we reallocated goodwill amongst the segments.
|
|
|
(c)
|
Goodwill transferred to the Partnership in the 2018 Drop Down was recorded at historical cost. We recorded goodwill of
$39 million
and
$225 million
in our Terminalling and Transportation and Gathering and Processing segments, respectively, as of December 31, 2017 as a result of the 2018 Drop Down.
|
For 2018, we elected to perform our annual goodwill impairment assessment using a quantitative assessment process on our goodwill. As part of our quantitative goodwill impairment process, we engaged a third-party appraisal firm to assist in the determination of estimated fair value. This determination includes estimating the fair value using both the income and market approaches. The income approach requires management to estimate a number of factors, including projected future operating results, economic projections, anticipated future cash flows and discount rates. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The determination of the fair value requires
|
|
|
|
Notes to Consolidated Financial Statements
|
us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the selection of appropriate peer group companies, control premiums appropriate for acquisitions in the industries in which we compete, the discount rates, terminal growth rates, and forecasts of revenue, operating income and capital expenditures.
We determined that
no
impairment charges resulted from our November 1, 2018 goodwill impairment assessments. The fair value of our
five
reporting units was in excess of their carrying value. There were
no
impairments of goodwill during the years ended
December 31, 2018
,
2017
and
2016
.
Note 6 - Equity Method Investments and Joint Ventures
For each of the following investments, we have the ability to exercise significant influence through our participation in the management committees, which make all significant decisions. However, since we have equal or proportionate influence over each committee as a joint interest partner and all significant decisions require the consent of the other investor(s) without regard to economic interest, we have determined that these entities should not be consolidated and apply the equity method of accounting with respect to our investments in each entity.
|
|
•
|
ALRP -
We own a
67%
interest in ALRP, a recently constructed crude oil pipeline located in the Delaware and Midland basins in west Texas.
|
|
|
•
|
MPL
-
We own a
17%
interest in MPL, which owns and operates a crude oil pipeline in Minnesota.
|
|
|
•
|
PNAC -
We own a
50%
interest in PNAC, which owns and operates an asphalt terminal in Nevada.
|
|
|
•
|
RGS -
We own a
78%
interest in RGS, which owns and operates the infrastructure that transports gas from certain fields to several re-delivery points in southwestern Wyoming, including natural gas processing facilities that are owned by us or a third party.
|
|
|
•
|
TRG -
We own a
50%
interest in TRG located in the southeastern Uinta Basin, which transports natural gas gathered by UBFS and other third-party volumes to gas processing facilities.
|
|
|
•
|
UBFS -
We own a
38%
interest in UBFS, which owns and operates the natural gas gathering infrastructure located in the southeastern Uinta Basin.
|
Equity Method Investments (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALRP (a)
|
|
MPL
(a)
|
|
PNAC (a)
|
|
RGS
|
|
TRG
|
|
UBFS
|
|
Total
|
Balance at December 31, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
281
|
|
|
$
|
40
|
|
|
$
|
16
|
|
|
$
|
337
|
|
Acquired interests
|
—
|
|
|
120
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
120
|
|
Equity in earnings
|
—
|
|
|
12
|
|
|
—
|
|
|
6
|
|
|
2
|
|
|
2
|
|
|
22
|
|
Distributions received
|
—
|
|
|
(12
|
)
|
|
—
|
|
|
(19
|
)
|
|
(5
|
)
|
|
(3
|
)
|
|
(39
|
)
|
Balance at December 31, 2017 (b)
|
—
|
|
|
120
|
|
|
—
|
|
|
268
|
|
|
37
|
|
|
15
|
|
|
440
|
|
Acquired interests
|
159
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
186
|
|
Equity in earnings (loss)
|
6
|
|
|
17
|
|
|
(1
|
)
|
|
5
|
|
|
3
|
|
|
1
|
|
|
31
|
|
Cumulative effect of accounting standard adoption
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
Distributions received
|
(5
|
)
|
|
(20
|
)
|
|
—
|
|
|
(20
|
)
|
|
(5
|
)
|
|
(2
|
)
|
|
(52
|
)
|
Balance at December 31, 2018 (b)
|
$
|
160
|
|
|
$
|
117
|
|
|
$
|
26
|
|
|
$
|
253
|
|
|
$
|
32
|
|
|
$
|
14
|
|
|
$
|
602
|
|
|
|
(a)
|
These equity method investments were included in the 2018 Drop Down. Amounts were adjusted to include the historical results of the Predecessors. See Notes 1 and 2 for further discussion.
|
|
|
(b)
|
The carrying amounts of our investments that exceed the underlying equity in net assets are amortized over the useful life of the underlying fixed assets and included in equity in earnings. The carrying amount of our investments in these equity method investments exceeded the underlying equity in net assets as shown below.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in millions)
|
2018
|
|
2017 (c)
|
ALRP
|
$
|
75
|
|
|
$
|
—
|
|
MPL
|
34
|
|
|
35
|
|
PNAC
|
17
|
|
|
—
|
|
RGS
|
125
|
|
|
130
|
|
TRG
|
14
|
|
|
15
|
|
UBFS
|
6
|
|
|
6
|
|
|
|
(c)
|
Adjusted to include the historical results of the Predecessors. See Notes 1 and 2 for further discussion.
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
We acquired
67%
of all of the issued and outstanding limited liability company interests in ALRP as part of the 2018 Drop Down. ALRP is a variable interest entity. We are not the primary beneficiary of ALRP under the partnership agreement because the Partnership and the other minor shareholder jointly direct the activities of ALRP that most significantly impact its economic performance. In addition, we have a
78%
interest in RGS. ALRP and RGS are unconsolidated variable interest entities and we use the equity method of accounting with respect to our investments in each entity.
Note 7 - Other Current Assets and Liabilities
Other Current Assets (in millions)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017 (a)
|
Deferred charges
|
$
|
45
|
|
|
$
|
—
|
|
Inventories
|
22
|
|
|
12
|
|
Prepayments
|
12
|
|
|
15
|
|
Total Other Current Assets
|
$
|
79
|
|
|
$
|
27
|
|
|
|
(a)
|
Adjusted to include the historical results of the Predecessors. See Notes 1 and 2 for further discussion.
|
Other Current Liabilities (in millions)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017 (a)
|
Deferred income
|
$
|
24
|
|
|
$
|
23
|
|
Taxes other than income taxes
|
22
|
|
|
20
|
|
Employee costs
|
11
|
|
|
7
|
|
Asset retirement obligation
|
10
|
|
|
11
|
|
Accrued environmental liabilities
|
4
|
|
|
12
|
|
Other
|
10
|
|
|
11
|
|
Total Other Current Liabilities
|
$
|
81
|
|
|
$
|
84
|
|
|
|
(a)
|
Adjusted to include the historical results of the Predecessors. See Notes 1 and 2 for further discussion.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
Note 8 - Debt
Debt Balance, Net of Unamortized Issuance Costs (in millions)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Revolving Credit Facility
|
$
|
945
|
|
|
$
|
423
|
|
Dropdown Credit Facility
|
300
|
|
|
—
|
|
MPC Loan Agreement
|
—
|
|
|
—
|
|
5.500% Senior Notes due 2019
|
500
|
|
|
500
|
|
3.500% Senior Notes due 2022 (a)
|
500
|
|
|
500
|
|
6.250% Senior Notes due 2022
|
300
|
|
|
300
|
|
6.375% Senior Notes due 2024
|
450
|
|
|
450
|
|
5.250% Senior Notes due 2025
|
750
|
|
|
750
|
|
4.250% Senior Notes due 2027 (a)
|
750
|
|
|
750
|
|
5.200% Senior Notes due 2047 (a)
|
500
|
|
|
500
|
|
Capital lease obligations
|
15
|
|
|
9
|
|
Total Debt
|
5,010
|
|
|
4,182
|
|
Unamortized issuance costs (a)
|
(46
|
)
|
|
(54
|
)
|
Current maturities, net of unamortized issuance costs
|
(504
|
)
|
|
(1
|
)
|
Debt, Net of Current Maturities and Unamortized Issuance Costs
|
$
|
4,460
|
|
|
$
|
4,127
|
|
|
|
(a)
|
Unamortized discounts of
$4 million
and
$5 million
associated with these senior notes are included in unamortized issuance costs at
December 31, 2018
and
2017
, respectively.
|
The aggregate maturities of our debt, including the principal payments of our capital lease obligations, for each of the five years following
December 31, 2018
are
$504 million
in
2019
,
$2 million
in
2020
,
$1.2 billion
in
2021
,
$802 million
in
2022
and
$1 million
in
2023
.
Revolving Credit Facility and Dropdown Credit Facility
We are party to our
$1.1 billion
Revolving Credit Facility and our
$1.0 billion
Dropdown Credit Facility (together, the “Credit Facilities”). On
January 5, 2018
, we amended our Credit Facilities to, among other things, (i) increase the aggregate commitments from
$600 million
to
$1.1 billion
, (ii) add certain financial institutions as additional lenders under the Revolving Credit Facility and (iii) make certain changes to our Credit Facilities to permit the incurrence of incremental loans (to be shared between the Credit Facilities), subject to the satisfaction of certain conditions. The total aggregate available facility limits for the Credit Facilities totaled
$2.1 billion
at
December 31, 2018
. The Credit Facilities mature on January 29, 2021.
On December 20, 2018, we amended our Credit Facilities to, among other things, (i) grant additional flexibility to the Partnership and its subsidiaries to create liens and incur indebtedness, subject to the negative financial covenant that requires us to maintain a Consolidated Leverage Ratio (as defined in the credit agreements) of no greater than 5.0 to 1.0 (or 5.5 to 1.0 during the two fiscal quarters following certain acquisitions), (ii) remove restrictions on the ability of the Partnership and its subsidiaries to make investments and (iii) grant additional flexibility to the Partnership and its subsidiaries to enter into acquisitions, sell or dispose of assets and enter into related party transactions. In addition, we amended our Credit Facilities to make certain legal and technical updates to the revolving credit facility agreements, including the removal of collateral and security provisions that are no longer applicable and changes to reflect the previously reported acquisition of Andeavor by MPC effective on October 1, 2018.
Our Revolving Credit Facility provided for total loan capacity of
$1.1 billion
as of
December 31, 2018
. Our Revolving Credit Facility is non-recourse to Marathon, except for TLGP, and is guaranteed by substantially all of our consolidated subsidiaries. As of
December 31, 2018
, there was
$945 million
in borrowings outstanding under the Revolving Credit Facility, which had unused credit availability of
$155 million
, or
14%
of the borrowing capacity. The weighted average interest rate for borrowings under our Revolving Credit Facility was
4.33%
at
December 31, 2018
.
As of
December 31, 2018
, the Dropdown Credit Facility provided for total loan availability of
$1.0 billion
. We had
$300 million
in borrowings outstanding under the Dropdown Credit Facility, which had unused credit availability of
$700 million
, or
70%
of the borrowing capacity. The weighted average interest rate for borrowings under our Dropdown Credit Facility was
4.14%
at
December 31, 2018
.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Covenants
Our Credit Facility agreements both contain representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for agreements of these types. The sole financial covenant that we are required to maintain, as of the last day of the fiscal quarter, is a Consolidated Leverage Ratio (as defined in the Credit Facility agreements) of no greater than 5.00 to 1.00. As of
December 31, 2018
, we were in compliance with this financial covenant.
Loan Agreement
On December 21, 2018, we entered into the MPC Loan Agreement. Under the terms of the MPC Loan Agreement, MPC will make a loan to the Partnership on a revolving basis as requested by the Partnership and as agreed to by MPC, in an amount or amounts that do not result in the aggregate principal amount of all loans outstanding exceeding
$500 million
at any one time. The MPC Loan Agreement matures and the entire unpaid principal amount of the Loan, together with all accrued and unpaid interest and other amounts, if any, owed by the Partnership under the MPC Loan Agreement will become due and payable on December 21, 2023, provided that MPC may demand payment of all or any portion of the outstanding principal amount of the Loan, together with all accrued and unpaid interest and other amounts, if any, at any time prior to the maturity date. Interest will accrue on the unpaid principal amount of the Loan at a rate equal to the sum of (i) the one-month term LIBOR for dollar deposits, plus (ii) a premium of
175
basis points (or such lower premium then applicable under the Partnership’s credit agreements).
There were
no
borrowings under the MPC Loan Agreement during
2018
.
WNRL Repayment
At the time of the WNRL Merger, WNRL had a
$500 million
senior secured revolving credit facility (“WNRL Revolving Credit Facility”) and
$300 million
of
7.5%
senior notes (the “WNRL Senior Notes”). In connection with the WNRL Merger, all amounts outstanding were repaid with borrowings on the Revolving Credit Facility and the WNRL Revolving Credit Facility was terminated. In addition, the WNRL Senior Notes were repaid for
$326 million
, including accrued interest of
$4 million
and a premium of
$22 million
, with borrowings on the Revolving Credit Facility.
Senior Notes
5.500%
Senior Notes Due
2019
In
October 2014
, we completed a private offering of
$1.3 billion
aggregate principal amount of senior notes pursuant to a private placement transaction conducted under Rule 144A and Regulation S of the Securities Act of 1933, as amended. The
$1.3 billion
of aggregate principal senior notes consisted of
$500 million
senior notes due in
2019
(the “
2019
Notes”) at
5.500%
, which approximates the effective interest rate, and
$800 million
of
6.250%
senior notes due in
2022
(the “
6.250%
2022
Notes”). The proceeds from the
2019
Notes were used to repay amounts outstanding under our Revolving Credit Facility and to fund the Rockies Natural Gas Business Acquisition. We completed a registered exchange offer to exchange the
2019
Notes for debt securities with substantially identical terms in April 2016.
The
2019
Notes have no sinking fund requirements. We may redeem some or all of the
2019
Notes prior to September 15,
2019
, at a make-whole price, and at par thereafter, plus accrued and unpaid interest. The
2019
Notes are unsecured and guaranteed by all of our consolidated subsidiaries, with the exception of Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Marathon, except for TLGP, and contain customary terms, events of default and covenants for an issuance of non-investment grade securities.
3.500%
Senior Notes Due
2022
In
November 2017
, we issued
$500 million
aggregate principal amount of senior notes due in
2022
at
3.500%
(the “
3.500%
2022
Notes”), which approximates the effective interest rate. The proceeds from the
3.500%
2022
Notes were used to repay a portion of our
5.875%
senior notes due in
2020
and
6.125%
senior notes due in
2021
, as well as borrowings under the Dropdown Credit Facility.
The
3.500%
2022
Notes will mature on
December 1, 2022
and have no sinking fund requirements. The
3.500%
2022
Notes may be redeemable in whole at any time or in part from time to time, at our option, prior to November 1, 2022. We may redeem the
3.500%
2022
Notes at a redemption price equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled principal and interest payments. The
3.500%
2022
Notes are unsecured and guaranteed by all of our consolidated subsidiaries, with the exception of Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Marathon, except for TLGP, and contain customary terms, events of default and covenants for an issuance of investment grade securities.
6.250%
Senior Notes Due
2022
In
October 2014
, we issued the
6.250%
2022
Notes, which approximates the effective interest rate. The proceeds from the
6.250%
2022
Notes were used to fund a portion of the Rockies Natural Gas Business Acquisition. We used the net proceeds from the sale of
600,000
Preferred Units to primarily redeem
$500 million
principal amount of our
6.250%
2022
Notes.
|
|
|
|
Notes to Consolidated Financial Statements
|
The
6.250%
2022
Notes have no sinking fund requirements. The
6.250%
2022
Notes may be redeemed at premiums equal to
3.125%
through October 15, 2019;
1.563%
from October 15, 2019 through October 15, 2020; and at par thereafter, plus accrued and unpaid interest. The
6.250%
2022
Notes are unsecured and guaranteed by all of our consolidated subsidiaries, with the exception of Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Marathon, except for TLGP, and contain customary terms, events of default and covenants for an issuance of non-investment grade securities.
6.375%
Senior Notes Due
2024
In
May 2016
, we issued
$450 million
aggregate principal amount of senior notes due in
2024
(the “
2024
Notes”) at
6.375%
, which approximates the effective interest rate. We used the proceeds of the offering to repay amounts outstanding under the Revolving Credit Facility and for general partnership purposes.
The
2024
Notes have no sinking fund requirements and we may redeem some or all of the
2024
Notes, prior to May 1, 2019, at a make-whole price plus accrued and unpaid interest, if any. On or after May 1, 2019, the
2024
Notes may be redeemed at premiums equal to
4.781%
through May 1, 2020;
3.188%
through May 1, 2021;
1.594%
from May 1, 2021 through May 1, 2022; and at par thereafter, plus accrued and unpaid interest. We will have the right to redeem up to
35%
of the aggregate principal amount at
106.375%
face value with proceeds from certain equity issuances through May 1, 2019. The
2024
Notes are unsecured and guaranteed by all of our consolidated subsidiaries, except Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Marathon, except for TLGP, and contain customary terms, events of default and covenants for an issuance of non-investment grade securities.
5.250%
Senior Notes Due
2025
In
December 2016
, we issued
$750 million
aggregate principal amount of the senior notes due in
2025
(the “
2025
Notes”) at
5.250%
, which approximates the effective interest rate. The proceeds from this offering were used to repay amounts outstanding under the Dropdown Credit Facility.
The
2025
Notes have no sinking fund requirements. We may redeem some or all of the
2025
Notes prior to January 15, 2021, at a make-whole price, plus any accrued and unpaid interest. On or after January 15, 2021, the
2025
Notes may be redeemed at premiums equal to
2.625%
through January 15, 2022;
1.313%
through January 15, 2023; and at par thereafter, plus accrued and unpaid interest. We will have the right to redeem up to
35%
of the aggregate principal amount at
105.250%
of face value with proceeds from certain equity issuances through January 15, 2020. The
2025
Notes are unsecured and guaranteed by all of our consolidated subsidiaries, except Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Marathon, except for TLGP, and contain customary terms, events of default and covenants for an issuance of non-investment grade securities.
4.250%
Senior Notes Due
2027
In
November 2017
, we issued
$750 million
aggregate principal amount of senior notes due in
2027
(the “
2027
Notes”) at
4.250%
, which approximates the effective interest rate. The proceeds from the
2027
Notes were used to repay a portion of our
5.875%
senior notes due in
2020
and
6.125%
senior notes due in
2021
, as well as borrowings under the Dropdown Credit Facility.
The
2027
Notes will mature on
December 1, 2027
and have no sinking fund requirement. The
2027
Notes may be redeemable in whole at any time or in part from time to time, at our option, prior to September 1, 2027. We may redeem the
2027
Notes at a redemption price equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled principal and interest payments as defined in the prospectus supplement. The
2027
Notes are unsecured and guaranteed by all of our consolidated subsidiaries, with the exception of Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Marathon, except for TLGP, and contain customary terms, events of default and covenants for an issuance of investment grade securities.
5.200%
Senior Notes Due
2047
In
November 2017
, we issued
$500 million
aggregate principal amount of senior notes due in
2047
(the “
2047
Notes”) at
5.200%
, which approximates the effective interest rate. The proceeds from the
2047
Notes were used to repay a portion of our
5.875%
senior notes due in
2020
and
6.125%
senior notes due in
2021
, as well as borrowings under the Dropdown Credit Facility.
The
2047
Notes will mature on
December 1, 2047
and have no sinking fund requirements. The
2047
Notes may be redeemable in whole at any time or in part from time to time, at our option, prior to June 1, 2047. We may redeem the
2047
Notes at a redemption price equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled principal and interest payments as defined in the prospectus supplement. The
2047
Notes are unsecured and guaranteed by all of our consolidated subsidiaries, with the exception of Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Marathon, except for TLGP, and contain customary terms, events of default and covenants for an issuance of investment grade securities.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Capital Lease Obligations
Our capital lease obligations relate to two leases of facilities used for trucking operations in North Dakota with initial terms of
15 years
, with
five
-year renewal options, leases of vehicles and equipment and a right of way with an initial term of
31 years
. The total cost of assets under capital leases was
$18 million
and
$11 million
at
December 31, 2018
and
2017
, respectively, and accumulated amortization was
$4 million
and
$3 million
at
December 31, 2018
and
2017
, respectively. We include the amortization of the cost of assets under capital leases in depreciation and amortization expenses in our consolidated statements of operations.
Future Minimum Annual Lease Payments, Including Interest for Capital Leases (in millions)
|
|
|
|
|
|
December 31, 2018
|
2019
|
$
|
4
|
|
2020
|
3
|
|
2021
|
3
|
|
2022
|
2
|
|
2023
|
2
|
|
Thereafter
|
4
|
|
Total minimum lease payments
|
18
|
|
Less amount representing interest
|
(3
|
)
|
Capital lease obligations
|
$
|
15
|
|
Note 9 - Benefit Plans
Employees supporting our operations participate in the benefit plans and the employee thrift plan of Marathon. Marathon allocates expense to us for costs associated with the benefit plans based on the salaries of Marathon’s employees that provide services to us as a percentage of total Marathon salaries. The Predecessors were allocated expenses for costs associated with the benefit plans primarily based on the percentage of the Predecessors’ allocated salaries compared to our Sponsor’s total salaries. Our portion of our Sponsor’s employee benefit plan expenses was
$35 million
,
$34 million
and
$25 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. These employee benefit plan expenses and the related payroll costs are included in operating expenses and general and administrative expenses in our consolidated statements of operations and include amounts allocated to the Predecessors.
Note 10 - Commitments and Contingencies
Operating Leases, Purchase Obligations and Other Commitments
Future Minimum Annual Payments Applicable to all Non-Cancellable Operating Leases and Purchase Obligations (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
Purchase obligations
|
$
|
2,078
|
|
|
$
|
2,084
|
|
|
$
|
2,054
|
|
|
$
|
2,013
|
|
|
$
|
2,013
|
|
|
$
|
1,673
|
|
|
$
|
11,915
|
|
Operating leases
|
17
|
|
|
17
|
|
|
15
|
|
|
13
|
|
|
13
|
|
|
105
|
|
|
180
|
|
Total
|
$
|
2,095
|
|
|
$
|
2,101
|
|
|
$
|
2,069
|
|
|
$
|
2,026
|
|
|
$
|
2,026
|
|
|
$
|
1,778
|
|
|
$
|
12,095
|
|
We have various cancellable and non-cancellable operating leases related to land, trucks, terminals, right-of-way permits and other operating facilities. In general, these leases have remaining primary terms up to
26 years
and typically contain multiple renewal options. Total lease expense for all operating leases, including leases with a term of one month or less, was
$25 million
,
$19 million
and
$11 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. See
Note 8
for information related to our capital leases. See
Note 3
for a discussion of revenue recognized under agreements where we are considered the lessor.
Our purchase obligations include enforceable and legally binding service agreement commitments that meet any of the following criteria: (1) they are non-cancellable, (2) we would incur a penalty if the agreement was canceled or (3) we must make specified minimum payments even if we do not take delivery of the contracted products or services. If we can unilaterally terminate the agreement simply by providing a certain number of days’ notice or by paying a termination fee, we have included the termination fee or the amount that would be paid over the notice period. Contracts that can be unilaterally terminated without a penalty are
|
|
|
|
Notes to Consolidated Financial Statements
|
not included. Future purchase obligations primarily include fuel costs associated with our wholesale product supply agreement, NGLs transportation costs, fractionation fees, and fixed charges under the Amended Omnibus Agreement and the 2019 Secondment Agreements.
Our Amended Omnibus Agreement remains in effect between the applicable parties until a change in control of the Partnership. As we are unable to estimate the termination of the omnibus agreement, we have included the fees for each of the five years following
December 31, 2018
for disclosure purposes in the table above. Total expense under the Amended Omnibus Agreement and the Andeavor Secondment Agreement was
$311 million
,
$232 million
and
$192 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. In addition to these purchase commitments, we also have minimum contractual capital spending commitments for approximately
$297 million
in
2019
.
Indemnification
Under the Amended Omnibus Agreement and the Carson Assets Indemnity Agreement, Marathon indemnifies us for certain matters, including environmental, title and tax matters associated with the ownership of our assets at or before the closing of the Initial Offering and the subsequent acquisitions from our Sponsor.
Under the Amended Omnibus Agreement, with respect to assets that we acquired from our Sponsor, excluding the Los Angeles Terminal Assets and the Los Angeles Logistics Assets, indemnification for unknown environmental and title liabilities is limited to pre-closing conditions identified prior to the earlier of the date that our Sponsor no longer controls our general partner or
five years
after the date of closing. Under the Amended Omnibus Agreement, the aggregate annual deductible for each type of liability (unknown environmental liabilities or title matters) is
$1 million
, as of
December 31, 2018
, before we are entitled to indemnification in any calendar year in consideration of the Initial Offering assets and all subsequent acquisitions from our Sponsor, with the exception of the Los Angeles Terminal Assets Acquisition and the Los Angeles Logistics Assets Acquisition. In addition, with respect to the assets that we acquired from our Sponsor, we have agreed to indemnify Marathon for events and conditions associated with the ownership or operation of our assets that occur after the closing of the Initial Offering, and the subsequent acquisitions from our Sponsor, and for environmental liabilities related to our assets to the extent Marathon is not required to indemnify us for such liabilities.
Under the Carson Assets Indemnity Agreement, our Sponsor retained responsibility for remediation of known environmental liabilities due to the use or operation of the Los Angeles Terminal Assets and the Los Angeles Logistics Assets prior to the acquisition dates, and has indemnified us for any losses we incurred arising out of those remediation obligations. The indemnification for unknown pre-closing remediation liabilities is limited to
five years
. However, with respect to Terminal 2 at the Long Beach marine terminal, which was included in the Los Angeles Logistics Assets Acquisition, the indemnification for unknown pre-closing remediation liabilities is limited to
ten years
. Indemnification of the Los Angeles Terminal Assets’ and the Los Angeles Logistics Assets’ environmental liabilities are not subject to a deductible.
Other Contingencies
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. Contingencies arising after the closing of the Initial Offering from conditions existing before the Initial Offering, and the subsequent acquisitions from our Sponsor that have been identified after the closing of each transaction, will be recorded in accordance with the indemnification terms set forth in the Amended Omnibus Agreement and the Carson Assets Indemnity Agreement. Any contingencies arising from events after the Initial Offering, and the subsequent acquisitions from our Sponsor, will be our responsibility.
Environmental Liabilities
Changes in our Environmental Liabilities (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tioga Crude Oil Pipeline Release
|
|
Other Liabilities
|
|
Total
|
At December 31, 2016
|
$
|
16
|
|
|
$
|
6
|
|
|
$
|
22
|
|
Additions
|
19
|
|
|
1
|
|
|
20
|
|
Expenditures
|
(25
|
)
|
|
(1
|
)
|
|
(26
|
)
|
At December 31, 2017
|
10
|
|
|
6
|
|
|
16
|
|
Additions
|
1
|
|
|
5
|
|
|
6
|
|
Expenditures
|
(11
|
)
|
|
(5
|
)
|
|
(16
|
)
|
At December 31, 2018
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Resolved Matters
Tioga, North Dakota Crude Oil Pipeline Release
In
September 2013
, we responded to the release of crude oil in a rural field northeast of Tioga, North Dakota (the “Crude Oil Pipeline Release”). This incident was covered by our pollution liability insurance policy, subject to a
$1 million
deductible and a
$25 million
loss limit in place at the time of the release. Pursuant to this policy, there were
no
insurance recovery receivables related to the Crude Oil Pipeline Release at both
December 31, 2018
and
2017
. The remediation costs of
$93 million
exceeded our policy loss limit by
$68 million
as of
December 31, 2018
. We received
no
insurance proceeds for the years ended
December 31, 2018
,
2017
and
2016
.
Other than described above, we do not have any other material outstanding lawsuits, administrative proceedings or governmental investigations. See current legal proceedings in Item 3.
Note 11 - Equity and Net Earnings per Unit
We had
89,320,056
common public units and
600,000
preferred units outstanding as of
December 31, 2018
. Additionally, as of
December 31, 2018
, Marathon owned
156,173,128
of our common units, constituting a
64%
ownership interest in us. Marathon also held
80,000
TexNew Mex Units and all of the outstanding non-economic general partner units as of
December 31, 2018
.
Unit Issuance
In connection with the 2018 Drop Down, we issued
28,283,742
common units to Andeavor.
In connection with the WNRL Merger, we issued
15,182,996
publicly held common units and
14,853,542
common units to subsidiaries of Andeavor. In addition, In October 2017, we issued
78,000,000
of our common units to TLGP in connection with the IDR/GP Transaction and converted our general partner units into non-economic general partner units.
In February 2017, we closed a registered public offering of
5.0 million
common units representing limited partner interests at a public offering price of
$56.19
per unit. The net proceeds of
$281 million
were used to repay borrowings outstanding under our Revolving Credit Facility and for general partnership purposes. Also, general partner units of
101,980
were issued for proceeds of
$6 million
.
In June 2016, we closed a registered public offering of
6.3 million
common units, including the over-allotment option exercised by the underwriter for the purchase of an additional
825,000
common units, at a public offering price of
$47.13
per unit. The net proceeds of
$293 million
were used for general partnership purposes, including debt repayment, acquisitions, capital expenditures and additions to working capital.
Issuance of Preferred Units
In December 2017, we issued and sold the Preferred Units, at a price to the public of
$1,000
per unit. We used the net proceeds from the sale of the Preferred Units (i) to primarily redeem
$500 million
principal amount of our
6.250%
2022
Notes, (ii) to repay a portion of the borrowings under our Revolving Credit Facility and (iii) to pay fees and expenses associated with the foregoing.
At any time on or after
February 15, 2023
, we may redeem the Preferred Units, in whole or in part at a redemption price of
$1,000
per Preferred Unit plus an amount equal to all accumulated and unpaid distributions up to, but not including, the date of redemption, whether or not declared. In addition, upon the occurrence of certain rating agency events as described in the prospectus, we may redeem the Preferred Units, in whole but not in part, at a price of
$1,020
per Preferred Unit, plus an amount equal to all accumulated and unpaid distributions up to, but not including, the date of redemption, whether or not declared.
Distributions on the Preferred Units will accrue and be cumulative from the original issue date of the Preferred Units and will be payable semi-annually in arrears on the 15th day of February and August of each year through and including February 15, 2023, with the first such payment made on February 15, 2018, and after February 15, 2023, quarterly in arrears on the 15th day of February, May, August, and November of each year to holders of record as of the close of business on the first business day of the month of the applicable Distribution Payment Date. If any Distribution Payment Date otherwise would fall on a day that is not a business day, declared distributions will be paid on the immediately succeeding business day without the accumulation of additional distributions.
The initial distribution rate for the Preferred Units from and including the original issue date of the Preferred Units to, but not including, February 15, 2023 will be
6.875%
per annum of the
$1,000
liquidation preference per Preferred Unit (equal to
$68.75
per Preferred Unit per annum). On and after February 15, 2023, distributions on the Preferred Units will accumulate for each distribution period at a percentage of the liquidation preference equal to the three-month LIBOR plus a spread of
4.652%
.
TexNew Mex Units
At the effective time of the WNRL Merger, each WNRL TexNew Mex unit was automatically converted into a right to receive TexNew Mex Units, which has substantially equivalent rights and obligations as the WNRL TexNew Mex unit.
|
|
|
|
Notes to Consolidated Financial Statements
|
Prior to any distributions of available cash to holders of common units, available cash with respect to any quarter will first be distributed to the holders of the TexNew Mex Units, pro rata, as of the record date, in an amount equal to
80%
of the excess, if any, of (1) the TexNew Mex Shared Segment Distributable Cash Flow with respect to the applicable quarter over (2) the TexNew Mex Base Amount with respect to such quarter, less any amounts reserved with the consent of holders of a majority of the TexNew Mex Units in accordance with our partnership agreement. As of
December 31, 2018
, we had
80,000
TexNew Mex Units outstanding. We did not separately disclose these units in the consolidated balance sheets and consolidated statements of partners’ equity because the equity balance was less than
$1 million
as of
December 31, 2018
and 2017.
No
distributions to TexNew Mex unitholders were declared during 2018 or 2017.
ATM Program
In August 2017, we filed a prospectus supplement to our shelf registration filed with the SEC in August 2015, authorizing the continuous issuance of up to an aggregate of
$750 million
of common units, in amounts, at prices and on terms to be determined by market conditions and other factors at the time of our offerings (such program referred to as our “2017 ATM Program”). During the year ended
December 31, 2017
, we issued an aggregate of
72,857
common units under our 2017 ATM Program, generating proceeds of
$3 million
before issuance costs. The net proceeds from sales under the 2017 ATM Program were used for general partnership purposes, which may include debt repayment, future acquisitions, capital expenditures and additions to working capital. There were
no
issuances in 2018.
On
August 24, 2015
, we filed a prospectus supplement to its shelf registration statement filed with the SEC in
August 2015
, authorizing the continuous issuance of up to an aggregate of
$750 million
of common units, in amounts, at prices and on terms to be determined by market conditions and other factors at the time of our offerings (such program referred to as the “2015 ATM Program”). During the year ended December 31, 2016, we issued under both the 2015 ATM Program an aggregate of
1,492,637
common units generating proceeds of
$72 million
before issuance costs.
Issuance of Additional Securities
Our partnership agreement authorizes us to issue an unlimited number of additional partnership securities for the consideration and on the terms and conditions determined by our general partner without the approval of the unitholders. Costs associated with the issuance of securities are allocated to all unitholders’ capital accounts based on their ownership interest at the time of issuance.
Net Earnings per Unit
Prior to the WNRL Merger, we used the two-class method when calculating the net earnings per unit applicable to limited partners, because we had more than one participating security consisting of limited partner common units, general partner units and IDRs. Net earnings earned by the Partnership were allocated between the limited and general partners in accordance with our partnership agreement. As a result of the IDR/GP Transaction, the general partner units no longer participate in earnings or distributions, including IDRs. With the issuance of the Preferred Units, earnings are allocated first to the Preferred Units equal to their fixed distribution rate. We base our calculation of net earnings per unit using the weighted-average number of common limited partner units outstanding during the period.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Net Earnings per Unit (in millions, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018 (a)
|
|
2017 (a)
|
|
2016 (a)
|
Net earnings
|
$
|
600
|
|
|
$
|
306
|
|
|
$
|
277
|
|
Special Allocation (b)
|
—
|
|
|
1
|
|
|
3
|
|
Net earnings, including special allocations
|
600
|
|
|
307
|
|
|
280
|
|
Distributions on Preferred Units (c)
|
(41
|
)
|
|
(3
|
)
|
|
—
|
|
Net earnings attributable to common units
|
559
|
|
|
304
|
|
|
280
|
|
General partner’s distributions
|
—
|
|
|
(6
|
)
|
|
(10
|
)
|
General partner’s IDRs (d)
|
—
|
|
|
(75
|
)
|
|
(148
|
)
|
Limited partners’ distributions on common units
|
(890
|
)
|
|
(611
|
)
|
|
(344
|
)
|
Distributions on common units greater than earnings
|
$
|
(331
|
)
|
|
$
|
(388
|
)
|
|
$
|
(222
|
)
|
General partner’s earnings:
|
|
|
|
|
|
Distributions
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
10
|
|
General partners IDRs (d)
|
—
|
|
|
75
|
|
|
148
|
|
Allocation of distributions (greater) less than earnings (e)
|
(28
|
)
|
|
(44
|
)
|
|
(65
|
)
|
Total general partner’s earnings
|
$
|
(28
|
)
|
|
$
|
37
|
|
|
$
|
93
|
|
Limited partners’ earnings on common units:
|
|
|
|
|
|
Distributions (f)
|
$
|
890
|
|
|
$
|
611
|
|
|
$
|
344
|
|
Special allocation (f)
|
—
|
|
|
(1
|
)
|
|
(3
|
)
|
Allocation of distributions greater than earnings
|
(303
|
)
|
|
(344
|
)
|
|
(157
|
)
|
Total limited partners’ earnings on common units
|
$
|
587
|
|
|
$
|
266
|
|
|
$
|
184
|
|
Weighted average limited partner units outstanding:
|
|
|
|
|
|
Common units - basic
|
228.7
|
|
|
126.0
|
|
|
98.2
|
|
Common units - diluted (g)
|
228.9
|
|
|
126.1
|
|
|
98.2
|
|
Net earnings per limited partner unit: (h)
|
|
|
|
|
|
Common - basic
|
$
|
2.57
|
|
|
$
|
2.11
|
|
|
$
|
1.87
|
|
Common - diluted
|
$
|
2.57
|
|
|
$
|
2.11
|
|
|
$
|
1.87
|
|
|
|
(a)
|
Adjusted to include the historical results of the Predecessors. See Notes 1 and 2 for further discussion.
|
|
|
(b)
|
Normal allocations according to percentage interests are made after giving effect, if any, to priority income allocations in an amount equal to incentive cash distributions fully allocated to the general partner and any special allocations. The adjustment reflects the special allocation to common units held by TLGP for the interest incurred in connection with borrowings on the Dropdown Credit Facility in lieu of using cash on hand to fund the North Dakota Gathering and Processing Assets in
2017
and the Alaska Storage and Terminalling Assets acquisition in
2016
.
|
|
|
(c)
|
The Preferred Units entitle unitholders to receive preferred distributions on a semi-annually basis.
|
|
|
(d)
|
IDRs entitled the general partner to receive increasing percentages, up to
50%
, of quarterly distributions in excess of
$0.3881
per unit per quarter. The amount above reflects earnings distributed to our general partner net of
$50 million
of IDRs for the year ended
December 31, 2017
waived by TLGP. Our general partner no longer holds IDRs as a result of the IDR/GP Transaction.
|
|
|
(e)
|
We have revised the historical allocation of general partner earnings to include the Predecessors’ losses of
$28 million
,
$43 million
and
$62 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
|
|
|
(f)
|
Distributions of earnings for limited partners’ common units for the years ended
December 31, 2018
and 2017 is net of a
$60 million
and
$25 million
waiver, respectively, from our Sponsor in connection with the WNRL Merger.
|
|
|
(g)
|
Diluted net earnings per unit include the effects of potentially dilutive units on our common units, which consist of unvested service and performance phantom units.
|
|
|
(h)
|
Amounts may not recalculate due to rounding of dollar and unit information.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
Allocations of the General Partner’s Interest in Net Earnings (in millions, except percentage of ownership interest)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Net earnings attributable to partners
|
$
|
628
|
|
|
$
|
349
|
|
|
$
|
339
|
|
Distributions on Preferred Units
|
(41
|
)
|
|
(3
|
)
|
|
—
|
|
General partner’s IDRs
|
—
|
|
|
(75
|
)
|
|
(148
|
)
|
Special allocation
|
—
|
|
|
1
|
|
|
3
|
|
Net earnings available to partners
|
$
|
587
|
|
|
$
|
272
|
|
|
$
|
194
|
|
General partner’s ownership interest (a)
|
—
|
%
|
|
—
|
%
|
|
2.0
|
%
|
General partner’s allocated interest in net earnings (b)
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
4
|
|
General partner’s IDRs
|
—
|
|
|
75
|
|
|
148
|
|
Allocation of Predecessors’ impact to general partner interest
|
(28
|
)
|
|
(43
|
)
|
|
(62
|
)
|
Total general partner’s interest in net earnings
|
$
|
(28
|
)
|
|
$
|
36
|
|
|
$
|
90
|
|
|
|
(a)
|
In connection with the IDR/GP Transaction, our general partner units converted into non-economic general partner units.
|
|
|
(b)
|
Prior to the IDR/GP Transaction, we allocated net earnings to our general partner based on its ownership interest.
|
Changes in the Number of Units Outstanding (in million units)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
Preferred
|
|
General Partner
|
|
Total
|
At December 31, 2015
|
93.5
|
|
|
—
|
|
|
1.9
|
|
|
95.4
|
|
Issuances under ATM Program
|
1.4
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
Issuance of units in June 2016 for cash
|
6.3
|
|
|
—
|
|
|
—
|
|
|
6.3
|
|
Issuance in July 2016 in connection with the Alaska Storage and Terminalling Assets acquisition
|
0.4
|
|
|
—
|
|
|
0.2
|
|
|
0.6
|
|
Issuance in September 2016 in connection with the Alaska Storage and Terminalling Assets acquisition
|
0.4
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
Issuance in November 2016 in connection with the Northern California Terminalling and Storage Assets acquisition
|
0.9
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
Unit-based compensation awards
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
At December 31, 2016
|
103.0
|
|
|
—
|
|
|
2.1
|
|
|
105.1
|
|
Issuances under ATM Program
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Issuance of units in February 2017 for cash
|
5.0
|
|
|
—
|
|
|
0.1
|
|
|
5.1
|
|
Issuance in October 2017 in connection with the WNRL Merger
|
108.0
|
|
|
—
|
|
|
—
|
|
|
108.0
|
|
Issuance in November 2017 in connection with the
Anacortes Logistics Assets
acquisition
|
1.0
|
|
|
—
|
|
|
—
|
|
|
1.0
|
|
Issuance of Preferred Units in December 2017
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
At December 31, 2017
|
217.1
|
|
|
0.6
|
|
|
2.2
|
|
|
219.9
|
|
Issuance in August 2018 in connection with the 2018 Drop Down
|
28.3
|
|
|
—
|
|
|
—
|
|
|
28.3
|
|
Unit-based compensation awards
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
At December 31, 2018
|
245.5
|
|
|
0.6
|
|
|
2.2
|
|
|
248.3
|
|
Equity Transactions related to Acquisitions
Distributions to unitholders and the general partner include
$300 million
,
$406 million
and
$760 million
in cash payments for Acquisitions from our Sponsor during
2018
,
2017
and
2016
, respectively. As an entity under common control with Marathon, we record the assets that we acquire from our Sponsor in our consolidated balance sheets at our Sponsor’s historical book value instead of fair value, and any difference in amounts paid compared to the historical book value of the assets acquired from our Sponsor is recorded within equity. The Acquisitions from our Sponsor resulted in net increases of
$1.4 billion
and
$1.3 billion
in our equity balance during
2018
and
2017
, respectively, and a net decrease of
$443 million
in our equity balance during
2016
. The
2017
increase includes
$1.7 billion
in basis received in connection with the WNRL Merger.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Cash Distributions
On
January 25, 2019
, in accordance with our partnership agreement, we announced the declaration of a quarterly cash distribution, based on the results of the fourth quarter of 2018, totaling
$238 million
, or
$1.03
per limited partner unit. This distribution was paid on
February 14, 2019
to unitholders of record on
February 5, 2019
.
During the year ended December 31, 2018, we paid distributions associated with our Preferred Units of
$29 million
. During January 2019, we declared a distribution associated with our Preferred Units in the amount of
$21 million
, which will be paid on February 15, 2019.
Our distributions are declared subsequent to quarter end; therefore, the following table represents total cash distributions applicable to the period in which the distributions are earned.
Total Quarterly Cash Distributions to General and Limited Partners (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
General partner’s distributions:
|
|
|
|
|
|
General partner’s distributions
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
(10
|
)
|
General partner’s IDRs (a)
|
—
|
|
|
(75
|
)
|
|
(148
|
)
|
Total general partner’s distributions
|
$
|
—
|
|
|
$
|
(81
|
)
|
|
$
|
(158
|
)
|
|
|
|
|
|
|
Limited partners’ distributions:
|
|
|
|
|
|
Common
|
$
|
(890
|
)
|
|
$
|
(611
|
)
|
|
$
|
(344
|
)
|
Total limited partners’ distributions
|
(890
|
)
|
|
(611
|
)
|
|
(344
|
)
|
Total Cash Distributions
|
$
|
(890
|
)
|
|
$
|
(692
|
)
|
|
$
|
(502
|
)
|
|
|
(a)
|
As a result of the IDR/GP Transaction that occurred on October 30, 2017, our general partner no longer receives IDRs.
|
Note 12 - Supplemental Cash Flow Information
Supplemental disclosure of cash activities includes interest paid, net of capitalized interest, of
$209 million
,
$243 million
and
$165 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Supplemental Disclosures of Non-Cash Investing and Financing Activities (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Capital expenditures included in accounts payable at period end
|
$
|
105
|
|
|
$
|
50
|
|
|
$
|
30
|
|
Capital expenditures included in affiliate payable at period end
|
—
|
|
|
—
|
|
|
8
|
|
Capital leases and other
|
—
|
|
|
—
|
|
|
2
|
|
Predecessors’ net liabilities not assumed by Andeavor Logistics
|
13
|
|
|
—
|
|
|
22
|
|
Receivable from affiliate for capital expenditures
|
26
|
|
|
4
|
|
|
4
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
Note 13 - Revenues
We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those products or services. For the year ended
December 31, 2018
, revenues from contracts with customers were
$2.0 billion
, which excludes lease revenues of
$425 million
. Upon adoption of ASC 606, revenue is recognized net of amounts collected from customers for taxes assessed by governmental authorities on, and concurrent with, specific revenue-producing transactions.
Service Revenue
We generate service revenue for gathering and transporting crude oil, natural gas and water; processing and fractionating natural gas and NGLs; and terminalling, transporting, and storing crude oil and refined products. We perform these services under various contractual arrangements with our customers. Under fee-based arrangements, we receive a fixed rate per volumetric unit for services we provide. For many of these fee-based arrangements, customers are required to make deficiency payments when they do not meet their minimum throughput volume commitments. Some of these contracts allow our customers to claw-back all or a portion of prior deficiency payments against excess volumes in future periods. Under keep-whole arrangements, we gather and process natural gas from producer-customers, retain and sell extracted NGLs, and return to the producer Shrink Gas with an equivalent British thermal unit content of the NGLs retained. For these arrangements, we receive from the producer a combination of fixed rate-per unit of cash consideration as well as non-cash consideration in the form of retained NGLs. Other agreements with producers consist of POP arrangements for which we gather and purchase natural gas from the producers, process purchased natural gas, and sell resulting NGLs and shrink gas at market prices. Reimbursements of certain costs and fees received under these purchase arrangements are recorded as a reduction to NGL expense. See further discussion below on our accounting for product revenues related to the sales of products resulting from our processing activities.
We recognize service revenue over time, as customers simultaneously receive and consume the related benefits of the services that we stand ready to provide. Revenue is recognized using an output measure, such as the throughput volume or capacity utilization, as these measures most accurately depict the satisfaction of our performance obligations. Where contracts contain variable pricing terms, the variability is either resolved within the reporting period, or the variable consideration is allocated to the specific unit of service to which it relates. Deficiency payments under contracts with claw-back provisions are deferred and recognized as revenue as customers reclaim amounts by throughputting excess volumes. To the extent it is probable a customer will not recover all or a portion of the deficiency payment, the estimated residual deficiency is recognized ratably over the claw-back period. Payments for services rendered are generally received no later than 60 days from the month of service, with the exception of deficiency payments described above.
For our keep-whole arrangements, we recognize service revenue for the fair value of non-cash consideration we receive in the form of NGLs. We obtain control of the NGLs we receive from our customers, have discretion in establishing price and have the ability to direct their use. We estimate the fair value of non-cash consideration at the date we obtain control of the respective NGLs, using the monthly average published price of underlying commodity adjusted for geography and commodity specifications.
We experience volume gains and losses, which we sometimes refer to as imbalances, within our pipelines, terminals and storage facilities due to pressure and temperature changes, evaporations and variances in meter reading in other measurement methods. Some of our arrangements require us to bear losses when actual volume losses exceed a contractually specified percentage. Similarly, we receive a benefit when actual volume losses are lower than the contractually specified percentage. For gains and losses which are cash settled, we include the settlement amounts in our service revenues. We recognize non-cash consideration for the stated percentage of commodity we retain and control. We record this non-cash consideration at fair value on a gross basis in service revenue and operating expense. The total amount of service revenue and NGL expense recorded associated with these arrangements is not material to our consolidated statements of operations.
Product Revenue
We generate product revenue from the sale of NGLs and related products along with the sale of gasoline and diesel fuel within our wholesale business. We sell NGLs, Shrink Gas and condensate using natural gas we acquire from producers under our POP arrangements. We record revenues for the sale of these NGLs and related products at market prices, and record the payments to producers for the agreed-upon percentage of the total sales proceeds as NGL expense, net of certain charges, which is reported within costs and expenses in our consolidated statements of operations.
We have certain fuel purchase and sale arrangements under which we receive minimum guaranteed margins with upside potential on a portion of our branded and unbranded fuel sales. Marathon retains control of fuel and is the principal in these affiliate arrangements. Therefore, we net the purchase and sale of fuel in our consolidated statements of operations.
NGLs received under keep-whole arrangements are sold to our affiliate. In return, we receive shrink gas which we then remit to the producers. This transaction is treated as a sale, for which we record the fair value of the non-cash consideration at the date we obtain control of the shrink gas. We utilize a monthly average of the published price of the commodity, adjusted for geography.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Our product sales arrangements are for specified goods for which enforceable rights and obligations are created when sales volumes are determined, which typically occurs as orders are issued or spot sales are made, but may be determined at contract inception. Each barrel, gallon or other unit of measure of product, is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated based on stand-alone selling price. We use observable market prices for the products we sell to determine the stand-alone selling price of each separate performance obligation. Product revenues are recognized at a point-in-time, which generally occurs upon delivery and transfer of title to the customer. Payments for product sales are generally received within 30 days from when control has transferred.
Other Arrangements
Based on the terms of certain storage and other agreements in which the counterparty is primarily our Sponsor, we are considered to be the lessor under these implicit operating lease arrangements. Income from these leases is excluded from the scope of the new revenue standard.
Customer Contract Assets
Our receivables are primarily associated with customer contracts. Our payment terms vary by product or service type, and the period between invoicing and payment is not significant. Included in our receivables are balances associated with commodity sales on behalf of our producer customers, for which we remit the net sales price back to the producer customers upon completion of each sale. These balances are commingled in our receivables, net of allowance for doubtful accounts in our consolidated balance sheets. Our contract assets include amounts recognized for deficiency payments associated with minimum volume commitments which have not been billed to customers. These contract assets are included in prepayments and other current assets in our consolidated balance sheets and are shown in the “Summary of Customer Contract Assets and Liabilities” table below.
Customer Contract Liabilities
For certain products or services, we receive payment in advance of when performance obligations are satisfied. These liabilities from contracts with customers consist primarily of certain deficiency payments for minimum volume commitments and customer reimbursements of costs for capital projects. Customer advances for capital projects are generally recognized over the contract term. We do not have a material impact for financing components associated with these customer advances. Payments for minimum volume commitments and other customer advances are included in deferred income within other current liabilities and other noncurrent liabilities based on timing of expected recognition, which generally extend up to
15 years
. During the year ended
December 31, 2018
, we recognized
$29 million
in revenue from contract liabilities existing as of January 1, 2018, after cumulative adjustments for the adoption of ASC 606.
Summary of Customer Contract Assets and Liabilities (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 (a)
|
|
Adjustments for ASC 606 (b)(c)
|
|
Balance at January 1, 2018
|
|
December 31,
2018
|
Contract assets
|
—
|
|
|
34
|
|
|
34
|
|
|
32
|
|
Deferred income, current
|
23
|
|
|
—
|
|
|
23
|
|
|
24
|
|
Deferred income, noncurrent
|
43
|
|
|
16
|
|
|
59
|
|
|
57
|
|
|
|
(a)
|
Adjusted to include the historical results of the Predecessors. See Notes 1 and 2 for further discussion.
|
|
|
(b)
|
These amounts exclude balances associated with equity method investments. We recognized a cumulative adjustment of
$3 million
as a decrease to Equity Method Investments in our consolidated balance sheets as of January 1, 2018 for the impacts related to our equity method investment in TRG. There were no material impacts to this balance during the year ended
December 31, 2018
due to the adoption.
|
|
|
(c)
|
Included in the
$34 million
change to contract assets is a
$32 million
reclass from Receivables for amounts for which we were not allowed to invoice as of January 1, 2018.
|
Remaining Performance Obligations
We do not disclose the value of unsatisfied performance obligations for contracts with original expected terms of one year or less or the value of variable consideration related to unsatisfied performance obligations, when such values are not required to be estimated for purposes of allocation and recognition. Revenues associated with remaining obligations under contracts with terms in excess of one year related primarily to arrangements for which the customer has agreed to fixed consideration based on minimum throughput volume commitments or capacity utilization. As of
December 31, 2018
, we had
$4.0 billion
of expected revenues from remaining performance obligations.
The future revenues from our service arrangements with fixed fees or minimum throughput volume commitments will be recognized over the period of performance to which the fixed fee or commitment relates, which generally ranges from
1 year
to
15 years
. We expect approximately
85%
of our total remaining obligations to be recognized within
5 years
.
|
|
|
|
Notes to Consolidated Financial Statements
|
Disaggregation
We disaggregate our revenues by product and services, and further by product line. For additional information regarding our operating segments, see
Note 14
.
Revenue Disaggregation by Type and Product Line (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Terminalling and Transportation (a)
|
|
Gathering and Processing (a)
|
|
Wholesale
|
Service Revenues (b)
|
|
|
|
|
|
Refined products
|
$
|
898
|
|
|
$
|
—
|
|
|
$
|
17
|
|
Crude oil and water
|
153
|
|
|
438
|
|
|
—
|
|
Natural gas
|
—
|
|
|
391
|
|
|
—
|
|
Other
|
3
|
|
|
—
|
|
|
—
|
|
Total Service Revenues
|
1,054
|
|
|
829
|
|
|
17
|
|
Product Revenues
|
|
|
|
|
|
NGL products
|
—
|
|
|
434
|
|
|
—
|
|
Refined products
|
—
|
|
|
—
|
|
|
46
|
|
Total Product Revenues
|
—
|
|
|
434
|
|
|
46
|
|
Total Revenues
|
$
|
1,054
|
|
|
$
|
1,263
|
|
|
$
|
63
|
|
|
|
(a)
|
Adjusted to include the historical results of the Predecessors. See Notes 1 and 2 for further discussion.
|
|
|
(b)
|
Includes
$425 million
of lease revenues for the year ended
December 31, 2018
.
|
Note 14 - Operating Segments
Our revenues are derived from
three
operating segments: Terminalling and Transportation, Gathering and Processing and Wholesale. Refer to
Note 1
for discussion of the operations included within each of our operating segments.
We evaluate the performance of our segments based primarily on segment operating income and EBITDA. For the purposes of our operating segment disclosure, we present operating income as it is the most comparable measure to the amounts presented in our statements of consolidated operations. Segment operating income includes those revenues and expenses that are directly attributable to management of the respective segment. Certain general and administrative expenses, interest and financing costs and equity in earnings of equity method investments are excluded from segment operating income as they are not directly attributable to a specific operating segment. Identifiable assets are those used by the segment, whereas other assets are principally cash, deposits and other assets that are not associated with a specific operating segment.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Segment Information (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018 (a)
|
|
2017 (a)
|
|
2016 (a)
|
Revenues
|
|
|
|
|
|
Terminalling and Transportation:
|
|
|
|
|
|
Terminalling
|
$
|
888
|
|
|
$
|
690
|
|
|
$
|
480
|
|
Pipeline transportation
|
160
|
|
|
130
|
|
|
125
|
|
Other revenues
|
6
|
|
|
18
|
|
|
—
|
|
Total Terminalling and Transportation
|
1,054
|
|
|
838
|
|
|
605
|
|
Gathering and Processing:
|
|
|
|
|
|
NGL sales
|
436
|
|
|
369
|
|
|
103
|
|
Gas gathering and processing
|
330
|
|
|
333
|
|
|
264
|
|
Crude oil and water gathering
|
336
|
|
|
262
|
|
|
582
|
|
Pass-thru and other
|
161
|
|
|
165
|
|
|
115
|
|
Total Gathering and Processing
|
1,263
|
|
|
1,129
|
|
|
1,064
|
|
Wholesale:
|
|
|
|
|
|
Fuel sales (b)
|
46
|
|
|
1,267
|
|
|
—
|
|
Other wholesale
|
33
|
|
|
15
|
|
|
—
|
|
Total Wholesale
|
79
|
|
|
1,282
|
|
|
—
|
|
Intersegment wholesale revenues
|
(16
|
)
|
|
—
|
|
|
—
|
|
Total Segment Revenues
|
$
|
2,380
|
|
|
$
|
3,249
|
|
|
$
|
1,669
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
|
|
|
|
Terminalling and Transportation
|
$
|
498
|
|
|
$
|
397
|
|
|
$
|
240
|
|
Gathering and Processing
|
310
|
|
|
245
|
|
|
235
|
|
Wholesale
|
27
|
|
|
15
|
|
|
—
|
|
Total Segment Operating Income
|
835
|
|
|
657
|
|
|
475
|
|
Unallocated general and administrative expenses
|
(39
|
)
|
|
(54
|
)
|
|
(27
|
)
|
Operating Income
|
796
|
|
|
603
|
|
|
448
|
|
Interest and financing costs, net
|
(233
|
)
|
|
(330
|
)
|
|
(195
|
)
|
Equity in earnings of equity method investments
|
31
|
|
|
22
|
|
|
13
|
|
Other income, net
|
6
|
|
|
11
|
|
|
11
|
|
Net Earnings
|
$
|
600
|
|
|
$
|
306
|
|
|
$
|
277
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense
|
|
|
|
|
|
Terminalling and Transportation
|
$
|
144
|
|
|
$
|
117
|
|
|
$
|
95
|
|
Gathering and Processing
|
213
|
|
|
191
|
|
|
138
|
|
Wholesale
|
11
|
|
|
5
|
|
|
—
|
|
Total Depreciation and Amortization Expense
|
$
|
368
|
|
|
$
|
313
|
|
|
$
|
233
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
Terminalling and Transportation
|
$
|
205
|
|
|
$
|
188
|
|
|
$
|
193
|
|
Gathering and Processing
|
545
|
|
|
175
|
|
|
119
|
|
Wholesale
|
1
|
|
|
—
|
|
|
—
|
|
Total Capital Expenditures
|
$
|
751
|
|
|
$
|
363
|
|
|
$
|
312
|
|
|
|
(a)
|
Adjusted to include the historical results of the Predecessors. See Notes 1 and 2 for further discussion.
|
|
|
(b)
|
The presentation of wholesale fuel sales was impacted by adoption of ASC 606 on January 1, 2018. Beginning January 1, 2018, the revenues and costs associated with our fuel purchase and supply arrangements were netted.
|
|
|
|
|
Notes to Consolidated Financial Statements
|
Total Identifiable Assets by Operating Segment (in millions)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017 (a)
|
Identifiable Assets
|
|
|
|
Terminalling and Transportation
|
$
|
3,458
|
|
|
$
|
3,045
|
|
Gathering and Processing
|
6,488
|
|
|
6,006
|
|
Wholesale
|
255
|
|
|
342
|
|
Other
|
94
|
|
|
112
|
|
Total Identifiable Assets
|
$
|
10,295
|
|
|
$
|
9,505
|
|
|
|
(a)
|
Adjusted to include the historical results of the Predecessors. See Notes 1 and 2 for further discussion.
|
Note 15 - Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total Year
|
2018 (a)
|
(In millions, except per unit amounts)
|
Revenues
|
$
|
546
|
|
|
$
|
569
|
|
|
$
|
642
|
|
|
$
|
623
|
|
|
$
|
2,380
|
|
NGL expense (b)
|
48
|
|
|
45
|
|
|
73
|
|
|
40
|
|
|
206
|
|
Operating expenses
|
201
|
|
|
221
|
|
|
236
|
|
|
227
|
|
|
885
|
|
Operating income
|
177
|
|
|
180
|
|
|
215
|
|
|
224
|
|
|
796
|
|
Net earnings
|
131
|
|
|
132
|
|
|
166
|
|
|
171
|
|
|
600
|
|
Limited partners' interest in net earnings
|
125
|
|
|
138
|
|
|
160
|
|
|
161
|
|
|
584
|
|
Net earnings per limited partner unit (c):
|
|
|
|
|
|
|
|
|
|
Common - basic
|
$
|
0.59
|
|
|
$
|
0.63
|
|
|
$
|
0.68
|
|
|
$
|
0.66
|
|
|
$
|
2.57
|
|
Common - diluted
|
$
|
0.59
|
|
|
$
|
0.63
|
|
|
$
|
0.68
|
|
|
$
|
0.66
|
|
|
$
|
2.57
|
|
2017 (a)
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
427
|
|
|
$
|
614
|
|
|
$
|
1,094
|
|
|
$
|
1,114
|
|
|
$
|
3,249
|
|
Cost of fuel and other (b)(d)
|
—
|
|
|
162
|
|
|
554
|
|
|
528
|
|
|
1,244
|
|
NGL expense (b)
|
59
|
|
|
56
|
|
|
64
|
|
|
86
|
|
|
265
|
|
Operating expenses
|
142
|
|
|
171
|
|
|
199
|
|
|
179
|
|
|
691
|
|
Operating income
|
131
|
|
|
146
|
|
|
147
|
|
|
179
|
|
|
603
|
|
Net earnings
|
73
|
|
|
90
|
|
|
90
|
|
|
53
|
|
|
306
|
|
Limited partners' interest in net earnings (c)
|
55
|
|
|
70
|
|
|
97
|
|
|
47
|
|
|
267
|
|
Net earnings per limited partner unit (c):
|
|
|
|
|
|
|
|
|
|
Common - basic
|
$
|
0.51
|
|
|
$
|
0.63
|
|
|
$
|
0.90
|
|
|
$
|
0.25
|
|
|
$
|
2.11
|
|
Common - diluted
|
$
|
0.51
|
|
|
$
|
0.63
|
|
|
$
|
0.90
|
|
|
$
|
0.25
|
|
|
$
|
2.11
|
|
|
|
(a)
|
Adjusted to include the historical results of the Predecessors. See Notes 1 and 2 for further discussion.
|
|
|
(b)
|
Excludes direct operating expenses incurred across our operating segments and depreciation and amortization expenses.
|
|
|
(c)
|
The sum of four quarters may not equal annual results due to rounding or the quarterly number of units outstanding.
|
|
|
(d)
|
Due to the adoption of ASC 606 effective January 1, 2018, the revenues and costs associated with our fuel purchase and supply arrangements for the year ended December 31, 2018 were netted. See Note 1 for further discussion.
|
|
|
|
|
Changes and Disagreements with Accountants, Controls and Procedures and Other Information
|