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 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

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.