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.

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.

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.

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.

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.