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.

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.

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.

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		$	—



	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		$	—



	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.