UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10‑K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to __________
Commission File Number 1‑3473
ANDEAVOR
(Exact name of registrant as specified in its charter)
Delaware
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95-0862768
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
19100 Ridgewood Pkwy, San Antonio, Texas 78259-1828
(Address of principal executive offices) (Zip Code)
210-626-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.16 2 / 3  par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
þ
 
Accelerated filer
o
 
 
Non-accelerated filer
o    (Do not check if a smaller reporting company)
 
Smaller reporting company
o
 
 
 
 
 
Emerging growth company
o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
At June 30, 2017 , the aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $13.8 billion based upon the closing price of its common stock on the New York Stock Exchange Composite tape. At February 15, 2018 , there were 153,764,533 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s Proxy Statement to be filed pursuant to Regulation 14A pertaining to the 2018 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. The Company intends to file such Proxy Statement no later than 120 days after the end of the fiscal year covered by this Form 10-K.
 

Table of Contents

Andeavor
Annual Report on Form 10-K
Glossary of Terms
Important Information Regarding Forward-Looking Statements
Part I
Item 1 Business
 
Marketing
 
Logistics
 
Refining
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Mine Safety Disclosures
Part II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6 Selected Financial Data
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Business Strategy and Overview
 
Results of Operations
 
 
Marketing
 
 
Logistics
 
 
Refining
 
Capital Resources and Liquidity
 
Non-GAAP Reconciliations
 
Accounting Standards
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Item 8 Financial Statements and Supplemental Data
 
Statements of Consolidated Operations
 
Statements of Consolidated Comprehensive Income
 
Consolidated Balance Sheets
 
Statements of Consolidated Equity
 
Statements of Consolidated Cash Flows
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Control and Procedures
 
Part III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions and Director Independence
Item 14 Principal Accounting Fees and Services
Part IV
Item 15 Exhibits and Financial Statement Schedules
Item 16 Form 10–K Summary
Signatures







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This Annual Report on Form 10-K (including documents incorporated by reference herein) contains statements with respect to our expectations or beliefs as to future events. These types of statements are “forward-looking” and subject to uncertainties. See “Important Information Regarding Forward-Looking Statements.”

Additionally, throughout this Annual Report on Form 10-K, we have used terms in our discussion of the business and operating results that have been defined in our Glossary of Terms.

 
 
December 31, 2017 | 2
Glossary of Terms

Glossary of Terms

Throughout this Annual Report on Form 10-K, we have used the following terms in our discussion of the business and operating results.

AB32 - California Assembly Bill 32.

AB197 - California Assembly Bill 197.

Alkylation  - A process that chemically combines isobutane with other hydrocarbons through the control of temperature and pressure in the presence of an acid catalyst. This process produces alkylates, which have a high octane value and are blended into gasoline to improve octane values.

Andeavor Logistics Dropdown Credit Facility - Andeavor Logistics secured dropdown credit facility.

Andeavor Logistics Revolving Credit Facility - Andeavor Logistics secured revolving credit facility.

Andeavor Index  - A performance benchmark that uses several crude oils and refined products to provide a potentially closer representation of the trends in the available margin. Our actual gross refining margins differ from the Andeavor Index based on the actual slate of crude oil that is run at our refineries and the products we produce or yield. The published Andeavor Index, including a reconciliation of the included components, is available on our website at www.andeavor.com.

API  - American Petroleum Institute - The main U.S. trade association for the oil and natural gas industry.

API Gravity - A scale for denoting the lightness or heaviness of crude oil and other liquid hydrocarbons. Calibrated in API degrees (or degrees API), it is used universally to express a crude oil’s relative density in an inverse measure - the lighter the crude, the higher the API gravity, and vice versa.

Average Crude Oil and Water Gathering Revenue per Barrel - calculated as total crude oil and water gathering fee-based revenue divided by total crude oil and water gathering throughput.

Average Gas Gathering and Processing Revenue per MMBtu - calculated as total gathering and processing fee-based revenue divided by total gas gathering throughput.

Average Margin on NGL Sales per Barrel - Calculated as the difference between the NGL sales revenues and the amounts recognized as NGL expenses divided by our NGL sales volumes in barrels presented in Mbpd multiplied by 1,000 and multiplied by the number of days in the period.

Average Pipeline Transportation Revenue per Barrel - calculated as total pipeline transportation revenue divided by total pipeline transportation throughput.

Average Terminalling Revenue per Barrel - Calculated as total terminalling revenue divided by total terminalling throughput.
 

BBA - Bipartisan Budget Act of 2015.

Blendstocks - Components used for blending or compounding into finished jet or gasoline (e.g., straight-run gasoline, alkylate, reformulate, benzene, toluene, and xylene). Excludes oxygenates (alcohols, ethers), butane and pentanes.

Board - Board of Directors.

Calcining - A process whereby green or raw petroleum coke from the refining process is converted to a high grade coke by thermally treating it to remove moisture and volatile combustible matter. The upgraded high grade calcined coke is typically used by the aluminum industry.

CARB - California Air Resources Board - Gasoline and diesel fuel sold in the state of California are regulated by CARB and require stricter quality and emissions reduction performance than required by other states.

Cracking - The process of breaking down larger hydrocarbon molecules into smaller molecules using catalysts and/or elevated temperatures and pressures.

Deasphalting - A solvent extraction process of recovering higher-value oils from refining residues.

DOT - Department of Transportation.

EBITDA - U.S. GAAP-based net earnings before interest, income taxes, and depreciation and amortization expenses.

EPA - U.S. Environmental Protection Agency.

Exchange Arrangement   - An agreement providing for the delivery of crude oil or refined products to/from a third party, in exchange for the delivery of crude oil or refined products to/from the third party.

FASB - Financial Accounting Standards Board.

FERC - Federal Energy Regulatory Commission.

Fluid Catalytic Cracking   - A process that breaks down larger, heavier, and more complex hydrocarbon molecules into simpler and lighter molecules through the use of a catalytic agent and is used to increase the yield of gasoline. Fluid catalytic cracking uses a catalyst in the form of very fine particles, which behave as a fluid when aerated with a vapor.

Fractionation - The process of separating natural gas liquids into its component parts by heating the natural gas liquid stream and boiling off the various fractions in sequence from the lighter to the heavier hydrocarbon.

Fuel Margin - The margin on fuel products sold through our Marketing segment calculated as the difference between

 
 
December 31, 2017 | 1
Glossary of Terms

total marketing revenues and marketing costs of fuels and other. Costs of fuels and other in fuel margin are based on purchases from our Refining segment and third parties using average bulk market prices adjusted for transportation and other differentials.

Fuel Margin per gallon - Calculated as the fuel margin divided by our total fuel sales volumes in gallons.

Gas Processing - A complex industrial process designed to remove the heavier and more valuable natural gas liquids components from raw natural gas allowing the residue gas remaining after extraction to meet the quality specifications for long-haul pipeline transportation or commercial use.

GHG - Greenhouse gas.

Heavy Crude Oil   - Crude oil with an API gravity of 24 degrees or less. Heavy crude oil is typically sold at a discount to lighter crude oil.

Heavy Fuel Oils, Residual Products, Internally Produced Fuel and Other  - Products other than gasoline, jet fuel and diesel fuel produced in the refining process. These products include residual fuels, gas oils, propane, petroleum coke, asphalt and internally produced fuel.

Homeland Standards - U.S. Department of Homeland Security Chemical Facility Anti-Terrorism Standards.

Hydrotreating   - A process that removes sulfur from refined products in the presence of catalysts and substantial quantities of hydrogen to reduce sulfur dioxide emissions that result from the use of the products.

IDRs - Incentive distribution rights in Andeavor Logistics, which were canceled on October 30, 2017 in conjunction with the WNRL Merger.

Isomerization   - A process that alters the fundamental arrangement of atoms in the molecule without adding or removing anything from the original material. The process is used to convert normal butane into isobutane and normal pentane into isopentane and hexane into isohexane.

Jobber/Dealer - Retail station owned by a third party that sells products purchased from or through us.

LCFS - Low Carbon Fuel Standard.

LCM - Lower of cost or market.

Light Crude Oil  - Crude oil with an API gravity greater than 24 degrees. Light crude oil is typically sold at a premium to heavy crude oil.

Manufacturing Costs  - Costs representing direct operating expenses incurred by our Refining segment for the production of refined products, but excluding depreciation and amortization.


 
Manufacturing costs (excluding depreciation and amortization) per throughput barrel - Calculated as manufacturing costs divided by our total refining throughput in barrels presented in Mbpd multiplied by 1,000 and multiplied by the number of days in the period.

Mbpd   - Thousand barrels per day.

Merchandise Margin - Calculated as the difference between merchandise sales and purchases of merchandise.

Merchandise Margin Percentage - Calculated as merchandise margin divided by merchandise sales.

MMBtu - Million British thermal units.

MMMBtu - Billion British thermal units.

MMcf - Million cubic feet.

MPL - Minnesota Pipe Line Company, LLC.

Multi-Site Operator (“MSO”) - Companies licensed to operate retail stations in which we have a fee or leasehold interest in the property and title to the fuel until sold to the consumer. MSOs operate the non-fuel business at the location and employ the operating personnel.

Naphtha   - Refined product used as a gasoline blending component, a feedstock for reforming and as a petrochemical feedstock.

NGLs - Natural gas liquids.

Number of Days in the Period - 365 days for both the years ended December 31, 2017 and 2015, and 366 days for the year ended December 31, 2016.

OPEC - Organization of the Petroleum Exporting Countries.

OSHA - The U.S. Occupational Safety Health Administration.

OSROs - Oil Spill Response Organizations.

Other Feedstocks - Any non-crude raw or semi-finished material, which is further processed in various units of a refinery.

Pemex - Petróleos Mexicanos.

PHMSA - The Pipeline and Hazardous Materials Safety Administration.

POP - Percent of proceeds.

RECLAIM - Regional Clean Air Incentives Market.

Refining Margin - The margin on products manufactured and purchased, including those sold to our Marketing segment. Refining margin is the difference between total refining revenues minus total cost of materials and other.

2  |  
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Glossary of Terms


Refining Margin per Throughput Barrel - Calculated as refining margin divided by our total refining throughput in barrels presented in Mbpd multiplied by 1,000 and multiplied by the number of days in the period.

Refined Products - Hydrocarbon compounds, such as gasoline, diesel fuel, jet fuel and residual fuel that are produced by a refinery.

Refining Yield  - Volumes of product produced from crude oil and feedstocks.

Reforming   - A process that uses controlled heat and pressure with catalysts to rearrange certain hydrocarbon molecules into petrochemical feedstocks and higher octane stocks suitable for blending into finished gasoline.

Residual oil - The remainder of the crude oil after gasoline and distillate fuel oils have been extracted through distillation.

Revolving Credit Facility - Andeavor revolving credit facility.

RFS2 - The second renewable fuels standard issued by the EPA.

RGS - Rendezvous Gas Services, L.L.C.

RINs - Renewable identification numbers.

SB 32 - California Senate Bill 32.

SEC - Securities and Exchange Commission.

 
Segment EBITDA - segment’s U.S. GAAP-based operating income before depreciation and amortization expense plus equity in earnings (loss) of equity method investments and other income (expense), net.

SG&A - Selling, general and administrative expenses.

Tax Act - tax reform legislation enacted December 22, 2017 under Public Law 115-97, known informally as the Tax Cuts and Jobs Act.

Throughput   - The quantity of crude oil and other feedstocks processed at a refinery measured in barrels per day.

TRG - Three Rivers Gathering, L.L.C.

Turnaround   - The scheduled shutdown of a refinery processing unit for significant overhaul and refurbishment. Turnaround expenditures are capitalized and amortized over the period of time until the next planned turnaround of the unit.

UBFS - Uintah Basin Field Services, L.L.C.

UDEQ - Utah Department of Environmental Quality.

USCG - United States Coast Guard.

U.S. GAAP - Accounting principles generally accepted in the United States of America.

Unit Train - A train consisting of approximately one hundred rail cars containing a single material (such as crude oil) that is transported by the railroad as a single unit from its origin point to the destination, enabling decreased transportation costs and faster deliveries.

Vacuum Distillation   - Distillation under reduced pressure, which lowers the boiling temperature of crude oil in order to distill crude oil components that have high boiling points.

Watson - Watson Cogeneration Company.


 
 
December 31, 2017 | 3
Important Information Regarding Forward-Looking Statements

Important Information Regarding Forward Looking Statements

This Annual Report on Form 10-K (including information incorporated by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, those under Item 1. Business, Item 1A. Risk Factors, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. All statements other than statements of historical fact, including without limitation statements regarding our business strategy and goals, and expectations regarding refining margins, revenues, cash flows, capital expenditures, turnaround expenses, other financial items, growth, acquisitions, our market position, future operations, margins and profitability, are forward-looking statements. Forward-looking statements may be identified by use of the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar terms and phrases. Although we believe our assumptions concerning future events are reasonable, a number of risks, uncertainties and other factors could cause actual results and trends to differ materially from those projected, including, but not limited to:

•
the constantly changing margin between the price we pay for crude oil and other refinery feedstocks as well as RINs and environmental credits, and the prices at which we are able to sell refined products;
•
changes in the expected value of and benefits derived from acquisitions and capital projects, including any inability to successfully integrate acquisitions, realize expected synergies or achieve operational efficiency and effectiveness;
•
changes in global economic conditions on our business, especially in California, and the business of our suppliers, customers, business partners and credit lenders;
•
changes in fuel and utility costs for our facilities;
•
changes in the cost or availability of third-party vessels, pipelines and other means of transporting crude oil feedstocks and refined products;
•
regulatory and other requirements concerning the transportation of crude oil, particularly in the areas where we operate;
•
changes in the carrying costs of our inventory;
•
the timing and extent of changes in commodity prices and underlying demand for our refined products, natural gas and NGLs;
•
the availability and costs of crude oil, other refinery feedstocks, refined products and RINs;
•
changes in our cash flow from operations;
•
direct or indirect effects on our business resulting from actual or threatened terrorist incidents, cyber-security breaches or acts of war;
•
weather conditions, earthquakes or other natural disasters affecting our operations or the areas in which our refined products are marketed;
 
•
actions of customers and competitors;
•
state and federal environmental, economic, health and safety, energy and other policies and regulations, including those related to climate change and any changes therein, and any legal or regulatory investigations, delays in obtaining necessary approvals and permits, compliance costs or other factors beyond our control;
•
changes in tax policies or the tax status of Andeavor Logistics;
•
adverse rulings, judgments, or settlements in litigation or other legal or tax matters, including unexpected environmental remediation costs in excess of any reserves;
•
operational hazards inherent in refining operations and in transporting and storing crude oil, natural gas, NGLs and refined products;
•
changes in our credit profile;
•
changes in capital requirements or in execution of planned capital projects;
•
disruptions due to equipment interruption or failure at our facilities or third-party facilities;
•
seasonal variations in demand for refined products and natural gas;
•
risks related to labor relations and workplace safety;
•
political developments;
•
risks related to our expanding presence in Mexico; and
•
the factors described in greater detail under “Competition” and “Government Regulation and Legislation” in Item 1 and “Risk Factors” in Item 1A and our other filings with the SEC.

All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events or otherwise.


4  |  
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Business

As used in this Annual Report on Form 10-K, the terms “Andeavor,” the “Company,” “we,” “us” or “our” may refer to Andeavor, one or more of its consolidated subsidiaries or all of them taken as a whole. The words “we,” “us” or “our” generally include Andeavor Logistics LP (“Andeavor Logistics”), a publicly traded limited partnership, and its subsidiaries as consolidated subsidiaries of Andeavor with certain exceptions where there are transactions or obligations between Andeavor Logistics and Andeavor or its other subsidiaries. When used in descriptions of agreements and transactions, “Andeavor Logistics” or the “Partnership” refers to Andeavor Logistics and its consolidated subsidiaries.

Part I

Part 1 should be read in conjunction with Management’s Discussion and Analysis in Item 7 and our consolidated financial statements and related notes thereto in Item 8.

Item 1.
Business

Effective August 1, 2017, Tesoro Corporation changed its name to Andeavor. Andeavor was incorporated in Delaware in 1968. Headquartered in San Antonio, Texas, our common stock trades on the New York Stock Exchange under the symbol “ANDV.”

We are a highly integrated marketing, logistics and refining company operating primarily in the western and mid-continent United States. Our business is organized into three operating segments: Marketing, Logistics and Refining. These segments operate together to provide Andeavor value from the procurement of crude oil at its source or from other third parties, transporting the crude oil to our refineries, and producing, marketing and distribution of refined products. Our retail marketing system includes more than 3,250 stations marketed under multiple well-known fuel brands, including ARCO ® , Shell ® , Mobil ™ and SUPERAMERICA ® . We also have an approximate ownership of 59% in Andeavor Logistics and own its general partner. Our refining operations include 10 refineries with a combined capacity of approximately 1.2 million barrels per day in the central and western United States.

Andeavor Logistics (formerly Tesoro Logistics LP) is a leading growth-oriented, full-service, and diversified midstream company operating in the western and mid-continent regions of the United States. Andeavor Logistics owns and operates networks of crude oil, refined products and natural gas pipelines, terminals with crude oil and refined products storage capacity, rail loading and offloading facilities, marine terminals including storage, bulk petroleum distribution facilities, a trucking fleet and natural gas processing and fractionation complexes.

See our discussion of our operating segments, including description of associated properties in the following section. Additionally, refer to Item 7 - Management’s Discussion and Analysis and Note 19 to our consolidated financial statements in Item 8 for additional information on our operating segments, including financial performance.

The following provides an overview of our assets and operations:
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December 31, 2017 | 5
Business

2017 Acquisitions

Western Refining Acquisition and WNRL Merger
On June 1, 2017, we acquired Western Refining, Inc. (“Western Refining”) and the controlling interest in Western Refining Logistics LP (“WNRL”) (the “Western Refining Acquisition”). Additionally, on October 30, 2017, Andeavor Logistics acquired with WNRL by exchanging units of Andeavor Logistics for all outstanding common units of WNRL (the “WNRL Merger”). Refer to our discussion of the Western Refining Acquisition and WNRL Merger, including financial details relating to these transactions and the concurrent equity restructuring of our general partner and IDR interests held in Andeavor Logistics at the time of the WNRL Merger in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and the notes to our consolidated financial statements in Item 8 - Financial Statements and Supplementary Data.

With the Western Refining Acquisition, we expanded our asset base and operations as follows:

•
Marketing segment: we added 544 stations to our branded network primarily under the SUPERAMERICA ® and Giant ® brands, including 457 company-operated stations and store management expertise to enable convenience store growth, and along with other strategic, immaterial acquisitions increased our store count to over 3,250 stations;
•
Logistics segment: through the acquisition of WNRL, we acquired assets that are strategically located providing for significant growth opportunities and access to advantaged crude oil. These assets include 705 miles of pipelines located in Permian Basin area of west Texas and southern New Mexico that gather and transport crude oil by pipeline, as well as by truck, from various production locations to the acquired El Paso, Texas and Gallup, New Mexico refineries and approximately 13 million barrels of crude oil, feedstock, blendstock, refined product and asphalt storage tanks supporting the acquired refineries and gathering pipelines; and
•
Refining segment: we acquired three refineries in El Paso, Gallup and St. Paul Park, Minnesota with a total refining capacity of 262 Mbpd bringing our capacity to 1.2 million barrels per day across ten refineries.

As of December 31, 2017, integration of these assets and operations continues. Refer to our discussion of each segment below for an understanding of how Western Refining’s assets and operations have been integrated with our existing operations.

North Dakota Gathering and Processing Assets
On January 1, 2017 , Andeavor Logistics acquired crude oil, natural gas and produced water gathering systems and two natural gas processing facilities from Whiting Oil and Gas Corporation, GBK Investments, LLC and WBI Energy Midstream, LLC (the “North Dakota Gathering and Processing Assets”). The North Dakota Gathering and Processing Assets include over 650 miles of crude oil, natural gas, and produced water gathering pipelines, 170 MMcf per day of natural gas processing capacity and 18.7 Mbpd of fractionation capacity in the Sanish and Pronghorn fields of the Williston Basin in North Dakota. With this acquisition, Andeavor Logistics expanded its assets in its Gathering and Processing business located in the Williston Basin area of North Dakota to further grow its 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 extends Andeavor Logistics’ capacity and capabilities by adding new origin and destination points for its common carrier pipelines in North Dakota and extends our crude oil, natural gas and water gathering and associated gas processing footprint to enhance and improve overall basin logistics efficiencies.

Working Capital

We fund our business operations through a combination of available cash and cash equivalents and cash flows generated from operations. In addition, our revolving lines of credit are available for additional working capital needs. See “Capital Resources and Liquidity” in Item 7 for additional information regarding working capital.

Employees

We had more than 14,300 full-time employees at December 31, 2017 , approximately 2,850 of whom are full-time represented union employees covered by collective bargaining agreements. Of these employees, approximately 1,700 are covered by collective bargaining agreements expiring on February 1, 2019 with the remaining employees covered under agreements with expirations ranging from May 2019 to March 2023.

Guiding Principles
Underpinning our strategies and the execution of our goals for all of our businesses is a high-performing culture where employees lead according to our Guiding Principles and have the opportunity to make a difference. These Guiding Principles are as follows:

•
Core Values – We act individually and collectively with the highest level of integrity and we are steadfast in our commitment to safety, health and the environment.
•
Exceptional People – We employ the best people and develop our capabilities and leadership to realize our objectives.
•
Shared Purpose  – Everyone clearly understands and owns our vision, strategy, how they fit and what they are expected to contribute.

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Business

•
Powerful Collaboration  – We leverage the power of collaboration and our individual and collective expertise to create value and competitive advantage.
•
Superior Execution – We pursue and deliver our objectives with energy, passion and a sense of urgency to deliver industry-leading results.

Strategic Priorities
By following our Guiding Principles, we aim to achieve our Strategic Priorities outlined below. In addition, we take a principles-based approach to conducting our business, seeking to create shared value for key stakeholders including employees, communities, business partners, the government and the environment.

•
High-Performing Culture – Fostering a culture that is committed to building leadership at all levels of the organization and across our value chain with employees from diverse backgrounds and experiences while being firmly grounded in our guiding principles.
•
Operational Efficiency & Effectiveness – Continuously improving safety, compliance, reliability, system improvements and cost leadership.
•
Value Chain Optimization – Enhancing margin capture through our supply and trading activities, optimization of our integrated businesses and customer focus.
•
Financial Discipline – Maintaining a strong financial position by exercising capital discipline and focusing on a balanced use of free cash flow.
•
Value-Driven Growth – Extending our capabilities and growing earnings through growth in our logistics and marketing businesses and other strategic opportunities accretive to shareholder value.

Shared Value
Shared Value is a way of doing business that involves considering and working with key stakeholders in service of one another, as well as the business. We think of it as a lens through which we view our roles and our decisions. Shared Value helps us focus on the intersection of what is important to our stakeholders and the value we create.

•
Our People - T he engagement, satisfaction and development of our people is of the utmost importance. Across the enterprise, we support our team members in a range of programs aimed at providing health and wellness support, ongoing learning and development, opportunities to reward and celebrate excellent performance, and foster a diverse and inclusive environment.
•
Communities - Our approach to philanthropy and community investment is both thoughtful and strategic. We work to ensure our giving supports the needs of our local communities, aligns with the passions of our people, and advances our business goals and objectives.
•
Customers and Business Partners - Our long-term strategy is focused on growth and transformation to generate strong cash flow for the health of our business and on behalf of our shareholders. We are also committed to providing a wide range of customers with a reliable supply of high-quality products and outstanding customer service.
•
Environment - We continue our focus on environmental stewardship, and strive to improve operational efficiency and effectiveness to reduce emissions, waste and water use, while pursuing business opportunities that enable efficient use of resources.
•
Government - We are a trusted and credible voice to government, working to find solutions to issues of mutual interest.

Health and Safety

Improving personal and process safety is a core value at Andeavor. We are committed to operating our refineries, pipelines, retail stations and other facilities in a manner that promotes the health and safety of our employees, our customers and the communities where we do business.

The pursuit of continually improving our safety performance led to a program approach, which we call Destination Zero. Our intent is to promulgate a belief across the organization that an incident free workplace is possible, then engaging employees in meaningful ways to achieve it. Increasingly impressive examples of Destination Zero are celebrated, powerfully shared across the Company, and widely recognized.

Our Environmental, Health & Safety policy in conjunction with our Operational Excellence Management System establish metrics, expectations and responsibilities for achieving our goals for the following key areas:

Personal Safety
At Andeavor, we strive to instill a culture of personal responsibility among our employees and contractors by setting clear expectations around our safety standards and policies. We conduct regular audits, assessments and program reviews to ensure these practices are being followed and to identify improvements to enhance our workplace safety.


 
 
December 31, 2017 | 7
Business

Process Safety
Andeavor’s facilities are designed, operated and maintained to be safe work environments. To maintain the integrity of our operating systems, we enforce a disciplined framework that includes comprehensive design, engineering, operating and maintenance practices. We use industry-recognized methodologies to assure process safety and asset integrity, and to reduce the risk of incidents.

Transportation Safety
We rely on industry best practices, internal policies, and persistent evaluation and improvement. Andeavor has proactively led the industry in the safe shipment of crude oil via rail. We worked collaboratively with tank car manufacturers to develop enhanced rail cars that surpass regulatory standards.

Website Access to Reports and Other Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other public filings with the SEC are available, free of charge, on our website ( http://andeavor.com ) as soon as reasonably practicable after we file them with, or furnish them to, the SEC. Information contained on our website is not part of this Annual Report on Form 10-K. You may also access these reports on the SEC’s website at http://www.sec.gov .

ANDV_MARKETINGA02.JPG Marketing

Our Marketing segment sells gasoline and diesel fuel in the western and mid-continent United States through Retail, Branded, and Unbranded channels along with convenience store products in our Retail channel. Our Retail business is made up of company-owned or leased properties offering fuel and convenience store products to end-consumers through company-operated stations and third party-operated stations (“MSOs”). The Branded business is comprised primarily of fuel sales through long-term contracts with Jobbers and Dealers utilizing one of the many successful brands in our portfolio. Our Retail and Branded channels primarily use the ARCO ® , Shell ® , Mobil ™ and SUPERAMERICA ® brands for fuel sales and ampm ® , SUPERAMERICA ® and Giant ® brands for convenience stores. Capturing this brand value results in higher fuel margins for our Marketing segment. Our Unbranded business includes fuel sales through agreements with third-party distributors/operators without an associated fuel brand. The combined use of these channels provides both income from merchandise sales through convenience stores as well as a profitable outlet for the majority of the fuel produced by our refineries. In addition to added profitability, our Marketing business enables our refineries to run optimally, which lowers overall operating costs per barrel.

Fuel Sales Brands
 
 
 
 
 
 
 
 
 
 
 
 
ARCOBRAND.JPG
SHELLBRANDA01.JPG
MOBIL.JPG
SUPERAMERICABRANDA01.JPG
 
 
TESOROLOGOA04.JPG
USAGASOLINELOGO.JPG
 
EXXONLOGO.JPG
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convenience Store Brands
 
 
 
 
 
 
 
 
 
 
 
AMPMBRAND.JPG
SUPERAMERICABRANDA01.JPG
GIANTBRANDA01.JPG
HOWDYSBRAND.JPG

The following provides an overview of our Retail and Branded network:
Fuel Brand
Location (a)
Number of Stations
ARCO ®
AZ, CA, NV, Mexico
996

Shell ®
AZ, CA, CO, IA, ID, MN, NM, NV, OR, SD, TX, UT, WI, WY
834

Exxon ™  and Mobil ™
AZ, CA, CO, ID, MN, ND, NM, NV, OR, TX, UT, WA, WI
475

SUPERAMERICA ®
MN, SD, WI
285

Other (b)
AK, AZ, CA, CO, ID, MN, ND, NM, NV, OR, SD, TX, UT, WA, WY
665

 
 
3,255


(a)
The Marketing segment’s wholesale fuel operations distributes commercial wholesale petroleum products primarily in Arizona, Colorado, Nevada, New Mexico and Texas.
(b)
Other brands include Tesoro ® , USA Gasoline ® , Conoco ® , Giant ® , Rebel ® , Flyers ® , 76 ® , Phillips 66 ® , Thrifty ® , Chevron ® , Mustang ® , Howdy’s ® and Texaco ® .

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Western Refining Acquisition and WNRL Merger

With the Western Refining Acquisition and the subsequent WNRL Merger, our Marketing segment added 544 stations to our branded network, including 457 company-operated stations, and along with other strategic, immaterial acquisitions increased our store count to over 3,250 stations. Beginning in the fourth quarter of 2017 and following the WNRL Merger, our Marketing segment includes the wholesale fuel operations of WNRL for which prior period segment results have been recast to conform to the new presentation.

Mexico

In July 2017, we reached a definitive agreement with Pemex for terminalling and transportation services in Mexico, allowing the potential to supply up to 40 Mbpd of transportation fuels in the states of Sonora and Baja California, Mexico. Also in July, we announced a definitive agreement for the supply of fuel in the states of Sonora and Baja California, Mexico allowing Andeavor to begin wholesale marketing operations in Mexico using the ARCO ® brand. These agreements support our integrated value chain by extending the marketing presence into the growing market in Mexico. We expect to increase our marketing presence across the entire northern part of Mexico over the next few years.

Competition

We sell gasoline through our network of branded retail stations as well as on an unbranded or wholesale basis. Our marketing operations compete with other independent marketers, integrated oil companies and high-volume retailers. Competitive factors that affect our Marketing segment include product price, location, convenience and brand appeal.

ANDXTERMINALLINGA03.JPG ANDX_GATHERINGA04.JPG ANDX_PROCESSINGA03.JPG Logistics

Overview
Our Logistics segment includes the operations of Andeavor Logistics with the exception of the wholesale fuel business acquired as part of the WNRL Merger. This wholesale fuel sales business is included in our Marketing segment.

Terminalling and Transportation
Andeavor Logistics’ terminalling and transportation business consists of the following assets and operations:
Asset
Number of Terminals
Location
Key Products Handled
Volume Source
Terminalling Throughput Capacity (Mbpd)
Storage Capacity (thousand barrels)
Pipeline Mileage
Land Terminals
44
AK, AZ, CA, ID, MN, NM, TX, UT, WA
Crude Oil, Refined Products, Asphalt
Andeavor, Third-Party
1,263

44,957

—

Marine Terminals
6
CA, WA
Crude Oil, Refined Products
Andeavor, Third-Party
955

2,900

—

Northwest Products System
—
ID, UT, WA
Refined Products
Andeavor, Third-Party
—

—

1,201

Southern California System
—
CA
Crude Oil, Natural Gas, Refined Product
Andeavor, Third-Party
—

—

216

Kenai Pipeline
—
AK
Refined Products
Andeavor
—

—

74

Salt Lake City Short-haul
—
UT
Crude Oil, Refined Products
Andeavor
—

—

22

Petroleum Coke Handling (a)
1
CA
Petroleum Coke
Andeavor
—

—

—

 
51
 
 
 
2,218

47,857

1,513


(a)
Our Petroleum Coke handling facility has capacity of 2,600 metric tons per day.

The terminalling and transportation business generates revenues by charging our customers fees for:

•
providing storage services;
•
transporting refined products;

 
 
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•
delivering crude oil, refined products and intermediate feedstocks from vessels to refineries and terminals;
•
loading and unloading crude oil transported by unit train to Andeavor’s Anacortes refinery;
•
loading and unloading from marine vessels and barges;
•
transferring refined products from terminals to trucks, barges, rail cars and pipelines;
•
providing ancillary services, ethanol blending and additive injection; and
•
handling petroleum coke for Andeavor’s Los Angeles refinery.

Andeavor Logistics typically enters into long-term contractual arrangements with customers for the provision of services. Many of these contracts have minimum volume commitments that must be met by the customer over a period of time. As of December 31, 2017, 90% of total shell capacity is dedicated for use by a specific customer. These commitments and dedications provide the terminalling and transportation business with stable, fee-based cash flow limiting the impact of seasonality.

Andeavor and its affiliates represent Andeavor Logistics’ largest customer. Approximately 92% of Andeavor Logistics’ terminalling and transportation revenues were from Andeavor and its affiliates, most of which were derived from contracts that include minimum volume commitments, and has provided approximately 43.1 million barrels of dedicated storage capacity for Andeavor’s refining operations under various agreements.

Gathering and Processing
Andeavor Logistics’ gathering and processing business consists of the following assets and operations:
System
Location
Key Products Handled
Volume Source
Processing Throughput Capacity (a)
(MMcf/d)
Pipeline
Mileage (b)
High Plains
MT, ND
Crude Oil
Andeavor, Third-Party
—

1,035

Southwest
NM, TX
Crude Oil
Andeavor, Third-Party
—

913

North Dakota
ND
Crude Oil, Natural Gas, Produced Water
Andeavor, Third-Party
170

780

Uinta Basin
UT
Natural Gas
Andeavor, Third-Party
650

635

Green River
WY
Crude Oil, Natural Gas
Andeavor, Third-Party
850

587

Vermillion
CO, UT, WY
Natural Gas
Third-Party
57

482

 
 
 
 
1,727

4,432


(a)
Andeavor Logistics has fractionation throughput capacity at its Blacks Fork, Robinson Lake and Belfield complexes of 15.0 Mbpd, 11.5 Mbpd and 7.2 Mbpd, respectively.
(b)
The pipeline mileage associated with our equity method investments is not included in the table. Our equity method investments are discussed below.

Andeavor Logistics generates gathering and processing revenues by charging our customers fees for:

•
gathering and transporting crude oil, natural gas and produced water;
•
operating storage facilities with tanks located in strategic areas;
•
operating truck-based crude oil gathering; and
•
processing gas under fee-based processing and percentage-of-proceeds agreements.

Certain equity method investments that contribute to Andeavor Logistics’ gathering and processing systems including investments in:

•
RGS which operates the infrastructure that transports gas along 333 miles of pipeline from certain fields to several re-delivery points, including natural gas processing facilities that are owned by Andeavor Logistics or a third party;
•
TRG which transports natural gas across 52 miles of pipeline to our natural gas processing facilities in the Uinta Basin; and
•
UBFS which operates 78 miles of gathering pipeline and gas compression assets located in the southeastern Uinta Basin.

Andeavor Logistics derived 24% of its gathering and processing revenues from Andeavor and its affiliates. Andeavor Logistics process gas for certain producers under keep-whole processing agreements. Approximately 23% of Andeavor Logistics’ processing throughput capacity is currently supported by long-term, fee-based processing agreements with minimum volume commitments.


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WNRL Assets and Operations

Terminalling and Transportation
Through the WNRL Merger, Andeavor Logistics’ terminalling and transportation business expanded to include the following WNRL assets and related operations:

•
Refined products terminals located in El Paso, Texas; Albuquerque, Bloomfield and Gallup, New Mexico; and St. Paul Park, Minnesota. The terminals distribute refined products supplied by an Andeavor refinery through truck loading racks, barge facilities, rail and other logistics assets;
•
Storage facilities located in El Paso, Gallup and St. Paul Park. Each facility is located adjacent to an Andeavor refinery and provides storage and transfer services required to support the refinery’s operations; and
•
Asphalt terminalling and processing services at our asphalt plant and terminal in El Paso, as well as at three stand-alone asphalt terminals in Albuquerque and Phoenix and Tucson, Arizona. The El Paso asphalt plant is located adjacent to Andeavor’s El Paso refinery. WNRL’s assets also include a fleet of asphalt trucks, which are utilized to deliver asphalt to Andeavor's asphalt terminals and third-party customers.

Gathering and Processing
Additionally from the WNRL Merger, Andeavor Logistics’ gathering and processing business expanded to include the following WNRL assets and related operations:

•
Four Corners System - A pipeline system which includes pipelines in Northwestern New Mexico that gather and transport crude oil and condensate produced in the Four Corners area and deliver it to Andeavor’s Gallup refinery or to the TexNew Mex pipeline system. This Four Corners area crude oil is received at our Bloomfield terminal and at crude oil stations we own located in Bisti, Lybrook, Pettigrew and Star Lake, New Mexico;
•
Permian Basin System - A pipeline system which includes the Delaware Basin system and other crude oil gathering assets in West Texas. It consists of 39 miles of pipelines located in Southeast New Mexico and West Texas and handles crude oil produced in the Delaware Basin. The system includes other crude gathering assets in West Texas that handle crude oil produced in the Permian Basin. The TexNew Mex pipeline extends 299 miles from our Four Corners system to the Delaware Basin; and
•
Crude Trucking - A fleet of crude oil trucks, which are utilized to gather, transport and deliver crude oil from collection points in Colorado, New Mexico and Utah to Andeavor’s El Paso and Gallup refineries and their interconnected pipelines.

Competition

Andeavor Logistics’ competition primarily comes from independent terminal and pipeline companies, integrated petroleum companies, refining and marketing companies and distribution companies with marketing and trading arms. Competition in particular geographic areas is affected primarily by the volumes of refined products produced by refineries located in those areas, the availability of refined products and the cost of transportation to those areas from refineries located in other areas.

Andeavor Logistics may compete with third-party terminals for volumes in excess of minimum volume commitments under its commercial agreements with us and third-party customers as other terminals and pipelines may be able to supply our refineries or end user markets on a more competitive basis, due to terminal location, price, versatility and services provided. If our customers reduced their purchases of refined products from us due to the increased availability of less expensive product from other suppliers or for other reasons, we may only receive or deliver the minimum volumes through Andeavor Logistics’ terminals (or pay the shortfall payment if we do not deliver the minimum volumes), which would decrease our revenues.

Andeavor Logistics’ common carrier crude oil gathering and transport systems consist of common carrier pipelines in North Dakota and Montana (“High Plains System”) and common carrier pipelines in New Mexico and Texas (“Southwest System”), which gather and transport crude oil into major regional takeaway pipelines and refining centers. The High Plains System and Southwest System compete with a number of transportation companies for gathering and transporting crude oil produced in the Bakken Shale/Williston Basin area of North Dakota and Montana (“Bakken Region”) and the Delaware and Midland Basins (“Southwest Region”), respectively. Andeavor Logistics may also compete for opportunities to build gathering lines from producers or other pipeline companies. Other companies have existing pipelines that are available to ship crude oil and continue to (or have announced their intent to) expand their pipeline systems in the Bakken and Southwest Regions. Andeavor Logistics also competes with third-party carriers that deliver crude oil by truck.

Although Andeavor Logistics competes for third-party shipments of crude oil on the High Plains System and Southwest System, contractual relationships with us under the High Plains transportation services agreement (the “High Plains Pipeline Transportation Services Agreement”), Southwest pipeline and gathering services agreement (the “Southwest Pipeline and Gathering Services Agreement”) and related connections to our refineries provide a strong competitive position in the regions.


 
 
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Andeavor Logistics’ competitors for natural gas gathering and processing include other midstream companies and producers. Competition for natural gas volumes and processing is primarily based on reputation, commercial terms, reliability, service levels, flexibility, access to markets, location, available capacity, capital expenditures and fuel efficiencies. In addition to competing for crude oil and natural gas volumes, Andeavor Logistics faces competition for customer markets, which is primarily based on the proximity of the pipelines to the markets, price and assurance of supply.

Safety

Terminal Safety
Terminal operations are subject to regulations under OSHA and comparable state and local regulations. Terminal facilities are operated in a manner consistent with industry safe practices and standards. The storage tanks that are at Andeavor Logistics’ terminals are designed for crude oil and refined products and are equipped with appropriate controls that minimize emissions and promote safety. Terminal facilities have response and control plans, spill prevention and other programs to respond to emergencies. Terminals are regulated under the Homeland Standards or USCG Transportation Act, which are designed to regulate the security of high–risk chemical facilities.

Pipeline Safety
Pipelines, gathering systems and terminal operations are subject to increasingly strict safety laws and regulations. The transportation and storage of refined products, natural gas and crude oil involve a risk that hazardous liquids or natural gas may be released into the environment, potentially causing harm to the public or the environment. The U.S. Department of Transportation, through the PHMSA and state agencies, enforces safety regulations governing the design, construction, operation, maintenance, inspection and management of our pipeline and storage facilities. These regulations require the development and implementation of pipeline integrity management programs, which include the inspection and testing of pipelines and the investigation of anomalies and if necessary, corrective action. These regulations also require that pipeline operation and maintenance personnel meet certain qualifications and that pipeline operators develop comprehensive spill response plans, including extensive spill response training for pipeline personnel.

Andeavor Logistics may incur significant costs and liabilities associated with repair, remediation, preventative or mitigation measures associated with its pipelines. These costs and liabilities might relate to repair, remediation, preventative or mitigating actions that may be determined to be necessary as a result of the testing program, as well as lost cash flows resulting from shutting down our pipelines during such repairs. Additionally, if Andeavor Logistics fails to comply with PHMSA or comparable state regulations, it could be subject to penalties and fines. If future PHMSA regulations impose new regulatory requirements on our assets, the costs associated with compliance could have a material effect on Andeavor Logistics’ operations.

While Andeavor Logistics operates and maintains pipelines consistent with applicable regulatory and industry standards, it cannot predict the outcome of legislative or regulatory initiatives, which could have a material effect on its operations, particularly by extending more stringent and comprehensive safety regulations to pipelines and gathering lines not previously subject to such requirements. While Andeavor Logistics expects any legislative or regulatory changes to allow us time to comply with new requirements, costs associated with compliance may have a material effect on operations.

Rail Safety
Andeavor Logistics’ rail operations are limited to loading and unloading rail cars at our facilities. Generally, rail operations are subject to federal, state and local regulations. Andeavor Logistics believes its rail car loading and unloading operations meet or exceed all applicable regulations.

Natural Gas Plant Safety
Natural gas processing plants and operations are subject to safety regulations under OSHA and comparable state and local requirements. A number of Andeavor Logistics’ natural gas processing facilities are also subject to OSHA’s process safety management regulations and the EPA’s risk management plan requirements. Together these regulations are designed to prevent or minimize the probability and consequences of an accidental release of toxic, reactive, flammable or explosive chemicals. A number of our facilities are also regulated under the Homeland Standards, which are designed to regulate the security of high-risk chemical facilities. Andeavor Logistics’ natural gas processing plants and operations are operated in a manner consistent with industry safe practices and standards.

ANDVREFININGA02.JPG Refining

Overview
We currently own and operate ten petroleum refineries located in the western and mid-continent United States with a combined crude oil capacity of approximately 1.2 million barrels per day. Our Refining segment buys and refines crude oil and other feedstocks into transportation fuels that we sell to a wide variety of customers. Demand for gasoline is higher during the spring and summer months than during the fall and winter months in most of our markets due to seasonal changes in vehicle miles

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traveled. As a result, our operating results for both the Refining and Marketing segments for the first and fourth quarters are typically lower than the second and third quarters.

Regions
We currently operate the Refining segment in three separate regions: California, Pacific Northwest and Mid-Continent. Our geographic footprint and physically integrated logistics and marketing businesses enable our refineries to interact across these regions providing higher asset utilization and lower operating costs while maintaining well-balanced product supplies to better serve our customers.

Feedstock Purchases
We purchase crude oil and other feedstocks from domestic and foreign sources either through the spot market or term agreements with renewal provisions and volume commitments. The domestic crude oil we purchase, which makes up 67% of our purchases based on volumes, is produced primarily in North Dakota, Alaska, California, Texas, New Mexico, Utah and Wyoming. The remaining 33% of our purchases consists of foreign crude oil produced in South America, the Middle East, Canada, western Africa, Asia and other locations.

Our refineries process both heavy and light crude oil. Light crude oil, when refined, produces a greater proportion of higher value transportation fuels such as gasoline, diesel and jet fuel, and as a result is typically more expensive than heavy crude oil. In contrast, heavy crude oil produces more low value by-products and heavy residual oils. These lower value products can be upgraded to higher value products through additional, more complex and expensive refining processes.

Refined Products
The total products produced in the refining process are referred to as the refining yield. The refining yield consists primarily of transportation fuels, including gasoline and gasoline blendstocks, jet fuel and diesel fuel, but may also include other products such as heavy fuel oils, liquefied petroleum gas, petroleum coke, calcined coke and asphalt.
 
Major Units (a)
Throughput by
Crude Type (Mbpd) (b)
Yield (Mbpd)
Refinery (Capacity - Mbpd)
Crude
Catalytic Cracking
Hydro-cracker
Coker
Light
Heavy
Other
Total
Gas
Diesel
Jet fuel
Other (c)
Total (d)
California Region:
 
 
 
 
 
 
 
 
 
 
 
 
 
Los Angeles, California (380)
ü
ü

ü

ü

300
48
34
382
214
68
71
36
389
Martinez, California (166)
ü

ü

ü

ü

25
108
8
141
70
50
—
26
146
Pacific Northwest Region:
 
 
 
 
 
 
 
 
 
 
 
 
 
Anacortes, Washington (120)
ü

ü

 
 
101
9
13
123
63
27
17
14
121
Kenai, Alaska (72)
ü

 
ü

 
62
—
2
64
18
7
22
16
63
Mid-Continent Region:
 
 
 
 
 
 
 
 
 
 
 
 
 
El Paso, Texas (135)
ü

ü

 
 
120
—
5
125
70
38
11
6
125
St. Paul Park, Minnesota (102)
ü
ü
 
 
75
27
2
104
53
29
7
15
104
Mandan, North Dakota (74)
ü

ü

 
 
59
—
1
60
34
19
4
2
59
Salt Lake City, Utah (63)
ü

ü

 
 
59
—
3
62
36
17
8
1
62
Gallup, New Mexico (25)
ü

ü

 
 
26
—
1
27
19
9
—
1
29
Dickinson, North Dakota (20)
ü

ü

 
 
14
—
—
14
4
6
—
3
13

(a)
Our refineries operate other units such as vacuum distillation, naptha reforming, hydrotreating, butane isomerization, deasphalting, and alkylation units. The table above provides an overview of the largest units at each refinery.
(b)
The throughput and yield amounts for the El Paso, St. Paul Park and Gallup refineries are calculated based on volumes from June 1, 2017 through December 31, 2017 and divided by 214 days.
(c)
The majority of internally produced fuel is consumed during the refining process.
(d)
Refined product sales may exceed our yield due to purchased refined products.


 
 
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Logistics Assets

Terminal and Pipelines
We transport, store and distribute crude oil, feedstocks and refined products through our terminals and pipelines or terminals and pipelines owned by Andeavor Logistics and third-parties in our market areas as well as through purchases and exchange arrangements with other refining and marketing companies. Our refineries are integrated with each other via pipelines, terminals and barges. The transportation links that connect our refineries allow for movement of intermediate and finished products, which permit us to optimize our value chain and maximize utilization.

Marine
We charter tankers to optimize the transportation of crude oil, feedstocks, and refined products to support our refinery system and ensure adequate shipping capacity. Our current U.S.-flag and foreign-flag tanker time charters will expire with varying dates between 2018 and 2022 , unless we exercise renewal options. We also time charter tug and barge units and a ship assist tug with varying expiration dates through 2018 , unless we exercise renewal options. We continually look to optimize our marine fleet and minimize costs, and from time to time we sub-charter vessels in our fleet to third-parties to maintain high utilization. All of our chartered tankers and barges are double-hulled.

Rail
We maintain a fleet of leased rail cars to transport crude and refined products in support of our refining operations.

Refined Product Sales

Our Marketing segment provides a committed outlet for the majority of gasoline as well as some of the diesel fuel produced by our refineries; however, we also sell gasoline and gasoline blendstocks, jet fuel, diesel fuel, heavy fuel oils and residual products in the western and mid-continental U.S. and northern Mexico. We also export bulk shipments of products into certain foreign markets. Our bulk sales are primarily to independent unbranded distributors, other refining and marketing companies, utilities, railroads, airlines and marine and industrial end-users. Our sales include refined products that we manufacture, purchase or receive through exchange arrangements.

Sales of Purchased Products
In the normal course of business, we purchase refined products manufactured by others for resale through our marketing and bulk operations to our customers to meet local market demands and fulfill supply commitments. We purchase these refined products, primarily gasoline, jet fuel, diesel fuel and industrial and marine fuel blendstocks, mainly in the spot market.

Competition

We obtain most of our crude oil from third-party sources and compete in the world market for the crude oil and feedstocks we process, and for the customers who purchase refined products. The availability and cost of crude oil and other feedstocks, as well as the prices of the products we produce, are heavily influenced by global supply and demand dynamics.

We compete with other refiners and with importers for customers in our market areas including sales of our distillate production through wholesale and bulk channels. Competition and concentrations specific to each of our refineries are:

•
Our Martinez, Los Angeles and Anacortes refineries compete with several refiners in the U.S., Canada and throughout the Pacific Rim;
•
Our Kenai refinery competes with two other in-state refineries along with refineries on the West Coast and in Asia. Our jet fuel sales in Alaska are concentrated in Anchorage, where we are one of the principal suppliers at the Anchorage International Airport; and
•
Our mid-continent refineries in Mandan, Dickinson, Salt Lake City, El Paso, Gallup and St. Paul Park compete with supplies provided from refineries in surrounding states and pipeline supply from the Midwest and Gulf Coast regions.

Government Regulation and Legislation

Regulatory Controls and Expenditures
Like other companies engaged in similar businesses, we are subject to extensive and frequently changing federal, state, regional and local laws, regulations and ordinances relating to the environment, including those governing emissions or discharges to land, air and water, the handling and disposal of solid and hazardous wastes and the remediation of contamination. While we believe our facilities are in substantial compliance with current requirements, we will continue to engage in efforts to meet new legislative and regulatory requirements applicable to our operations. Compliance with these laws and regulations may require us to make significant expenditures.


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For example:

•
The EPA has promulgated multiple regulations to control greenhouse gas emissions under the Federal Clean Air Act. The first of these regulations, finalized on April 1, 2010, set standards for the control of greenhouse gas emissions from light trucks and cars. The U.S. Congress may also consider legislation regarding greenhouse gas emissions in the future.
•
The Energy Independence and Security Act of 2007 mandates the blending of increasing amounts of renewable fuels in the supply of transportation fuels used domestically. This use of renewable fuels is required of all manufacturers and importers of transportation fuels sold domestically. The EPA implemented the RFS2 through regulation and RFS2 requires transportation fuel manufacturers to provide proof of purchase of these renewable fuels. The costs associated with RFS2 compliance are uncertain and fluctuate with market dynamics.
•
The EPA finalized amendments to the Clean Air Act Risk Management Planning regulations in 2016 significantly expanding the regulatory requirements.
•
The DOT issued new regulations in 2015 governing the design of rail cars used to transport petroleum and other materials.
•
In California, SB 32 set a new greenhouse gas emission reduction requirement of 40% below 1990 levels by 2030. AB 197 mandated direct emission reductions of greenhouse gases from large stationary sources such as our refineries. AB 32, previously created a statewide cap on greenhouse gas emissions now replaced by SB 32 but also created a low carbon fuel standard, which requires a 10% reduction in the carbon intensity of fuels by 2020.
•
In California, the Board for the South Coast Air Quality Management District passed amendments to RECLAIM on December 4, 2015. The RECLAIM Amendments became effective in 2016 and required a staged reduction of Nitrogen Oxides through 2022.
•
In California, new and expanded Process Safety Management and Refinery Safety and Prevention regulations were proposed in 2016 in response to recommendations made in 2014 by the Governor’s Interagency Refinery Safety Working Group.

The impact of these and other regulatory and legislative developments is likely to result in increased compliance costs, additional operating restrictions on our business and an increase in the cost of the products we manufacture. Depending on market conditions, we may attempt to pass these costs on to consumers. If that is not possible, the changes could have an adverse impact on our financial position, results of operations, and liquidity. We cannot currently determine the amounts of such future impacts. For additional information regarding our environmental matters see “Environmental and Other Matters” in Item 7.

Oil Spill Prevention and Response
We operate in environmentally sensitive coastal waters, where tanker, pipeline, rail cars and other petroleum product transportation operations are regulated by federal, state and local agencies and monitored by environmental interest groups. The transportation of crude oil and refined products involves risk and subjects us to the provisions of the Federal Oil Pollution Act of 1990 and related state requirements, which require that most petroleum refining, transport and storage companies maintain and update various oil spill prevention and oil spill contingency plans. Our spill prevention plans and procedures are frequently reviewed and modified to prevent releases and to minimize potential impacts to land and water should a release occur. We have submitted these plans and received federal and state approvals necessary to comply with the Federal Oil Pollution Act of 1990 and related regulations. At our facilities adjacent to water, federally certified OSROs are available to respond to a spill on water from above ground storage tanks or pipelines. We have contracts in place to ensure support from the respective OSROs for spills in both open and inland waters, as well as on land.

We currently charter tankers to ship crude oil from foreign and domestic sources to our California, Washington and Alaska refineries. The tanker owners contract with OSROs to comply with federal, state and local requirements, except in Alaska where we contract with the OSROs. The OSROs are capable of responding to an oil spill equal to the greatest tanker volume delivering crude oil to our refineries. Those volumes range from 350,000 barrels to two million barrels.

We have entered into spill-response contracts with various OSROs to provide spill-response services, if required, to respond to a spill of oil originating from our facilities. We have spill-response agreements in Alaska with Cook Inlet Spill Prevention and Response, Incorporated and with Alyeska Pipeline Service Company. We also have entered into contracts with Marine Spill Response Corporation for the San Francisco Bay, Puget Sound, the Port of Los Angeles and the Port of Long Beach, and the Clean Rivers Cooperative, Inc. for the Columbia River, and Bay West, Inc. in our Mid-Continent region, which includes our new St. Paul Park refinery. We contract with H2O Environmental, Inc. for our El Paso and Gallup refineries which are supplied by pipeline. These OSROs are capable of responding to an oil spill on water equal to the greatest volume above ground storage tank at our facilities or pipelines. Those volumes range from 50,000 to 600,000 barrels. We also contract with one spill-response organization outside the U.S. to support our shipments in foreign waters. In addition, we contract with various spill-response specialists to ensure appropriate expertise is available for any contingency. We believe these contracts provide the additional services necessary to meet or exceed all regulatory spill-response requirements and support our commitment to environmental stewardship.

The OSROs we contract with have the highest available rating and certification from the U.S. Coast Guard and are required to annually demonstrate their response capability to the U.S. Coast Guard and state agencies. We maintain our own spill-response

 
 
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resources to mitigate the impact of a spill from a tanker at our refineries until an OSRO can deploy its resources. Our spill response capability meets the U.S. Coast Guard and state requirements to either deploy on-water containment equipment two and one-half times the length of a vessel at our dock or have smaller vessels available.

The services provided by the OSROs principally consist of operating response-related equipment, managing certain aspects of a response and providing technical expertise. The OSROs provide various resources in response to an oil spill. The resources include dedicated vessels that have skimming equipment to recover oil, storage barges to temporarily store recovered oil, containment boom to control the spread of oil on water and land and to protect shorelines, and various pumps and other equipment supporting oil recovery efforts and the protection of natural resources. The OSROs have full-time personnel and contract with third parties to provide additional personnel when needed.

As a general matter, our agreements with these organizations do not contain specific physical or financial limitations. General physical limitations of these organizations would include the geographical area for which services are available and the amount of resources available at the initiation of a request for services or the duration of response and recovery efforts.

Additionally, we require all tankers and barges engaged in moving crude oil, heavy and finished products to be double hulled. All vessels used by us to transport crude oil and refined products over water are examined or evaluated and subject to our approval prior to their use.

Rail Car Safety
Andeavor maintains a fleet of leased rail cars to transport crude and support our refining operations. Generally, rail operations are subject to federal, state and local regulations. Andeavor has a significant number of new DOT120J200 tank cars in its crude oil fleet, which exceed the new federal standards issued by the DOT during 2015. The DOT regulations allow for an orderly phase out or retrofit of previous generation rail cars. We have retrofitted a significant portion of the previous generation of rail cars in our fleet to the new DOT117 standard. Andeavor will continue to comply with all regulatory requirements and explore and invest in tank car technology that provides a shared value for Andeavor, our rail carriers and the communities where we operate.

Regulation of Pipelines
Operations on portions of our pipelines are regulated by state agencies in Alaska and California. In addition, Andeavor Logistics owns and operates crude oil, refined product and natural gas pipelines, which are common carriers regulated by various federal, state and local agencies. The FERC regulates interstate transportation on Andeavor Logistics’ Four Corners System, High Plains System, Northwest Products Pipeline and natural gas pipeline, Permian Basin System and TexNew Mex System under the Interstate Commerce Act, the Energy Policy Act of 1992 and the rules and regulations promulgated under those laws.

Federal regulation of interstate pipelines extends to such matters as rates, services, and terms and conditions of service; the types of services offered to customers; the certification and construction of new facilities; the acquisition, extension, disposition or abandonment of facilities; the maintenance of accounts and records; relationships between affiliated companies; the initiation and continuation of services; market manipulation in connection with interstate sales, purchases or transportation of commodities; and participation by interstate pipelines in cash management arrangements.

The intrastate operation of Andeavor Logistics’ Alaska pipeline is regulated by the Regulatory Commission of Alaska. The state regulatory authorities require that we notify shippers of proposed tariff increases to provide the shippers an opportunity to protest the increases. In addition to challenges to new or proposed rates, challenges to existing intrastate rates are permitted by complaint of an interested person or by independent action of the appropriate regulatory authority. The intrastate operations of Andeavor Logistics’ High Plains System in North Dakota are regulated by the North Dakota Public Service Commission, its operations in the Four Corners system in New Mexico are regulated by the New Mexico Public Service Commission and its Permian Basin system operations in New Mexico and Texas are regulated by both the New Mexico Public Service Commission and the Texas Rail Commission. Applicable state law requires that pipelines operate as common carriers, that access to transportation services and pipeline rates be non-discriminatory, that if more crude oil is offered for transportation than can be transported immediately the crude oil volumes transported be apportioned equitably and that pipeline rates be just and reasonable.

Executive Officers

The following is a list of our executive officers, their ages and their positions at Andeavor, effective as of February 21, 2018 . There are no family relationships among the officers listed and there are no arrangements or understandings pursuant to which any of them were elected as officers. Officers are elected annually by our Board in conjunction with the annual meeting of stockholders. The term of each office runs until the corresponding meeting of the Board in the next year or until a successor has been elected or qualified. Positions held for at least the past five years for each of our executive officers are described below (positions, unless otherwise specified, are with Andeavor).

Gregory J. Goff , 61 , has served as our President and Chief Executive Officer since May 2010 and as our Chairman since December 31, 2014. Since December 2011, Mr. Goff has also served as Chairman of the Board of Directors and Chief Executive Officer of Tesoro Logistics GP, LLC, the general partner of Andeavor Logistics. Prior to joining us, Mr. Goff served as Senior Vice

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President, Commercial for ConocoPhillips Corporation, an international, integrated energy company, from 2008 to 2010. Mr. Goff also held various other positions at ConocoPhillips from 1981 to 2008, including Managing Director and CEO of Conoco JET Nordic from 1998 to 2000; Chairman and Managing Director of Conoco Limited, a UK-based refining and marketing affiliate, from 2000 to 2002; President of ConocoPhillips Europe and Asia Pacific downstream operations from 2002 to 2004; President of ConocoPhillips U.S. Lower 48 and Latin America exploration and production business from 2004 to 2006; and President of ConocoPhillips specialty businesses and business development from 2006 to 2008. Mr. Goff is a member of the board of directors of the American Fuel and Petrochemical Manufacturers trade association and on the National Advisory Board of the University of Utah Business School. Previously, Mr. Goff served on the board of Chevron Phillips Chemical Company and was a member of the upstream and downstream committees of the American Petroleum Institute. In addition, Mr. Goff has public company experience from his current and prior service on several public company boards. Mr. Goff holds a Bachelor’s degree in Science and a Master’s degree in Business Administration from the University of Utah.

Keith M. Casey , 51 , has served as our Executive Vice President, Commercial and Value Chain, since May 2017, having previously served as Executive Vice President, Marketing and Commercial from August 2016 to May 2017, as Executive Vice President, Operations from May 2014 to August 2016, and as Senior Vice President, Strategy and Business Development from April 2013 to May 2014. Before joining Andeavor, Mr. Casey served as Vice President, BP Products North America, Texas City Refinery beginning in September 2006. Mr. Casey holds a Bachelor of Science in Metallurgical and Materials Engineering from California Polytechnic State University San Luis Obispo.

Michael J. Morrison , 60 , has served as Senior Vice President, Marketing since April 2016. Prior to that, he served at Conoco, ConocoPhillips and Phillips 66 for more than 30 years in various strategic and leadership roles within marketing, strategy, logistics, optimization, and commercial supply and trading including most recently, as Global Crude Oil Trading Lead and Lead Executive for the London office of Phillips 66. Mr. Morrison holds a Master of Business Administration degree from the University of Missouri and a Bachelor of Arts degree in Economics from DePauw University.

Kim K.W. Rucker , 51 , has served as Executive Vice President, General Counsel and Secretary since March 2016. Prior to joining Andeavor, Ms. Rucker served as Executive Vice President, Corporate & Legal Affairs, General Counsel and Corporate Secretary of Kraft Foods Group, Inc., a food and beverage company, from October 2012 until July 2015. She joined Mondelēz International as Executive Vice President, Corporate & Legal Affairs, Kraft Foods North America in September 2012. Prior to that, Ms. Rucker served as Senior Vice President, General Counsel and Chief Compliance Officer of Avon Products, Inc., a global manufacturer of beauty and related products, beginning in March 2008, and assumed additional duties as Corporate Secretary in February 2009. Ms. Rucker also served as Senior Vice President, Secretary and Chief Governance Officer of Energy Future Holdings Corp. (formerly TXU Corp.), an energy company, from 2004 to 2008. She was also Corporate Counsel for Kimberly-Clark Corporation and a Partner in the Corporate & Securities group at the law firm of Sidley Austin LLP. Ms. Rucker serves on the board of directors of Lennox International Inc. She holds a Bachelor of Business Administration degree in Economics from the University of Iowa, a law degree from the Harvard Law School and a Master in Public Policy degree from the John F. Kennedy School of Government at Harvard University.

Steven M. Sterin , 46 , has served as Executive Vice President and Chief Financial Officer since August 2014. From August 2016 to May 2017, he also led corporate development in support of our growth plans. Mr. Sterin also serves as President, Chief Financial Officer and Director of Tesoro Logistics GP, LLC, the general partner of Andeavor Logistics. Prior to joining Andeavor, Mr. Sterin served as the Senior Vice President and Chief Financial Officer of Celanese Corporation, a global technology and specialty material company, from July 2007 until May 2014 and continued to serve as an employee until August 2014. From December 2010 through January 2013, he was President of Celanese’s Advanced Fuel Technologies business. Mr. Sterin joined Celanese in 2003 as Director of Finance and Controller for the company’s chemical business and served as Corporate Controller and Principal Accounting Officer before being appointed Chief Financial Officer in 2007. Before Celanese, Mr. Sterin spent six years with global chemicals company Reichhold, Inc., a subsidiary of Dainippon Ink & Chemicals, in a variety of financial positions, including Director of Tax and Treasury in the Netherlands, Global Treasurer and Vice President of Finance for one of the company’s divisions in North Carolina. He started his professional career at Price Waterhouse in 1995. Mr. Sterin has nearly 20 years of financial leadership and over 10 years of large public company chief financial officer experience. He has also served as a member of the Dean’s advisory council at the Red McCombs School of Business (University of Texas at Austin). Mr. Sterin holds a Master of Professional Accounting degree and a Bachelor of Business Administration degree in Accounting, from the University of Texas at Austin. He is also a certified public accountant in Texas.

Cynthia J. Warner , 59 , has served as Executive Vice President, Operations since August 2016. Prior to her current role, Mrs. Warner served as Executive Vice President, Strategy and Business Development from October 2014 to August 2016. Before joining Andeavor, Mrs. Warner served as President, Chief Executive Officer, and Chairman of the Board of Sapphire Energy beginning in 2009. Ms. Warner is a non-executive director for IDEX Corporation and also serves on the board of the National Manufacturer’s Association and the Vanderbilt University School of Engineering Board of Visitors. She is a member of the National Petroleum Council. Ms. Warner holds a Bachelor of Engineering in Chemical Engineering from Vanderbilt University and a Master of Business Administration degree from the Illinois Institute of Technology.

Blane W. Peery , 51 , has served as Vice President and Controller of Andeavor and Tesoro Logistics GP, LLC since November 2016. Prior to that, he served as Vice President, Process Excellence and Chief Information Officer from February 2015 through

 
 
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October 2016. From March 2014 to February 2015, Mr. Peery served as VP, Global Business Services at Mylan N.V., a leading global pharmaceutical company. Prior to that he worked for Celanese Corporation, a global technology and specialty materials company, for over 20 years in roles with increasing responsibility, including positions as its Vice President, Global Business Services from October 2012 to March 2014 and its Vice President, Supply Chain from October 2011 to October 2012. Mr. Peery is a Certified Public Accountant (CPA), as well as a Certified Management Accountant (CMA) and Certified in Financial Management (CFM). Mr. Peery holds a Bachelor of Business Administration degree in Accounting from the University of Texas at Austin.

Stephan E. Tompsett , 41 , has served as Vice President and Treasurer of Andeavor and Tesoro Logistics GP, LLC since August 2016. He previously served as Chief Financial Officer, Logistics for a subsidiary of Andeavor from May 2015 to August 2016. Prior to that time, Mr. Tompsett served in a variety of finance roles at Energy Transfer Partners from February 2011 to May 2015. From September 2008 to January 2011, he was Vice President, Corporate Development at Synthesis Energy Systems. He was an associate at JPMorgan from July 2005 to August 2008. Mr. Tompsett holds a Master of Business Administration degree from the Red McCombs School of Business at University of Texas at Austin, and a Bachelor of Science degree in Biology and Mathematics from the University of Texas at Austin.

Item 1A.
Risk Factors

The volatility of crude oil prices, refined product prices and natural gas and electrical power prices may have a material adverse effect on our cash flow and results of operations.

Our refining margins are influenced by the price of our refining feedstocks-crude oil and other feedstocks-and the price of our refined products. These prices often move independently of each other, which can negatively impact our margins, earnings or cash flows. In recent years, prices have fluctuated significantly due to global and local factors that are beyond our control, including:

•
production and availability of foreign and domestic crude oil and refined products;
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production controls set and maintained by the members of the Organization of the Petroleum Exporting Countries;
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transportation infrastructure availability, local market conditions, operation levels of other refineries in our markets, and the import or export of crude and refined products;
•
political instability, threatened or actual terrorist incidents, acts of war, and other global political conditions;
•
domestic and foreign governmental regulations and taxes;
•
the price, availability and efficiency of competing energy sources;
•
local, regional, national and worldwide economic conditions; and
•
weather conditions, hurricanes or other natural disasters.

Some of these factors can vary by region and may change quickly, adding to market volatility, while others may have longer-term effects. The long-term effects of these and other factors on prices for crude oil, refinery feedstocks and refined products are uncertain and could negatively impact our margins, earnings or financial condition.

The short-term effects of these fluctuations could affect our margins, earnings and cash flows. We purchase our refinery feedstocks weeks before manufacturing and selling the refined products. Price level changes during the period between purchasing feedstocks and selling the refined products could affect our margins, earnings or cash flows. In addition, we purchase refined products manufactured by others to sell to our customers. If we are unable to manage our commodity exposure risk, it could affect our business, financial condition and results of operations. Lower refining margins may reduce the amount of refined products we produce, which may reduce our revenues, income from operations or cash flows. Significant reductions in margins could require us to reduce our capital expenditures or impair the carrying value of our assets.

Volatile prices for natural gas and electricity used by our refineries and other operations affect manufacturing and operating costs. Natural gas and electricity prices have been, and will continue to be, affected by supply and demand for fuel and utility services in both local and regional markets. In addition, the volume of crude oil, refined products, natural gas and NGLs that Andeavor Logistics distributes and stores at its terminals, transports and processes depends substantially on our and other customers’ profit margins, the market price of crude oil, natural gas, NGLs and other refinery feedstocks, and product demand.

Federal tax reform could adversely affect our business.

On December 22, 2017, President Trump signed major tax legislation into law under the Tax Act. The Tax Act, known informally as the Tax Cuts and Jobs Act, reduces the statutory rate of U.S. federal corporate income tax to 21% and enacts numerous other changes impacting us and the oil and gas industry. We cannot predict the impact these changes will have on our business; however, it is possible that these changes could adversely affect our business, our cash flows, our profitability and our ability to compete domestically and internationally.

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Risk Factors

The reduction in the statutory U.S. federal corporate income rate is expected to positively impact our future U.S. after-tax earnings. Other changes in the Tax Act that broaden the tax base by reducing or eliminating deduction for certain items (e.g., reductions to dividends received deductions, elimination of deductions for income attributable to domestic production activities, limitations on business interest expense deduction, and limitations on the deduction of certain executive compensation costs) will offset a portion of the benefits from the lower statutory rate. The overall impact of the Tax Act is subject to the effect of other complex provisions in the Tax Act.

Additionally, we are subject to ongoing income tax audits. The taxing authorities may disagree with positions taken on our tax returns. Coupled with the change in tax rates from the Tax Act, this could result in an adverse effect to our effective income tax rate in the period of adjustment.

Furthermore, it is possible that the Tax Act will be subject to further changes either in a technical corrections bill or entirely new legislation. The overall impact of the Tax Act also depends on the future interpretations and regulations that may be issued by U.S. tax authorities. It remains difficult to predict whether or when there will be any tax law changes or further guidance by the authorities having a material adverse effect on our financial conditions or results of operations, as the impact of broad proposals on our business can vary substantially depending upon the specific changes or further guidance made and how the changes or guidance are implemented by the authorities.

We may be unsuccessful in integrating the operations of the assets we have acquired or may acquire in the future, or in realizing all or any part of the anticipated benefits of any such acquisition.

If we are unable to successfully integrate our acquisitions into our business, we may never realize their expected benefits. With each acquisition, we may discover or experience unexpected costs, environmental liabilities for which we are not indemnified, delays, lower than expected cost savings or synergies, or incurrence of other significant charges such as impairment of goodwill or other intangible assets and asset devaluation. In addition, we may be unable to successfully integrate the diverse company cultures, retain key personnel, apply our expertise to new competencies, or react to adverse changes in commodity prices or industry conditions.

We cannot predict with certainty the benefits of these acquisitions, which often constitute multi-year endeavors. On June 1, 2017, we completed our acquisition of Western Refining. This acquisition will require substantial capital during 2018 and later years. If we are unable to realize all or part of the projected benefits from this or other acquisitions within our expected time frames, our business, results of operations and financial condition may suffer.

We are subject to interruptions of supply and increased costs as a result of our reliance on logistics assets for the transportation of crude oil, feedstocks and refined products within our business.

Our subsidiaries own and operate ten refineries in the western and mid-continent United States, which refine crude oil and other feedstocks into refined products for sale to a wide variety of markets. We rely on a variety of logistics assets to transport crude oil, feedstocks and refined products, including, but not limited to, marine vessels, marine terminals, rail, pipelines, product terminals, storage tanks and trucks. Some of these assets are owned and operated by third-parties. In particular, losing access to certain assets owned by Andeavor Logistics could halt production at some of our refineries. Accidents, natural disasters, government regulation, third-party actions or other events outside of our control could impede our use or increase the cost of using these assets, which could have a material adverse effect on our financial condition and results of operations.

Adverse changes in global economic conditions and the demand for transportation fuels may impact our business and financial condition in ways that we currently cannot predict.

Our business is affected by the strength of the U.S. and global economies, related demand for transportation fuels, and the risk of global economic downturn. Technological changes in vehicles and other energy systems, such as electric vehicles, fuel cells and battery storage systems, as well as transportation alternatives, could also affect demand. New energy technologies or prolonged economic downturns could result in declines in consumer and business confidence and spending as well as increased unemployment and reduced demand for transportation fuels. These conditions may decrease the creditworthiness of our suppliers, customers and business partners, which could interrupt or delay our suppliers’ performance of our contracts, reduce or delay customer purchases, delay or prevent customers from obtaining financing to purchase our products, or result in bankruptcy of customers or business partners. Any of these events may adversely affect our cash flow, profitability and financial condition.


 
 
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Risk Factors

We operate in international markets, and are thus subject to risks of doing business on a global level.

We operate in and sell some of our products in non-U.S. jurisdictions, primarily in Mexico, South America and Asia. Our operating results or financial condition could be negatively impacted by disruptions in any of these markets, including economic instability, restrictions on the transfer of funds, duties and tariffs, transportation delays, import and export controls, changes in governmental policies, labor unrest, security issues involving key personnel and changing regulatory and political environments. In addition, if trade relationships deteriorate with these countries, if existing trade agreements are modified or terminated, new economic sanctions relevant to such jurisdictions are passed or if taxes, border adjustments or tariffs make trading with these countries more costly, it could have a material adverse effect on our business.

A portion of our contracts and revenues are denominated in foreign currencies. Our consolidated financial statements are presented in U.S. dollars. Consequently, fluctuations in the value of foreign currencies relative to the U.S. dollar may negatively affect the value of these items in our consolidated financial statements. To the extent we do not manage our foreign currency exposure adequately, we may suffer losses in value of our net foreign currency investment, and our consolidated results of operations and financial position may be negatively affected.

Actions of governments through tax legislation and other changes in law, executive order and commercial restrictions could reduce our operating profitability, both in the U.S. and abroad. The U.S. government can prevent or restrict us from doing business in foreign countries. These restrictions could limit our ability to operate in, or gain access to, opportunities in various countries.

We are required to comply with U.S. and international laws and regulations, including those involving anti-bribery, anti-corruption and anti-money laundering. For example, the Foreign Corrupt Practices Act and similar laws and regulations prohibit improper payments to foreign officials for the purpose of obtaining or retaining business or gaining any business advantage. Our compliance policies and programs mandate compliance with all applicable anti-corruption laws but may not be completely effective in ensuring our compliance. Our training and compliance program and our internal control policies and procedures may not always protect us from violations committed by our employees or agents. Actual or alleged violations of these laws could disrupt our business and cause us to incur significant legal expenses, and could result in a material adverse effect on our reputation, business, results of operations, financial condition and liquidity. 

The availability and cost of renewable identification numbers could have an adverse effect on our financial condition and results of operations.

The RFS2, issued by the EPA, requires refiners to add annually increasing amounts of “renewable fuels” to their petroleum products or to purchase credits, known as RINs, in lieu of such blending. Due to regulatory uncertainty and in part due to the nation’s fuel supply approaching the “blend wall” (the 10% ethanol limit prescribed by most automobile warranties), the price and availability of RINs has been volatile.

While we generate RINs by blending renewable fuels manufactured by third parties, we purchase RINs on the open market to comply with the RFS2. We cannot predict the future prices of RINs, and the costs to obtain the necessary RINs could be material. Our financial condition and results of operations could be adversely affected if we are unable to pass the cost of compliance on to our customers, pay significantly higher prices for RINs, and generate or purchase RINs to meet RFS2 mandated standards.

Meeting the requirements of, including the cost to comply with, evolving environmental, health and safety laws and regulations and any failure to meet those requirements could materially affect our performance, financial condition and results of operations.

Environmental, health and safety laws and regulations may continue to increase our operating costs and require significant capital investments. If we discover conditions at our facilities that require remediation, or if environmental, health and safety, and energy requirements change materially, we could be required to increase our capital expenditures or incur additional operating costs, which could negatively impact our financial condition. Environmental and operational risks, including those relating to process safety could result in increased regulatory requirements, liabilities, permit restrictions or revocation or an adverse effect to our reputation. Equipment or system failures, human error, extreme weather events or natural disasters could result in hazardous material releases into the environment, fires, explosions, loss of life, personal injury and property damage. We cannot predict the effect of future developments in federal or state laws or regulations governing environmental, health and safety or energy matters on our operations, or how these changes may impact our business or financial condition. For example:

•
In July 2017 California adopted additional process safety management regulations to implement recommendations made in 2014 by the Governor’s Interagency Refinery Safety Working Group. These requirements significantly expand the scope and requirements of California’s process safety management and accidental release prevention programs. These requirements could have a material impact on our cash flows, profitability and financial condition.


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Risk Factors

•
In California, the Board for the South Coast Air Quality Management District passed amendments to the RECLAIM on December 4, 2015. The RECLAIM Amendments became effective in 2016 and require a staged reduction of NOx through 2022. The agency is also working on a process to “sunset” the existing RECLAIM program and require facilities to install best available retrofit control technologies on equipment.

•
In California, AB-617, a companion bill to green house gas legislation, was passed in 2017 to establish programs to reduce local criteria and toxic emissions at an individual community level. This will involve community monitoring, emission reduction plans, and installation of equipment in the selected communities.

Climate change and greenhouse regulation could affect our operations, energy consumption patterns and regulatory obligations, any of which could affect our results of operations and financial condition.

Scientific studies have indicated that increasing concentrations of greenhouse gases in the atmosphere can produce changes in climate with significant physical effects, including increased frequency and severity of storms, floods and other extreme weather events that could affect our operations. Increased concern over the effects of climate change may also affect our customers’ energy strategies, consumer consumption patterns, including the adoption of electric vehicles, and government and private sector alternative energy initiatives any of which could adversely affect demand for petroleum products.

Currently, multiple legislative and regulatory measures to address greenhouse gas (including carbon dioxide, methane and nitrous oxides) and other emissions are in various phases of consideration, promulgation or implementation. These include actions to develop international, federal, regional or statewide programs, which could require reductions in our greenhouse gas or other emissions and decrease the demand for our refined products. Requiring reductions in these emissions could result in increased costs to (i) operate and maintain our facilities, (ii) install new emission controls at our facilities and (iii) administer and manage any emissions programs, including acquiring emission credits or allotments.
For example, in California, the state legislature adopted SB 32 in 2016. SB 32 set a cap on emissions of 40% below 1990 levels by 2030 but did not establish a particular mechanism to achieve that target. The legislature also adopted a companion bill, AB 197, that most significantly directs the California Air Resources Board to prioritize direct emission reductions on large stationary sources. In 2017, the state legislature adopted AB 398 which provides direction and parameters on utilizing cap and trade after 2020 to meet the 40% reduction target from 1990 levels by 2030 specified in SB 32. In 2009, CARB adopted the Low Carbon Fuel Standard (“LCFS”), which requires a 10% reduction in the carbon intensity of gasoline and diesel by 2020 and additional reductions beyond 2020 are anticipated. Compliance is demonstrated by blending lower carbon intensity biofuels into gasoline and diesel or by purchasing credits. Compliance with each of the cap and trade and LCFS programs is demonstrated through a market-based credit system. If we are unable to pass the costs of compliance on to our customers, sufficient credits are unavailable for purchase, we have to pay a significantly higher price for credits, or if we are otherwise unable to meet our compliance obligation, our financial condition and results of operations could be adversely affected.

California’s ambitious climate change and air emissions goals and regulatory programs are complex, subject to change and considerable uncertainty due to a number of factors including technological feasibility, legal challenges and potential changes in federal policy. Increasing concerns about climate change have also resulted in a number of international, national, regional and statewide measures to limit greenhouse gas emissions. Additional stricter measures can be expected in the future and any of these changes may have a material adverse impact on our business or financial condition.

Regulatory and other requirements concerning the transportation of crude oil and other commodities by rail may cause increases in transportation costs or limit the amount of crude oil that we can transport by rail.

We rely on a variety of systems to transport crude oil, including rail. In 2012, we completed the construction of a 50 Mbpd crude oil rail car unloading facility in Anacortes, Washington (the “Anacortes Rail Facility”), which Andeavor Logistics subsequently acquired from us. The Anacortes Rail Facility allows us to receive crude oil into our Anacortes refinery.

Rail transportation is regulated by federal, state and local authorities. New regulations or changes in existing regulations could result in increased compliance expenditures. For example, in 2015 the U.S. Department of Transportation issued new standards and regulations applicable to crude-by-rail transportation (Enhanced Tank Car Standards and Operational Controls for High-Hazard Flammable Trains). These or other regulations could increase the time required to move crude oil from production areas to our refineries, increase the cost of rail transportation and decrease the efficiency of shipments of crude oil by rail within our operations. Any of these outcomes could have a material adverse effect on our business and results of operations.

We rely upon certain critical information systems for the operation of our business, and the failure of any critical information system, including a cyber-security breach, may result in harm to our reputation and business.

We depend heavily on our technology infrastructure and critical information systems, including data networks, telecommunications, remote connectivity, cloud-based information controls, software applications and hardware, including those that are critical to operating our refineries, pipelines, terminals, retail stations and other business operations. In addition, we collect sensitive data, including personally identifiable information of our customers using credit cards at our retail outlets.


 
 
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Risk Factors

We are in the process of completing the enterprise resource planning project (see further discussion in Item 7) which aims to simplify business processes by implementing a standardized and scalable technology platform. Large information systems and business process transformations such as this one are complex and require significant investments in system software, business process development and employee resources. Our business and results of operations may be adversely affected if we experience operating problems, scheduling delays, cost overages or service limitations. Additionally, we may not achieve all of the expected synergies with this project which may impact our ability to achieve the project’s objectives.

Our technology infrastructure and information systems are subject to damage or interruption from a number of potential sources including natural disasters, software viruses or other malware, power failures, cyber-attacks, employee error or malfeasance, and other events. Although we have experienced actual or attempted breaches of our cybersecurity, none of these breaches have had a material effect on our business, operations or reputation (or compromised any customer data). However, no cybersecurity or emergency recovery processes is failsafe, and if our safeguards fail or our data or technology infrastructure is compromised, the safety and efficiency of our operations could be materially harmed, our reputation could suffer, and we could be subject us to additional costs, liabilities, and costly legal challenges, including those involving privacy of customer data. Any of these outcomes could materially harm our business and operations. Finally, state and federal legislation relating to cybersecurity could impose new requirements, which could increase our costs or reduce our efficiency.

Disruption of our ability to obtain crude oil could adversely affect our operations, revenue and cash flow.

To maintain or increase production levels at our refineries, we must continually contract for crude oil supplies from third parties. A material decrease in crude oil production from the fields that supply our refineries as a result of decreased exploration and production activity, natural production declines or otherwise, could result in a decline in the volume of crude oil available to our refineries. Such an event could result in an overall decline in volumes of refined products processed at our refineries and a corresponding reduction in our revenue and cash flow.

In addition, many of our logistics agreements contain minimum volume commitments. If we do not satisfy the minimum volume commitments, we will still be responsible for payment for transportation and storage services as if we had utilized such minimum volumes.

Our investments in joint ventures decrease our ability to manage risk.

We conduct some of our operations, through joint ventures in which we share control over certain economic and, business interests with our joint venture partners. Our joint venture partners may have economic, business or legal interests or goals that are inconsistent with our goals and interests or may be unable to meet their obligations. Failure by us, or an entity in which we have a joint-venture interest, to adequately manage the risks associated with any acquisitions or joint ventures could have a material adverse effect on the financial condition or results of operations of our joint ventures and adversely affect our results of operations, financial position and cash flows.

Terrorist attacks aimed at our facilities or that impact our customers or the markets we serve could adversely affect our business.

The U.S. government has issued warnings that energy assets in general, including the nation’s refining, pipeline and terminal infrastructure, may be future targets of terrorist organizations. Any future terrorist attacks on our facilities, those of our customers, or on any transportation networks, including pipelines, could have a material adverse effect on our business. Similarly, any future terrorist attacks that severely disrupt the markets we serve could materially and adversely affect our results of operations, financial position and cash flows.

Our inventory risk management activities may result in substantial derivative variability or losses.

We enter into derivative transactions to manage the risks from changes in the prices of crude oil, refined products, natural gas, and other feedstocks associated with our physical inventories and future production, and these may result in substantial derivatives variability or losses, which could increase the volatility of our earnings. We manage price risk on inventories above or below our target levels to minimize the impact these price fluctuations have on our earnings and cash flows. Consequently, our results may fluctuate significantly from one reporting period to the next depending on commodity price fluctuations and our relative physical inventory positions. These transactions may also expose us to the risk of financial loss; for example, if our production is less than we anticipated at the time we entered into a hedge agreement or if a counterparty to our hedge agreement fails to perform its obligations under the agreements. See Item 7A.


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Risk Factors

Competition in the refining, logistics and marketing industry is intense, and an increase in competition in the markets in which we sell our products could adversely affect our earnings and profitability.

We compete with a broad range of refining and marketing companies, including certain multinational oil companies. Competitors with greater geographic diversity, larger or more complex refineries, integrated operations with exploration and production resources and broader access to resources, may be better able to withstand volatile market conditions and to bear the risks inherent in the refining industry. For example, competitors that engage in exploration and production of crude oil may be better positioned to withstand periods of depressed refining margins or feedstock shortages. Our competitors’ recent consolidations and acquisitions and their plans for projects that could increase refining capacity or efficiency could increase competition in our markets, reduce our margins and affect our cash flow.

In addition, we compete with alternative energy and fuel producers for some industrial, commercial and individual consumers. There is significant governmental and consumer pressure to increase the use of alternative fuels and vehicles in the United States. If these alternative energy sources gain support as a result of governmental regulations and subsidies, technological advances, consumer demand, or other causes, they could impact demand for our products and our financial condition.

Our operations are subject to operational hazards that could expose us to potentially significant losses.

Refineries, gas processing plants, pipelines, rail cars, terminals, underground gas storage and other components of our business are subject to potential operational hazards and risks inherent in refining operations and in transporting and storing crude oil, natural gas, refined products and waste. Operational hazards, such as fires, floods, earthquakes, explosions, third-party accidents, maritime disasters, security breaches, pipeline ruptures and spills, mechanical failure of equipment, severe weather and other natural disasters, at our or third-party facilities, could result in business interruptions or shutdowns and damage to our properties and the properties of others. A serious accident at our facilities could also result in serious injury or death to our employees or contractors and could expose us to significant liability for personal injury claims and reputational risk. These events could create significant liabilities that are outside the limits or scope or our insurance policies, and could expose us to penalties under federal, state and local laws. The costs that we could have to pay in penalties or for clean-up, remediation and damages could have a material adverse effect on our business, financial condition and operations. Any such unplanned event or shutdown could have a material adverse effect on our business, financial condition and results of operations.

In addition, we operate in and adjacent to environmentally sensitive coastal waters where tanker, pipeline, rail car and refined product transportation and storage operations are closely regulated by federal, state and local agencies and monitored by environmental interest groups. Our coastal refineries receive crude oil and other feedstocks by tanker. In addition, our refineries receive crude oil and other feedstocks by rail car and truck. Transportation and storage of crude oil, other feedstocks and refined products over and adjacent to water involves inherent risk and subjects us to the provisions of the Federal Oil Pollution Act of 1990 and state laws in California, Washington, Alaska and Oregon, as well as international laws in the jurisdictions in which we operate. If we are unable to promptly and adequately contain any accident or discharge involving tankers, pipelines, rail cars or above ground storage tanks transporting or storing crude oil, other feedstocks or refined products, we may be subject to substantial liability. In addition, the service providers we have contracted to aid us in a discharge response may be unavailable due to weather conditions, governmental regulations or other local or global events. International, federal or state rulings could divert our response resources to other global events.

We are also required to ensure the quality and purity of the products loaded at our loading racks and pipeline connections. If our quality control measures were to fail or be compromised, we may have contaminated or off-specification products commingled in our pipelines and storage tanks that could be sent to customers and other end users. These types of incidents could result in product liability claims from our customers or other pipelines to which our pipelines connect. These product liability claims may have a material adverse effect on our business or results or operations or our ability to maintain existing customers or retain new customers.

We do not maintain insurance coverage against all potential losses. Marine vessel charter agreements may not provide complete indemnity for oil spills, and any marine charterer’s liability insurance we carry may not cover all losses. If a loss event is not fully covered by insurance or if our insurers fail to honor their coverage commitments for an insured event or if our counterparties fail to honor any indemnification agreements, it could have a material adverse effect on our business, financial condition and results of operations.

Our operations are also subject to general environmental risks, expenses and liabilities, which could affect our results of operations.

From time to time we have been, and presently are, subject to litigation and investigations with respect to environmental and related matters, including product liability claims related to the oxygenate methyl tertiary butyl ether. We may become involved in further litigation or other civil or criminal proceedings, or we may be held responsible in any existing or future litigation or proceedings, the costs of which could be material.


 
 
December 31, 2017 | 23
Risk Factors

We operate and have in the past operated retail stations with underground storage tanks in various jurisdictions. Federal and state regulations and legislation govern the storage tanks, and compliance with these requirements can be costly. The operation of underground storage tanks poses certain risks, including leaks. Leaks from underground storage tanks, which may occur at one or more of our retail stations, or which have occurred at our previously operated retail stations, can impact soil or groundwater and result in fines and civil liability for us.

Large capital projects can take several years to complete, and if we are unable to complete capital projects at their expected costs or in a timely manner, or if market conditions deteriorate significantly between the project approval date and the project startup date, our results of operations, cash flows or project returns could be adversely impacted.

We are constructing several new projects and expanding existing ones, such as the construction of the Conan Crude Oil Gathering Pipeline System and the Clean Product Upgrade Project. The construction process involves numerous regulatory, environmental, political and legal uncertainties, most of which are not fully within our control. If we are unable to complete capital projects at their expected costs or in a timely manner our results of operations or cash flows could be adversely affected. In addition, our revenues may not increase immediately upon the expenditure of funds because construction or expansion may occur over an extended period of time, and we may not receive any material increases in revenues until after substantial completion of the project.

To approve a large-scale capital project, the project must meet an acceptable level of return on the capital to be employed in the project. We base these economic projections on our best estimate of future market conditions that are not within our control. Most large-scale projects take many years to complete and during this multi-year period, market conditions can change from those we forecast due to changes in general economic conditions, available alternative supply and changes in customer demand. Accordingly, we may not be able to realize our expected returns from a large investment in a capital project, and this could negatively impact our results of operations, cash flows and return on capital employed.

Because of our debt obligations, our business, financial condition, results of operations and cash flows could be negatively impacted by a deterioration of our credit profile, a decrease in debt capacity or unsecured commercial credit available to us, or by factors adversely affecting credit markets generally.

At December 31, 2017 , our total debt obligations for borrowed money and capital lease obligations were $7.8 billion . We may incur substantial additional debt obligations in the future.

Our indebtedness may impose various restrictions and covenants on us that could have material adverse consequences, including:

•
increasing our vulnerability to changing economic, regulatory and industry conditions;
•
limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry;
•
limiting our ability to pay dividends to our stockholders;
•
limiting our ability to borrow additional funds; and
•
requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for working capital, capital expenditures, acquisitions and other purposes.

Refining operations require certain levels of commodity inventories, which we may fund using combinations of working capital and debt. Our ability to obtain credit and capital is significantly impacted by the state of the credit and capital markets, which is beyond our control. Our ability to access credit and capital markets may be restricted at a time that constrains our flexibility to react to changing economic and business conditions. Certain lenders may not lend to us due to the industry in which we operate, or other factors beyond our control. In addition, the cost and availability of debt and equity financing may be adversely impacted by unstable or illiquid market conditions. Uncertainty and illiquidity in these markets could also have an adverse impact on our lenders, commodity hedging counterparties, or our customers, preventing them from meeting their obligations to us. Further, from time to time, we may need to supplement cash generated from operations with proceeds from financing activities. A decrease in our debt or commercial credit capacity, including unsecured credit extended by third-party suppliers, or a deterioration in our credit profile, could increase our costs of borrowing money or limit our access to the capital markets and commercial credit, which could affect our ability to manage our inventory or otherwise materially and adversely affect our business, financial condition, results of operations and cash flows.

Our business may be negatively affected by work stoppages, slowdowns or strikes by our employees, as well as new labor requirements.

As of December 31, 2017 , approximately 2,850 of our employees are covered by collective bargaining agreements. Of these employees, approximately 1,700 are covered by collective bargaining agreements expiring on February 1, 2019 with the remaining employees covered under agreements with expirations ranging from May 2019 to March 2023. A strike, work stoppage or other labor action could have an adverse effect on our financial condition or results of operations.


24  |  
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Risk Factors

In addition, California requires refinery owners to pay prevailing wages to contract craft workers and restricts refiners’ ability to hire qualified employees to a limited pool of applicants. Legislation or changes in regulations could result in labor shortages higher labor costs, and an increased risk that contract employees become joint employees of Andeavor, which could trigger bargaining issues, employment discrimination liability issues as well as wage and benefit consequences, especially during critical maintenance and construction periods.

Ownership of the general partner of Andeavor Logistics may involve a greater exposure to legal liability than our historic business operations.

One of our subsidiaries acts as the general partner of Andeavor Logistics. Our control of the general partner may increase the possibility of claims of breach of fiduciary duties including claims of conflicts of interest related to Andeavor Logistics. Any liability resulting from such claims could have a material adverse effect on our future business, financial condition, results of operations and cash flows.

Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

Our principal properties are described in Item 1 under “Marketing”, “Logistics” and ”“Refining.” We believe that our properties and facilities are adequate for our operations and are adequately maintained. We, along with Andeavor Logistics, are the lessee under a number of cancellable and noncancellable leases for certain properties, including office facilities, retail facilities, ship charters, barges and equipment used in the storage, transportation and production of feedstocks and refined products. See Note 12 and 15 to our consolidated financial statements in Item 8 for additional information on our leased properties.

Item 3.
Legal Proceedings

In the ordinary course of business, we may become party to lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.

Unresolved Matters

2010 Washington Refinery Fire
The naphtha hydrotreater unit at our Washington refinery was involved in a fire in April 2010, which fatally injured seven employees and rendered the unit inoperable. The Washington State Department of Labor & Industries (“L&I”) investigated the incident, and issued a citation in October 2010 with an assessed fine of approximately $2 million. We appealed the citation in January 2011 as we disagree with L&I’s characterizations of operations at the refinery and believe, based on available evidence and scientific reviews, that many of the agency’s conclusions are mistaken. In separate September 2013, November 2013 and February 2015 orders, the Board of Industrial Insurance Appeals (“BIIA”) granted partial summary judgment in our favor rejecting 33 of the original 44 allegations in the citation as lacking legal or evidentiary support. The hearing on the remaining 11 allegations concluded in July 2016.

On June 8, 2017, the BIIA Judge issued a proposed decision and order vacating the entire citation, which L&I and the United Steel Workers (“USW”) appealed. On September 18, 2017, the BIIA granted L&I and USW’s petitions for review of the BIIA Judge’s June 8, 2017 proposed decision and order. On January 25, 2018, the BIIA issued an order remanding 12 of the allegations for further proceedings. We cannot currently estimate the outcome or final amount or timing of the resolution of this matter.

Air Quality Regulations
On February 12, 2016, we received an offer to settle 35 Notices of Violations (“NOVs”) received from the Bay Area Air Quality Management District (“BAAQMD”). The NOVs were issued from May 2011 to November 2015 and allege violations of air quality regulations for ground level monitors located at our Martinez refinery. While we are negotiating a settlement of the allegations with the BAAQMD, we cannot currently estimate the amount or timing of the resolution of this matter.

On June 6, 2017, we received an offer to settle a NOV that we received from the EPA alleging violations of air emission limits at our St. Paul Park refinery. The NOV was issued in January 2016 and alleges hydrogen sulfide concentrations from the flare exceeds the limit. While we have an agreement in principle to settle this matter and are negotiating the terms of a settlement, we cannot currently estimate the timing of the final resolution of this matter. The final resolution of this matter will not have a material impact on our liquidity, financial position or results of operations.


 
 
December 31, 2017 | 25
Legal Proceedings

On February 13, 2018, we received an offer to settle a NOV issued by the California Air Resources Board (“CARB”) on December 28, 2017. The NOVs allege violations of the Low Carbon Fuel Standard’s reporting requirements for our California operations from 2011 to 2016. We self-reported the discovered instances of under and over reporting during this time frame to CARB.  The correction of the inaccurate reports did not result in a negative LCFS credit balance.  While we are evaluating CARB’s offer and cannot currently estimate the timing of the resolution of this matter, the outcome will not have a material impact on our liquidity, financial positions, or results of operations.

Gallup Refinery
In March 2016, the EPA conducted a Risk Management Program inspection at our Gallup refinery and issued an Inspection Report on April 7, 2016 identifying Areas of Concern. While we are working with the EPA to address the Areas of Concern, we cannot currently estimate the amount or timing of the resolution of this matter.

Fuel Standards
On April 19, 2016, we received an offer to settle two NOVs received from the California Air Resources Board (“CARB”). The NOVs were issued in February 2016 and allege certain batches of fuels produced in June and July 2015 at our Martinez and Los Angeles refineries violated fuel standards within the California Code of Regulations. While we are actively discussing a settlement of the allegations with CARB, we cannot currently estimate the amount or timing of the resolution of this matter.

Resolved Matters

In November 2017, we agreed to settle six NOVs received from the South Coast Air Quality Management District. The NOVs were issued from January 2014 to March 2016 and allege violations of air quality regulations at our Los Angeles refinery. The final resolution of this matter will not have a material impact on our liquidity, financial position or results of operations.

In December 2017, we agreed to settle 51 NOVs received from the BAAQMD. The NOVs were issued from July 2011 to July 2015 and allege violations of various air quality regulations at our Martinez refinery. The final resolution of this matter will not have a material impact on our liquidity, financial position or results of operations.

Item 4.
Mine Safety Disclosures

Not applicable .

26  |  
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Market for Equity, Stockholder Matters and Purchases of Equity Securities

Part II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Performance Graph

The performance graph below compares the cumulative total return of our common stock to (a) the cumulative total return of the S&P 500 Composite Index and (b) a composite peer group (“Peer Group”) comprised of HollyFrontier Corporation, Marathon Petroleum, Phillips 66 and Valero Energy Corporation. The graph below is for the five year period commencing December 31, 2012 and ending December 31, 2017 .

We selected the Peer Group to include four domestic refining companies we believe follow a similar business model to ours, including refining, transporting, storing and marketing transportation fuels and related products. The Peer Group is representative of companies that we internally benchmark against.

Comparison of Five Year Cumulative Total Return
Among the Company, the S&P Composite 500 Index and Peer Group (a)
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
Andeavor
$
100.00

 
$
135.05

 
$
174.75

 
$
252.51

 
$
215.21

 
$
288.38

S&P 500
100.00

 
132.39

 
150.51

 
152.59

 
170.84

 
208.14

Peer Group
100.00

 
148.25

 
144.77

 
183.18

 
193.11

 
255.79


(a)
Assumes that the value of the investments in common stock and each index was $100 on December 31, 2012 , and that all dividends were reinvested. Investment is weighted on the basis of market capitalization.
TSO201610-K_CHARTX00674A02.JPG
Note: The stock price performance shown on the graph is not necessarily indicative of future performance.


 
 
December 31, 2017 | 27
Market for Equity, Stockholder Matters and Purchases of Equity Securities
 

Stock Prices and Dividends per Common Share

Our common stock is listed under the symbol “ANDV” on the New York Stock Exchange.

High and Low Sales Prices and Dividends Declared and Paid on our Common Stock
 
2017
 
2016
 
Sales Prices per Common Share
 
Dividends per Common Share
 
Sales Prices per Common Share
 
Dividends per Common Share
Quarter Ended
High
 
Low
 
 
High
 
Low
 
December 31
$
116.06

 
$
102.29

 
$
0.59

 
$
93.06

 
$
78.32

 
$
0.55

September 30
105.63

 
91.82

 
0.59

 
84.89

 
69.49

 
0.55

June 30
95.11

 
75.11

 
0.55

 
87.85

 
70.78

 
0.50

March 31
91.37

 
79.10

 
0.55

 
109.24

 
67.80

 
0.50


Dividend Declaration

Our Board declared a quarterly cash dividend on common stock of $0.59 per share on February 14, 2018 . The dividend is payable on March 15, 2018 to holders of record at the close of business on February 28, 2018 . There were approximately 1,327 holders of record of our 153,764,533 outstanding shares of common stock on February 15, 2018 . For information regarding restrictions on future dividend payments and stock purchases, see Item 7 and Note 16 to our consolidated financial statements in Item 8.

Purchases of Equity Securities

We are authorized by our Board to purchase shares of our common stock in open market transactions at our discretion. The Board’s authorization has no time limit and may be suspended or discontinued at any time. Purchases of our common stock can also be made to offset the dilutive effect of stock-based compensation awards and to meet our obligations under employee benefit and compensation plans, including the exercise of stock options and vesting of restricted stock and to fulfill other stock compensation requirements. Our Board authorized a $1.0 billion share repurchase program on July 30, 2014. On October 28, 2015, our Board approved a new $1.0 billion share repurchase program to become effective upon the full completion of the previous $1.0 billion share repurchase authorized. On November 16, 2016, the Board approved an additional $1.0 billion of share repurchases. We purchased approximately 7.0 million and 3.2 million shares of our common stock in the years ended December 31, 2017 and 2016 for approximately $692 million and $250 million , respectively. We have $1.4 billion remaining under our authorized programs as of December 31, 2017 .

Purchases by Andeavor of its Common Stock
Period
Total Number of Shares Purchased (a)
 
Average Price Paid
per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)
October 2017
19,962

 
$
106.05

 
—

 
$
1,706

November 2017
930,640

 
$
104.65

 
930,419

 
$
1,609

December 2017
1,785,082

 
$
108.97

 
1,785,082

 
$
1,414

Total
2,735,684

 
 
 
2,715,501

 
 

(a)
Includes 20,183 shares acquired from employees during the fourth quarter of 2017 to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to them.


28  |  
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Selected Financial Data
 

Item 6.
Selected Financial Data

The following table sets forth certain selected consolidated financial data of Andeavor as of and for each year in the five-year period ended December 31, 2017 . The selected consolidated financial information presented below has been derived from our historical financial statements. The following table should be read in conjunction with Item 7 and our consolidated financial statements in Item 8.
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(in millions except per share amounts)
Statement of Consolidated Operations Data
 
 
 
 
 
 
 
 
 
Revenues
$
34,975

 
$
24,582

 
$
28,711

 
$
40,633

 
$
37,601

Net Earnings from Continuing Operations
1,675

 
850

 
1,694

 
917

 
434

Net Earnings from Continuing Operations Attributable to Andeavor
1,520

 
724

 
1,544

 
872

 
392

Net Earnings from Continuing Operations per Share:
 
 
 
 
 
 
 
 
 
Basic
10.85

 
6.11

 
12.53

 
6.79

 
2.90

Diluted
10.75

 
6.04

 
12.39

 
6.67

 
2.85

Dividends per Share
2.28

 
2.10

 
1.85

 
1.10

 
0.90

 
 
 
 
 
 
 
 
 
 
 
As of December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In millions)
Consolidated Balance Sheet Data
 
 
 
 
 
 
 
 
 
Total Current Assets
$
6,883

 
$
7,414

 
$
4,307

 
$
5,074

 
$
5,262

Total Assets
28,573

 
20,398

 
16,332

 
16,491

 
13,252

Total Debt, Net of Unamortized Issuance Costs
7,685

 
6,933

 
4,073

 
4,167

 
2,756

Total Liabilities
15,158

 
12,271

 
8,592

 
9,515

 
7,767

Andeavor Stockholders’ Equity
9,815

 
5,465

 
5,213

 
4,454

 
4,302

Total Equity
13,415

 
8,127

 
7,740

 
6,976

 
5,485



 
 
December 31, 2017 | 29
Management’s Discussion and Analysis

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information concerning our results of operations and financial condition should be read in conjunction with Items 1 and 2 and our consolidated financial statements in Item 8.

Management’s Discussion and Analysis is our analysis of our financial performance, financial condition and significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See “Important Information Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements.

Business Strategy and Overview

We are the leading integrated marketing, logistics and refining company in our strategic footprint and are driven to create value by operating an integrated business model. Our diversified and integrated portfolio of assets and operations provides us with strong growth opportunities across our value chains.

In recent years, we have implemented strategies to transform the composition of our portfolio of marketing, logistics and refining assets. In 2010, the majority of our operating income was generated through our Refining segment with only a small portion attributable to our previous retail segment and we did not have commercial logistics operations. However, in recent years, we have successfully implemented strategies to drive operational productivity improvements, organic growth and portfolio enhancing acquisitions. Identifying new value creation opportunities to grow the Company is core to our strategy. Our focused execution of this strategy has resulted in a transformation of the Company into a highly integrated, well diversified marketing, logistics and refining business. As of 2017, our Marketing segment continues to expand and Andeavor Logistics has grown significantly resulting in each having a larger and more balanced contribution to our operating results. We believe our integrated business model coupled with our Guiding Principles and Strategic Priorities will position us to create leading value for our investors.

Our Strategy and Goals

Execution of our strategy and the achievement of our goals across our business segments is driven by our commitment to our Guiding Principles and Strategic Priorities that are discussed further in Item 1. The following discussion outlines how we create value across our integrated business segments.

Marketing
Our marketing operations provide a secure and ratable off-take of gasoline and diesel production from our refineries and allow us to enhance our margin capture as refined product moves through the value chain. We are driving growth and improvements in our Marketing segment by focusing on higher value, branded distribution channels, adding new retail sites to our network and implementing store improvements to enhance our convenience store position.

With the closing of the Western Refining Acquisition, we added 544 stations to our branded network, including 457 company-operated stations, and along with other strategic, immaterial acquisitions increased our store count to over 3,250 stations. These stations will further drive volumes through higher-value, branded channels thus maximizing capture of margin downstream within the value chain.

Logistics
Our Logistics segment includes assets that establish a market position that helps to minimize our transportation costs as well as maximize our overall performance by focusing on a stable, fee-based business. We achieve value by optimizing our existing asset base, pursuing organic expansion opportunities and growing through strategic acquisitions across our terminalling and transportation and gathering and processing businesses.

Refining
In our Refining segment, our strategy focuses on:

•
driving operational excellence enabling asset availability in excess of 97%;
•
maintaining strict operating cost discipline;
•
enhancing capital efficiency through superior execution; and
•
maximizing capital productivity through process optimization including our ability to access regionally advantaged crude oil.

To meet our strategic objectives, we invest in high return capital projects designed to enhance our feedstock flexibility, improve our yields and lower our costs. In addition to the above strategies and goals, we aim to execute on our strategic priorities to further create value for our shareholders through the achievement of annual improvements to operating income and the capturing of synergies associated with the Western Refining Acquisition.


30  |  
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Management’s Discussion and Analysis

Accomplishments
Our goals are focused on these Strategic Priorities and we have announced or accomplished the following:
 
 
High-Performing Culture
 
 
 
 
 
 
 
 
 
 
 
Operational
Efficiency &
Effectiveness
 
Value Chain Optimization
 
Financial
Discipline
 
Value
Driven
Growth
Safety.   Our 2017 OSHA recordable rate was the lowest in Andeavor history. The Anacortes refinery received the “Elite Gold Safety Award” from the American Fuel & Petrochemical Manufacturers. The Salt Lake City refinery achieved two years with zero process safety incidents. West Coast Logistics achieved 2 years without an OSHA recordable incident.
 
ü
 
 
 
 
 
 
Freedom Award.  Andeavor was named by U.S. Secretary of Defense James Mattis as a recipient of the 2017 Secretary of Defense Employer Support Freedom Award. The award is the highest honor given to employers for support of employees who serve in the U.S. National Guard and Reserve.
 
ü
 
 
 
 
 
 
Community Investment.  In 2017, Andeavor and the Andeavor Foundation invested over $13 million to help create cleaner, safer, well-educated communities where we operate and matched a further $2 million in employee donations to K-12 schools, colleges, universities and various charitable organizations.
 
ü
 
 
 
 
 
 
Western Refining Acquisition.  On June 1, 2017, we completed the previously announced acquisition of Western Refining for approximately $4.0 billion.
 
 
 
ü
 
ü
 
ü
WNRL Merger.  On October 30, 2017, Andeavor Logistics closed the merger with WNRL on a unit-for-unit exchange. In conjunction with the merger, all of WNRL’s outstanding senior notes and revolving credit facility were refinanced.
 
ü

 
ü
 
ü
 
 
North Dakota Logistics Acquisition.   On January 1, 2017, Andeavor Logistics completed its previously announced acquisition of crude oil, natural gas and produced water gathering pipelines and two processing facilities in the Bakken Region of North Dakota for $705 million.
 
 
 
ü
 
 
 
ü
Rangeland Energy Acquisition.  On January 19, 2018, Andeavor completed its acquisition of 100% of the equity of Rangeland Energy II, LLC which owns and operates assets in the Delaware and Midland Basins in New Mexico and Texas.
 
 
 
ü
 
 
 
ü
Marketing Acquisition. We acquired 39 retail stations primarily in Northern California to strengthen our value chain and to further grow our Marketing business.
 
 
 
ü
 
 
 
ü
Anacortes Logistics Assets. On November 8, 2017, Andeavor Logistics acquired logistics assets in Anacortes, Washington from Andeavor for $445 million.
 
 
 
ü
 
 
 
ü
Joint Development Agreement.  On May 24, 2017, we announced our joint development agreement with EP Energy Corporation to fund oil and natural gas development in the Uinta Basin of Utah. We also entered into a multi-year Crude Oil Supply Agreement with EP Energy Corporation for yellow and black waxy crude oil to supply our Salt Lake City Refinery.
 
ü
 
ü
 
ü
 
 
Mexico Operations.  We became the first company to bring U.S. transportation fuels into Mexico through the country’s energy reform. This was accomplished by reaching a definitive agreement with Pemex to utilize logistics assets and entering into a new wholesale marketing agreement with the launch of the ARCO brand in northwest Mexico.
 
 
 
ü
 
 
 
ü
Major Capital Projects.  We received the permits and began construction for both the Los Angeles Refinery Integration and Compliance Project and the Anacortes Isomerization Project.
 
 
 
ü
 
 
 
ü
Returning Capital to Shareholders.  We purchased 7.0 million shares of our common stock and paid $2.28 per share in dividends, returning approximately $1.0 billion in 2017.
 
 
 
 
 
ü
 
ü

 
 
December 31, 2017 | 31
Management’s Discussion and Analysis

 
 
High-Performing Culture
 
 
 
 
 
 
 
 
 
 
 
Operational
Efficiency &
Effectiveness
 
Value Chain Optimization
 
Financial
Discipline
 
Value
Driven
Growth
Investment Grade.  Andeavor and Andeavor Logistics achieved investment grade credit ratings providing for incremental operational and financial flexibility and lower cost of debt:
-      We received investment grade ratings from Fitch, S&P and Moody’s; and
-      Andeavor Logistics received investment grade ratings from Fitch and S&P.
 
 
 
 
 
ü
 
 
IDR Buy-In.  Andeavor Logistics issued 78.0 million common units to Andeavor in exchange for the cancellation of its IDRs and the conversion of its economic general partner interest into a non-economic general partner interest, representing a $3.6 billion total value based on a $45.90 closing unit price.
 
 
 
 
 
ü
 
 
Andeavor Logistics Equity Issuance.   On February 21, 2017, Andeavor Logistics and TLGP issued 5.0 million common units at a price of $56.19 per common unit receiving net proceeds of approximately $281 million.
 
 
 
 
 
ü
 
 
Senior Notes Offerings.  In order to lower cost of debt and reduce balances on revolving credit facilities and refinance outstanding senior notes:
-      On December 14, 2017, we completed a public offering of $500 million 3.800% Senior Notes due 2028 and $500 million 4.500% Senior Notes due 2048; and
-      On November 28, 2017, Andeavor Logistics completed a public offering of $500 million 3.500% Senior Notes due 2022, $750 million 4.250% Senior Notes due 2027 and $500 million 5.200% Senior Notes due 2047.
 
 
 
 
 
ü
 
 
Andeavor Logistics Preferred Units Offering. On December 1, 2017, Andeavor Logistics issued and sold $600 million in 6.875% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units at a price to the public of $1,000 per unit.
 
 
 
 
 
ü
 
 

2017 Performance Objectives

Improvements to Operating Income
Our plans, as presented in November 2016, were to deliver $475 to $575  million of improvements to operating income during 2017, which is comprised of $395 to $475 million of growth and productivity and $80 to $100 million of higher throughput and other operational improvements. These improvements consist of $45 to $70 million in Marketing, $125 to $150 million in Logistics and $305 to $355 million in Refining. In addition to these improvements, we outlined market assumptions for 2017, including fuel margins of 11 to 14 cents per gallon in our Marketing segment and an Andeavor Index of $12 to $14 per throughput barrel in our Refining segment. All of these improvements exclude any expected synergies from the Western Refining Acquisition.

Andeavor exceeded its target and delivered approximately $505 million of growth and productivity improvements to operating income in 2017. Those improvements consisted of $40 million in Marketing, $175 million in Logistics and $290 million in Refining.

Synergies
Concurrent with the closing of the Western Refining Acquisition, we outlined expected synergies of $350 to $425 million on an annual basis with this run rate expected to be achieved by June 2019, the second year following the closing of the transaction. This includes approximately $120 to $160 million from value chain optimization, $130 to $140 million from operational improvements and $100 to $125 million from corporate efficiencies. We estimate that we realized approximately $80 million of synergies as of December 31, 2017 resulting in approximately $190 million of annual run-rate synergies being achieved through the fourth quarter of 2017, consisting primarily of approximately $100 million in corporate efficiencies and the remainder in value chain optimization and operational improvements.


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Management’s Discussion and Analysis

Andeavor’s Journey to 2020

At our December 5, 2017 Investor and Analyst Day, we laid out plans to grow our business and earnings through 2020. Our journey to creating superior value in 2020 is based on the following:

•
advancing our fully-integrated fuel and convenience store marketing and wholesale businesses;
•
expanding our customer-focused, full-service, diversified midstream business, strategically integrated into our value chain;
•
enhancing our integrated refining system and maximize margin capture of our value chain through regional optimization;
•
identifying and capturing opportunities across the value chain that drive higher integrated margins; and
•
focusing on disciplined allocation of capital and financial strength.

Our five strategic actions leading to the growth are delivering the remaining Western Refining synergies, executing on $175 million of income growth from strategic Refining capital projects, achieving $300 million of profitability growth in our Marketing segment by growing both the fuel and convenience store businesses, investing in organic projects and drop downs in our Logistics segment resulting in $430 million of profitability growth and improving costs and driving productivity in our Refining segment resulting in $175 million of growth. We plan to improve results by spending relatively the same amount of capital that we have the last two years. From 2015 to 2017, we spent on average about $1.3 billion per year in capital expenditures and we plan to spend on average approximately $1.4 billion per year from 2018 to 2020. These expectations assume an Andeavor Index of $12 to $14 per throughput barrel in our Refining segment and fuel margins of 11 to 14 cents per gallon in our Marketing segment over the next three years .

Marketing
Our Marketing segment is a key part of our integrated value chain as it provides a stable placement for our products and creates value by improving and maximizing margins. The objective for our Marketing segment is to be a leading convenience marketer, and we have a significant opportunity to excel at both fuel and convenience marketing. We are targeting segment growth by 2020 by increasing Retail and Branded fuel volumes to approximately 52% of total fuel volumes, expanding Retail and Branded stations to over 4,000, improving convenience margin contribution, investing in store enhancements and focusing on key brands and developing a network of 250 to 300 stations in northwest Mexico.

Logistics
Our Logistics segment is a leading midstream service provider and supports our integrated value chain by being able to leverage our commercial capabilities. We are targeting segment growth through 2020 by executing on $1.0 billion of annual high-return growth investments including drop downs from Andeavor, investing in projects to support our growth in the Permian and Bakken regions and increasing third-party revenues.

Refining
Our Refining system is reliable, efficient, strategically located and geographically diverse. We capture differential value by operating with a focus on integration both amongst the refineries and across the whole value chain. We are targeting growth through 2020 by investing in major capital projects, capturing additional Western Refining synergies, improving productivity, efficiency and costs, maintaining high utilization with a focus on our Operational Excellence Management System and creating value by optimizing the integrated value chain.

Results of Operations

A discussion and analysis of the factors contributing to our results of operations is presented below. The accompanying consolidated financial statements in Item 8, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but should not serve as the only criteria for predicting our future performance.

Market Overview

Our results from operations may be impacted significantly from market volatility through the price of crude oil and other feedstocks we acquire for refining and the price we can sell our refined products through our Marketing and Refining segments. Refined product values and crude oil prices are generally set by the global market balances. However, refined product demand trends and crude oil supplies in the U.S. and globally have a significant impact on our business. Additionally, refinery disruptions, planned maintenance, changing logistical infrastructure and healthy domestic macroeconomic conditions continue to influence all portions of our business.


 
 
December 31, 2017 | 33
Management’s Discussion and Analysis

Refined Products
Globally, crude and product inventory levels have declined from last year. However, continued improvement in global macro-economic factors remains supportive to healthy refined product demand. In the markets in which we operate, refined product fundamentals continued to experience volatility. U.S. refiners ran at near-full capacity throughout the year, exceeding prior seasonal high crude run rates. The exception was during the third quarter when domestic refining utilization declined markedly when multiple large-scale hurricanes impacted Gulf Coast refineries. Despite high gasoline production and relatively flat domestic demand growth, U.S. gasoline inventories ended the year slightly below 2016 levels due to increased export demand. At the start of the year, U.S. distillate inventories displayed a significant supply surplus over demand that carried over from 2016. The healthy distillate demand growth and high export levels outpaced strong production, which led to stock draws throughout the year.

Logistics
During 2017, the spot prices of the commodities that our Logistics segment handles largely improved in 2017. Crude oil, refined products, and the majority of NGL prices increased while prices for natural gas decreased. The U.S. oil and gas drilling landscape improved from 2016 due to price appreciation, increased rig counts and operator efficiencies. Domestic crude production exhibited material growth in 2017, which resulted in significantly higher U.S. crude exports. The higher crude price experienced in the fourth quarter has further improved shale economics and U.S. crude production is expected to continue to grow in 2018. From a products perspective, growing export opportunities are providing an incentive for U.S. refiners to maximize production of gasoline and diesel. These factors create a positive outlook for U.S. oil, natural gas and refined product throughput volumes, however, regional impacts may differ.

Continued improvements in the U.S. economic landscape such as lower unemployment, wage growth, strong consumer sentiment, robust manufacturing and expansion of petrochemical plants support healthy refined product demand from our downstream and marketing customers. We continue to monitor the impact of commodity prices and fundamentals as it relates to our business. Given the outlined market conditions, we believe our diversified portfolio of businesses as well as our strong customer base are sufficient to continue to meet our goals and objectives outlined above.

Refining Margins
The market prices for crude oil and other feedstocks continued to experience significant volatility during the year. In the first half of the year, the price of Brent crude oil declined nearly $9 per barrel as OPEC and non-OPEC production cuts did not lead to a reduction of high inventories within well developed countries. However, in the second half of 2017, the price of Brent crude oil increased nearly 40% ending the year higher by over $10 per barrel. During this time, U.S. crude stocks drew over 75 million barrels, significantly narrowing the variance over the 5 year average, on strong refinery demand and tempered import levels. U.S. crude production displayed strong growth throughout the year as shale economics improved due to operator efficiencies and a higher price environment. The increase of domestic light crude production led to export growth throughout the year. This was particularly evident in the fourth quarter as export economics became more favorable due to the widening of the price spread between Brent crude oil (“Brent”) and West Texas Intermediate (“WTI”). West Coast refinery output remained robust through much of the year. However, various planned and unplanned downtime saw utilization rates lag behind the record levels seen in overall U.S. West Coast margins that averaged near typical seasonal values supported by healthy gasoline demand and refined product exports. We continue to monitor the impact of changes on prices and fundamentals on our business.

As a performance benchmark and a comparison with other industry participants, we have utilized the West Coast and Mid-Continent crack spreads. The crack spread is a measure of the difference between market prices for crude oil and refined products and is a commonly used proxy within the industry to estimate or identify trends in refining margins. Crack spreads can fluctuate significantly over time as a result of market conditions and supply and demand balances. The West Coast 321 crack spread is calculated using 3 barrels of Alaska North Slope crude oil (“ANS”) producing 2 barrels of Los Angeles CARB gasoline and 1 barrel of Los Angeles CARB diesel. The Mid-Continent 321 crack spread is calculated using 3 barrels of WTI crude oil producing 2 barrels of Group 3 gasoline and 1 barrel of Group 3 diesel.

West Coast and Mid Continent crack spreads increased during 2017 compared to last year. The U.S. West Coast crack spread averaged $17.66 per barrel in 2017 compared to $16.24 per barrel in 2016. The Mid-Continent crack spread averaged $20.37 per barrel in 2017 compared to $16.12 per barrel in 2016.

Our actual refining margins differ from these crack spreads based on the actual slate of crude oil we run at our refineries and the products we produce. The global commodity markets for crude oil and refined products are subject to significant volatility resulting in rapidly changing prices and margin environments. Our refineries process a variety of crude oils that are sourced from around the world. The slate of crude oil we process can vary over time as a result of changes in market prices and shipping rates. Additionally, our refining margin is impacted by the changing crude oil price differentials, which is the difference between the benchmark crude oils, WTI and Brent crude oil, and the actual crude oil we run at our refineries. We may experience financial risk associated with price volatility of crude oil and refined products, and we may utilize financial hedge instruments to help mitigate such risks where possible.


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Management’s Discussion and Analysis

Crude Oil Differentials ($/Barrel)
CHART-741AD31142DFCD85A70.JPG
Items Impacting Comparability

During 2017, we revised the title of certain of our financial statement line items to avoid any misperception that the amounts included are equivalent to financial information presented in accordance with U.S. GAAP. The underlying financial information has not changed from what we have previously disclosed. See our discussion under “Non-GAAP Measures” for additional information about the financial measures we use to analyze our operations.

On June 1, 2017, we closed the Western Refining Acquisition. Our results include the operations from Western Refining for the period of June 1, 2017 to December 31, 2017 and thus prior periods may not be comparable. With the Western Refining Acquisition, we have updated our segments to reflect the results and operations of Western Refining and WNRL. Our Marketing segment reflects our expanded marketing business that, combined with Western Refining, now consists of expanded wholesale marketing operations from WNRL and over 3,250 retail stations marketed under multiple well-known fuel brands including ARCO ® , Shell ® , Mobil ™ and SUPERAMERICA ® . Our renamed Logistics segment includes the results of Andeavor Logistics, excluding WNRL’s Wholesale business. We now report the Logistics segment’s results for the combined Terminalling and Transportation and Gathering and Processing business lines. Our Refining segment reports the results of our refining system that now consists of ten refineries in the western and mid-continent United States with a combined capacity of approximately 1.2 million barrels per day. The Refining segment includes the results from Andeavor’s existing Refining segment along with the Refining business contributed in the Western Refining Acquisition.

Non-GAAP Measures

During 2017, we expanded our listing of certain “non-GAAP” performance measures our management uses to analyze operating segment performance and non-GAAP financial measures to evaluate past performance and prospects for the future to supplement our GAAP financial information presented in accordance with U.S. GAAP. These non-GAAP measures are defined in our glossary of terms. These financial and operational non-GAAP measures are important factors in assessing our operating results and profitability and include:

•
EBITDA
•
Segment EBITDA
•
Fuel margin
•
Fuel margin per gallon
•
Merchandise margin
•
Merchandise margin percentage
•
Average margin on NGL sales per barrel
•
Refining margin
•
Refining margin per throughput barrel
•
Manufacturing costs (excluding depreciation and amortization) per throughput barrel

We present these measures because we believe they may help investors, analysts, lenders and ratings agencies analyze our results of operations and liquidity in conjunction with our U.S. GAAP results, including but not limited to:

•
our operating performance as compared to other publicly traded companies in the refining, logistics and marketing industries, without regard to historical cost basis or financing methods;
•
our ability to incur and service debt and fund capital expenditures; and
•
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

 
 
December 31, 2017 | 35
Management’s Discussion and Analysis


Management also uses these measures to assess internal performance. Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures.

Consolidated Results

Highlights (in millions)
TSO201610-K_CHARTX00507A02.JPG TSO201610-K_CHARTX01617A02.JPG TSO201610-K_CHARTX02601A02.JPG
(a)    See “Non-GAAP Reconciliations” section below for further information regarding these non-GAAP measures.

Percentage of Segment Operating Income by Operating Segment
CHART-9CEAB35F041332020B5.JPG CHART-C0C018352D256906208.JPG CHART-DFA309B423B3DEAC6EF.JPG

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Management’s Discussion and Analysis

2017 Versus 2016

Operating Income Reconciliation by Segment (in millions)
CHART-37FC2E9FD77873D70A4.JPG
Overview
Our net earnings in 2017 of $1.7 billion increased $823 million , or 96% from net earnings of $860 million in 2016 , primarily due to a $918 million benefit related to the impact of Federal tax reform and the Western Refining Acquisition offset by higher general and administrative costs and interest and financing costs. Similarly, EBITDA of $2.6 billion in 2017 increased $171 million , or 7% , from $2.4 billion in 2016 as a result of the Western Refining Acquisition.

Segment Results
Operating income increased slightly to $1.5 billion during 2017 compared to 2016 driven by increases in our Refining and Logistics segments that were offset by an increase in corporate costs as discussed further below. Refer to our detailed discussion of each segment’s operating and financial results contained in this section.

Corporate Costs
General and administrative expenses increased $341 million in 2017 compared to 2016 largely due to $222 million in acquisition and integration costs incurred in connection with the Western Refining Acquisition, WNRL Merger and the IDR buy-in transaction. Additionally, the addition of Western Refining contributed to the increase. Included in the integration costs were $53 million of severance and equity payouts, of which $42 million was due to the change of control and $11 million due to expected severance and retention payments.

Interest and Financing Costs, Net
Interest and financing costs increased approximately $165 million to $439 million during 2017 from $274 million in 2016 . The increase was driven by transactional costs of new Andeavor Logistics senior notes during 2017 that included $60 million in early redemption premiums and $17 million in write-offs of unamortized issuance costs. Also contributing to the increase was a $76 million impact from a full year of interest on our senior notes issued in December 2016 in addition to a $46 million increase from a full year of interest on the Andeavor Logistics senior notes issued in 2016. See further discussion of senior note issuances and debt repayments in the “Capital Resources and Liquidity” section. Partially offsetting the annual increase was a one-time bridge fee paid in 2016 related to the Western Refining Acquisition.

Other Income, Net
Other income during 2016 included nonrecurring gains of $15 million related to pipeline tariff refunds received in California, $13 million of proceeds related to an insurance settlement on a contaminated crude oil shipment we received in 2013 and a $9 million gain related to an adjustment permitted in the agreement from the 2013 acquisition of the ARCO ®  brand.

Income Tax Expense (Benefit)
Our income tax benefit from continuing operations totaled $560 million in 2017 versus income tax expense of $427 million in 2016 . The year over year income tax variance is primarily attributable to a $918 million benefit arising from the impact of the recently enacted federal Tax Act coupled with a decrease in earnings before income taxes. The combined federal and state effective income tax rate was (50.2)% and 33.4% during 2017 and 2016 , respectively. Refer to Note 13 to our consolidated financial statements in Item 8 for further discussion of the impact of the federal Tax Act.

Earnings (Loss) from Discontinued Operations, Net of Income Tax
Earnings from discontinued operations related to Tesoro Hawaii, LLC, (the “Hawaii Business”), net of tax, were $8 million in 2017 , compared to $10 million in 2016 . The earnings in 2017 relate to the lowering of an estimate for remaining regulatory improvements to be made in Hawaii and 2016 related to proceeds from the 2014 and 2015 calendar year earn-out payments received.

 
 
December 31, 2017 | 37
Management’s Discussion and Analysis


2016 Versus 2015

Operating Income Reconciliation by Segment (in millions)
CHART-6FEE29337CBED0C2994.JPG
Overview
Our net earnings in 2016 of $860 million decreased from net earnings of $1.7 billion in 2015 primarily due to the weaker margin environment within our Refining segment. Similarly, EBITDA of $2.4 billion in 2016 declined $1.2 billion , or 33% , from $3.6 billion in 2015 as a result of the weaker margin environment.

Segment Results
Operating income decreased $1.3 billion during 2016 compared to 2015 primarily as a result of a decrease of $1.3 billion in our Refining segment. Refer to our detailed discussion of each segment’s operating and financial results contained in this section.

Interest and Financing Costs, Net
Interest and financing costs increased approximately $57 million to $274 million during 2016 from $217 million in 2015 . The increase was attributable to the write-off of deferred financing costs related to revolver amendments and bridge facility fees in anticipation of the Western Refining acquisition and new debt issuances in the year, primarily the $250 million aggregate principal amount of Andeavor Logistics’ 6.125% Senior Notes due in 2021 and the $450 million aggregate principal amount of Andeavor Logistics’ 6.375% Senior Notes due in 2024 issued in May 2016.

Other Income, Net
Other income during 2016 included gains of $15 million related to pipeline tariff refunds received in California, $13 million proceeds related to an insurance settlement on contaminated crude oil shipment we received in 2013 and $9 million gain related to an adjustment permitted in the agreement from the 2013 acquisition of the ARCO ®  brand. In 2015, other income included a gain for an insurance settlement of $11 million related to the Washington Refinery Fire.

Income Tax Expense
Our income tax expense from continuing operations totaled $427 million in 2016 versus $936 million in 2015 . The decreased income tax expense is attributable to the decrease in earnings before income taxes. The combined federal and state effective income tax rate was 33.4% and 35.6% during 2016 and 2015 , respectively. Compared to 2015 , the income from non-taxable noncontrolling interests attributable to Andeavor Logistics was a higher percentage of earnings before income taxes. The 2016 rate also benefited from a $16 million decrease in expense related to the early adoption of Accounting Standards Update 2016-09, “Improvements to Employee Share-Based Payment Accounting.”

Earnings (Loss) from Discontinued Operations, Net of Income Tax
Earnings from discontinued operations related to the Hawaii Business, net of tax, were $10 million in 2016 , compared to a $4 million loss in 2015 . The earnings in 2016 primarily related to proceeds from the calendar year 2015 earn-out owed to the Company. The loss in 2015 was related to a change in estimate for the regulatory improvements we were required to make.


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Management’s Discussion and Analysis

ANDV_MARKETINGA02.JPG Marketing

Refer to Item 1 for a description of our Marketing segment operations.

Highlights
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(a)
See “Non-GAAP Reconciliations” section for further information regarding these non-GAAP measures.

Operational Data and Results
Management uses fuel margin per gallon and merchandise margin to compare results to other companies in the industry. There are a variety of ways to calculate fuel margin per gallon and merchandise margin; different companies may calculate them in different ways. We report fuel margin separate for our retail and branded operations as well as our unbranded operations due to the difference in margin economics in these channels. Fuel margin and fuel margin per gallon include the effect of intersegment purchases from the Refining segment. Merchandise margin is frequently used in the convenience store industry to measure operating results related to merchandise sales. Investors and analysts may use these metrics to help analyze and compare companies in the industry on the basis of operating performance. These financial measures should not be considered alternatives to revenues, segment operating income or any other measures of financial performance presented in accordance with U.S. GAAP.

Number of Retail and Branded Stations
COPY3OFTSO_CHART-53656A01.JPG
(a)
457 company operated stations and 87 jobber/dealer operated stations acquired with the Western Refining Acquisition.


 
 
December 31, 2017 | 39
Management’s Discussion and Analysis

Marketing Fuel Sales (in million of gallons)
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Marketing Segment Operating Results (dollars in millions, except ¢/gallon)
 
Year Ended
December 31,
 
2017 (a)
 
2016
Revenues
$
21,513

 
$
15,490

Expenses
 
 
 
Cost of fuels and other (excluding items shown separately below)
20,122

 
14,292

Operating expenses (excluding depreciation and amortization)
511

 
298

Depreciation and amortization expense
68

 
49

Selling, general and administrative expenses
23

 
17

Loss on asset disposals and impairments
1

 
4

Segment Operating Income
$
788

 
$
830

 
 
 
 
Segment EBITDA (b)
$
856

 
$
889

 
 
 
 
Marketing Margin (b)
 
 
 
Retail and Branded fuel margin
$
1,058

 
$
1,061

Unbranded fuel margin
110

 
69

Total Fuel Margin
1,168

 
1,130

Merchandise margin
127

 
8

Other margin
96

 
60

Total Convenience Margin
223

 
68

Total Marketing Margin
$
1,391

 
$
1,198

Fuel Margin (¢/gallon) (b)
Retail and Branded Fuel Margin

20.9
¢
 

23.3
¢
Unbranded Fuel Margin

2.0
¢
 

1.6
¢
Total Fuel Margin

11.2
¢
 

12.7
¢
 
 
 
 
Merchandise Margin % (b)
27.1
%
 
34.4
%

(a)
Includes historical results of Western Refining’s retail and wholesale fuels business since June 1, 2017, the date of acquisition.
(b)
See “Non-GAAP Reconciliations” section for further information regarding these non-GAAP measures.

 
2017 Versus 2016

Overview
Operating income decreased $42 million , or 5% , and Segment EBITDA decreased $33 million in 2017 compared to 2016 primarily due to weaker California fuel margins partially offset by contributions from the Western Refining Acquisition and retail stations acquired in northern California.

Retail and Branded Fuel Margin
Fuel margin remained relatively flat at $1.1 billion in 2017 compared to 2016 . During the first half of 2017, inclement weather along the west coast negatively impacted demand while rising spot prices in the second half of 2017 negatively impacted margins. These impacts were offset by margin contributions from the Western Refining Acquisition. Volumes increased 518 million gallons due to growth in our network from the Western Refining Acquisition, sales from 39 stations acquired in northern California and organic growth in our branded network.

Unbranded Fuel Margin
Fuel margin increased $41 million to $110 million in 2017 due to increased fuel sale volumes of 1.1 billion gallons primarily driven by the Western Refining Acquisition.

Convenience Margin
Convenience margin increased $155 million to $223 million during 2017 compared to 2016 primarily reflecting contributions of the company-operated stations included in the Western Refining Acquisition. This also resulted in a decreased merchandise margin percentage to 27.1% in 2017 compared to 34.4% in 2016 due to the product mix of the acquired business.

Operating Expenses and Depreciation
Operating expenses increased $213 million and depreciation and amortization expenses increased $19 million in 2017 versus 2016 primarily due to higher operating costs associated with company-operated stations acquired in the Western Refining Acquisition.


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Management’s Discussion and Analysis

Marketing Segment Operating Results (dollars in millions, except ¢/gallon)
 
Year Ended
December 31,
 
2016
 
2015
Revenues
$
15,490

 
$
18,144

Expenses
 
 
 
Cost of fuels and other (excluding items shown separately below)
14,292

 
16,878

Operating expenses (excluding depreciation and amortization)
298

 
300

Depreciation and amortization expense
49

 
46

Selling, general and administrative expenses
17

 
15

Loss on asset disposals and impairments
4

 
6

Segment Operating Income
$
830

 
$
899

 
 
 
 
Segment EBITDA (a)
$
889

 
$
945

 
 
 
 
Margin (a)
 
 
 
Retail and Branded fuel margin
$
1,061

 
$
1,134

Unbranded fuel margin
69

 
74

Total Fuel Margin
1,130

 
1,208

Merchandise margin
8

 
3

Other margin
60

 
55

Total Convenience Margin
68

 
58

Total Marketing Margin
$
1,198

 
$
1,266

Fuel Margin (¢/gallon) (a)
Retail and Branded Fuel Margin

23.3
¢
 

26.1
¢
Unbranded Fuel Margin

1.6
¢
 

1.7
¢
Total Fuel Margin

12.7
¢
 

14.0
¢
 
 
 
 
Merchandise Margin % (a)
34.4
%
 
44.0
%

(a)
See “Non-GAAP reconciliations” section for further information regarding this non-GAAP measure.
 

2016 Versus 2015

Overview
Operating income decreased $69 million , or 8% , to $830 million in 2016 compared to $899 million in 2015 and Segment EBITDA decreased $56 million to $889 million in 2016 compared to $945 million in 2015 . These decreases were primarily due to lower gasoline margins in 2016 in all of the regions we operate in, particularly in the West Coast region.

Retail and Branded Fuel Margin
Fuel margin decreased $73 million , or 6% , to $1.1 billion during 2016 compared to 2015 . The decrease is primarily attributable to 2016 margins approaching the low end of the 5-year range with 2015 at near record levels partially offset by a 5% increase in volumes driven by growth in our retail and branded network.

Unbranded Fuel Margin
Fuel margin decreased $5 million to $69 million in 2016 with slightly lower per gallon margins offset by a modest increase in sales volumes.

Convenience Margin
Convenience margin increased $10 million to $68 million during 2016 compared to 2015 primarily reflecting the growth of our retail and branded network.




 
 
December 31, 2017 | 41
Management’s Discussion and Analysis

ANDXTERMINALLINGA03.JPG ANDX_GATHERINGA04.JPG ANDX_PROCESSINGA03.JPG Logistics

Refer to Item 1 for a description of our Logistics segment operations.

Operational Data and Results
Several operating metrics are used by management to evaluate performance and efficiency and compare profitability to other companies in the industry. These metrics include:

•
Average terminalling revenue per barrel;
•
Average pipeline transportation revenue per barrel;
•
Average margin on NGL sales per barrel;

 
•
Average gas gathering and processing revenue per MMBtu; and
•
Average crude oil and water gathering revenue per barrel.

Investors and analysts use these financial measures to help analyze and compare companies in the industry on the basis of operating performance. These financial measures should not be considered as an alternative to segment operating income, revenues and operating expenses or any other measure of financial performance presented in accordance with U.S. GAAP.

Highlights (in millions)
TSO201610-K_CHARTX00879A02.JPG TSO201610-K_CHARTX02370A02.JPG
Logistics Segment Operating Data
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COPY3OFTSO_CHART-58234A01.JPG COPY3OFTSO_CHART-58979A01.JPG
(a)
Volumes represent barrels sold under Andeavor Logistics’ keep-whole arrangements, net barrels retained under its POP arrangements and other associated products.

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Management’s Discussion and Analysis

Logistics Segment Operating Results (in millions, except per barrel and per MMBtu)
 
Year Ended December 31,
 
2017 (a)
 
2016
Revenues
 
 
 
Terminalling and transportation
 
 
 
Terminalling
$
688

 
$
480

Pipeline transportation
130

 
125

Other revenues
18

 
—

Gathering and processing
 
 
 
NGL sales (b)
369

 
103

Gas gathering and processing
333

 
264

Crude oil and water gathering
228

 
133

Pass-thru and other revenue
165

 
115

Total Revenues (c)
1,931

 
1,220

Costs and Expenses
 
 
 
Terminalling and transportation
 
 
 
Operating expenses (excluding depreciation and amortization) (d)
257

 
193

Gathering and processing
 
 
 
NGL expense (excluding items shown separately below) (b)
265

 
2

Operating expenses (excluding depreciation and amortization) (d)
357

 
249

Depreciation and amortization expense
276

 
190

General   and   administrative expenses (d)
135

 
95

(Gain) loss on asset disposals
(24
)
 
4

Segment Operating Income
$
665

 
$
487

 
 
 
 
Segment EBITDA (e)
$
954

 
$
696

 
 
 
 
Average terminalling revenue per barrel
$
1.32

 
$
1.33

Average pipeline transportation revenue per barrel
$
0.40

 
$
0.39

Average margin on NGL sales per barrel (b)(e)
$
34.77

 
$
36.59

Average gas gathering and processing revenue per MMBtu
$
0.95

 
$
0.82

Average crude oil and water gathering revenue per barrel
$
2.11

 
$
1.72


 

2017 Versus 2016

Overview
Operating income for our Logistics segment increased from $487 million in 2016 to $665 million in 2017 and Segment EBITDA increased from $696 million to $954 million , respectively. These increases were driven by Andeavor Logistics’ acquisitions of the Alaska Storage and Terminalling Assets and the Northern California Terminalling and Storage Assets from Andeavor in the second half of 2016 , the North Dakota Gathering and Processing Assets in January 2017 and from the operations obtained through the Western Refining Acquisition during 2017 . The 2017 results also reflect a $25 million gain on the sale of a refined products terminal in Alaska.

Terminalling and Transportation
Terminalling and transportation revenues, net of operating expenses, increased $167 million , or 41% , in 2017 compared to 2016 primarily due to higher revenues associated with new commercial terminalling and storage agreements executed with our Refining segment in connection with the acquisitions in the second half of 2016 . Also contributing to the increase were seven months of contributions from the WNRL operations obtained through the Western Refining Acquisition and higher marine terminalling revenues driven by higher refinery utilization. The increase in revenues was partially offset by higher operating expenses, particularly related to the acquisitions.

Gathering and Processing
Gathering and processing revenues, net of NGL expense and operating expenses, increased $109 million , or 30% , in 2017 compared to 2016 . Revenues increased across the natural gas gathering and processing systems and crude oil and water gathering systems due primarily to the acquisition of the North Dakota Gathering and Processing Assets and expanded capabilities on our existing assets. Also contributing to the increase were seven months of contributions from the WNRL operations obtained through the Western Refining Acquisition. The increases were partially offset by a decline in revenues resulting from lower natural gas volumes in the Rockies Region, incremental operating expenses primarily associated with the acquired assets and estimated costs to complete remediation and closure activities along with long-term monitoring in Tioga, North Dakota.

(a)
Includes results of Western Refining’s logistics business, excluding its wholesale fuel sales business, since June 1, 2017, the date of acquisition.
(b)
For 2017, our Logistics segment had 22.2 Mbpd of gross NGL sales under POP and keep-whole arrangements, of which Logistics retained 8.3 Mbpd. The difference between gross sales barrels and barrels retained is reflected in NGL expense due to the gross presentation required for the POP arrangements associated with the North Dakota Gathering and Processing Assets.
(c)
Our Logistics segment revenues from services provided to our Refining segment were $1.0 billion and $715 million for the years ended December 31, 2017 and 2016 , respectively. These amounts are eliminated upon consolidation.
(d)
Our Logistics segment operating expenses as well as general and administrative expenses include amounts billed by Andeavor for services provided to Andeavor Logistics under various operational contracts. Amounts billed by Andeavor included in operating expenses totaled $186 million and $190 million for the years ended December 31, 2017 and 2016 , respectively. The net amounts billed include reimbursements of $16 million and $17 million for the years ended December 31, 2017 and 2016 , respectively. Amounts billed by Andeavor included in general and administrative expenses totaled $82 million and $69 million for the years ended December 31, 2017 and 2016 , respectively. All of these amounts are eliminated upon consolidation. Those expenses with third-parties related to the transportation of crude

 
 
December 31, 2017 | 43
Management’s Discussion and Analysis

oil and refined products related to Andeavor’s sale of those refined products during the ordinary course of business are reclassified to cost of materials and other in our statements of consolidated operations upon consolidation.
(e)
See “Non-GAAP Reconciliations” section for further information regarding this non-GAAP measure.

Logistics Segment Operating Results (in millions, except per barrel and per MMBtu)
 
Year Ended December 31,
 
2016
 
2015
Revenues
 
 
 
Terminalling and transportation
 
 
 
Terminalling
$
480

 
$
377

Pipeline transportation
125

 
118

Gathering and Processing
 
 
 
NGL sales
103

 
99

Gas gathering and processing
264

 
274

Crude oil and water gathering
133

 
123

Pass-thru and other revenue
115

 
121

Total Revenues (a)
1,220

 
1,112

Costs and Expenses
 
 
 
Terminalling and transportation
 
 
 
Operating expenses (excluding depreciation and amortization) (b)
193

 
184

Gathering and Processing
 
 
 
NGL expense (excluding items shown separately below)
2

 
—

Operating expenses (excluding depreciation and amortization) (b)
249

 
244

Depreciation and amortization expense
190

 
187

General   and   administrative   expenses   (b)
95

 
103

Loss on asset disposals
4

 
1

Segment Operating Income
$
487

 
$
393

 
 
 
 
Segment EBITDA (c)
$
696

 
$
587

 
 
 
 
Average terminalling revenue per barrel
$
1.33

 
$
1.08

Average pipeline transportation revenue per barrel
$
0.39

 
$
0.39

Average margin on NGL sales per barrel (c)
$
36.59

 
$
34.38

Average gas gathering and processing revenue per MMBtu
$
0.82

 
$
0.69

Average crude oil and water gathering revenue per barrel
$
1.72

 
$
1.79

 

2016 Versus 2015

Overview
Operating income for our Logistics segment increased to $487 million in 2016 from $393 million in 2015 and Segment EBITDA increased to $696 million from $587 million . These increases were primarily driven by the full year impact of the LA Storage and Handling Assets purchased in November 2015 and the Alaska Storage and Terminalling Assets purchased in 2016.

Terminalling and Transportation
Terminalling and transportation revenues, net of operating expenses, increased $101 million , or 32% , in 2016 compared to 2015 primarily due to higher revenues associated with a full year impact of the new commercial terminalling and storage agreements executed with our Refining segment associated with the LA Storage and Handling Assets and the Alaska Storage and Terminalling Assets acquisitions, stronger customer demand and organic growth projects adding new capabilities to Andeavor Logistics’ system.

Gathering and Processing
Gathering and processing revenues, net of NGL expense and operating expenses, decreased $9 million , or 2% , in 2016 compared to 2015 . Gas gathering and processing volume decreased largely due to the deconsolidation of RGS in 2016 while crude oil and water gathering throughput increased due to increased activity and the completion of expansion projects. Operating expenses increased $5 million in 2016 compared to 2015 primarily resulting from the inclusion of gross operating expenses related to Andeavor Logistics’ transactions with RGS in 2016 that were previously eliminated upon consolidation as well as additional expenses related to acquisitions during 2016 partially offset by a reduction in the environmental remediation costs recognized in 2016 compare to 2015 related to the 2013 release of crude oil in a rural field northeast of Tioga, North Dakota.


(a)
Our Logistics segment revenues from services provided to our Refining segment were $715 million and $615 million for the years ended December 31, 2016 and 2015 , respectively. These amounts are eliminated upon consolidation.
(b)
Our Logistics segment operating expenses as well as general and administrative expenses include amounts billed by Andeavor for services provided to Andeavor Logistics under various operational contracts. Amounts billed by Andeavor included in operating expenses totaled $190 million and $177 million for the years ended December 31, 2016 and 2015 , respectively. The net amounts billed include reimbursements of $17 million and $34 million for the years ended December 31, 2016 and 2015 , respectively. Amounts billed by Andeavor included in general and administrative expenses totaled $69 million and $72 million for the years ended December 31, 2016 and 2015 , respectively. All of these amounts are eliminated upon consolidation. Those expenses with third-parties related to the transportation of crude oil and refined products related to Andeavor’s sale of those refined products during the ordinary course of business are reclassified to cost of materials and other in our statements of consolidated operations upon consolidation.
(c)
See “Non-GAAP Reconciliations” section for further information regarding this non-GAAP measure.

44  |  
ANDVLOGOPRIMARYCOLORRGBA21.JPG
 
Management’s Discussion and Analysis

ANDVREFININGA02.JPG Refining

Refer to Item 1 for a description of our Refining segment operations.

Highlights
TSO201610-K_CHARTX02143A02.JPG TSO201610-K_CHARTX03196A02.JPG TSO201610-K_CHARTX04162A02.JPG
(a)    See “Non-GAAP Reconciliations” section for further information regarding these non-GAAP measures.

Operational Data and Results
Various operating metrics are used by management to evaluate performance and efficiency and to compare profitability to other companies in the industry. These measures include:

•
Refining utilization;
•
Refining margin;
•
Refining margin per barrel of throughput; and
•
Manufacturing costs before depreciation and amortization expense per throughput barrel.

Investors and analysts use these financial measures to help analyze and compare companies in the industry on the basis of operating performance. These financial measures should not be considered alternatives to segment operating income, revenues, costs of sales and operating expenses or any other measure of financial performance presented in accordance with U.S. GAAP.

Refining Utilization (a)
CHART-7451C02E582C84A7DF5.JPG
(a)
Andeavor had a total refining capacity of 1,157 Mbpd in 2017 following the Western Refining Acquisition and 895 Mbpd in 2016 following the acquisition of the Dickinson refinery. In December 2015, we updated our capacity to 875 Mbpd after the completion of several key capital projects. For purposes of the utilization calculation above, a total refining capacity of 850 Mbpd was used for the year ended December 31, 2015.
 
Refining Throughput (Mbpd)
TSO201610-K_CHARTX10686A02.JPG

 
 
December 31, 2017 | 45
Management’s Discussion and Analysis

Yield (Mbpd)
CHART-CD6551457904162886F.JPG
Refined Product Sales (a) (Mbpd)
CHART-3BD663E5F4C23864770.JPG

(a)
Sources of total refined product sales include refined products manufactured at our refineries and refined products purchased from third parties. Total refined product sales include sales of manufactured and purchased refined products. Refined product sales include all sales through our Marketing segment as well as in bulk markets and exports through our Refining segment.

46  |  
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Management’s Discussion and Analysis

Refining Segment Operating Results (dollars in millions, except per barrel amounts)
 
Year Ended December 31,
 
2017 (a)
 
2016
Refining Revenues  
 
 
 
Refined products (b)
$
29,572

 
$
21,213

Crude oil resales and other
2,009

 
1,043

Total Revenues
31,581

 
22,256

Refining Cost of Materials and Expenses
 
 
 
Cost of materials and other (excluding items shown separately below)
27,741

 
19,469

LCM
—

 
(359
)
Operating expenses (excluding depreciation and amortization):
 
 
 
Manufacturing costs
1,954

 
1,591

Other operating expenses
438

 
429

Total operating expenses
2,392

 
2,020

Depreciation and amortization expenses
647

 
588

General and administrative expenses
8

 
2

Loss on asset disposals and impairments
8

 
1

Segment Operating Income
$
785

 
$
535

 
 
 
 
Segment EBITDA (c)
$
1,447

 
$
1,163

 
 
 
 
Refining Margin (c)
$
3,840

 
$
3,146

Refining Margin per throughput barrel (c)
$
10.55

 
$
10.42

Manufacturing costs (excluding depreciation and amortization) per throughput barrel (c)
$
5.37

 
$
5.27


(a)
Includes results of Western Refining’s refining business since June 1, 2017, the date of acquisition.
(b)
Refined product sales included intersegment sales to our Marketing segment of $15.9 billion and $13.7 billion for the years ended December 31, 2017 and 2016 , respectively.
(c)
See “Non-GAAP Reconciliations” section for further information regarding this non-GAAP measure.

 

2017 Versus 2016

Overview
Operating income for our Refining segment increased $250 million , or 47% , to $785 million in 2017 compared to 2016 due to the Western Refining Acquisition and a stronger margin environment. Average U.S. West Coast and Mid-Continent crack spreads were up approximately $1.42 and $4.25 per barrel, respectively, in 2017 compared to 2016. Total refinery utilization increased slightly to 95% in 2017 from the 93% experienced in 2016 due to higher turnaround and maintenance activities in 2016.

California Region
Refining margin decreased $180 million in 2017 to $1.9 billion , or $10.10 per barrel, compared to $2.1 billion , or $11.36 per barrel in 2016 as the refining throughput increased for the region by 16 Mbpd to 523 Mbpd for 2017. The lower refining margin was primarily driven by the year on year change in the LCM. There was no LCM margin impact in 2017 compared to a benefit to the refining margin in 2016 of $236 million . In addition, manufacturing costs increased in 2017 to $6.11 per barrel compared to $6.02 per barrel driven by higher energy prices and the timing of maintenance expenses.

Pacific Northwest Region
Refining margin increased $45 million in 2017 to $560 million , or $8.20 per barrel, compared to $515 million , or $7.77 per barrel in 2016, primarily due to a more favorable margin environment and an increase in refining throughput for the region of 6 Mbpd to 187 Mbpd for 2017. Partially offsetting this increase was the year on year change in LCM impact. There was no LCM margin impact in 2017 compared to a positive impact to refining margin in 2016 of $84 million . In addition, manufacturing costs increased in 2017 to $4.06 per barrel compared to $3.90 per barrel driven by higher energy prices and unplanned maintenance expenses.

Mid-Continent Region
Refining margin increased in 2017 to $1.4 billion , or $12.91 per barrel, compared to $523 million , or $10.43 per barrel in 2016, primarily due to the results from the operations from the Western Refining Acquisition for seven months of 2017, which led to a significant increase in refining throughput for the region of 150 Mbpd to 287 Mbpd in 2017. Partially offsetting this impact was the year on year change in LCM impact. There was no LCM margin impact in 2017 compared to a positive impact to the refining margin in 2016 of $39 million . In addition, manufacturing costs increased in 2017 to $4.88 per barrel compared to $4.29 per barrel in 2016 driven by the Western Refining Acquisition.


 
 
December 31, 2017 | 47
Management’s Discussion and Analysis

Refining Segment Operating Results (dollars in millions, except per barrel amounts)
 
Year Ended December 31,
 
2016
 
2015
Refining Revenues  
 
 
 
Refined products (a)
$
21,213

 
$
25,443

Crude oil resales and other
1,043

 
946

Total Revenues
22,256

 
26,389

Refining Cost of Materials and Expenses
 
 
 
Cost of materials and other (excluding items shown separately below)
19,469

 
21,728

LCM
(359
)
 
317

Operating expenses (excluding depreciation and amortization):
 
 
 
Manufacturing costs
1,591

 
1,594

Other operating expenses
429

 
329

Total operating expenses
2,020

 
1,923

Depreciation and amortization expenses
588

 
504

General and administrative expenses
2

 
14

Loss on asset disposals and impairments
1

 
32

Segment Operating Income
$
535

 
$
1,871

 
 
 
 
Segment EBITDA (b)
$
1,163

 
$
2,375

 
 
 
 
Refining Margin (b)
$
3,146

 
$
4,344

Refining Margin per throughput barrel (b)
$
10.42

 
$
15.12

Manufacturing costs (excluding depreciation and amortization) per throughput barrel (b)
$
5.27

 
$
5.55


(a)
Refined product sales included intersegment sales to our Marketing segment of $13.7 billion and $16.3 billion for the years ended December 31, 2016 and 2015 , respectively.
(b)
See “Non-GAAP Reconciliations” section for further information regarding this non-GAAP measure.

 

2016 Versus 2015

Overview
Operating income for our Refining segment decreased $1.3 billion , or 71% , to $535 million in 2016 compared to 2015 due to a weaker margin environment. Average U.S. West Coast and Mid-Continent crack spreads were down approximately $5.53 per barrel in 2016 compared to 2015 . Total refinery utilization of 93% in 2016 was in line with the utilization we experienced in 2015 .

California Region
Refining margin decreased $824 million in 2016 to $2.1 billion , or $11.36 per barrel, primarily driven by a weaker refining margin environment in the region when compared to $2.9 billion , or $16.29 per barrel in 2015 , Partially offsetting the effects of the refining margin environment was the positive impact of the LCM adjustment in 2016 and continued demand growth for our refined products. Manufacturing costs decreased in 2016 to $6.02 per barrel compared to $6.37 per barrel driven by lower energy prices and the timing of maintenance expenses.

Pacific Northwest Region
Refining margin decreased $165 million in 2016 to $515 million , or $7.77 per barrel, primarily driven by a weaker refining margin environment in the region when compared to $680 million , or $10.96 per barrel in 2015 , Partially offsetting the effects of the refining margin environment was the positive impact of the LCM adjustment in 2016 and continued demand growth for our refined products. Manufacturing costs decreased in 2016 to $3.90 per barrel compared to $4.37 per barrel driven by lower energy prices and the timing of maintenance expenses.

Mid-Continent Region
Refining margin decreased $209 million in 2016 to $523 million , or $10.43 per barrel, primarily driven by a weaker refining margin environment in the region when compared to $732 million , or $16.17 per barrel in 2015 . Partially offsetting the effects of the refining margin environment was the positive impact of the LCM adjustment in 2016 and continued demand growth for our refined products. Other operating expenses as well as depreciation and amortization expenses increased as a result of the acquisitions during 2016 . Manufacturing costs remained steady in 2016 at $4.29 per barrel compared to $4.26 per barrel.


48  |  
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Management’s Discussion and Analysis

Refining Segment Operating Results by Region (in millions, except per barrel amounts)
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
California
(Los Angeles and Martinez)
 
Pacific Northwest
 (Washington and Alaska)
 
Mid-Continent
(Texas, Minnesota, North Dakota, Utah and New Mexico)
Revenues  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Refined products
$
16,346

 
$
14,231

 
$
17,317

 
$
4,872

 
$
4,030

 
$
4,767

 
$
8,354

 
$
2,952

 
$
3,359

Crude oil resales and other
413

 
312

 
344

 
258

 
226

 
350

 
1,338

 
505

 
252

Total Revenues
16,759

 
14,543

 
17,661

 
5,130

 
4,256

 
5,117

 
9,692

 
3,457

 
3,611

Refining Cost of Materials and Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of materials and other (excluding items shown separately below)
14,831

 
12,671

 
14,522

 
4,570

 
3,825

 
4,361

 
8,340

 
2,973

 
2,845

LCM
—

 
(236
)
 
207

 
—

 
(84
)
 
76

 
—

 
(39
)
 
34

Operating expenses (excluding depreciation and amortization)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing costs
1,166

 
1,119

 
1,144

 
277

 
258

 
256

 
511

 
214

 
194

Other operating expenses
252

 
210

 
206

 
80

 
65

 
64

 
106

 
154

 
59

Total operating expenses
1,418

 
1,329

 
1,350

 
357

 
323

 
320

 
617

 
368

 
253

Depreciation and amortization expense
379

 
375

 
336

 
106

 
96

 
86

 
162

 
117

 
82

General and administrative expense
5

 
1

 
13

 
—

 
1

 
—

 
3

 
—

 
1

Loss on asset disposals and impairments
7

 
—

 
10

 
—

 
—

 
6

 
1

 
1

 
16

Operating Income
$
119

 
$
403

 
$
1,223

 
$
97

 
$
95

 
$
268

 
$
569

 
$
37

 
$
380

Refining throughput (Mbpd)
523

 
507

 
493

 
187

 
181

 
170

 
287

 
137

 
124

Refining margin (a)
$
1,928

 
$
2,108

 
$
2,932

 
$
560

 
$
515

 
$
680

 
$
1,352

 
$
523

 
$
732

Refining margin per throughput barrel (a)
$
10.10

 
$
11.36

 
$
16.29

 
$
8.20

 
$
7.77

 
$
10.96

 
$
12.91

 
$
10.43

 
$
16.17

Manufacturing costs per throughput barrel (a)
$
6.11

 
$
6.02

 
$
6.37

 
$
4.06

 
$
3.90

 
$
4.37

 
$
4.88

 
$
4.29

 
$
4.26


(a)
See “Non-GAAP Reconciliations” section for further information regarding this non-GAAP measure.

 
 
December 31, 2017 | 49
Management’s Discussion and Analysis

Capital Resources and Liquidity

Overview

We operate in an environment where our capital resources are impacted by changes in the price of crude oil and refined products, availability of trade credit, market uncertainty and a variety of additional factors beyond our control. These factors include the level of consumer demand for transportation fuels, weather conditions, fluctuations in seasonal demand, governmental regulations, geo-political conditions and overall market and global economic conditions. See “Important Information Regarding Forward-Looking Statements” and “Risk Factors” for further information related to risks and other factors. Future capital expenditures, as well as borrowings under our credit agreements and other sources of capital, may be affected by these conditions. Debt is described in greater detail in Note 12 to our consolidated financial statements in Item 8.

Capitalization

Capital Structure (in millions)
 
As of December 31,
Debt, including current maturities:
2017
 
2016
Andeavor Revolving Credit Facility
$
55

 
$
—

4.250% Senior Notes due 2017
—

 
450

5.375% Senior Notes due 2022
475

 
475

4.750% Senior Notes due 2023
850

 
850

5.125% Senior Notes due 2024
300

 
300

5.125% Senior Notes due 2026
750

 
750

3.800% Senior Notes due 2028 (a)
500

 
—

4.500% Senior Notes due 2048 (a)
500

 
—

Term Loan Facility (b)
56

 
64

Capital lease obligations and other
131

 
44

Andeavor Debt
3,617

 
2,933

Andeavor Logistics Revolving Credit Facility
423

 
330

Andeavor Logistics Dropdown Credit Facility
—

 
—

Andeavor Logistics 5.500% Senior Notes due 2019
500

 
500

Andeavor Logistics 5.875% Senior Notes due 2020 (c)
—

 
470

Andeavor Logistics 6.125% Senior Notes due 2021 (c)
—

 
800

Andeavor Logistics 3.500% Senior Notes due 2022 (a)
500

 
—

Andeavor Logistics 6.250% Senior Notes due 2022
300

 
800

Andeavor Logistics 6.375% Senior Notes due 2024
450

 
450

Andeavor Logistics 5.250% Senior Notes due 2025
750

 
750

Andeavor Logistics 4.250% Senior Notes due 2027 (a)
750

 
—

Andeavor Logistics 5.200% Senior Notes due 2047 (a)
500

 
—

Capital lease obligations and other
9

 
9

Andeavor Logistics Debt
4,182

 
4,109

Total Debt
7,799

 
7,042

Unamortized Issuance Costs (a) (c) (d)
(114
)
 
(109
)
Debt, Net of Unamortized Issuance Costs
7,685

 
6,933

Total Equity
13,415

 
8,127

Total Capitalization
$
21,100

 
$
15,060


(a)
Unamortized discounts of $12 million associated with these senior notes are included in unamortized issuance costs at December 31, 2017 .
(b)
In connection with our acquisition of the Dickinson Refinery, we assumed its term loan debt.
(c)
Unamortized premiums of $4 million associated with these senior notes are included in unamortized issuance costs at December 31, 2016 .
(d)
The unamortized issuance costs for Andeavor Logistics were $54 million and $55 million at December 31, 2017 and 2016 , respectively.


50  |  
ANDVLOGOPRIMARYCOLORRGBA21.JPG
 
Management’s Discussion and Analysis

Senior Notes by Maturity (in millions)
TSO201610-K_CHARTX01851A02.JPG
2017 Debt Transactions

On June 1, 2017, to finance approximately $424 million in total cash consideration, the $1.6 billion repayment of certain Western Refining and Northern Tier Energy LP (“NTI”) indebtedness and fees and expenses related to the Western Refining Acquisition, we borrowed $575 million under our revolving credit facility and utilized cash on hand, including the proceeds from the 4.750% Senior Notes due 2023 and the 5.125% Senior Notes due 2026 that we issued in December 2016. Included in the $1.6 billion of debt repayments were Western Refining’s $532 million Term Loan - 5.25% Credit Facility due 2020, $350 million of 6.250% Senior Unsecured Notes due 2021, $371 million Term Loan - 5.500% Credit Facility due 2023 and NTI’s $350 million of 7.125% Senior Secured Notes due 2020 along with approximately $45 million to pay down the outstanding credit facilities at Western Refining and NTI upon acquisition. The Western Refining and NTI revolving credit facilities were terminated upon completion of the acquisition. We paid premiums of approximately $23 million in paying off the Western Refining and NTI senior notes, which were included in our purchase price allocation of the Western Refining Acquisition. The WNRL revolving credit facility and senior notes remained after the acquisition. Following the completion of the Western Refining Acquisition, our revolving credit facility increased in capacity from $2.0 billion to $3.0 billion in accordance with the amendment entered into in December 2016.

On September 27, 2017, we redeemed all of our outstanding 4.250% senior notes due 2017 for approximately $459 million, including $9 million of accrued interest, by borrowing on the Revolving Credit Facility. Later, on October 30, 2017 and in connection with the WNRL Merger, WNRL terminated all commitments and repaid all amounts outstanding under the WNRL revolving credit facility for approximately $20 million and redeemed all of the then outstanding 7.5% senior notes due 2023 for approximately $326 million, including an early payment premium and accrued interest, with borrowings from the Andeavor Logistics Revolving Credit Facility.

In addition, on November 16, 2017, Andeavor Logistics completed the public offering of $500 million aggregate principal of 3.500% senior notes due 2022, $750 million aggregate principal of 4.250% senior notes due 2027 and $500 million aggregate principal of 5.200% senior notes due 2047. The proceeds of these senior notes were used to redeem all of Andeavor Logistics’ outstanding 5.875% senior notes due 2020 and 6.125% Senior Notes due 2021 and to repay borrowings under the Andeavor Logistics Dropdown Credit Facility along with fees and expenses associated with the offering. And finally, on December 14, 2017, we completed the public offering of $500 million aggregate principal of 3.800% senior notes due 2028 and $500 million aggregate principal of 4.500% senior notes due 2048. The proceeds of these senior notes were primarily used to pay down the Revolving Credit Facility.

See Note 12 to our consolidated financial statements in Item 8 for a more detailed discussion regarding the Company’s debt transactions in the year.

Credit Facilities Overview

Our primary sources of liquidity are cash flows from operations with additional sources available under borrowing capacity from our revolving lines of credit. We ended 2017 with $543 million of cash and cash equivalents, $55 million of borrowings outstanding under the Revolving Credit Facility and $423 million of borrowings outstanding under the Andeavor Logistics Revolving Credit Facility. We believe available capital resources are adequate to meet our capital expenditure, working capital and debt service requirements. See Note 12 to our consolidated financial statements in Item 8 for the available capacities under our credit facilities and expenses and fees associated with our credit facilities.


 
 
December 31, 2017 | 51
Management’s Discussion and Analysis

Covenants
The Andeavor and Andeavor Logistics revolving credit facility agreements and indentures 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 Andeavor is required to maintain, as of the last day of the fiscal quarter, is a Consolidated Total Net Debt to Total Capitalization (as defined in the ANDV revolver credit facility agreement) of no greater than 60%. As of December 31, 2017, we were in compliance with this financial covenant.

See Note 12 to our consolidated financial statements in Item 8 for additional information on our debt obligations.

The investment grade rating achievements in 2017 for Andeavor and Andeavor Logistics align with our capital allocation and financial principles. Benefits of Investment Grade Ratings are:

•
Lower Cost of Capital - We expect incremental interest savings and lower costs on new issuances.
•
Balance Sheet Flexibility - We have the ability to extend our maturity profile to increase duration and match asset life while also benefiting from simplified and less restrictive covenants.
•
Financial and Operational Flexibility - We gain access to improved commercial terms that reduce the need for Letters of Credit, enhancing our financial standing with customers, suppliers and partners.
•
Improved Market Access - We have greater market depth and breadth that provides stability and reliable access along with better access to subordinated debt and preferred equity markets.

Share Repurchases and Cash Dividends

Return to Shareholders (in millions, except per share)
CHART-BA4EF9551AE1F05C4EC.JPG
We are authorized by our Board to purchase shares of our common stock in open market transactions at our discretion. The Board’s authorization has no time limit and may be suspended or discontinued at any time. Purchases of our common stock can be made to offset the dilutive effect of stock-based compensation awards and to meet our obligations under employee benefit and compensation plans, including the exercise of stock options and vesting of restricted stock and to fulfill other stock compensation requirements. We purchased approximately 7.0 million shares of our common stock for the year ended December 31, 2017 at an average price of $99.43 per share and 3.2 million shares of our common stock for the year ended December 31, 2016 at an average price of 78.56 per share for approximately $692 million and $250 million , respectively. In October 2015, our Board approved a $1.0 billion share repurchase program that became effective upon the full completion of the initial program. In connection with the Western Refining Acquisition, our Board approved a new $1.0 billion share repurchase program. We have over $1.4 billion remaining under our authorized programs.

On February 14, 2018 , our Board declared a cash dividend of $0.59 per share, payable on March 15, 2018 to shareholders of record on February 28, 2018 .


52  |  
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Management’s Discussion and Analysis

Cash Flow Summary

Components of our Cash Flows (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Cash Flows From (Used in):
 
 
 
 
 
Operating activities
$
1,630

 
$
1,304

 
$
2,131

Investing activities
(2,443
)
 
(1,317
)
 
(1,129
)
Financing activities
(1,939
)
 
2,366

 
(1,060
)
Increase (Decrease) in Cash and Cash Equivalents
$
(2,752
)
 
$
2,353

 
$
(58
)

2017 Compared to 2016

Operating Activities
Net cash from operating activities increased $326 million , or 25% , to $1.6 billion  in 2017 compared to $1.3 billion in 2016. The increase in net cash from operating activities was primarily due to higher net earnings after considering the impacts from non-cash operating activities partially offset by larger net cash outflows due to movements in working capital.

Investing Activities
Net cash used in investing activities increased $1.1 billion , or 85% , to $2.4 billion in 2017 compared to $1.3 billion in 2016 primarily due to funds used for acquisitions and increased capital expenditures in 2017. See “Capital Expenditures” discussed further in this Item as well as the discussion of our acquisitions in Note 2 to our consolidated financial statements in Item 8 for more information.

Financing Activities
Net cash used in financing activities during 2017 totaled $1.9 billion compared to net cash from financing activities of $2.4 billion in 2016. The $4.3 billion year on year change was primarily due to increases in repayments of debt, repayment on revolving credit facilities, purchases of common stock and lower proceeds from debt offerings of $3.9 billion , $806 million , $442 million and $314 million , respectively. These decreases in cash were partially offset by increases in borrowings under our revolving credit facilities and proceeds from Andeavor Logistics’ preferred equity issuance.

2016 Compared to 2015

Operating Activities
Net cash from operating activities decreased $827 million , or 39% , to $1.3 billion in 2016 compared to $2.1 billion in 2015. The decrease in net cash from operating activities was primarily due to $830 million in lower net earnings in 2016 versus 2015 coupled with a $676 million change in the lower cost of market adjustment offset by changes in working capital in the period.

Investing Activities
Net cash used in investing activities increased $188 million , or 17% , to $1.3 billion in 2016 compared to $1.1 billion in 2015 primarily due to funds used for acquisitions in the year partially offset by reduced capital expenditures in 2016. See “Capital Expenditures” in this Item for more information.

Financing Activities
Net cash from financing activities during 2016 totaled $2.4 billion compared to net cash used of $1.1 billion in 2015. The $3.4 billion year on year change was primarily due to $3.1 billion of proceeds from debt offerings in 2016, $265 million more proceeds from issuances of Andeavor Logistics common units and $394 million less purchases of common stock in the year partially offset by no borrowings under the Andeavor Logistics term loan credit agreement in 2016 versus $250 million in 2015. The 2016 debt offerings primarily consisted of the $1.6 billion of senior notes issuances in late 2016 in anticipation of the Western Refining transaction, the $700 million of senior notes issuances by Andeavor Logistics in May 2016 and the $750 million of senior notes issued in December 2016 by Andeavor Logistics. Dividend payments and payments to noncontrolling interests increased $55 million during 2016 compared to 2015.

Capital Expenditures

Our capital spending reflects the Company’s emphasis on long term strategic priorities including continued focus on safety, reliability and value-driven growth. Growth capital expenditures include purchases or construction of new assets and expansion of existing facilities or services that increase throughput capacity or operational capabilities of our assets. Maintenance capital expenditures include projects to extend the life or maintain equipment reliability and integrity. Andeavor regulatory capital expenditures include projects to attain or maintain compliance with regulatory standards. We monitor the effectiveness of our

 
 
December 31, 2017 | 53
Management’s Discussion and Analysis

investments in capital projects as part of our focus on financial discipline and continuous improvement. In addition, for major capital projects, we routinely review project assumptions and project execution as well as obtain third-party evaluations to assist in improving our project planning and execution. Actual and estimated amounts described below include amounts representing capitalized interest and labor. Andeavor primarily funds capital expenditures with cash generated from operations. Andeavor Logistics primarily funds its capital expenditures with cash generated from operations, reimbursements for certain growth and maintenance capital expenditures, borrowings under the Andeavor Logistics Revolving Credit Facility and issuances of additional Andeavor Logistics debt and equity securities, as needed.

Capital Expenditures (in millions)
CHART-ADE989CB6C279A14590.JPG CHART-B4806D054311CE900F8.JPG
(a)
Andeavor capital expenditures exclude Andeavor Logistics.

Cost estimates for projects currently in process or under development are subject to further review, analysis and permitting requirements resulting in revisions to our current spend estimates. Amounts presented include expected capitalized interest and labor.

Major Projects in Process or Under Development (in millions)
Major Projects
Total Project Expected
Capital Expenditures
 
Actual 2017
Capital Expenditures
Los Angeles Refinery Integration and Compliance Project (a) (b)
$
510

 
$
126

Mixed Xylenes Project (c)
500

 
9

Enterprise Resource Planning Project (d)
310

 
145

Conan Crude Oil Gathering System (b) (e)
225

 
74

Mandan Tier 3 Project (f)
220

 
34

Waxy Crude Oil Drilling Program (g)
175

 
37

Naphtha Isomerization Project (h)
150

 
53

Andeavor Logistics - Carson Crude Terminal Expansion Project (i)
165

 
1

Andeavor Logistics - North Dakota NGL Logistics Hub (j)
160

 
1


(a)
The integration and compliance project at the Los Angeles refinery is designed to improve the flexibility of gasoline and diesel yields and reduce carbon dioxide emissions. The project scope includes the construction of a pipeline between the operations located in Wilmington, California and Carson, California and the decommissioning the fluid catalytic cracking unit at our Wilmington, California facility.
(b)
A portion of the Los Angeles Integration and Compliance Project and the entire Conan Crude Oil Gathering System are expected to be acquired by Andeavor Logistics at cost plus capitalized interest once they are completed by Andeavor.
(c)
The Mixed Xylenes Project will be located at our Anacortes, Washington refinery and will help diversify our product mix through the extraction of existing mixed xylene from gasoline and improve our capability to deliver cleaner local transportation fuels and global feedstocks, primarily for polyester. The Mixed Xylenes Project and its components remain subject to final board and regulatory approval.

54  |  
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Management’s Discussion and Analysis

(d)
The Enterprise Resource Planning Project will simplify business processes by implementing a standardized and scalable platform across the Company to transform our business information and technology systems and to further streamline our operations, reduce costs and provide for future growth. We expect this project to be a complex, multi-year process that will require significant investments in software and technology. We expect the project to go-live in the first half of 2018.
(e)
The Conan Crude Oil Gathering System is a newly constructed crude oil gathering pipeline system located in the Delaware Basin. The pipeline system will be approximately 130 miles in length and transport crude oil from origins in Lea County, New Mexico and Loving County, Texas to a terminal to be constructed in Loving County, Texas, where the gathering system interconnects with long-haul pipeline carriers. The first phase of the Conan Crude Oil Gathering Pipeline system will provide capacity of approximately 250 Mbpd and storage capacity of 720,000 barrels. We expect the project to be completed in the second half of 2018.
(f)
The Mandan Tier 3 Project is designed to lower the sulfur content in gasoline, which aligns with the new Federal Tier 3 standards. The project will install a gasoline hydrotreater and associated infrastructure with completion expected before the end of 2019.
(g)
The Waxy Crude Oil Drilling Program is a drilling joint venture between Andeavor and EP Energy to fund oil and natural gas development located in the Uinta Basin of Utah. This project is limited to 60 wells and included a crude oil supply agreement allowing Andeavor to purchase all of the oil produced along with additional Waxy Crude Oil produced by EP Energy, ensuring ratable Waxy Crude Oil supply for Andeavor’s Salt Lake City Refinery.
(h)
The Naphtha Isomerization Project is located at our Anacortes, Washington refinery and will improve our capability to deliver cleaner local transportation fuels. The project is progressing with construction and is designed to lower the sulfur content in gasoline, which aligns with the new Federal Tier 3 standards. We expect the project to be completed in the first half of 2018.
(i)
The Carson Terminal Expansion Project will be constructed and funded by Andeavor Logistics. Andeavor Logistics intends to construct and operate two to three million barrels of additional crude oil storage capacity to better accommodate the unloading of marine vessels at the nearby marine terminals, which is expected to reduce transportation costs for Andeavor, such as extended port fees and demurrage.
(j)
The North Dakota NGL Logistics Hub will be constructed and funded by Andeavor Logistics. Andeavor Logistics intends to transport mixed NGLs from a third party processing plant in McKenzie County, North Dakota to its Belfield Gas Processing Plant for fractionation and then ship purity NGL products on manifest and unit trains from its Fryburg Rail Terminal.

Turnarounds and Marketing Branding Charges

In addition to our capital spending program, we have expenditures for turnarounds, catalyst and marketing branding charges.

Significant Planned Turnarounds by Location and Marketing Branding Charges (in millions)
Significant Turnarounds
Los Angeles
Martinez
Anacortes
Kenai
Mandan
Salt Lake City
El Paso
Gallup
St. Paul Park
Turnarounds and catalysts
Marketing Branding Charges
Total
2017
ü
ü
 
 
ü
 
ü
 
 
$
548

$
76

$
624

Planned 2018
ü
ü
ü
 
 
 
 
ü
ü
575

75

650


Off-Balance Sheet Arrangements

We have not entered into any transactions, agreements or other contractual arrangements, other than our leasing arrangements described in Note 1 to our consolidated financial statements in Item 8 that would result in off-balance sheet liabilities.

Environmental

We are a party to various litigation and contingent loss situations, including environmental and income tax matters, arising in the ordinary course of business. Although we cannot predict the ultimate outcomes of these matters with certainty, we have accrued for the estimated liabilities when appropriate. We believe that the outcome of these matters will not have a material impact on our liquidity or financial position, although the resolution of certain of these matters could have a material impact on our interim or annual results of operations. Additionally, if applicable, we accrue receivables for probable third-party recoveries.

Environmental Laws and Regulations
We are subject to extensive federal, state and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment and may require us to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites, install additional controls or make other modifications to certain emission sources, equipment or facilities.

Future expenditures may be required to comply with the Clean Air Act and other federal, state and local requirements for our various sites, including our refineries, tank farms, pipelines and currently and previously owned or operated terminal and retail station properties. The impact of these legislative and regulatory requirements, including any greenhouse gas cap-and-trade program or low carbon fuel standards, could result in increased compliance costs, additional operating restrictions on our business and an increase in the cost of the products we manufacture, which could have a material adverse impact on our liquidity, consolidated financial position, or results of operations.

The Energy Independence and Security Act was enacted into federal law in December 2007 creating RFS2 requiring the total volume of renewable transportation fuels (including ethanol and advanced biofuels) sold or introduced in the U.S. to reach 20.5 billion gallons in 2015 and to increase to 36.0 billion gallons by 2022. These requirements could reduce future demand growth

 
 
December 31, 2017 | 55
Management’s Discussion and Analysis

for petroleum products that we manufacture. In the near term, the RFS2 presents ethanol production and logistics challenges for the ethanol, alternative fuel and refining and marketing industries. We are currently meeting the RFS2 requirements through a combination of RINs that were carried over from prior periods, blending renewable fuels obtained from third parties and purchases of RINs in the open market. The spending related to the purchases of RINs for 2017 was not material to our operations and the spending for 2018 is not expected to be material based on our operations and the current regulatory environment. Actual costs related to RINs may differ due to changes in the market price of RINs and the ultimate destinations of our products. Additional expenditures could be required to logistically accommodate the increased use of renewable transportation fuels. While we cannot currently estimate the ultimate impact of this statute and implementing its regulations for future blending mandates, and currently believe that the outcome will not have a material impact on our liquidity or financial position, the ultimate outcome could have a material impact on our results of operations.

In California, AB 32 created a statewide cap on greenhouse gas emissions by requiring that the state return to 1990 emission levels by 2020. In 2016, SB 32 set a new emissions reduction target of 40% below 1990 levels by 2030. AB 32 focuses on using market mechanisms, such as a cap-and-trade program and LCFS, to achieve emissions reduction targets. The LCFS became effective in January 2010 and requires a 10% reduction in the carbon intensity of gasoline and diesel fuel by 2020. In 2011, CARB approved cap-and-trade requirements that became effective in January 2013, and all of AB 32 related regulations are to be fully implemented by 2020. In December 2011, a U.S. District Court ruled that the LCFS violates the U.S. Constitution. CARB appealed the decision and, on September 18, 2013, the U.S. Ninth Circuit Court of Appeals reversed the lower court’s decision and remanded the case to the lower court to rule on whether the ethanol provisions of the LCFS are unconstitutional. We cannot predict the ultimate outcome of the lower court’s ruling on the LCFS, and the implementation and implications of AB 32 and SB 32 will take many years to realize. On January 1, 2015, transportation fuels were brought into the California cap-and-trade program, making fuel suppliers responsible for carbon emission from their products. The cost for carbon emissions is being passed through to customers. While we believe that the cap and trade requirements will not materially impact our liquidity, financial position, or results of operations, we cannot currently predict the impact of the LCFS and other AB 32 or expected SB 32-related regulations on our liquidity, financial position, or results of operations.

Environmental Liabilities
We are incurring and expect to continue to incur expenses for environmental remediation liabilities at a number of currently and previously owned or operated refining, pipeline, terminal and retail station properties. We have accrued liabilities totaling $211 million and $227 million , including $16 million and $22 million for Andeavor Logistics, at December 31, 2017 and 2016, respectively.

On October 17, 2016, the U.S. 5th Circuit Court of Appeals upheld the July 10, 2015 federal court order denying coverage pursuant to an insurance policy for environmental remediation liabilities at our Martinez refinery. In November 2016, the Court of Appeals denied our petitions for a rehearing. The liabilities are included in our accruals as we have not recognized possible insurance recoveries under the policies. See Note 15 to our consolidated financial statements in Item 8 for additional information on our environmental obligations.

Other Matters

In the ordinary course of business, we become party to lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters. We have not established accruals for these matters unless a loss is probable and the amount of loss is currently estimable.

Washington Refinery Fire
The naphtha hydrotreater unit at our Washington refinery was involved in a fire in April 2010, which fatally injured seven employees and rendered the unit inoperable. The Washington State Department of L&I investigated of the incident and issued a citation in October 2010 with an assessed fine of approximately $2 million. We appealed the citation in January 2011 as we disagree with L&I’s characterizations of operations at the refinery and believe, based on available evidence and scientific reviews, that many of the agency’s conclusions are mistaken. In separate September 2013, November 2013 and February 2015 orders, the BIIA granted partial summary judgment in our favor rejecting 33 of the original 44 allegations in the citation as lacking legal or evidentiary support. On June 8, 2017, the BIIA Judge issued a proposed decision and order vacating the entire citation, which L&I and the United Steel Workers (“USW”) appealed. On September 18, 2017, the BIIA granted L&I and USW’s petitions for review of the BIIA Judge’s June 8, 2017 proposed decision and order. The hearing on the remaining 11 allegations concluded in July 2016. While we cannot currently estimate the final amount or timing of the resolution of this matter, we have established an accrual based on our best estimate at this time and believe it will not have a material adverse impact on our liquidity, financial position, or results of operations.

Environmental
We have investigated conditions at certain active wastewater treatment units at our Martinez refinery pursuant to an order received in 2004 from the San Francisco Bay Regional Water Quality Control Board that named us as well as two previous owners of the Martinez refinery. We cannot currently estimate the amount of the ultimate resolution of the order, but amounts that may be recognized in future periods for remediation of these wastewater treatment units could have a material impact on our results of operations.


56  |  
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Management’s Discussion and Analysis

On October 26, 2016, the Utah Supreme Court rejected the Utah Physicians for a Healthy Environment’s and the Utah Chapter of the Sierra Club’s (“Petitioners”) challenge of an air permit issued by the UDEQ to our Salt Lake City refinery in September 2012. Petitioners had filed a Request for Agency Action (the “Request”) with UDEQ challenging UDEQ’s permitting of our refinery conversion project alleging that the permit did not conform to the requirements of the Clean Air Act. After proceedings before an administrative law judge and the Executive Director of UDEQ’s subsequent dismissal of Petitioners’ Request, Petitioners filed a petition for review with the Utah Court of Appeals in December 2014, and the Court of Appeals certified the case to the Utah Supreme Court. On December 27, 2016, the Utah Supreme Court denied the Petitioners’ petition for rehearing.

In response to incidents in February and March 2014 at our Martinez refinery involving sulfuric acid exposure at the Alkylation Unit, the U.S. Environmental Protection Agency is conducting an investigation to evaluate the Martinez refinery’s compliance with certain federal environmental acts and the Risk Management Plan requirements under the Clean Air Act. While we cannot currently predict the timing and the resolution of this investigation, we believe the outcome will not have a material impact on our liquidity, financial position, or results of operations.

Tax
We are subject to extensive federal, state and foreign tax laws and regulations. Newly enacted tax laws and regulations and changes in existing tax laws and regulations such, including the Tax Act, could materially impact our financial positions, results of operations and cash flows in the future. See Note 13 to our consolidated financial statements in Item 8 for additional information on our tax matters.

Long-Term Commitments

During the ordinary course of business, we enter into contractual commitments for purchases associated with the operation of our refineries along with other debt service and lease arrangements (see Note 12 and 15 to our consolidated financial statements in Item 8 for additional information). We also have minimum contractual spending requirements for certain capital projects. The contractual commitments detailed below do not include our contractual obligations to Andeavor Logistics under our various fee-based commercial agreements as these related-party transactions are eliminated in the consolidated financial statements.

Summary of Contractual Obligations (in millions)
Contractual Obligation
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Long-term debt obligations (a)
$
388

 
$
893

 
$
415

 
$
772

 
$
1,601

 
$
7,166

 
$
11,235

Capital lease obligations (b)
17

 
17

 
14

 
13

 
13

 
109

 
183

Operating lease obligations (b)
466

 
371

 
313

 
305

 
180

 
799

 
2,434

Crude oil supply obligations (c)
2,496

 
1,360

 
508

 
441

 
72

 
8

 
4,885

Other purchase obligations (d)
360

 
279

 
220

 
163

 
111

 
200

 
1,333

Capital expenditure obligations (e)
491

 
—

 
—

 
—

 
—

 
—

 
491

Total Contractual Obligations
$
4,218

 
$
2,920

 
$
1,470

 
$
1,694

 
$
1,977

 
$
8,282

 
$
20,561


(a)
Includes maturities of principal and interest payments, excluding capital lease obligations. Amounts and timing may be different from our estimated commitments due to potential voluntary debt prepayments and borrowings. Interest payments assume the interest rate in effect as of December 31, 2017 .
(b)
Capital lease obligations include amounts classified as interest. Operating lease obligations primarily represent our future minimum noncancellable lease commitments. Operating lease obligations primarily include lease arrangements with initial or remaining noncancellable terms in excess of one year and are not reduced by minimum rentals to be received by us under subleases.
(c)
Represents an estimate of our long-term contractual purchase commitments for crude oil, having initial or remaining terms in excess of one year. At December 31, 2017 , these agreements have remaining terms ranging from three months to ten years. Prices under these term agreements fluctuate due to market-responsive pricing provisions. To estimate our annual commitments under these contracts, we estimated crude oil prices using exchange-traded crude future prices by crude oil type as of December 31, 2017 , with prices ranging from $52 per barrel to $65 per barrel, and volumes based on the contract’s minimum purchase requirements over the term of the contract. We also purchase additional crude oil under short-term renewable contracts and in the spot market, which are not included in the table above.
(d)
Represents long-term commitments primarily for the transportation of crude oil, refined products and NGLs as well as to purchase industrial gases, chemical processing services and utilities at our refineries. These purchase obligations are based on the contract’s minimum volume requirements.
(e)
Minimum contractual spending requirements for certain capital projects.

We also have other noncurrent liabilities pertaining to our defined benefit plans and other postretirement benefits, environmental liabilities and asset retirement obligations. With the exception of amounts classified as current, there is uncertainty as to the timing of future cash flows related to these obligations. As such, we have excluded the future cash flows from the contractual commitments table above. See additional information on pension and other postretirement benefits, environmental liabilities and asset retirement obligations in Note 14 and 15 , respectively, to our consolidated financial statements in Item 8.


 
 
December 31, 2017 | 57
Management’s Discussion and Analysis

In addition, due to the uncertainty of the timing of future cash flows with our unrecognized tax benefits, with the exception of amounts classified as current, we are unable to make reasonably reliable estimates of the period of cash settlement. Accordingly, we have excluded from the table $35 million of unrecognized tax benefits recorded as liabilities in our consolidated balance sheets. Related to these unrecognized tax benefits, and excluded from the table, is a liability for potential interest and penalties of $7 million at December 31, 2017 . See Note 13 to our consolidated financial statements in Item 8 for further information.

Pension Funding

We provide a qualified defined benefit retirement plan for all eligible employees, with benefits based on age and compensation. Our long-term expected return on plan assets is 6.50% as of December 31, 2017 , and the actual return on our funded employee pension plan assets was $60 million , or 11.8% , gain in 2017 and $30 million , or 7.1% , gain in 2016 . Based on a 3.65% discount rate and fair values of plan assets as of December 31, 2017 , the assets in our funded employee pension plan were equal to approximately 55% of the projected benefit obligation. For funding purposes, the Moving Ahead for Progress in the 21 st Century Act, as signed into law in July 2012 and later modified by the BBA stipulates that the discount rate must remain within a specified corridor of a 25-year average corporate bond rate, with such corridor widening from 10% to 30% between 2012 and 2024. On the BBA basis, the adjusted funding target attainment percentage (a funding status measure defined under applicable pension funding regulations) was 100% at January 1, 2017 . Although our funded employee retirement plan fully meets all of the funding requirements under applicable laws and regulations, we contributed $87 million and $60 million during 2017 and 2016 , respectively, to improve the plan’s funded status. Future contributions are affected by returns on plan assets, discount rates, employee demographics, regulatory environments and other factors. See Note 14 to our consolidated financial statements in Item 8 for additional information on our benefit plans.

Non-GAAP Reconciliations

Reconciliation of Net Earnings to EBITDA (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Net Earnings
$
1,683

 
$
860

 
$
1,690

Add back:
 
 
 
 
 
Depreciation and amortization expenses
1,021

 
851

 
756

Interest and financing costs, net
439

 
274

 
217

Income tax expense (benefit)
(560
)
 
427

 
936

EBITDA
$
2,583

 
$
2,412

 
$
3,599

Marketing Segment Operating Income
$
788

 
$
830

 
$
899

Depreciation and amortization expenses
68

 
49

 
46

Other income, net
—

 
10

 
—

Segment EBITDA
$
856

 
$
889

 
$
945

Logistics Segment Operating Income
$
665

 
$
487

 
$
393

Depreciation and amortization expenses
276

 
190

 
187

Equity in earnings of equity method investments
10

 
13

 
7

Other income, net
3

 
6

 
—

Segment EBITDA
$
954

 
$
696

 
$
587

Refining Segment Operating Income
$
785

 
$
535

 
$
1,871

Depreciation and amortization expenses
647

 
588

 
504

Equity in earnings of equity method investments
13

 
—

 
—

Other income, net
2

 
40

 
—

Segment EBITDA
$
1,447

 
$
1,163

 
$
2,375

 

58  |  
ANDVLOGOPRIMARYCOLORRGBA21.JPG
 
Management’s Discussion and Analysis

Fuel Margin and Convenience Margin Calculation (dollars in millions, except cents per gallon and percent)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Segment Operating Income
$
788

 
$
830

 
$
899

Add back:
 
 
 
 
 
Operating expenses
511

 
298

 
300

Depreciation and amortization expenses
68

 
49

 
46

General and administrative expenses
23

 
17

 
15

Loss on asset disposals
1

 
4

 
6

Marketing Margin
$
1,391

 
$
1,198

 
$
1,266

 
 
 
 
 
 
Revenues
 
 
 
 
 
Retail and Branded fuel sales
$
11,217

 
$
8,863

 
$
10,294

Unbranded fuel sales
9,727

 
6,542

 
7,788

Total fuel sales
20,944

 
15,405

 
18,082

Merchandise
456

 
25

 
8

Other sales
113

 
60

 
55

Total Revenues
21,513

 
15,490

 
18,144

Cost of Fuel and Other (excluding depreciation and amortization)
 
 
 
 
 
Retail and Branded fuel costs
10,159

 
7,802

 
9,160

Unbranded fuel costs
9,617

 
6,473

 
7,714

Total fuel costs
19,776

 
14,275

 
16,874

Purchases of merchandise
329

 
17

 
4

Other costs
17

 
—

 
—

Total Cost of Fuel and Other
20,122

 
14,292

 
16,878

Marketing Margin
 
 
 
 
 
Retail and Branded fuel margin
1,058

 
1,061

 
1,134

Unbranded fuel margin
110

 
69

 
74

Total fuel margin
1,168

 
1,130

 
1,208

Merchandise margin
127

 
8

 
4

Other margin
96

 
60

 
55

Total convenience margin
223

 
68

 
59

Marketing Margin
$
1,391

 
$
1,198

 
$
1,267

 
 
 
 
 
 
Merchandise Margin Percentage (a)
27.1
%
 
34.4
%
 
44.0
%
Fuel Sales (millions of gallons)
 
 
 
 
 
Retail and Branded fuel sales
5,068

 
4,550

 
4,338

Unbranded fuel sales
5,405

 
4,329

 
4,273

Total Fuel Sales
10,473

 
8,879

 
8,611

 
 
 
 
 
 
Retail and Branded Fuel Margin (¢/gallon) (a)

20.9
¢
 

23.3
¢
 

26.1
¢
Unbranded Fuel Margin (¢/gallon) (a)

2.0
¢
 

1.6
¢
 

1.7
¢
Total Fuel Margin (¢/gallon) (a)

11.2
¢
 

12.7
¢
 

14.0
¢

(a)
Amounts may not recalculate due to rounding of dollar and volume information.


 
 
December 31, 2017 | 59
Management’s Discussion and Analysis

Average Margin on NGL Sales per Barrel Calculation (in million, except days and per barrel amounts)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Segment Operating Income
$
665

 
$
487

 
$
393

Add back:
 
 
 
 
 
Operating expenses
614

 
442

 
428

Depreciation and amortization expenses
276

 
190

 
187

General and administrative expenses
135

 
95

 
103

(Gain) loss on asset disposals and impairments
(24
)
 
4

 
1

Other commodity purchases (a)
2

 
—

 
—

Subtract:
 
 
 
 
 
Terminalling revenues
(688
)
 
(480
)
 
(377
)
Pipeline transportation revenues
(130
)
 
(125
)
 
(118
)
Other terminalling revenues
(18
)
 
—

 
—

Gas gathering and processing revenues
(333
)
 
(264
)
 
(274
)
Crude oil gathering revenues
(228
)
 
(133
)
 
(123
)
Pass-thru and other revenues
(165
)
 
(115
)
 
(121
)
Margin on NGL Sales
$
106

 
$
101

 
$
99

Divided by Total Volumes for the Period:
 
 
 
 
 
NGLs sales volumes (Mbpd)
8.3

 
7.5

 
7.9

Number of days in the period
365

 
366

 
365

Total volumes for the period (thousands of barrels)
3,030

 
2,745

 
2,884

Average Margin on NGL Sales per Barrel (b)
$
34.77

 
$
36.59

 
$
34.38


(a)
Included in the NGL expense for the year ended December 31, 2017 was approximately $2 million of costs related to crude oil volumes obtained by Andeavor Logistics and immediately sold to Andeavor in connection with the North Dakota Gathering and Processing Assets acquisition
(b)
Amounts may not recalculate due to rounding of dollar and volume information.

Refining Margin per Throughput Barrel Calculation (in millions, except days and per barrel amounts)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Segment Operating Income
$
785

 
$
535

 
$
1,871

Add back:
 
 
 
 
 
Manufacturing costs (excluding depreciation and amortization)
1,954

 
1,591

 
1,594

Other operating expenses (excluding depreciation and amortization)
438

 
429

 
329

Depreciation and amortization expenses
647

 
588

 
504

General and administrative expenses
8

 
2

 
14

Loss on asset disposals and impairments
8

 
1

 
32

Refining Margin
$
3,840

 
$
3,146

 
$
4,344

Divided by Total Volumes:
 
 
 
 
 
Total refining throughput (Mbpd)
997

 
825

 
787

Number of days in period
365

 
366

 
365

Total volumes for the period (millions of barrels) (a)
364

 
302

 
287

Refining Margin per Throughput Barrel (a)
$
10.55

 
$
10.42

 
$
15.12


(a)
Amounts may not recalculate due to rounding of dollar and volume information.

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Management’s Discussion and Analysis

California Refining Margin per Throughput Barrel Calculation (in millions, except days and per barrel amounts)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Segment Operating Income
$
119

 
$
403

 
$
1,223

Add back:
 
 
 
 
 
Manufacturing costs (excluding depreciation and amortization)
1,166

 
1,119

 
1,144

Other operating expenses (excluding depreciation and amortization)
252

 
210

 
206

Depreciation and amortization expenses
379

 
375

 
336

General and administrative expenses
5

 
1

 
13

Loss on asset disposals and impairments
7

 
—

 
10

Refining Margin
$
1,928

 
$
2,108

 
$
2,932

Divided by Total Volumes:
 
 
 
 
 
Total refining throughput (Mbpd)
523

 
507

 
493

Number of days in period
365

 
366

 
365

Total volumes for the period (millions of barrels) (a)
191

 
186

 
180

Refining Margin per Throughput Barrel (a)
$
10.10

 
$
11.36

 
$
16.29


(a)
Amounts may not recalculate due to rounding of dollar and volume information.

Pacific Northwest Refining Margin per Throughput Barrel Calculation (in millions, except days and per barrel amounts)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Segment Operating Income
$
97

 
$
95

 
$
268

Add back:
 
 
 
 
 
Manufacturing costs (excluding depreciation and amortization)
277

 
258

 
256

Other operating expenses (excluding depreciation and amortization)
80

 
65

 
64

Depreciation and amortization expenses
106

 
96

 
86

General and administrative expenses
—

 
1

 
—

Loss on asset disposals and impairments
—

 
—

 
6

Refining Margin
$
560

 
$
515

 
$
680

Divided by Total Volumes:
 
 
 
 
 
Total refining throughput (Mbpd)
187

 
181

 
170

Number of days in period
365

 
366

 
365

Total volumes for the period (millions of barrels) (a)
68

 
66

 
62

Refining Margin per Throughput Barrel (a)
$
8.20

 
$
7.77

 
$
10.96


(a)
Amounts may not recalculate due to rounding of dollar and volume information.


 
 
December 31, 2017 | 61
Management’s Discussion and Analysis

Mid-Continent Refining Margin per Throughput Barrel Calculation (in millions, except days and per barrel amounts)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Segment Operating Income
$
569

 
$
37

 
$
380

Add back:
 
 
 
 
 
Manufacturing costs (excluding depreciation and amortization)
511

 
214

 
194

Other operating expenses (excluding depreciation and amortization)
106

 
154

 
59

Depreciation and amortization expenses
162

 
117

 
82

General and administrative expenses
3

 
—

 
1

Loss on asset disposals and impairments
1

 
1

 
16

Refining Margin
$
1,352

 
$
523

 
$
732

Divided by Total Volumes:
 
 
 
 
 
Total refining throughput (Mbpd)
287

 
137

 
124

Number of days in period
365

 
366

 
365

Total volumes for the period (millions of barrels) (a)
105

 
50

 
45

Refining Margin per Throughput Barrel (a)
$
12.91

 
$
10.43

 
$
16.17


(a)
Amounts may not recalculate due to rounding of dollar and volume information.

Manufacturing Costs (Excluding Depreciation and Amortization) per Throughput Barrel Calculation
(in millions, except days and per barrel amounts)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Total Refining Segment operating expenses (excluding depreciation and amortization)
$
2,392

 
$
2,020

 
$
1,923

Subtract:
 
 
 
 
 
Other operating expenses (excluding depreciation and amortization)
438

 
429

 
329

Manufacturing Costs (excluding depreciation and amortization)
$
1,954

 
$
1,591

 
$
1,594

Divided by Total Volumes:
 
 
 
 
 
Total refining throughput (Mbpd)
997

 
825

 
787

Number of days in the period
365

 
366

 
365

Total volumes for the period (millions of barrels)
364

 
302

 
287

Manufacturing Costs (excluding depreciation and amortization) per Throughput Barrel (a)
$
5.37

 
$
5.27

 
$
5.55


(a)    Amounts may not recalculate due to rounding of dollar and volume information.


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Management’s Discussion and Analysis

California Manufacturing Costs (Excluding Depreciation and Amortization) per Throughput Barrel Calculation
(in millions, except days and per barrel amounts)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Total Refining Segment operating expenses (excluding depreciation and amortization)
$
1,418

 
$
1,329

 
$
1,350

Subtract:
 
 
 
 
 
Other operating expenses (excluding depreciation and amortization)
252

 
210

 
206

Manufacturing Costs (excluding depreciation and amortization)
$
1,166

 
$
1,119

 
$
1,144

Divided by Total Volumes:
 
 
 
 
 
Total refining throughput (Mbpd)
523

 
507

 
493

Number of days in the period
365

 
366

 
365

Total volumes for the period (millions of barrels)
191

 
186

 
180

Manufacturing Costs (excluding depreciation and amortization) per Throughput Barrel (a)
$
6.11

 
$
6.02

 
$
6.37


(a)    Amounts may not recalculate due to rounding of dollar and volume information.

Pacific Northwest Manufacturing Costs (Excluding Depreciation and Amortization) per Throughput Barrel Calculation
(in millions, except days and per barrel amounts)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Total Refining Segment operating expenses (excluding depreciation and amortization)
$
357

 
$
323

 
$
320

Subtract:
 
 
 
 
 
Other operating expenses (excluding depreciation and amortization)
80

 
65

 
64

Manufacturing Costs (excluding depreciation and amortization)
$
277

 
$
258

 
$
256

Divided by Total Volumes:
 
 
 
 
 
Total refining throughput (Mbpd)
187

 
181

 
170

Number of days in the period
365

 
366

 
365

Total volumes for the period (millions of barrels)
68

 
66

 
62

Manufacturing Costs (excluding depreciation and amortization) per Throughput Barrel (a)
$
4.06

 
$
3.90

 
$
4.14


(a)    Amounts may not recalculate due to rounding of dollar and volume information.


 
 
December 31, 2017 | 63
Management’s Discussion and Analysis

Mid-Continent Manufacturing Costs (Excluding Depreciation and Amortization) per Throughput Barrel Calculation
(in millions, except days and per barrel amounts)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Total Refining Segment operating expenses (excluding depreciation and amortization)
$
617

 
$
368

 
$
253

Subtract:
 
 
 
 
 
Other operating expenses (excluding depreciation and amortization)
106

 
154

 
59

Manufacturing Costs (excluding depreciation and amortization)
$
511

 
$
214

 
$
194

Divided by Total Volumes:
 
 
 
 
 
Total refining throughput (Mbpd)
287

 
137

 
124

Number of days in the period
365

 
366

 
365

Total volumes for the period (millions of barrels)
105

 
50

 
45

Manufacturing Costs (excluding depreciation and amortization) per Throughput Barrel (a)
$
4.88

 
$
4.29

 
$
4.26


(a)    Amounts may not recalculate due to rounding of dollar and volume information.

Accounting Standards

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to our consolidated financial statements in Item 8. We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying footnotes. Actual results could differ from those estimates. For additional information concerning certain estimates and assumptions, see the respective footnotes to our consolidated financial statements in Item 8. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Goodwill and Other Identified Intangible Assets with Indefinite Lives
Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired in a business combination. Goodwill acquired in a business combination is not amortized, but instead tested for impairment at least annually or more frequently should an event occur or circumstances indicate that the carrying amount may be impaired. Such events or circumstances may be a significant change in business climate, economic and industry trends, legal factors, negative operating performance indicators, significant competition, changes in strategy, or disposition of a reporting unit or a portion thereof. Goodwill impairment testing is performed at the reporting unit level on November 1 of each year and when circumstances change that might indicate impairment.

We test goodwill for impairment by performing an optional qualitative assessment process and/or using the quantitative assessment process. If we choose to perform a qualitative assessment process and determine it is more likely than not (that is, a likelihood of more than 50 percent) that the carrying value of the net assets is more than the fair value of the reporting unit, a quantitative assessment process is then performed; otherwise, no further testing is performed. We may elect not to perform a qualitative assessment process and, instead, proceed directly to the quantitative assessment process. For reporting units where the quantitative assessment process is performed, the carrying value of net assets, including goodwill, is compared to the fair value at the reporting unit level. If the fair value exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recorded for the difference between the carrying value and fair value of the reporting unit.

We elected to perform our annual goodwill impairment analysis using a quantitative assessment process on the goodwill recorded in our reporting units of our Logistics segment and the qualitative assessment process on the remaining goodwill in the reporting units in our other two segments as of November 1, 2017.

As part of our quantitative goodwill impairment process for our Logistics’ reporting units, we engaged a third-party appraisal firm to assist in the determination of estimated fair value for each reporting unit. This determination includes estimating the fair value of each reporting unit using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, 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

64  |  
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Management’s Discussion and Analysis

within a comparable industry grouping. The determination of the fair value of the reporting units requires 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.

Factors utilized in the qualitative assessment include, among other things, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, company specific operating results and other relevant entity-specific events affecting individual reporting units.

We determined that no impairment charges resulted from our November 1, 2017 goodwill impairment assessment. The fair values of our reporting units were substantially in excess of carrying values. There were no impairments of goodwill during the years ended December 31, 2017 , 2016 and 2015 .

We evaluate our indefinite-lived intangible assets for impairment annually in the fourth quarter and at other times when an event occurs or circumstances change such that an impairment may exist. In evaluating our indefinite-lived intangible assets for impairment, we assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If, after completing the qualitative assessment, we determine it is more likely than not that the fair value of the indefinite-lived intangible asset is greater than its carrying amount, the asset is not impaired. If we conclude it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying value, we would then proceed to a quantitative impairment test, which consists of a comparison of the fair value of the intangible assets to their carrying amounts. There were no impairments of indefinite-lived intangible assets during the years ended December 31, 2017 , 2016 and 2015 .

Impairment of Long-Lived Assets
Long-lived assets (which include property, plant, and equipment, intangible assets with defined useful lives, deferred refinery turnaround and catalyst costs) are evaluated for potential impairment whenever events or changes in business circumstances indicate the net book values of the assets may not be recoverable (for example, current period operating losses combined with a history of operating losses or a temporary shutdown of a refinery) and, if so, assessing whether the asset net book values are recoverable from estimated future undiscounted cash flows. The actual amount of an impairment loss to be recorded, if any, is equal to the amount by which the asset’s net book value exceeds its fair market value. Fair market value is based on the present values of estimated future cash flows in the absence of quoted market prices. Estimates of future cash flows and fair market values of assets require subjective assumptions with regard to several factors, including an assessment of global market conditions, future operating results and forecasts of the remaining useful lives of the assets. Actual results could differ from those estimates. Providing sensitivity analysis if other assumptions were used in performing the impairment evaluations is not practicable due to the significant number of assumptions involved in the estimates.

Income Taxes
As part of the process of preparing our consolidated financial statements, we must assess the likelihood that our deferred income tax assets will be recovered through future taxable income. We must establish a valuation allowance to the extent we believe that recovery is not likely. Significant management judgment is required in determining any valuation allowance recorded against deferred income tax assets. We have recorded a valuation allowance of $23 million on certain state net operating loss carryforwards as of December 31, 2017 , which were obtained with the acquisition of Western Refining. The valuation allowance is based on our estimate of future taxable income in each jurisdiction in which we operate and the period over which the net operating loss carryforwards can be utilized. We may need to establish an additional valuation allowance if actual results differ from these estimates or we make adjustments to these estimates in future periods. We also recognize the financial statement effects of a tax position when it is more likely than not that the position will be sustained upon examination.

Pension and Other Postretirement Benefits
Accounting for pensions and other postretirement benefits involves several assumptions and estimates including discount rates, expected rate of return on plan assets, rates of compensation, health care cost trends, inflation, retirement rates and mortality rates. We must assume a rate of return on funded pension plan assets in order to estimate our obligations under our defined benefit plans. Due to the nature of these calculations, we engage an actuarial firm to assist with these estimates and the calculation of certain employee benefit expenses. We record an asset for our plans overfunded status or a liability if the plans are underfunded. The funded status represents the difference between the fair value of our plans’ assets and the projected benefit obligations. While we believe the assumptions we used are appropriate, significant differences in actual experience or significant changes in assumptions would affect pension and other postretirement benefits costs and obligations. We determine the discount rate primarily by reference to the effective yields on high quality corporate bonds that have a comparable cash flow pattern to the expected payments to be made under our plans. The expected return on plan assets is based upon the weighted averages of the expected long-term rates of return for the broad categories of investments held in our plans and also uses a three-year average of the market value of plan assets. These assumptions can have a significant effect on the amounts reported in our consolidated financial statements.


 
 
December 31, 2017 | 65
Management’s Discussion and Analysis

One-Percentage-Point Change in Expected Rate of Return and Discount Rate
 
1-Percentage-
Point Increase
 
1-Percentage-
Point Decrease
Expected Rate of Return:
 
 
 
Effect on net periodic pension expense
$
(4
)
 
$
4

Discount Rate:
 
 
 
Effect on net periodic pension expense
$
(5
)
 
$
10

Effect on projected benefit obligation
(92
)
 
129


See Note 14 to our consolidated financial statements in Item 8 for more information regarding costs and assumptions.

Environmental Liabilities
We record environmental liabilities when environmental assessments and/or proposed environmental remedies are probable and can be reasonably estimated. Usually, the timing of our accruals coincides with when an assessment or claim has been asserted subsequent to which a feasibility study or formal plan of action is undertaken. When we complete our assessment or when we commit to a plan of action, we accrue a liability based on the minimum range of the expected costs, unless we consider another amount more likely. We base our cost estimates on the extent of remedial actions required by applicable governing agencies, experience gained from similar environmental projects and the amounts to be paid by other responsible parties.

Accruals for our environmental liabilities require judgment due to the uncertainties related to the magnitude of the liability and timing of the remediation effort. Our environmental liability estimates are subject to change due to potential changes in environmental laws, regulations or interpretations, additional information related to the extent and nature of the liability, and potential improvements in remediation technologies. Certain of our environmental liabilities, specific to long-term monitoring costs that 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 other, 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.

Acquisitions
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Determining the fair value of these items requires management’s judgment, the utilization of independent valuation experts, and involves the use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices, and asset lives, among other items. The judgments made in the determination of the estimated fair value assigned to the assets acquired and the liabilities assumed, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition, such as through depreciation and amortization.

While management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.

New Accounting Standards and Disclosures

New accounting standards and disclosures are discussed in Note 1 to our consolidated financial statements in Item 8.


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Quantitative and Qualitative Disclosures
 

Item 7A.
Quantitative and Qualitative Disclosures about Market Risk

Risk Management

We have established a risk committee comprised of senior level leadership from our financial, strategic, governance, administrative and operational functions. The risk committee’s responsibilities include performing an annual review to assess and prioritize the Company’s risks in coordination with our subject matter experts, assessing the status and effectiveness of risk prevention and mitigation activities, identifying emerging risks and facilitate management’s development of risk assessment and management practices. The risk committee is also responsible for assessing and advising management on our system of controls to ensure policies and procedures are properly followed and appropriate accountability is present. Our controls are designed to:

•
create and maintain a comprehensive risk management framework;
•
provide for authorization by the appropriate levels of management;
•
provide for segregation of duties;
•
maintain appropriate level of knowledge regarding the execution of and the accounting for derivative instruments; and
•
implement key indicators to measure the performance of hedging activities.

The risk committee meets at least monthly to review priority and emerging risks and risk prevention and mitigation activities. In addition, our risk committee chairman presents a quarterly risk update to executive management and an annual update to our Board of Directors concerning the status and effectiveness of our risk prevention and mitigation activities, emerging risks and risk assessment and management practices.

Commodity Price Risks

Our primary source of market risk emanates from the difference between the sale prices for our refined products and the purchase prices for crude oil and other feedstocks. Refined product prices are directly influenced by the price of crude oil. Our earnings and cash flows from operations depend on the margin, relative to fixed and variable expenses (including the costs of crude oil and other feedstocks) at which we are able to sell our refined products. The prices of crude oil and refined products fluctuate substantially and depend on many factors including the global supply and demand for crude oil and refined products. This demand is impacted by changes in the global economy, the level of foreign and domestic production of crude oil, natural gas and refined products, geo-political conditions, the availability of imports of crude oil and refined products, the relative strength of the U.S. dollar, the marketing of alternative and competing fuels and the impact of government regulations. Our refined product sale prices are also affected by local factors such as local market conditions and the level of operations of other suppliers in our markets.

In most cases, an increase or decrease in the price of crude oil results in a corresponding increase or decrease in the price of gasoline and other refined products. The timing, direction and the overall change in refined product prices versus crude oil prices could have a significant impact on our profit margins, earnings and cash flows. Assuming all other factors remained constant, a $1 per barrel change in average gross refining margins, based on our average throughput of 997 Mbpd, would change annualized pre-tax operating income by approximately $360 million . This analysis may differ from actual results.

We maintain inventories of crude oil, intermediate products and refined products, the values of which are subject to fluctuations in market prices. The valuation of our inventories can significantly impact amounts reported in our balance sheet where changes therein can then impact amounts recorded in our results of operations. Our inventories of refinery feedstocks and refined products totaled 58 million barrels and 45 million barrels at December 31, 2017 and 2016 , respectively.

We use non-trading physical derivative instruments to manage exposure to commodity price risks associated with the purchase or sale of crude oil and finished products and inventories above or below our target levels. We also use these instruments to manage the impact of market volatility and arbitrage opportunities for crude oil where the price of crude oil is higher in the future than the current spot price. For the purchase or sale of crude oil and finished products to be used in our normal operations, we enter into physical commodity forward purchase and sale contracts (“Forward Contracts”), which are not typically classified and reported as derivatives for accounting purposes. The gains or losses associated with these Forward Contracts are recognized as incurred in our financial statements separate from the gains or losses associated with other derivative instruments reported below and in Note 10 to our consolidated financial statements in Item 8.

Also, we entered into financial derivative contracts such as exchange-traded futures, over-the-counter swaps, options and over-the-counter options, most of which had remaining durations of less than one year as of December 31, 2017 , to economically hedge price risk associated with our physical commodity Forward Contracts or to take advantage of other market opportunities. We mark-to-market these derivative instruments each period during the contract term, which can create timing differences for gain or loss recognition in our financial statements. The derivative gains or losses presented below do not reflect the realized losses or gains, respectively, from the settlement of our physical commodity transactions. Both the derivative and the physical commodity Forward Contracts’ gains and losses are reflected in our gross refining margin in the refining segment. We evaluate

 
 
December 31, 2017 | 67
Quantitative and Qualitative Disclosures

our performance based on all contract types available to manage our risk, which includes contracts that may or may not be classified and reported as derivatives for accounting purposes.

We believe the governance structure that we have in place is adequate given the size and sophistication of our commodity optimization, inventory management and trading activities. Our governance over commodity activities includes regular monitoring of the performance of our risk management strategies and limits over dollar and volume based transactional authority, commodity position, aggregate spread, stop-loss and value-at-risk. Performance against our strategies and authorized limits is monitored daily via position reports and profit and loss analysis and is reviewed on a regular basis, at least monthly, by our risk committee.

Composition of Net Loss on our Commodity Derivative Positions (in millions)
 
Years ended December 31,
 
2017
 
2016
Unrealized (gain) loss carried on open derivative positions from prior period
$
49

 
$
(44
)
Realized gain (loss) on settled derivative positions
(122
)
 
26

Unrealized loss on open net derivative positions
(51
)
 
(49
)
Net Loss
$
(124
)
 
$
(67
)

Our open derivative positions at December 31, 2017 will expire at various times through 2018. We prepared a sensitivity analysis to estimate our exposure to market risk associated with our derivative instruments. Based on our open net positions at December 31, 2017 , a 1% change in quoted market prices of our derivative instruments, assuming all other factors remain constant, could change the fair value of our derivative instruments and pre-tax operating income by less than $1 million . This analysis may differ from actual results.

With the exception of a small amount of condensate and pipeline loss allowances, Andeavor Logistics is not exposed to commodity price risk with respect to any of the crude oil, natural gas, NGLs or refined products that are handled. See Note 3 to our consolidated financial statements in Item 8 for additional information on our Keep-Whole Commodity Agreement.

Counterparty Credit Risk

We have exposure to concentrations of credit risk related to our counterparties’ ability to meet their contractual payment obligations, and the potential non-performance by counterparties to deliver contracted commodities or services at the contracted price. Customer concentrations within the refining industry and oil and gas producers may affect our overall exposure to counterparty risk because these customers may be similarly impacted by changes in economic or other conditions. In addition, financial services companies are the counterparties in certain of our price risk management activities, and such financial services companies could be adversely impacted by periods of uncertainty and illiquidity in the credit or capital markets. We have credit management processes in place by which we closely monitor the status of our counterparties by performing ongoing credit evaluations of their financial condition. In certain circumstances, we require prepayments, letters of credit or other credit enhancement.

Interest Rate Risk

Our use of fixed or variable-rate debt directly exposes us to interest rate risk. Fixed rate debt, such as our senior notes, exposes us to changes in the fair value of our debt due to changes in market interest rates. Fixed rate debt also exposes us to the risk that we may need to refinance maturing debt with new debt at higher rates or that our current fixed rate debt may be higher than the current market. Variable-rate debt, such as borrowings under our Revolving Credit Facility, exposes us to short-term changes in market rates that impact our interest expense. The carrying and fair values of our debt were approximately $7.8 billion and $8.1 billion at December 31, 2017 , respectively, and approximately $7.0 billion and $7.3 billion at December 31, 2016 , respectively. The fair value of our debt was estimated primarily using quoted market prices. These carrying and fair values of our debt do not consider the unamortized issuance costs, which are netted against our total debt. Unless interest rates increase significantly in the future, our exposure to interest rate risk should be minimal. With all other variables constant, a 0.25% change in the interest rate associated with the borrowings outstanding would change annual interest expense by approximately $1 million under any of our variable-rate debt. We currently do not use interest rate swaps to manage our exposure to interest rate risk; however, we continue to monitor the market and our exposure, and may in the future enter into these transactions to mitigate risk. We believe in the short-term we have acceptable interest rate risk and continue to monitor the risk on our long-term obligations. There were $55 million borrowings outstanding under the Revolving Credit Facility and $423 million borrowings outstanding under the Andeavor Logistics Revolving Credit Facility as of December 31, 2017 .

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Financial Statements

Item 8.
Financial Statements and Supplemental Data

Report of Independent Registered Public Accounting Firm


To the Stockholders and Board of Directors of Andeavor


Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Andeavor (the “Company“) as of December 31, 2017 and 2016 , the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2017 , and the related notes (collectively referred to as the “financial statements“). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016 , and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 , in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017 , based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 21, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB“) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ ERNST & YOUNG LLP

We have served as the Company‘s auditor since 2008.

San Antonio, Texas
February 21, 2018

 
 
December 31, 2017 | 69
Financial Statements

Andeavor
Statements of Consolidated Operations
 
 
Year Ended December 31,
 
Note
2017
 
2016
 
2015
 
 
(in millions except per share amounts)
Revenues (a)
 
$
34,975

 
$
24,582

 
$
28,711

Cost and Expenses:
 
 
 
 
 
 
Cost of materials and other (excluding items shown separately below) (a)
 
28,480

 
19,658

 
21,928

Lower of cost or market inventory valuation adjustment
5
—

 
(359
)
 
317

Operating expenses (excluding depreciation and amortization)
 
3,182

 
2,541

 
2,455

Depreciation and amortization expenses
 
1,021

 
851

 
756

General and administrative expenses
 
742

 
401

 
386

Loss on asset disposals and impairments
 
25

 
9

 
42

Operating Income
 
1,525

 
1,481

 
2,827

Interest and financing costs, net
 
(439
)
 
(274
)
 
(217
)
Equity in earnings of equity method investments
8
23

 
13

 
7

Other income, net
 
6

 
57

 
13

Earnings Before Income Taxes
 
1,115

 
1,277

 
2,630

Income tax expense (benefit)
13
(560
)
 
427

 
936

Net Earnings from Continuing Operations
 
1,675

 
850

 
1,694

Earnings (loss) from discontinued operations, net of tax
4
8

 
10

 
(4
)
Net Earnings
 
1,683

 
860

 
1,690

Less: Net earnings from continuing operations attributable to noncontrolling interest
 
155

 
126

 
150

Net Earnings Attributable to Andeavor
 
$
1,528

 
$
734

 
$
1,540

 
 
 
 
 
 
 
Net Earnings (Loss) Attributable to Andeavor:
 
 
 
 
 
 
Continuing operations
 
$
1,520

 
$
724

 
$
1,544

Discontinued operations
 
8

 
10

 
(4
)
Total
 
$
1,528

 
$
734

 
$
1,540

 
 
 
 
 
 
 
Net Earnings (Loss) Per Share - Basic:
 
 
 
 
 
 
Continuing operations
 
$
10.85

 
$
6.11

 
$
12.53

Discontinued operations
 
0.06

 
0.08

 
(0.03
)
Total
 
$
10.91

 
$
6.19

 
$
12.50

Weighted average common shares outstanding - Basic
16
140.1

 
118.5

 
123.2

 
 
 
 
 
 
 
Net Earnings (Loss) Per Share - Diluted:
 
 
 
 
 
 
Continuing operations
 
$
10.75

 
$
6.04

 
$
12.39

Discontinued operations
 
0.06

 
0.08

 
(0.03
)
Total
 
$
10.81

 
$
6.12

 
$
12.36

Weighted average common shares outstanding - Diluted
16
141.3

 
119.9

 
124.6

 
 
 
 
 
 
 
Dividends per Share
 
$
2.28

 
$
2.10

 
$
1.85

 
 
 
 
 
 
 
Supplemental Information:
 
 
 
 
 
 
(a) Includes excise taxes collected by our Marketing segment
 
$
771

 
$
577

 
$
561


The accompanying notes are an integral part of these consolidated financial statements.

70  |  
ANDVLOGOPRIMARYCOLORRGBA21.JPG
 
Financial Statements

Andeavor
Statements of Consolidated Comprehensive Income
 
 
Year Ended December 31,
 
Note
2017
 
2016
 
2015
 
 
(in millions)
Net Earnings
 
$
1,683

 
$
860

 
$
1,690

Pension and other postretirement benefit liability adjustments
14
(85
)
 
(65
)
 
—

Income tax benefit on pension and other postretirement benefit liability adjustments
 
21

 
26

 
—

Total Comprehensive Income
 
1,619

 
821

 
1,690

Less: Noncontrolling interest in comprehensive income
 
155

 
126

 
150

Comprehensive Income Attributable to Andeavor
 
$
1,464

 
$
695

 
$
1,540


The accompanying notes are an integral part of these consolidated financial statements.


 
 
December 31, 2017 | 71
Financial Statements

Andeavor
Consolidated Balance Sheets
 
 
December 31,
 
Note
2017
 
2016
 
 
(in millions, except share data)
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents  (Andeavor Logistics: $75  and $688, respectively)
 
$
543

 
$
3,295

Receivables, net of allowance for doubtful accounts
5
1,961

 
1,108

Inventories
5
3,630

 
2,640

Prepayments and other current assets
 
749

 
371

Total Current Assets
 
6,883

 
7,414

Property, Plant and Equipment, Net (Andeavor Logistics: $5,413  and $3,444, respectively)
6
14,742

 
9,976

Other Noncurrent Assets
 
 
 
 
Goodwill (Andeavor Logistics: $692  and $117, respectively)
7
3,234

 
190

Acquired intangibles, net (Andeavor Logistics: $1,153  and $947, respectively)
7
1,645

 
1,277

Other noncurrent assets, net (Andeavor Logistics: $406  and $414, respectively)
9
2,069

 
1,541

Total Other Noncurrent Assets
 
6,948

 
3,008

Total Assets
 
$
28,573

 
$
20,398

Liabilities and Equity
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
 
$
3,330

 
$
2,032

Current maturities of debt
12
17

 
465

Other current liabilities
9
1,654

 
1,057

Total Current Liabilities
 
5,001

 
3,554

Deferred Income Taxes
13
1,591

 
1,428

Debt, Net of Unamortized Issuance Costs (Andeavor Logistics: $4,127  and $4,053, respectively)
12
7,668

 
6,468

Other Noncurrent Liabilities
9
898

 
821

Total Liabilities
 
15,158

 
12,271

Commitments and Contingencies
15


 


Equity
 
 
 
 
Andeavor Stockholder’s Equity
 
 
 
 
Common stock, par value $0.16 2 / 3 ; authorized 300,000,000  shares (200,000,000 in 2016); 200,095,819  shares issued (159,474,572 in 2016)
 
33

 
27

Additional paid-in capital
 
5,224

 
1,473

Retained earnings
 
7,651

 
6,437

Treasury stock, 46,810,338   common shares (42,574,625 in 2016), at cost
 
(2,841
)
 
(2,284
)
Accumulated other comprehensive loss, net of tax
 
(252
)
 
(188
)
Total Andeavor Stockholders’ Equity
 
9,815

 
5,465

Noncontrolling Interest
 
3,600

 
2,662

Total Equity
 
13,415

 
8,127

Total Liabilities and Equity
 
$
28,573

 
$
20,398


The accompanying notes are an integral part of these consolidated financial statements.

72  |  
ANDVLOGOPRIMARYCOLORRGBA21.JPG
 
Financial Statements

Andeavor
Statements of Consolidated Equity
 
Andeavor Stockholders’ Equity (In millions)
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interest
 
Total Equity
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
At December 31, 2014
156.6

 
$
26

 
$
1,255

 
$
4,642

 
(31.7
)
 
$
(1,320
)
 
$
(149
)
 
$
2,522

 
$
6,976

Net earnings
—

 
—

 
—

 
1,540

 
—

 
—

 
—

 
150

 
1,690

Purchases of common stock
—

 
—

 
—

 
—

 
(6.9
)
 
(644
)
 
—

 
—

 
(644
)
Net proceeds from issuance of Andeavor Logistics LP Common Units
—


—

 
(2
)
 
—

 
—

 
—

 
—

 
101

 
99

Transfers to (from) noncontrolling interest, net of tax
—

 
—

 
47

 
—

 
—

 
—

 
—

 
(70
)
 
(23
)
Shares issued for equity-based compensation awards, net of tax
1.8

 
—

 
12

 
—

 
(0.5
)
 
(45
)
 
—

 
—

 
(33
)
Excess tax benefits from stock-based compensation arrangements
—

 
—

 
37

 
—

 
—

 
—

 
—

 
—

 
37

Amortization of equity settled awards
—

 
—

 
42

 
—

 
—

 
—

 
—

 
4

 
46

Dividend payments
—

 
—

 
—

 
(228
)
 
—

 
—

 
—

 
—

 
(228
)
Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(182
)
 
(182
)
Other
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
2

At December 31, 2015
158.4

 
$
26

 
$
1,391

 
$
5,954

 
(39.1
)
 
$
(2,009
)
 
$
(149
)
 
$
2,527

 
$
7,740

Net earnings
—

 
—

 
—

 
734

 
—

 
—

 
—

 
126

 
860

Purchases of common stock
—

 
—

 
—

 
—

 
(3.2
)
 
(250
)
 
—

 
—

 
(250
)
Shares issued for equity-based compensation awards, net of tax
1.1

—

1

 
1

 
—

 
(0.3
)
 
(25
)
 
—

 
—

 
(23
)
Net proceeds from issuance of Andeavor Logistics LP Common Units
—

 
—

 
(2
)
 
—

 
—

 
—

 
—

 
366

 
364

Amortization of equity settled awards
—

 
—

 
43

 
—

 
—

 
—

 
—

 
5

 
48

Transfers to (from) noncontrolling interest, net of tax
—

 
—

 
41

 
—

 
—

 
—

 
—

 
(69
)
 
(28
)
Dividend payments
—

 
—

 
—

 
(249
)
 
—

 
—

 
—

 
—

 
(249
)
Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(216
)
 
(216
)
Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(39
)
 
—

 
(39
)
Deconsolidation of RGS
—

—

—

 
—

 
—

 
—

 
—

 
—

 
(84
)
 
(84
)
Consolidation of Vancouver Energy
—

 
—

 
—

 
—

 
—

 
—

 
—

 
8

 
8

Other
—

 
—

 
(1
)
 
(2
)
 
—

 
—

 
—

 
(1
)
 
(4
)
At December 31, 2016
159.5

 
$
27

 
$
1,473

 
$
6,437

 
(42.6
)
 
$
(2,284
)
 
$
(188
)
 
$
2,662

 
$
8,127

Net earnings
—

 
—

 
—

 
1,528

 
—

 
—

 
—

 
155

 
1,683

Purchases of common stock
—

 
—

 
—

 
—

 
(7.0
)
 
(692
)
 
—

 
—

 
(692
)
Shares issued for equity-based compensation awards, net of tax
1.1

—

—

 
4

 
—

 
(0.3
)
 
(34
)
 
—

 
—

 
(30
)
Net proceeds from issuance of Andeavor Logistics LP Common Units
—

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
285

 
284

Net proceeds from issuance of Andeavor Logistics LP Preferred Units
—

 
—

 
—

 
—

 
—

 
—

 
—

 
589

 
589

Amortization of equity settled awards
—

 
—

 
57

 
—

 
—

 
—

 
—

 
9

 
66

Transfers to (from) noncontrolling interest, net of tax
—

 
—

 
313

 
—

 
—

 
—

 
—

 
(513
)
 
(200
)
Dividend payments
—

 
—

 
—

 
(314
)
 
—

 
—

 
—

 
—

 
(314
)
Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(306
)
 
(306
)
Issuance of shares for Western Refining Acquisition
39.5

 
6

 
3,372

 
—

 
3.1

 
169

 
—

 
—

 
3,547

Consideration for Western Refining related to stock awards
—

 
—

 
8

 
—

 
—

 
—

 
—

 
—

 
8

Noncontrolling interest acquired from Western Refining
—

 
—

 
—

 
—

 
—

 
—

 
—

 
719

 
719

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(64
)
 
—

 
(64
)
Other
—

 
—

 
(2
)
 
—

 
—

 
—

 
—

 
—

 
(2
)
At December 31, 2017
200.1

 
$
33

 
$
5,224

 
$
7,651

 
(46.8
)
 
$
(2,841
)
 
$
(252
)
 
$
3,600

 
$
13,415


The accompanying notes are an integral part of these consolidated financial statements.

 
 
December 31, 2017 | 73
Financial Statements

Andeavor
Statements of Consolidated Cash Flows
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(In millions)
Cash Flows From (Used In) Operating Activities
 
 
 
 
 
Net earnings
$
1,683

 
$
860

 
$
1,690

Adjustments to reconcile net earnings to net cash from operating activities:
 
 
 
 
 
Depreciation and amortization expense
1,021

 
851

 
756

Lower of cost or market inventory valuation adjustment
—

 
(359
)
 
317

Amortization of debt issuance costs and discounts
20

 
17

 
16

Debt redemption charges
74

 
9

 
1

(Gain) loss related to Hawaii Business
(13
)
 
(17
)
 
6

Loss on asset disposals and impairments
25

 
9

 
42

Stock-based compensation expense
69

 
35

 
75

Deferred income taxes
(695
)
 
203

 
65

Excess tax benefits from stock-based compensation arrangements
—

 
—

 
(38
)
Turnaround expenditures
(544
)
 
(323
)
 
(290
)
Marketing branding costs
(53
)
 
(65
)
 
(52
)
Other operating activities
7

 
16

 
12

Changes in current assets and current liabilities:
 
 
 
 
 
Receivables
(352
)
 
(259
)
 
638

Inventories
(187
)
 
40

 
(179
)
Prepayments and other
(174
)
 
(91
)
 
(77
)
Accounts payable and other current liabilities
904

 
427

 
(863
)
Changes in noncurrent assets and noncurrent liabilities
(155
)
 
(49
)
 
12

Net cash from operating activities
1,630

 
1,304

 
2,131

Cash Flows From (Used In) Investing Activities
 
 
 
 
 
Capital expenditures
(1,346
)
 
(894
)
 
(1,030
)
Acquisitions, net of cash
(1,116
)
 
(413
)
 
(97
)
Deposits for acquisitions
(33
)
 
(33
)
 
—

Proceeds from asset sales
48

 
25

 
—

Other investing activities
4

 
(2
)
 
(2
)
Net cash used in investing activities
(2,443
)
 
(1,317
)
 
(1,129
)
Cash Flows From (Used In) Financing Activities
 
 
 
 
 
Borrowings under revolving credit agreements
2,315

 
1,451

 
476

Repayments on revolving credit agreements
(2,232
)
 
(1,426
)
 
(431
)
Borrowings under term loan credit agreement
—

 
—

 
250

Proceeds from debt offerings
2,737

 
3,051

 
—

Repayments of debt
(4,140
)
 
(260
)
 
(404
)
Premium paid on debt redemption
(109
)
 
—

 
—

Dividend payments
(314
)
 
(249
)
 
(228
)
Proceeds from stock options exercised
4

 
2

 
13

Net proceeds from issuance of Andeavor Logistics LP common units
284

 
364

 
99

Net proceeds from issuance of Andeavor Logistics LP preferred units
589

 
—

 
—

Distributions to noncontrolling interest
(306
)
 
(216
)
 
(182
)
Purchases of common stock
(692
)
 
(250
)
 
(644
)
Taxes paid related to net share settlement of equity awards
(34
)
 
(25
)
 
(45
)
Payments of debt issuance costs
(29
)
 
(37
)
 
(2
)
Excess tax benefits from stock-based compensation arrangements
—

 
—

 
38

Other financing activities
(12
)
 
(39
)
 
—

Net cash from (used in) financing activities
(1,939
)
 
2,366

 
(1,060
)
Increase (Decrease) in Cash and Cash Equivalents
(2,752
)
 
2,353

 
(58
)
Cash and Cash Equivalents, Beginning of Year
3,295

 
942

 
1,000

Cash and Cash Equivalents, End of Year
$
543

 
$
3,295

 
$
942

The accompanying notes are an integral part of these consolidated financial statements.

74  |  
ANDVLOGOPRIMARYCOLORRGBA21.JPG
 
Notes to Consolidated Financial Statements
 


Note 1 - Description of Business and Summary of Significant Accounting Policies

Description and Nature of Business

Effective August 1, 2017, Tesoro Corporation changed its name to Andeavor. As used in this report, the terms “Andeavor,” the “Company,” “we,” “us” or “our” may refer to Andeavor, one or more of its consolidated subsidiaries or all of them taken as a whole. The words “we,” “us” or “our” generally include Andeavor Logistics LP and its subsidiaries as consolidated subsidiaries of Andeavor with certain exceptions where there are transactions or obligations between Andeavor Logistics and Andeavor or its other subsidiaries. When used in descriptions of agreements and transactions, “Andeavor Logistics” or the “Partnership” refers to Andeavor Logistics, formally known as Tesoro Logistics, LP, and its consolidated subsidiaries.

Andeavor was incorporated in Delaware in 1968. Based in San Antonio, Texas, we are one of the largest independent petroleum refining and marketing companies in the United States. Our subsidiaries, operating through 3 business segments, primarily transport crude oil and manufacture, transport and sell transportation fuels. Our Marketing operating segment sells transportation fuels in 17 states and Mexico through a network of 3,255 retail stations primarily under the ARCO ® , Shell ® , Mobil ™ and SUPERAMERICA ® brands. Our unbranded business includes volumes sold through agreements with third-party dealers. Our Logistics operating segment, which is comprised of Andeavor Logistics’ assets and operations with the exception of Western Refining Logistics, LP’s (“WNRL”) wholesale fuel sales business that is reflected in our Marketing segment, includes certain crude oil and natural gas gathering assets, natural gas and NGLs processing assets, and crude oil and refined products terminalling, transportation and storage assets acquired from Andeavor and third parties. Prior to the adoption of ASU 2017-01 discussed further below, the Andeavor Logistics financial and operational data presented include the historical results of all assets acquired from Andeavor prior to the dates they were acquired by Andeavor Logistics. Our Refining operating segment, which owns and operates 10 refineries in the western and mid-continent United States, refines crude oil and other feedstocks into transportation fuels, such as gasoline and gasoline blendstocks, jet fuel and diesel fuel, as well as other products, including heavy fuel oils, liquefied petroleum gas and petroleum coke for sale in bulk markets to a wide variety of customers within our markets. Our refineries have a combined crude oil capacity of approximately 1,157 Mbpd.

Our earnings, cash flows from operations and liquidity depend upon many factors, including producing and selling refined products at margins above fixed and variable expenses. The prices of crude oil and refined products fluctuate substantially and our financial results are significantly influenced by the timing of changes in crude oil costs and how quickly refined product prices adjust to reflect these changes. These price fluctuations depend on numerous factors beyond our control, including the global supply and demand for crude oil and refined products, which are subject to factors including changes in the global economy, the level of foreign and domestic production of crude oil and refined products, geo-political conditions, availability of crude oil and refined product imports, the infrastructure to transport crude oil and refined products, weather conditions, earthquakes and other natural disasters, seasonal variations, government regulations, threatened or actual terrorist incidents or acts of war, and local factors, including market conditions and the level of operations of other suppliers in our markets. Margin fluctuations resulting from these factors have a significant impact on our results of operations, cash flows, liquidity and financial position.

Western Refining
On June 1, 2017, pursuant to the Agreement and Plan of Merger, dated as of November 16, 2016 (the “Merger Agreement”), by and among Western Refining, Inc. (“Western Refining”), the Company, our wholly-owned subsidiaries Tahoe Merger Sub 1, Inc. and Tahoe Merger Sub 2, LLC, Tahoe Merger Sub 1 was merged with and into Western Refining, with Western Refining surviving such merger as a wholly-owned subsidiary of the Company (the “Merger” or the “Western Refining Acquisition”). As a result of the Merger, we obtained Western Refining’s controlling interest in WNRL. Thus, these consolidated financial statements reflect the operations, financial position and cash flows associated with Western Refining, WNRL and their related subsidiaries with all intercompany transactions eliminated upon consolidation. Refer to Note 2 for further information on the Western Refining Acquisition.

WNRL Merger and IDR Buy-In
Effective October 30, 2017, Andeavor Logistics closed its merger with WNRL (the “WNRL Merger”) exchanging all outstanding common units of WNRL with units of Andeavor Logistics. WNRL unitholders, including Andeavor, received units of Andeavor Logistics at agreed upon exchange rates. Concurrently with the closing of the WNRL Merger, WNRL GP Merger Sub LLC, a direct, wholly owned subsidiary of Andeavor Logistics merged with and into Western Refining Logistics GP, LLC (“WNRL General Partner”) with WNRL General Partner being the surviving entity and becoming a wholly owned subsidiary of Andeavor Logistics. Both WNRL General Partner and Tesoro Logistics GP, LLC (“TLGP”) are indirectly owned by Andeavor and as a result, Andeavor controls both WNRL and Andeavor Logistics.

The closing of the WNRL Merger was conditioned upon, among other things, the adoption and effectiveness of the Second Amended and Restated Agreement of Limited Partnership of Andeavor Logistics LP, pursuant to which, simultaneously with the closing of the WNRL Merger: (i) the IDRs held by TLGP were canceled (the “IDR Exchange”), (ii) the general partner interests in Andeavor Logistics held by TLGP were converted into a non-economic general partner interest in Andeavor Logistics (together with the IDR Exchange, the “IDR/GP Transaction”) and (iii) Andeavor and its affiliates, including TLGP, agreed to increase and extend existing waivers on distributions to Andeavor and its affiliates by  $60 million  to an aggregate of  $160 million  between

 
 
December 31, 2017 | 75
Notes to Consolidated Financial Statements
 
 

2017 and 2019. As consideration for the IDR/GP Transaction, TLGP was issued  78.0 million  common units in Andeavor Logistics simultaneously with the closing of the WNRL Merger, resulting in an approximate  59%  ownership interest in Andeavor Logistics.

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of Andeavor and its subsidiaries. All intercompany accounts and transactions have been eliminated. We have evaluated subsequent events through the filing of this Form 10-K. Any material subsequent events that occurred during this time have been properly recognized or disclosed in our financial statements.

During 2016, we made certain reclassifications to the 2015 period presentations to conform to the 2016 year. In the first quarter of 2016, we revised the process by which we classify certain logistics costs, primarily recognized by Andeavor Logistics, during consolidation from operating expenses and general and administrative expense to costs of materials and other. This better reflected the distribution costs related to Andeavor’s sale of refined products during the ordinary course of business. This change in process did not impact current or prior segment operating results. However, we reclassified $221 million from costs of materials and other and recognized $177 million in operating expenses and $44 million in general and administrative expenses of the statement of consolidated operations for the year ended December 31, 2015.

Our consolidated financial statements include Andeavor Logistics, a variable interest entity. TLGP, Andeavor’s fully consolidated subsidiary, serves as Andeavor Logistics’ general partner. As the general partner of Andeavor Logistics, we have the sole ability to direct the activities of Andeavor Logistics that most significantly impact its economic performance. We are also considered to be the primary beneficiary for accounting purposes and are Andeavor Logistics’ primary customer. Under our long-term transportation agreements with Andeavor Logistics (discussed further below), transactions with us accounted for 44% , 59% and 55% of Andeavor Logistics’ total revenues for the years ended December 31, 2017 , 2016 and 2015 , respectively. In the event Andeavor Logistics incurs a loss, our operating results will reflect Andeavor Logistics’ loss, net of intercompany eliminations, to the extent of our ownership interest in Andeavor Logistics. All intercompany transactions with Andeavor Logistics are eliminated upon consolidation.

Use of Estimates

We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts and disclosures of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. We review our estimates on an ongoing basis, based on 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. 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

Our receivables primarily consist of customer accounts receivable. Open credit is extended based on an ongoing evaluation of our customers’ financial condition and other factors. In certain circumstances, we may require prepayments, letters of credit, guarantees, or other forms of collateral. Credit risk with respect to trade receivables is mitigated by the large number of customers comprising our customer base and their dispersion across various industries and geographic areas of operations. Our allowance for doubtful accounts is based on numerous factors including current sales amounts, historical write-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 2017 , 2016 and 2015 . The Company does not have any off-balance-sheet credit exposure related to its customers.

Inventories

Inventories are stated at the lower of cost or market. We use the last-in, first-out method to determine the cost of petroleum commodities, oxygenates and by-products held by our U.S. subsidiaries. We determine the carrying value of inventories of petroleum commodities held by our foreign subsidiaries and certain refined product inventories for our wholesale business using the first-in, first-out cost method. We value merchandise along with materials and supplies at average cost and using the retail inventory method.


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Notes to Consolidated Financial Statements
 

Property, Plant and Equipment

We capitalize the cost of additions, major improvements and modifications to property, plant and equipment (“Property Assets”). The cost of repairs to, and normal maintenance of, Property Assets is expensed as incurred. Major improvements and modifications of Property Assets are those expenditures that extend the useful life, increase the capacity or improve the operating efficiency of the asset, or improve the safety of our operations. The cost of Property Assets constructed includes interest and certain overhead costs allocable to the construction activities. Capitalized interest totaled $49 million , $31 million and $36 million during 2017 , 2016 and 2015 , respectively, and is recorded as a reduction to net interest and financing costs in our statements of consolidated operations.

We compute depreciation of Property Assets using the straight-line method, based on the estimated useful life and salvage value of each asset. We record Property Assets under capital leases at the lower of the present value of minimum lease payments using our incremental borrowing rate or the fair value of the leased property at the date of lease inception. We depreciate leasehold improvements and Property Assets acquired under capital leases over the lesser of the lease term or the economic life of the asset. Depreciation expense totaled $656 million , $537 million and $491 million for 2017 , 2016 and 2015 , respectively.

Asset Retirement Obligations
We record asset retirement obligations (“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 disposal of hazardous materials used in our production processes and the removal or dismantlement of refining and terminal facilities, pipelines and other buildings. We have not historically incurred significant AROs for hazardous materials disposal or other removal costs associated with asset retirements or replacements during scheduled maintenance projects. This precludes development of assumptions about the potential timing of settlement dates based on there being no plans to retire or dispose of the assets, our plans to extend the assets’ economic lives through scheduled maintenance and updating for technological advances, our history of rarely retiring similar assets in the past and industry practices for similar assets. As of December 31, 2017 and 2016 , we had $41 million and $26 million recorded for AROs, respectively. During 2017 , partially due to the Western Refining Acquisition, there were $17 million of additions to AROs. There was no material change in AROs in 2016 .

Acquired Intangibles and Goodwill

Acquired intangibles are recorded at fair value as of the date acquired and consist primarily of customer relationships, air emission credits, trade names and plans, liquor licenses, favorable leases, intellectual property, franchise rights and a master franchise license for the ampm ® convenience store brand (“ampm ® license”). We amortize acquired intangibles with finite lives on a straight-line basis over estimated useful lives of 1 to 35 years, and we include the amortization of acquired intangibles in depreciation and amortization expense in our statements of consolidated operations. Our indefinite-lived intangible assets consist of the ARCO ® and SUPERAMERICA ® brands, liquor licenses and associated registered trademarks for certain of our retail stations as well as perpetual emission credits. See Note 7 for further information on our amortization expense for acquired intangibles.

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. 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 (gain) loss on asset disposals and impairments in our statements of consolidated 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. Our review of goodwill is discussed further in Note 7 .

Impairment of Long-Lived Assets

We review Property Assets and other long-lived assets, including acquired intangible assets 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 the assets’ net book value. If this occurs, an impairment loss is recognized for the difference between the 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. During the year ended December 31, 2017, we recorded a long-lived asset impairment of $40 million associated with Vancouver Energy, our venture with Savage Companies, given the terminal project not being approved. The impairment represents the write off of all capital costs previously capitalized in support of the terminal design and engineering.

 
 
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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, 2017 , 2016 and 2015 .

Other Noncurrent Assets

We defer turnaround costs and the costs of certain catalysts (“Deferred Charges”) used in the refinery processing units that have a benefit period that exceeds 1 year and amortize these costs on a straight-line basis over the expected periods of benefit, normally ranging from 2 to 10 years . Deferred Charges are amortized over the period of time until the next planned turnaround or catalyst change-out. Amortization for Deferred Charges, which is included in depreciation and amortization expense in our statements of consolidated operations, amounted to $293 million , $251 million and $222 million in 2017 , 2016 and 2015 , respectively.

Environmental Credits and Environmental Credit Obligations

We are subject to extensive and frequently changing federal, state, regional and local laws, regulations and ordinances relating to the environment, including those governing emissions or discharges to land, air and water, the handling and disposal of solid and hazardous wastes and the remediation of contamination. In order to comply with certain of these regulations and ordinances, we are required to reduce our emissions or blend certain levels of biofuels. Otherwise, we are required to obtain allowances or credits (“environmental credits”) to offset the obligations created by our operations. Specific to the RINs required to comply with the RFS2 implemented by the EPA along with allowances and credits needed to comply with the cap-and-trade emission reduction program and low carbon fuel standard implemented by the state of California, we account for environmental credits using an inventory method of accounting. Environmental credits are recorded on our consolidated balance sheet at weighted average cost and expensed as cost of materials and others as they are used to offset obligations incurred by our operations. In determining the weighted average cost of environmental credits, we record environmental credits purchased from third parties at the price paid and environmental credits allocated to us by regulatory agencies or attached to commodities purchased for use in our operations at a cost of zero unless market data indicates an incremental price was paid for the acquisition of the environmental credit. Costs incurred to obtain allowances or credits necessary to comply with other federal, state or local regulations or ordinances are expensed as incurred. The amounts associated with these other regulations or ordinances are not material to our consolidated financial statements.

We record obligations associated with RFS2 and the California programs as obligations are incurred. Our liabilities for environmental credit obligations are comprised of the weighted average cost of credits we hold but are required to be remitted for satisfaction of the obligation generated by our operations plus amounts recognized at fair value for any deficiency in environmental credits held compared to our obligation. Refer to Note 11 for amounts recognized at fair value for environmental credit obligations.

Derivative Instruments

We use non-trading derivative instruments to manage exposure to commodity price risks associated with the purchase or sale of feedstocks, refined products and energy supplies to or from our refineries, terminals, marketing operations and customers. We also use non-trading derivative instruments to manage price risks associated with inventories above or below our target levels. These derivative instruments typically involve physical commodity forward purchase and sale contracts (“Forward Contracts”), exchange-traded futures (“Futures Contracts”), over-the-counter swaps, including those cleared on an exchange (“Swap Contracts”), options (“Options”) and over-the-counter options (“OTC Option Contracts”), most of which had remaining durations of less than one year as of December 31, 2017 . Our positions are monitored daily by our trading controls group to ensure compliance with our risk management policies.

We mark-to-market our derivative instruments and recognize the changes in their fair values, realized or unrealized, in either revenues or cost of materials and other in our statements of consolidated operations, depending on the purpose for acquiring and holding the derivatives. All derivatives are recorded and carried at fair value in receivables, other current assets or accounts

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Notes to Consolidated Financial Statements
 

payable in our consolidated balance sheets. Margin deposits represent cash collateral paid between our counterparties and us to support our commodity contracts. We net our asset and liability positions associated with multiple derivative instruments that are executed with the same counterparty when a legal right of offset exists.

Financial Instruments

The carrying value of certain of our financial instruments, including cash and cash equivalents, receivables, accounts payable and certain accrued liabilities, approximates fair value primarily because of the short-term maturities of these instruments. The borrowings under the Revolving Credit Facility and the Andeavor Logistics Revolving Credit Facility, which include variable interest rates, approximate fair value. We estimate the fair value for our fixed rate debt primarily using prices from recent trade activity.

Income Taxes

We record deferred tax assets and liabilities for future income tax consequences that are attributable to differences between the financial statement carrying amounts of assets and liabilities and their income tax bases. We base the measurement of deferred tax assets and liabilities on enacted tax rates that we expect will apply to taxable income in the year we expect to settle or recover those temporary differences. We recognize the financial statement effects of a tax position when it is more likely than not that the position will be sustained upon examination. We provide a valuation allowance for deferred tax assets if it is more likely than not that those items will either expire before we are able to realize their benefit or their future deductibility is uncertain.

We recognize the effect on deferred tax assets and liabilities of any change in income tax rates in the period that includes the enactment date. However, regarding the accounting for the tax effects of the Tax Act, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) in December to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. Among other things, SAB 118 provides for a period of up to twelve months from the enactment date to record the effects of the Tax Act. See Note 13 for details regarding our accounting for the tax effects of the Tax Act.

We use the flow-through method to account for state investment tax credits earned on eligible capital expenditures. Under this method, the investment tax credits are recognized as a reduction to income tax expense in the year they are earned, except to the extent there is a continuing obligation.

Pension and Other Postretirement Benefits

We recognize separately the overfunded or underfunded status of our pension and other postretirement plans as an asset or liability. A change in the funded status of our defined benefit retirement plans resulting from different outcomes from those assumed or changes in actuarial assumptions are recognized in other comprehensive income in the period the change occurs. The funded status represents the difference between the projected benefit obligation and the fair value of the plan assets. The projected benefit obligation is the present value of benefits earned to date by plan participants, including the effect of assumed future salary increases. Plan assets are measured at fair value. We use a December 31 st measurement date for plan assets and obligations for all of our plans.

Contingencies

Environmental Matters
We are subject to extensive federal, state and local environmental laws and regulations. These laws, which change frequently, regulate the discharge of materials into the environment and may require us to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites, install additional controls or make other modifications to certain emission sources, equipment or facilities.

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 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. Usually, the timing of these accruals coincides with the completion of a feasibility or engineering study and or our commitment to a formal plan of action where a range of costs can be reliably estimated and supported. Certain of our environmental liabilities, specific to long-term monitoring costs that 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 other, 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

 
 
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Notes to Consolidated Financial Statements
 
 

remediation are included as part of the estimated liability. The majority of our environmental liabilities are recorded on an undiscounted basis.

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 accrued liabilities or other noncurrent liabilities on our consolidated balance sheet, 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. Any excess consideration transferred over the estimated fair values of the identifiable net assets acquired 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 statements of consolidated operations.

Revenue Recognition

We recognize revenues upon delivery of goods or services to a customer. For goods, this is the point at which title is transferred and when payment has either been received or collection is reasonably assured. Revenues for services are recorded when the services have been provided. We record certain transactions in cost of materials and other in our statements of consolidated operations on a net basis. These transactions include nonmonetary crude oil and refined product exchange transactions used to optimize our refinery supply, and sale and purchase transactions entered into with the same counterparty that are deemed to be in contemplation with one another. We include transportation and processing fees charged to customers in revenues in our statements of consolidated operations, while the related costs are included in cost of materials and other.

Federal and state excise taxes, which are remitted to governmental agencies through the Refining segment and collected from customers in the Marketing segment, are included in both revenues and cost of materials and other in our statements of consolidated operations. These taxes were primarily related to sales of gasoline and diesel fuel from continuing operations and totaled $771 million , $577 million and $561 million in 2017 , 2016 and 2015 , respectively.

Cost Classification

Cost of materials and other includes the purchase cost of commodities sold within our Refining and Logistics segments along with the cost of inbound transportation and distribution costs incurred to transport product to our customers, gains and losses related to our commodity hedging activities and the cost of merchandise sold through our Marketing segment. Additionally, lower of cost or market valuation adjustments impact our cost of materials and other but are separately presented in our statements of consolidated operations.

Operating expenses is comprised of direct and indirect operating costs. Direct operating expenses reflect 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 production of refined products sold through our Marketing or Refining segments or the provision of services in our Logistics segment. Indirect operating expense represents allocated labor and other administrative costs for centralized personnel that influence our underlying operations, environmental remediation costs unrelated to current period operations, and other costs that are related, but not directly, to our segment operations.

Operating Expenses (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Direct operating expenses
$
3,053

 
$
2,391

 
$
2,328

Indirect operating expenses
129

 
150

 
127

Operating expenses (excluding depreciation and amortization)
$
3,182

 
$
2,541

 
$
2,455


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Notes to Consolidated Financial Statements
 


Depreciation and amortization expenses consist of the depreciation and amortization of property, plant and equipment, turnaround expenditures, marketing branding costs 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 marketing, logistics or refining operations. Cost of materials and other, any lower of cost or market valuation adjustments, direct operating expenses incurred across our operating segments, and depreciation and amortization expenses recognized by our Marketing, Logistics and Refining segments (refer to amounts disclosed in Note 19 ) constitute costs of revenue as defined by U.S. GAAP.

Stock-Based Compensation

Our stock-based compensation includes performance share awards, market stock units, stock options, restricted common stock, restricted stock units, liability-based phantom stock and stock appreciation rights (“SARs”). We also acquired phantom stock and cash performance awards as a result of the Merger, which were evaluated upon change in control on June 1, 2017 for appropriate fair values.

The grant date fair value of performance share awards based on performance conditions, restricted common stock awards and restricted stock units are equal to the market price of our common stock on the date of grant. The fair values of market stock units and performance shares based on market conditions are estimated using the Monte Carlo simulation on the date of grant, while stock options are estimated using the Black-Scholes option-pricing model on the date of grant. The fair values of our SARs and phantom stock are remeasured at the end of each reporting period. SARs and phantom stock are recorded in other current liabilities in our statement of financial position. Since we do not have any SARs awards outstanding at December 31, 2017 and our liability balance is at zero , we do not anticipate any further remeasurements or transactions related to SARs. We primarily amortize the fair value of our stock-based awards using the straight-line method over the vesting period. Our stock-based compensation expense includes estimates for forfeitures and volatility based on our historical experience. If actual forfeitures differ from our estimates, we adjust stock-based compensation expense accordingly. Expenses related to stock-based compensation are included in operating expenses and in general and administrative expenses in our statements of consolidated operations.

Earnings per Share

We compute basic earnings per share by dividing net earnings attributable to Andeavor stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share include the effects of potentially dilutive shares, principally consisting of common stock options and unvested restricted stock, restricted stock units, market stock units and performance share awards outstanding during the period. Additionally, for the diluted earnings per share computation, net earnings attributable to Andeavor is reduced, where applicable, for the decrease in earnings from Andeavor’s limited partner unit ownership in Andeavor Logistics that would have resulted assuming the incremental units related to Andeavor Logistics’ equity incentive plans had been issued during the respective periods.

New Accounting Standards and Disclosures

Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” and has since amended the standard with ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date,” ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” ASU 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,” and ASU   2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (collectively, “ASC 606”). ASC 606 replaces 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 in 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. We adopted ASC 606 on January 1, 2018 using the modified retrospective transition method.

In 2016, we initiated a project to guide the implementation of the new standard by performing accounting assessments of our contracts with customers and assessing related changes to our systems, business processes, and internal controls. We have completed our adoption efforts for revenue recognition under ASC 606 in the period beginning January 1, 2018 and have implemented changes to our business processes and internal controls for impacted areas.

Under the modified retrospective transition method, a cumulative effect adjustment of $24 million was recorded as a reduction to retained earnings on January 1, 2018, which relates to the timing of recognition on contracts within our Logistics segment for which our customers provide minimum throughput volume commitments that remain subject to claw-back provisions and for changes in the timing of recognition of franchise fees in our Marketing segment. Additionally, we will be making changes to our

 
 
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Notes to Consolidated Financial Statements
 
 

presentation of revenues and cost of materials and other for gross presentation of non-cash consideration we receive in the form of natural gas liquids in our Logistics segment and to reflect our election to show all taxes, including excise taxes, imposed on specific revenue producing activities for which we collect payments and remit to government authorities on a net basis. We do not expect the adoption of ASC 606 to have a material impact to the timing or amount of revenue we recognize in future periods.

Inventory
In July 2015, the FASB issued ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory” (“ASU 2015-11”), which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test for inventories determined by methods other than last-in-first-out and the retail inventory method, which remain subject to existing impairment models. We adopted ASU 2015-11 as of January 1, 2017, which resulted in changes to how we perform our lower of cost or market tests for inventory. These changes did not have an impact on our financial statements.

Leases
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), which amends existing accounting standards for lease accounting and adds additional disclosures about leasing arrangements. Under the new guidance, lessees are required to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either a financing lease or operating lease, with classification affecting the pattern of expense recognition in the income statement and presentation of cash flows in the statement of cash flows. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods. Early adoption is permitted and modified retrospective application is required, however, we do not intend to early adopt the standard. While it is early in our assessment of the impacts from this standard, we expect that the recognition of right-of-use assets and lease liabilities not currently reflected in our balance sheet could have a material impact on total assets and liabilities. Additionally, we expect the presentation changes required for amounts currently reflected in our statement of consolidated operations to impact certain financial statement line items. We cannot estimate the impact on our business processes, accounting systems, controls and financial statement disclosures due to the implementation of this standard given the preliminary stage of our assessment.

Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which amends guidance on the impairment of financial instruments. The ASU requires the estimation of credit losses based on expected losses and provides for a simplified accounting model for purchased financial assets with credit deterioration. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim reporting periods within those annual reporting periods. Early adoption is permitted for annual reporting periods beginning after December 15, 2018. While we are still evaluating the impact of ASU 2016-13, we do not expect the adoption of this standard to have a material impact on our financial statements.

Definition of a Business
In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business” (“ASU 2017-01”), which revises the definition of a business and assists in the evaluation of when a set of transferred assets and activities is a business. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017, and should be applied prospectively. As permitted under ASU 2017-01, we elected to early adopt this standard as of September 30, 2017. We do not expect the adoption of this standard to have a material impact on our financial statements.

Goodwill
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which eliminates the second step from the goodwill impairment test that requires goodwill impairments to be measured as the amount that a reporting unit’s carrying amount of goodwill exceeded its implied fair value of goodwill. Instead, an entity can perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount with any impairment being limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied on a prospective basis. As permitted under ASU 2017-04, we have elected to early adopt this standard for our 2017 goodwill impairment tests that were performed as of November 1, 2017. The adoption of this standard did not have a material impact on our financial statements.

Pension and Postretirement Costs
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), which requires the current service-cost component of net benefit costs to be presented similarly with other current compensation costs for related employees on the statements of consolidated operations, and stipulates that only the service cost component of net benefit costs is eligible for capitalization. The Company will present other components of net benefit costs elsewhere on the statements of consolidated operations. ASU 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted in the first quarter of 2017 only. The amendments to the presentation of the statements of consolidated operations in this update should be applied retrospectively while the change in capitalized benefit cost is to be applied prospectively. We have evaluated the impact of this standard on our financial statements and determined there will be no impact to net earnings, but it is expected to have an

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immaterial impact on other line items such as operating income. We did not elect to early adopt and will implement the changes in presentation when the standard becomes effective.

Share-Based Compensation
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which provides guidance about which changes to the terms or conditions of a share-based payment awarded require an entity to apply modification accounting. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The amendments in ASU 2017-09 are to be applied prospectively to an award modified on or after the adoption date, consequently the impact will be dependent on whether we modify any share-based payment awards and the nature of such modifications. The adoption of this standard is not expected to have a material impact on our financial statements.

Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), which amends and simplifies existing guidance in order to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. While we are still evaluating the impact of ASU 2017-12, we do not expect the adoption of this standard to have a material impact on our financial statements.

Note 2 - Acquisitions and Divestitures

2017 Acquisitions

Western Refining Acquisition
On June 1, 2017 , we completed the Western Refining Acquisition. Under the terms of the Merger Agreement, the shareholders of Western Refining elected cash consideration of $37.30 per share up to the maximum aggregate cash election of $405 million with each remaining Western Refining share being exchanged for 0.4350 shares of the Company. This resulted in the issuance of 42,617,738 of our shares, which was comprised of 39,499,524 newly issued shares of common stock and 3,118,214 shares of treasury stock. Based on our $83.25 per share closing stock price on June 1, 2017 , the aggregate value of consideration paid to Western Refining shareholders was $4.0 billion , including approximately $3.6 billion of our stock and approximately $424 million of cash, including cash payable upon accelerated vesting of Western Refining equity awards. The cash portion of the purchase price, along with the settlement of $1.6 billion of certain Western Refining debt and other transaction related costs, was funded using cash on hand, including the proceeds from the 4.750% Senior Notes due 2023 and the 5.125% Senior Notes due 2026 that we issued in December 2016, and $575 million of funds drawn on the Revolving Credit Facility, the capacity of which increased to $3.0 billion following the Merger.

We accounted for the Western Refining Acquisition using the acquisition method of accounting, which requires, among other things, that assets acquired at their fair values and liabilities assumed be recognized on the balance sheet as of the acquisition date. The purchase price allocation for the Western Refining Acquisition is preliminary and has been allocated based on estimated fair values of the assets acquired and liabilities assumed at the acquisition date, pending the completion of an independent valuation and other information as it becomes available to us. We expect that, as we obtain more information, the preliminary purchase price allocation disclosed below may change. The purchase price allocation adjustments can be made through the end of Andeavor’s measurement period, which is not to exceed one year from the acquisition date.


 
 
December 31, 2017 | 83
Notes to Consolidated Financial Statements
 
 

Preliminary Acquisition Date Purchase Price Allocation (in millions)
Cash
$
159

Receivables
511

Inventories
805

Prepayments and Other Current Assets
212

Property, Plant and Equipment (a)
3,464

Goodwill
2,949

Acquired Intangibles
316

Other Noncurrent Assets
162

Accounts Payable
(701
)
Accrued Liabilities
(270
)
Current Portion of Long-term Debt
(12
)
Deferred Income Taxes
(718
)
Debt
(2,092
)
Other Noncurrent Liabilities
(86
)
Noncontrolling Interest
(719
)
Total purchase price
$
3,980


(a)
Estimated useful lives ranging from 3 to 28 years have been assumed based on the preliminary valuation.

Goodwill
Andeavor evaluated several factors that contributed to the amount of goodwill presented above. These factors include the acquisition of an existing integrated marketing, logistics and refining business located in areas with access to cost-advantaged feedstocks with an assembled workforce that cannot be duplicated at the same costs by a new entrant. Further, the Western Refining Acquisition provides a platform for future growth through operating efficiencies Andeavor expects to gain from the application of best practices across the combined company and an ability to realize synergies from the geographic diversification of Andeavor’s business and rationalization of general and administrative costs. The amount of goodwill by reportable segment is as follows: Refining $1.9 billion , Logistics $684 million and Marketing $318 million . Based on information evaluated to date, we estimate approximately $2.0 billion of the $2.9 billion in goodwill resulting from the tax-free Merger with Western Refining to be non-deductible for tax purposes. As a result of prior acquisitions, Western Refining has tax-deductible goodwill, in which we received carryover basis, providing tax deductibility for an estimated $972 million of the $2.9 billion in goodwill that otherwise would not be deductible.

Property, Plant and Equipment
The fair value of property, plant and equipment is $3.5 billion . This preliminary fair value is based on a valuation using a combination of the income, cost and market approaches. We have not yet finalized our valuation estimate. The useful lives are based on similar assets of Andeavor.

Acquired Intangible Assets
We estimated the fair value of the acquired identifiable intangible assets at $316 million . This fair value is based on a preliminary valuation completed for the business enterprise, along with the related tangible assets, using a combination of the income method, cost method and comparable market transactions. We recognized intangible assets associated with customer relationships, franchise rights and favorable leases, all of which will be amortized over a definite-life. We also recognized an intangible asset of approximately $38 million related to liquor licenses and approximately $113 million related to trade names, both of which have indefinite lives. We considered the assets' history, accounting by Western Refining, our plans for the continued use and marketing of the assets, and how a market participant would use the assets in determining whether the intangible assets have an indefinite or definite life. We amortize acquired intangibles with finite lives on a straight-line basis over an estimated weighted average useful life of 13 years, and we include the amortization in depreciation and amortization expenses on our statement of consolidated operations. The gross carrying value of our finite life intangibles acquired from the Western Refining Acquisition was $165 million and the accumulated amortization was $7 million as of December 31, 2017 . Amortization expense is expected to be approximately  $13 million  per year for the next five years. We have not yet finalized our valuation estimate and related evaluation of the useful lives; accordingly, future amortization of intangible assets related to customer relationships may be revised.

Contingencies
We assumed environmental, legal and asset retirement obligation liabilities of approximately $19 million in the Western Refining Acquisition. The fair value of these liabilities is preliminary, pending the completion of an independent valuation and other information as it becomes available to us.

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Notes to Consolidated Financial Statements
 


Interests in WNRL and Minnesota Pipe Line Company
With the Western Refining Acquisition, we acquired a controlling interest in WNRL. The fair value of the noncontrolling interest in WNRL was based on the share price, shares outstanding and the percent of public unitholders of WNRL on June 1, 2017. Following the WNRL Merger on October 30, 2017 as discussed further in Note 3 , all ownership interests in WNRL were exchanged for Andeavor Logistics common units, including the portion owned by the public. The public’s ownership now is in Andeavor Logistics and continues to be reported in noncontrolling interest on our consolidated financial statements. Additionally, we acquired a 17% common equity interest in Minnesota Pipe Line Company, LLC (“MPL”). We are accounting for our investment in MPL under the equity method of accounting given our ability to exercise significant influence over MPL.

Acquisition Costs
We recognized acquisition costs related to the Western Refining Acquisition of $71 million in general and administrative expenses for the year ended December 31, 2017 . Additionally, we recognized $53 million of severance costs, of which $42 million was due to the change of control and $11 million of expected severance and retention payments in future periods. We had $13 million recognized in accrued liabilities remaining to be paid at December 31, 2017.

Western Refining Revenues and Net Earnings
For the period from June 1, 2017 through December 31, 2017 , we recognized $6.5 billion in revenues and $309 million of earnings before income taxes related to the business acquired. The earnings before income taxes for the period include related acquisition and severance costs along with interest expense incurred related to the acquisition.

Pro Forma Financial Information
The following unaudited pro forma information combines the historical operations of Andeavor and Western Refining, giving effect to the merger and related transactions as if they had been consummated on January 1, 2016, the beginning of the earliest period presented.

Pro Forma Consolidated Revenues and Consolidated Net Earnings (in millions) (unaudited)
 
Year Ended December 31,
 
2017
 
2016
Revenues
$
39,069

 
$
32,565

Net earnings (a)
1,869

 
993


(a)
While many recurring adjustments impact the pro forma figures presented, the increase in pro forma net earnings compared to our net earnings presented on the statements of consolidated operations for the year ended December 31, 2017 includes a significant non-recurring adjustment removing acquisition and integration costs from 2017 and reflects these costs in the year ended 2016, the year the acquisition was assumed to be completed for pro forma purposes.

Other Transactions

Rangeland Energy
On January 19, 2018 , Andeavor completed its announced acquisition of 100% of the equity of Rangeland Energy II, LLC (“Rangeland”). Rangeland owns and operates assets in the Delaware and Midland Basins in New Mexico and Texas, including a recently constructed crude oil pipeline, three crude oil storage terminals and a fractionation sand storage and truck loading facility. This acquisition is not material to our consolidated financial statements.

2017 Divestiture

On June 2, 2017, pursuant to our consent decree with the state of Alaska associated with our acquisition of certain terminalling and storage assets in Alaska during 2016, Andeavor Logistics sold one of its existing Alaska products terminals (“Alaska Terminal”). The sale of the Alaska Terminal resulted in a $25 million gain on sale being recognized in our consolidated statement of operations for the year ended December 31, 2017 . The Alaska Terminal divestiture did not have an impact on our Logistics segment’s operations.


 
 
December 31, 2017 | 85
Notes to Consolidated Financial Statements
 
 

Note 3 - Andeavor Logistics LP

Andeavor Logistics is a publicly traded limited partnership that was formed to own, operate, develop and acquire logistics assets. Its assets are integral to the success of Andeavor’s refining and marketing operations and are used to gather crude oil, natural gas, and water, process natural gas and distribute, transport and store crude oil and refined products. Andeavor Logistics provides us with various pipeline transportation, trucking, terminal distribution, storage and petroleum-coke handling services under long-term, fee-based commercial agreements. Each of these agreements, with the exception of the storage and transportation services agreement, contain minimum volume commitments. We do not provide financial or equity support through any liquidity arrangements or financial guarantees to Andeavor Logistics. At December 31, 2017 , the assets of Andeavor Logistics consisted of:

•
crude oil and refined products terminals and storage facilities in the western, southwest and midwestern U.S. that are supplied by Andeavor-owned and third-party pipelines, trucks and barges;
•
crude oil, feedstock and refined product storage and marine terminals in California that load and unload vessels;
•
crude oil and natural gas pipeline gathering systems in the Bakken Shale/Williston Basin area of North Dakota and Montana and the Green River Basin, Uinta Basin and Vermillion Basin in the states of Utah, Colorado and Wyoming;
•
pipelines, which transport products and crude oil from Andeavor’s refineries to nearby facilities in Salt Lake City and Los Angeles and a 50% fee interest in a pipeline that transports jet fuel from Andeavor’s Los Angeles refinery to the Los Angeles International Airport;
•
pipeline and gathering assets that support crude oil supply for Andeavor’s El Paso, Gallup and St. Paul Park refineries as well as third parties and consist of crude oil pipelines and gathering assets located primarily in the Delaware Basin, in the Four Corners area of Northwestern New Mexico and in the Upper Great Plains region;
•
bulk petroleum distribution plants in the southwest U.S.;
•
a fleet of asphalt, crude and refined product delivery trucks;
•
asphalt terminalling and processing plants in the southwest U.S.;
•
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 rail car unloading facility in Washington that receives crude oil transported on unit trains leased by Andeavor;
•
a petroleum coke handling and storage facility in Los Angeles that handles and stores petroleum coke from Andeavor’s Los Angeles refinery; and
•
a regulated common carrier refined products pipeline system connecting our Kenai refinery terminals to terminals in Anchorage, Alaska.

TLGP, our wholly-owned subsidiary, serves as the general partner of Andeavor Logistics. We held an approximate 59% interest in Andeavor Logistics at December 31, 2017 . This interest at December 31, 2017 includes 127,889,386 common units. The public ownership of Andeavor Logistics is included in the Statements of Consolidated Operations and Consolidated Balance Sheets as noncontrolling interest.

2017 Acquisitions

North Dakota Gathering and Processing Assets
On January 1, 2017, Andeavor Logistics acquired crude oil, natural gas and produced water gathering systems and two natural gas processing facilities from Whiting Oil and Gas Corporation, GBK Investments, LLC and WBI Energy Midstream, LLC (the "North Dakota Gathering and Processing Assets") for total consideration of approximately $705 million , including payments for working capital amounts, funded with cash on-hand, which included borrowings under the Andeavor Logistics 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. This acquisition was immaterial to our consolidated financial statements.

WNRL Merger
Effective October 30, 2017 , Andeavor Logistics completed the WNRL Merger at a purchase price of approximately $1.7 billion , including amounts paid to Andeavor that are eliminated upon consolidation. The WNRL assets include logistic assets consisting of pipeline and gathering, terminalling, storage and transportation assets and provides services to Andeavor’s Refining segment. The majority of WNRL's logistics assets are integral to the operations of Andeavor’s El Paso, Gallup and St. Paul Park refineries. It also includes a wholesale business that operates primarily in the southwest United States and includes the operations of several bulk petroleum distribution plants and a fleet of crude oil, asphalt and refined product delivery trucks. It distributes commercial wholesale petroleum products primarily in Arizona, Colorado, Nevada, New Mexico and Texas. See Note 1 for further discussion of the WNRL Merger.

Anacortes Logistics Assets
On November 8, 2017 , Andeavor Logistics acquired logistics assets located in Anacortes, Washington (the “Anacortes Logistics Assets”) from a subsidiary of Andeavor for total consideration of $445 million . The Anacortes Logistics Assets include crude oil,

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Notes to Consolidated Financial Statements
 

feedstock and refined products storage at Andeavor’s Anacortes refinery, the Anacortes marine terminal with feedstock and refined product throughput, a manifest rail facility and crude oil and refined products pipelines. Andeavor Logistics paid $445 million , including $400 million of cash financed with borrowings on the Andeavor Logistics Revolving Credit Facility and $45 million in common units issued to Andeavor.

2016 Acquisitions

Alaska Storage and Terminalling Assets
Effective July 1, 2016 , Andeavor Logistics entered into an agreement to purchase certain terminalling and storage assets owned by Andeavor for total consideration of $444 million and was completed in two phases. On July 1, 2016, Andeavor Logistics completed the acquisition of the first phase consisting of tankage, related equipment and ancillary facilities used for the operations at Andeavor’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 approximately $240 million in cash, financed with borrowings under the Andeavor Logistics Dropdown Credit Facility and Andeavor Logistics’ issuance of equity to Andeavor with a fair value of $26 million . Consideration for the second phase was $178 million , comprised of approximately $160 million in cash, financed with borrowings under the Andeavor Logistics Dropdown Credit Facility and Andeavor Logistics issuing equity securities with a fair value of approximately $18 million .

Northern California Terminalling and Storage Assets
Effective November 21, 2016 , the Partnership acquired certain terminalling and storage assets owned by Andeavor for total consideration of $400 million comprised of $360 million of cash financed with borrowings on Andeavor Logistics’ Dropdown Credit Facility and $40 million of common and general partner units to Andeavor. The assets purchased consisted of tankage with crude oil, feedstock, and refined product storage capacity at Andeavor’s Martinez refinery along with a marine terminal capable of handling feedstock and refined product throughput.

2015 Acquisitions

LA Storage and Handling Assets
On November 12, 2015 , Andeavor Logistics purchased crude oil and refined product storage and pipeline assets in Los Angeles, California owned by Andeavor for a total consideration of $500 million (the “LA Storage and Handling Asset Acquisition”). Assets included in the transaction consisted of a crude oil, feedstock, and refined product storage tank facility and a 50% fee interest in a pipeline that transports jet fuel from Andeavor’s Los Angeles refinery to the Los Angeles International Airport. The acquisition price of $500 million included cash of approximately $250 million , funded in part from an Andeavor Logistics unsecured term loan facility and the issuance of common and general partner units to Andeavor, valued at approximately $250 million .

Additional Equity Issuances

Unit Issuance
Andeavor Logistics closed a registered public offering of 5.0 million common units representing limited partner interests, including the over-allotment option exercised by the underwriter for the purchase of an additional 101,980 common units, at a public offering price of $56.19  per unit on February 27, 2017 . The net proceeds of $281 million were used to repay borrowings outstanding under the Andeavor Logistics Revolving Credit Facility and for general partnership purposes.

In June 2016, Andeavor Logistics closed a registered public offering of  6.3 million  common units representing limited partner interests, including the over-allotment option exercised by the underwriter for the purchase of an additional  825 thousand 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.

Preferred Unit Issuance
On December 1, 2017, Andeavor Logistics issued and sold 600,000 of its 6.875% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units representing limited partner interests in Andeavor Logistics (the “Andeavor Logistics Preferred Units”), at a price to the public of $1,000 per unit. The net proceeds of $589 million from the sale of the Andeavor Logistics Preferred Units were used for debt repayment and to pay fees and expenses associated with issuance.

WNRL Merger and IDR Buy-In
In connection with the WNRL Merger, Andeavor Logistics issued approximately 15.2 million publicly held common units and approximately 14.9 million common units to subsidiaries of Andeavor.

Immediately following the closing of the WNRL Merger, Andeavor and Andeavor Logistics completed its IDR Buy-In transaction whereby Andeavor Logistics issued 78.0 million Andeavor Logistics common units to Andeavor in exchange for the cancellation of Andeavor Logistics’ IDRs and the conversion of its economic general partner interest into a non-economic general partner interest. Additionally, Andeavor and its affiliates, including TLGP, agreed to increase and extend existing waivers on distributions to Andeavor and its affiliates by $60 million to an aggregate of $160 million between 2017 and 2019.


 
 
December 31, 2017 | 87
Notes to Consolidated Financial Statements
 
 

ATM Program
On August 22, 2017 , Andeavor Logistics filed a prospectus supplement to its 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 its offerings (such continuous offering program, or at-the-market program referred to as the “2017 ATM Program”). During the year ended December 31, 2017, Andeavor Logistics issued an aggregate of 72,857 common units under its 2017 ATM Program, generating proceeds of approximately $3 million before issuance costs. The net proceeds from sales under the 2017 ATM Program will be used for general partnership purposes, which may include debt repayment, future acquisitions, capital expenditures and additions to working capital.

On August 24, 2015 , Andeavor Logistics 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 its offerings (such continuous offering program, or at-the-market program, referred to as the “2015 ATM Program”). Prior to then, Andeavor Logistics issued shares under a June 25, 2014 filed prospectus supplement to its shelf registration statement filed with the SEC in 2012 (the “2014 ATM Program”). During the years ended December 31, 2016 and 2015, Andeavor Logistics issued under both the 2015 ATM Program and the 2014 ATM Program an aggregate of 1,492,637 and 1,912,996 common units, respectively, generating proceeds of approximately $72 million and $103 million , respectively, before issuance costs.

Commercial Agreements with Andeavor Logistics

Andeavor Logistics generates revenue by charging fees for gathering crude oil, natural gas, and water, for terminalling, transporting and storing crude oil and refined products in terminals and storage tanks, processing and fractionating NGLs, a fleet of asphalt, crude and refined product delivery trucks and the sale of fuel through wholesale commercial contracts. We do not provide financial or equity support through any liquidity arrangements or financial guarantees to Andeavor Logistics. In connection with the acquisitions between Andeavor and Andeavor Logistics, we entered into long-term, fee-based storage and throughput and use agreements.

Andeavor Logistics provides us with various pipeline transportation, wholesale, trucking, terminal distribution, gas processing, storage and coke-handling services under various long-term, fee-based commercial agreements expiring 2018 through 2034 . These include ten -year use and throughput agreements and ten -year transportation agreements. Many of these agreements, with the exception of the storage and transportation services agreement, contain minimum volume commitments. Each agreement has fees that are indexed for inflation and provides us options to renew for 2 additional five -year terms.

Other Agreements with Andeavor Logistics

Fourth Amended and Restated Omnibus Agreement
We entered into an omnibus agreement with Andeavor Logistics at the closing of Andeavor Logistics’ initial public offering in April 2011 (the “Initial Offering”). The omnibus agreement, most recently amended on October 30, 2017 (the “Fourth Amended Omnibus Agreement”) in connection with the WNRL Merger, contains the following key provisions:

•
Non-compete clause between us and Andeavor Logistics effective under certain circumstances;
•
Right of first offer to Andeavor Logistics for certain of our retained logistics assets, including certain terminals, pipelines, docks, storage facilities and other related assets located in California, Alaska and Washington;
•
Payment of an annual fee to us for the provision of various general and administrative services;
•
Reimbursement to Andeavor Logistics for certain maintenance and expansion capital expenditures; and
•
Indemnification to Andeavor Logistics for certain matters, including pre-Initial Offering environmental, title and tax matters.

Additional acquisitions of assets by Andeavor Logistics from us are governed by the Fourth Amended Omnibus Agreement, 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”), which are covered by the Carson Assets Indemnity Agreement.

Carson Assets Indemnity Agreement
We entered into the Carson Assets Indemnity Agreement with Andeavor Logistics at the closing of the Los Angeles Logistics Assets Acquisition effective December 6, 2013 . The Carson Assets Indemnity Agreement establishes indemnification to Andeavor Logistics 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.


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Notes to Consolidated Financial Statements
 

Secondment and Logistics Services Agreement
In connection with Andeavor Logistics’ purchase of certain terminalling and pipeline assets owned by Andeavor and two of our subsidiaries on July 1, 2014, Andeavor Logistics terminated the operational services agreement entered into at the closing of the Initial Offering and entered into the Secondment and Logistics Services Agreement (the “Secondment Agreement”) with Andeavor to govern the provision of seconded employees to or from Andeavor, Andeavor Logistics, and its subsidiaries, as applicable. The Secondment Agreement, as amended as recently as October 2017, also governs 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, will be provided on the service schedules attached to the 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.

Keep-Whole Commodity Agreement
Andeavor Logistics processes 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”). Andeavor Logistics entered into a five-year agreement with Andeavor, which transfers the commodity risk exposure associated with these keep-whole processing agreements from Andeavor Logistics to Andeavor (the “Keep-Whole Commodity Agreement”). Under the Keep-Whole Commodity Agreement with Andeavor, Andeavor pays Andeavor Logistics a fee to process NGLs related to keep-whole agreements and delivers Shrink Gas to the producers on behalf of Andeavor Logistics. Andeavor Logistics pays Andeavor a marketing fee in exchange for assuming the commodity risk. As of 2017, pricing under this agreement is subject to a tiered pricing structure with pricing for a base level of NGLs production and pricing for incremental volumes over 315,000 gallons per day. The pricing for both the base and incremental volumes are subject to revision each year. The impact of the Keep-Whole Commodity Agreement is immaterial to our consolidated financial statements.

Environmental Liabilities

In September 2013 , Andeavor Logistics responded to the release of crude oil in a rural field northeast of Tioga, North Dakota (the “Crude Oil Pipeline Release”). The environmental liabilities related to the Crude Oil Pipeline Release include amounts estimated for remediation activities that will be conducted during the next few years to restore the site for agricultural use. An additional $19 million was accrued during the year ended December 31, 2017 to reflect improved scope definition and estimates, which resulted in an increase in the total estimated cost associated with the project. This incident was covered by a 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, 2017 and 2016 . The estimated remediation costs of $93 million exceeded our policy loss limit by $68 million as of December 31, 2017 . We received no insurance proceeds for the years ended December 31, 2017 and 2016 , respectively, and $18 million in reimbursement of costs incurred during the year ended December 31, 2015 .

Note 4 - Discontinued Operations

On September 25, 2013 , we completed the sale of all our interest in Tesoro Hawaii, LLC, (the “Hawaii Business”). We received gross proceeds of $539 million , including $75 million from the sale of assets and $464 million from the sale of inventory and other net working capital. Additional contingent consideration includes an earnout arrangement payable over three years for an aggregate amount of up to $40 million based on consolidated gross margins, as defined in the sale agreement. Any income related to the earnout arrangement will not be recorded until it is considered realizable. During 2016, we recognized $16 million associated with the receipt of earnout payments for the 2014 and 2015 calendar years. The earnout calculation for 2016 has not been agreed upon as of December 31, 2017. We have also agreed to indemnify the purchaser for up to $15 million of environmental remediation costs related to the Hawaii Business, subject to limitations described in the purchase agreement, and retained responsibility for the resolution of certain Clean Air Act matters. In 2017, we recorded income of $13 million related to the lowering of an estimate for remaining regulatory improvements to be made in Hawaii to resolve certain Clean Air Act Matters.

The results of operations for this business have been presented as discontinued operations in the statements of consolidated operations for the years ended December 31, 2017 , 2016 and 2015 . Cash flows related to the Hawaii Business have been combined with the cash flows from continuing operations in the statements of consolidated cash flows for all three years presented.


 
 
December 31, 2017 | 89
Notes to Consolidated Financial Statements
 
 

Earnings (Loss), Before and After Tax from the Hawaii Business (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Earnings (loss) from discontinued operations, before tax
$
13

 
$
17

 
$
(6
)
Less: income tax expense (benefit)
5

 
7

 
(2
)
Earnings (loss) from discontinued operations, net of tax
$
8

 
$
10

 
$
(4
)
 
 
 
 
 
 
Net cash from (used in) operating activities
$
(7
)
 
$
6

 
$
(5
)

Note 5 - Receivables and Inventories

Receivables

Components of Receivables (in millions)
 
December 31,
 
2017
 
2016
Trade receivables
$
1,881

 
$
1,092

Tax receivables
70

 
21

Notes receivables
10

 
—

Other receivables
8

 
2

Allowance for doubtful accounts (a)
(8
)
 
(7
)
Receivables, Net of Allowance for Doubtful Accounts
$
1,961

 
$
1,108


(a)
Allowances for doubtful accounts relate to estimated uncollectible amounts on our trade receivables.

Inventories

Components of Inventories (in millions)
 
December 31,
 
2017
 
2016
Domestic crude oil and refined products
$
3,203

 
$
2,099

Materials and supplies
229

 
149

Foreign subsidiary crude oil and refined products
63

 
310

Oxygenates and by-products
85

 
81

Merchandise
50

 
1

Total Inventories
$
3,630

 
$
2,640


At December 31, 2017 and 2016 , the replacement cost of our crude oil and refined product inventories exceeded carrying value, both in the aggregate, by approximately $703 million and $107 million , respectively.


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Notes to Consolidated Financial Statements
 

Note 6 - Property, Plant and Equipment

Property, Plant and Equipment (in millions)
 
Estimated Useful Lives
 
December 31,
 
(Years)
 
2017
 
2016
Refining machinery and equipment
15 - 28
 
$
7,927

 
$
6,214

Pipelines, tankage and terminals
10 - 28
 
6,207

 
3,803

Land and leasehold improvements
0 - 28
 
1,357

 
1,107

Marketing facilities
5 - 20
 
662

 
527

Buildings and improvements
6 - 28
 
656

 
459

Other
3 - 10
 
472

 
302

Construction in progress
—
 
1,542

 
1,060

Property, plant and equipment, at cost

 
18,823

 
13,472

Accumulated depreciation
 
 
(4,081
)
 
(3,496
)
Property, Plant and Equipment, Net
 
 
$
14,742

 
$
9,976


Note 7 - Acquired Intangibles and Goodwill

Acquired Intangibles

Net Book Value for Each Major Class of Acquired Intangible Assets (in millions)
 
December 31, 2017
 
December 31, 2016
 
Historical
Cost
 
Accumulated
Amortization
 
Net Book
Value
 
Historical
Cost
 
Accumulated
Amortization
 
Net Book
Value
Business relationships (a)
$
1,323

 
$
128

 
$
1,195

 
$
1,071

 
$
81

 
$
990

Refinery emissions credits and other
331

 
150

 
181

 
331

 
137

 
194

Trade names (a)
162

 
19

 
143

 
49

 
17

 
32

Marketing supply network
48

 
31

 
17

 
35

 
24

 
11

Liquor licenses (a)
38

 
—

 
38

 
—

 
—

 
—

ampm ®  license
31

 
6

 
25

 
31

 
4

 
27

Favorable leases (a)
24

 
2

 
22

 
10

 
5

 
5

Intellectual property
16

 
2

 
14

 
18

 
—

 
18

Franchise rights (a)
11

 
1

 
10

 
—

 
—

 
—

Total
$
1,984

 
$
339

 
$
1,645

 
$
1,545

 
$
268

 
$
1,277


(a)
As part of the Western Refining Acquisition, we acquired intangible assets associated with customer relationships, franchise rights and favorable leases, all of which will be amortized over a definite-life. We also recognized intangible assets related to trade names and liquor licenses, which have indefinite lives.

All of our acquired intangible assets are subject to amortization with the exception of certain indefinite-lived intangible assets totaling $165 million and $62 million at December 31, 2017 and 2016 , respectively. These indefinite-lived intangible assets relate to liquor licenses, trade names and perpetual emission credits within the refinery emissions credits and other category. Amortization expense of acquired intangible assets was $70 million , $63 million and $43 million for the years ended December 31, 2017 , 2016 and 2015 , respectively. As of December 31, 2017, our estimated amortization expense is expected to be $75 million for each of the next four years and $73 million in 2022. In accordance with our policies, we performed an impairment assessment on our indefinite-lived intangible assets and no impairments were recognized during the years ended December 31, 2017 , 2016 and 2015 .


 
 
December 31, 2017 | 91
Notes to Consolidated Financial Statements
 
 

Goodwill

Goodwill by Operating Segment (in millions)
 
December 31,
 
2017 (a)
 
2016
Marketing
$
430

 
$
26

Logistics
811

 
117

Refining
1,993

 
47

Goodwill
$
3,234

 
$
190


(a)
The Western Refining Acquisition increased our consolidated goodwill by $2.9 billion . See Note 2 for further details regarding our acquisitions.

For 2017, we elected to perform our annual goodwill impairment using a quantitative assessment process on our Logistics segment’s goodwill and the qualitative assessment process on our Marketing and Refining segments’ goodwill. Factors utilized in the qualitative assessments performed on goodwill in our Refining and Marketing segments include, among other things, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, company specific operating results and other relevant entity-specific events affecting individual reporting units.

As part of our quantitative goodwill impairment process for our Logistics segment, we engaged a third party appraisal firm to assist in the determination of estimated fair value for each reporting unit. This determination includes estimating the fair value of each Logistics reporting unit using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, 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 of the reporting units requires 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, depreciation and amortization and capital expenditures.

We determined that no impairment charges resulted from our November 1, 2017 goodwill impairment assessments. There were no impairments of goodwill during the years ended December 31, 2017 , 2016 and 2015 .

Note 8 - Investments - Equity Method and Joint Ventures

For each of the following investments, we have the ability to exercise significant influence over each of these investments 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 consent of the other investor(s) without regard to our 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.

•
Watson - We own a 51% interest in Watson, which produces steam and electricity at a facility located at our Los Angeles refinery. Our transactions with Watson, which do not have intra-entity profits requiring elimination, consist of sales of fuel gas and water, purchases of steam and electricity and charges for general and administrative support.
•
MPL - We own a 17% interest in MPL, which owns and operates a crude oil pipeline in Minnesota.
•
RGS - Andeavor Logistics has 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 Andeavor Logistics or a third party.
•
TRG - Andeavor Logistics owns a 50% interest in TRG which operates natural gas gathering assets within the southeastern Uinta Basin and is primarily supported by long-term, fee-based gas gathering agreements with minimum volume commitments.
•
UBFS - Andeavor Logistics owns a 38% interest in UBFS which owns and operates the natural gas gathering infrastructure located in the southeastern Uinta Basin and is supported by long-term, fee-based gas gathering agreements that contain firm throughput commitments, which generate fees whether or not the capacity is used, and is operated by Andeavor Logistics.


92  |  
ANDVLOGOPRIMARYCOLORRGBA21.JPG
 
Notes to Consolidated Financial Statements
 

Equity Method Investments (in millions)
 
Watson
 
MPL
 
Vancouver Energy
 
Andeavor Logistics
 
 
 
 
 
 
RGS
 
TRG
 
UBFS
 
Total
Balance at December 31, 2015 (a)
$
92

 
$
—

 
$
9

 
$
—

 
$
42

 
$
16

 
$
159

Effect of RGS deconsolidation (b)
—

 
—

 
—

 
295

 
—

 
—

 
295

Effect of consolidation (c)
—

 
—

 
(8
)
 
—

 
—

 
—

 
(8
)
Equity in earnings (loss)
1

 
—

 
(1
)
 
8

 
2

 
3

 
13

Distributions received
(10
)
 
—

 
—

 
(22
)
 
(4
)
 
(3
)
 
(39
)
Balance at December 31, 2016 (a)
83

 
—

 
—

 
281

 
40

 
16

 
420

Fair value of acquired MPL interest
—

 
120

 
—

 
—

 
—

 
—

 
120

Equity in earnings
2

 
11

 
—

 
6

 
2

 
2

 
23

Distributions received
(7
)
 
(11
)
 
—

 
(19
)
 
(5
)
 
(3
)
 
(45
)
Balance at December 31, 2017 (a)
$
78

 
$
120

 
$
—

 
$
268

 
$
37

 
$
15

 
$
518


(a)
The carrying amount of our investments in Watson, MPL, RGS, TRG and UBFS exceeded the underlying equity in net assets by $62 million , $35 million , $130 million , $15 million and $6 million , respectively, at December 31, 2017 . The carrying amount of our investments in Watson, RGS, TRG and UBFS exceeded the underlying equity in net assets by $65 million , $135 million , $16 million and $7 million , respectively, at December 31, 2016 . 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 (loss).
(b)
The reassessment of the investments performed by Andeavor Logistics resulted in the deconsolidation of RGS and the reporting of RGS as an equity method investment. Andeavor Logistics recognized an increase of $295 million to equity method investments as of January 1, 2016 as a result of the deconsolidation.
(c)
Effective September 1, 2016, we became majority owner of Vancouver Energy. As a result, Vancouver Energy was consolidated.

Note 9 - Other Assets and Liabilities

Other Noncurrent Assets

Components of Other Noncurrent Assets (in millions)
 
December 31,
 
2017
 
2016
Deferred charges, net of amortization
$
994

 
$
743

Investments - equity method and joint ventures
518

 
420

Deferred branding costs, net of amortization
213

 
160

Environmental credits
93

 
89

Deposits
50

 
36

Long term tax receivable
49

 
—

Other assets, net of amortization
152

 
93

Total Other Noncurrent Assets
$
2,069

 
$
1,541



 
 
December 31, 2017 | 93
Notes to Consolidated Financial Statements
 
 

Other Current Liabilities

Components of Other Current Liabilities (in millions)
 
December 31,
 
2017
 
2016
Taxes other than income taxes
$
474

 
$
288

RINs liabilities
366

 
126

Employee costs
294

 
229

Environmental credit obligations
171

 
123

Environmental liabilities
60

 
60

Interest
55

 
62

Income taxes payable
41

 
38

Pension and other postretirement benefits
15

 
11

Asset retirement obligations
14

 
6

Current liabilities related to discontinued operations
2

 
22

Other
162

 
92

Total Other Current Liabilities
$
1,654

 
$
1,057


Other Noncurrent Liabilities

Components of Other Noncurrent Liabilities (in millions)
 
December 31,
 
2017
 
2016
Pension and other postretirement benefits
$
475

 
$
430

Environmental liabilities
151

 
167

Employee costs, excluding pension and other postretirement benefits
74

 
50

Deferred income
45

 
39

Liability for unrecognized tax benefits, including interest and penalties
42

 
8

Asset retirement obligations
27

 
20

Environmental credit obligations
—

 
42

Other
84

 
65

Total Other Noncurrent Liabilities
$
898

 
$
821


Note 10 - Derivative Instruments

In the ordinary course of business, our profit margins, earnings and cash flows are impacted by the timing, direction and overall change in pricing for commodities used throughout our operations. We use non-trading derivative instruments to manage our exposure to the following:

•
price risks associated with the purchase or sale of feedstocks, refined products and energy supplies related to our refineries, terminals, marketing fuel inventory and customers;
•
price risks associated with inventories above or below our target levels;
•
future emission credit requirements; and
•
exchange rate fluctuations on our purchases of Canadian crude oil.

Our accounting for derivative instruments depends on whether the underlying commodity will be used or sold in the normal course of business. For contracts where the crude oil or refined products are expected to be used or sold in the normal course of business, we apply the normal purchase normal sale exception and follow the accrual method of accounting. All other derivative instruments are recorded at fair value using mark-to-market accounting. We did not designate any of our derivatives for hedge accounting during the years ended December 31, 2017 , 2016 and 2015 .

94  |  
ANDVLOGOPRIMARYCOLORRGBA21.JPG
 
Notes to Consolidated Financial Statements
 


Our derivative instruments can include Forward Contracts, Futures Contracts, over-the-counter swaps, including swap Contracts, Options, and OTC Option Contracts. Forward Contracts are agreements to buy or sell the commodity at a predetermined price at a specified future date. Futures Contracts are standardized agreements, traded on a futures exchange, to buy or sell the commodity at a predetermined price at a specified future date. Options provide the right, but not the obligation to buy or sell the commodity at a specified price in the future. Swap Contracts and OTC Option Contracts require cash settlement for the commodity based on the difference between a contracted fixed or floating price and the market price on the settlement date. Certain of these contracts require cash collateral to be received or paid if our asset or liability position, respectively, exceeds specified thresholds. We believe that we have minimal credit risk with respect to our counterparties.

The following table presents the fair value of our derivative instruments as of December 31, 2017 and 2016 . The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements including cash collateral on deposit with, or received from, brokers. We offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of offset exists. As a result, the asset and liability amounts below will not agree with the amounts presented in our consolidated balance sheets.

Derivative Assets and Liabilities (in millions)
 
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet Location
December 31,
2017
 
December 31,
2016
 
December 31,
2017
 
December 31,
2016
Commodity Futures Contracts
Prepayments and other current assets
$
780

 
$
821

 
$
807

 
$
871

Commodity Swap Contracts
Prepayments and other current assets
48

 
11

 
63

 
13

Commodity Swap Contracts
Receivables
15

 
—

 
—

 
—

Commodity Swap Contracts
Accounts payable
—

 
—

 
24

 
2

Commodity Option Contracts
Prepayments and other current assets
—

 
1

 
2

 
—

Commodity Forward Contracts
Receivables
2

 
6

 
—

 
—

Commodity Forward Contracts
Accounts payable
—

 
—

 
—

 
2

Total Gross Mark-to-Market Derivatives
 
845

 
839

 
896

 
888

Less: Counterparty Netting and Cash Collateral (a)
 
(746
)
 
(744
)
 
(813
)
 
(832
)
Total Net Fair Value of Derivatives
 
$
99

 
$
95

 
$
83

 
$
56


(a)
Certain of our derivative contracts, under master netting arrangements, include both asset and liability positions. We offset both the fair value amounts and any related cash collateral amounts recognized for multiple derivative instruments executed with the same counterparty when there is a legally enforceable right and an intention to settle net or simultaneously. As of December 31, 2017 and 2016 , we had provided cash collateral amounts of $67 million and $88 million , respectively, related to our unrealized derivative positions. Cash collateral amounts are netted with mark-to-market derivative assets.

Gain (Loss) on Mark-to-Market Derivatives (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Commodity Contracts
$
(124
)
 
$
(67
)
 
$
279

Foreign Currency Forward Contracts (a)
—

 
—

 
(6
)
Total Gain (Loss) on Mark-to-Market Derivatives
$
(124
)
 
$
(67
)
 
$
273


(a)
Losses for our foreign currency forward contracts are located in other income, net in our statements of consolidated operations.


 
 
December 31, 2017 | 95
Notes to Consolidated Financial Statements
 
 

Income Statement Location of Gain (Loss) on Mark-to-Market Derivatives (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Revenues
$
8

 
$
(4
)
 
$
67

Cost of materials and other
(132
)
 
(63
)
 
212

Other income, net
—

 
—

 
(6
)
Total Gain (Loss) on Mark-to-Market Derivatives
$
(124
)
 
$
(67
)
 
$
273


Open Long (Short) Positions

Outstanding Commodity and Other Contracts (units in thousands)
 
Contract Volumes by Year of Maturity
 
 
Mark-to-Market Derivative Instrument
2018
 
2019
 
Unit of Measure
Crude oil, refined products and blending products:
 
 
 
 
 
Futures - short
—

 
(25
)
 
Barrels
Futures - long
3,074

 
—

 
Barrels
Swap Contracts - short
—

 
(990
)
 
Barrels
Swap Contracts - long
4,075

 
—

 
Barrels
Forwards - short
(471
)
 
—

 
Barrels
Options - long
2,500

 
—

 
Barrels

Note 11 - Fair Value Measurements

Recurring Fair Value Measurements

We classify financial assets and liabilities according to the fair value hierarchy. Financial assets and liabilities classified as level 1 instruments are valued based on quoted prices in active markets for identical assets and liabilities. Level 2 instruments are valued based on quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices, such as liquidity, that are observable for the asset or liability. Our level 2 instruments include derivatives valued using market quotations from independent price reporting agencies, third-party brokers and commodity exchange price curves that are corroborated with market data. Level 3 instruments are valued using significant unobservable inputs that are not supported by sufficient market activity. We do not have any financial assets or liabilities classified as level 3 at December 31, 2017 or 2016 .

Our financial assets and liabilities measured at fair value on a recurring basis include derivative instruments. Additionally, our financial liabilities include obligations for RINs and cap and trade emission credits for the state of California (together with RINs, our “Environmental Credit Obligations”). See Note 10 for further information on our derivative instruments. Amounts presented below for Environmental Credit Obligations represent the estimated fair value amount at each balance sheet date for which we do not have sufficient RINs and California cap and trade credits to satisfy our obligations to the EPA and the state of California, respectively.


96  |  
ANDVLOGOPRIMARYCOLORRGBA21.JPG
 
Notes to Consolidated Financial Statements
 

Financial Assets and Liabilities at Fair Value (in millions)
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral (a)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts
$
780

 
$
—

 
$
—

 
$
(707
)
 
$
73

Commodity Swap Contracts
—

 
63

 
—

 
(39
)
 
24

Commodity Forward Contracts
—

 
2

 
—

 
—

 
2

Total Assets
$
780

 
$
65

 
$
—

 
$
(746
)
 
$
99

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts
$
807

 
$
—

 
$
—

 
$
(774
)
 
$
33

Commodity Swap Contracts
—

 
87

 
—

 
(39
)
 
48

Commodity Options Contracts
—

 
2

 
—

 
—

 
2

Environmental Credit Obligations
—

 
43

 
—

 
—

 
43

Total Liabilities
$
807

 
$
132

 
$
—

 
$
(813
)
 
$
126


 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Netting and Collateral (a)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts
$
821

 
$
—

 
$
—

 
$
(733
)
 
$
88

Commodity Swap Contracts
—

 
11

 
—

 
(11
)
 
—

Commodity Option Contracts
1

 
—

 
—

 
—

 
1

Commodity Forward Contracts
—

 
6

 
—

 
—

 
6

Total Assets
$
822

 
$
17

 
$
—

 
$
(744
)
 
$
95

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity Futures Contracts
$
870

 
$
1

 
$
—

 
$
(821
)
 
$
50

Commodity Swap Contracts
—

 
15

 
—

 
(11
)
 
4

Commodity Forward Contracts
—

 
2

 
—

 
—

 
2

Environmental Credit Obligations
—

 
79

 
—

 
—

 
79

Total Liabilities
$
870

 
$
97

 
$
—

 
$
(832
)
 
$
135


(a)
Certain of our derivative contracts, under master netting arrangements, include both asset and liability positions. We offset both the fair value amounts and any related cash collateral amounts recognized for multiple derivative instruments executed with the same counterparty when there is a legally enforceable right and an intention to settle net or simultaneously. As of December 31, 2017 and 2016 , we had provided cash collateral amounts of $67 million and $88 million , respectively, related to our unrealized derivative positions. Cash collateral amounts are netted with mark-to-market derivative assets.

We believe the carrying value of our other financial instruments, including cash and cash equivalents, receivables, accounts payable and certain accrued liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including the short-term duration of the instruments and the expected future insignificance of bad debt expense, which includes an evaluation of counterparty credit risk. The borrowings under the Revolving Credit Facility, the Andeavor Logistics Revolving Credit Facility and our Term Loan Credit Facility, which include variable interest rates, approximate fair value. The fair value of our fixed rate debt is based on prices from recent trade activity and is categorized in level 2 of the fair value hierarchy. The carrying and fair values of our debt were approximately $7.8 billion and $8.1 billion at December 31, 2017 , respectively, and approximately $7.0 billion and $7.3 billion for the carrying and fair values of our debt at December 31, 2016 , respectively. These carrying and fair values of our debt do not consider the unamortized issuance costs, which are netted against our total debt.

Nonrecurring Fair Value Measurements

Except as discussed in Note 1 related to the long-lived asset impairment related to Vancouver Energy and in Note 2 and Note 3 related to our purchase price allocations associated with the Western Refining Acquisition and the North Dakota Gathering and

 
 
December 31, 2017 | 97
Notes to Consolidated Financial Statements
 
 

Processing Assets, respectively, no other nonrecurring asset and liability fair value measurements were performed during the years ended December 31, 2017 and 2016 .

Note 12 - Debt

Total Debt Composition (in millions)
 
December 31,
 
2017
 
2016
Revolving credit facilities:
 
 
 
Andeavor Revolving Credit Facility
$
55

 
$
—

Andeavor Logistics Revolving Credit Facility
423

 
330

Andeavor Logistics Dropdown Credit Facility
—

 
—

Andeavor debt:
 
 
 
Term Loan Facility
56

 
64

4.250% Senior Notes due 2017
—

 
450

5.375% Senior Notes due 2022
475

 
475

4.750% Senior Notes due 2023
850

 
850

5.125% Senior Notes due 2024
300

 
300

5.125% Senior Notes due 2026
750

 
750

3.800% Senior Notes due 2028 (a)
500

 
—

4.500% Senior Notes due 2048 (a)
500

 
—

Andeavor Logistics debt:
 
 
 
Andeavor Logistics 5.500% Senior Notes due 2019
500

 
500

Andeavor Logistics 5.875% Senior Notes due 2020 (b)
—

 
470

Andeavor Logistics 6.125% Senior Notes due 2021 (b)
—

 
800

Andeavor Logistics 3.500% Senior Notes due 2022 (a)
500

 
—

Andeavor Logistics 6.250% Senior Notes due 2022
300

 
800

Andeavor Logistics 6.375% Senior Notes due 2024
450

 
450

Andeavor Logistics 5.250% Senior Notes due 2025
750

 
750

Andeavor Logistics 4.250% Senior Notes due 2027 (a)
750

 
—

Andeavor Logistics 5.200% Senior Notes due 2047 (a)
500

 
—

Capital lease obligations and other
140

 
53

Total Debt
7,799

 
7,042

Unamortized issuance costs (a) (b) (c)
(114
)
 
(109
)
Current maturities, net of unamortized issuance costs
(17
)
 
(465
)
Debt, Net of Current Maturities and Unamortized Issuance Costs
$
7,668

 
$
6,468


(a)
Unamortized discounts of $12 million associated with these senior notes are included in unamortized issuance costs at December 31, 2017 .
(b)
Unamortized premiums of $4 million associated with these senior notes are included in unamortized issuance costs at December 31, 2016 .
(c)
Unamortized debt issuance costs of $102 million and $113 million are recorded as a reduction to debt on the balance sheet at December 31, 2017 and 2016 , respectively.

The aggregate maturities of our debt, including capital leases, for each of the five years following December 31, 2017 are as follows: 2018  — $17 million ; 2019  — $528 million ; 2020  — $71 million ; 2021  — $446 million ; and 2022  — $1.3 billion .


98  |  
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Notes to Consolidated Financial Statements
 

Revolving Credit Facilities

Available Capacity Under Credit Facilities (in millions)
 
Total
Capacity
 
Amount Borrowed as of December 31, 2017
 
Outstanding
Letters of
Credit
 
Available
Capacity
 
Expiration
Andeavor Revolving Credit Facility (a)
$
3,000

 
$
55

 
$
11

 
$
2,934

 
September 30, 2020
Andeavor Logistics Revolving Credit Facility
600

 
423

 
2

 
175

 
January 29, 2021
Andeavor Logistics Dropdown Credit Facility
1,000

 
—

 
—

 
1,000

 
January 29, 2021
Letter of Credit Facilities
725

 
—

 
139

 
586

 
 
Total Credit Facilities
$
5,325

 
$
478

 
$
152

 
$
4,695

 
 

(a)
The $3.0 billion total capacity includes the additional $1.0 billion related to the incremental revolving facility, as discussed further below.

Expenses and Fees of our Credit Facilities
Credit Facility
 
30 day Eurodollar (LIBOR) Rate
 
Eurodollar Margin
 
Base Rate
 
Base Rate Margin
 
Commitment Fee (unused portion)
Andeavor Revolving Credit Facility
($3.0 billion)
 
1.56%
 
1.50%
 
4.50%
 
0.50%
 
0.225%
Andeavor Logistics Revolving Credit Facility
($600 million)
 
1.56%
 
1.50%
 
4.50%
 
0.50%
 
0.250%
Andeavor Logistics Dropdown Credit Facility
($1.0 billion)
 
1.56%
 
1.51%
 
4.50%
 
0.51%
 
0.250%

Andeavor Revolving Credit Facility
On September 30, 2016 , we entered into a new senior revolving credit agreement (the “Revolving Credit Agreement”) with a syndicate of banks and financial institutions that provides for a total available revolving capacity of $2.0 billion . The credit availability is not subject to borrowing base redetermination and is scheduled to mature on September 30, 2020 . On December 13, 2016, in connection with the Merger, Andeavor entered into an amendment to the Revolving Credit Agreement with the banks which provided for an incremental revolving facility in an aggregate principal amount of $1.0 billion (the “Incremental Revolver”) and increased the aggregate commitments from $2.0 billion to $3.0 billion . The Incremental Revolver was initially borrowed upon to fund the cash consideration payable in connection with the Merger, the repayment and redemption of certain outstanding indebtedness of Western Refining and its subsidiaries and the payment of fees and expenses associated with the foregoing. The Incremental Revolver converted into a single tranche with the existing commitments and is now available for working capital and general corporate purposes.

We had unused credit availability of 98% of the borrowing capacity at December 31, 2017 . The weighted average interest rate for borrowings under the Revolving Credit Facility was 5.00% at December 31, 2017 . Borrowings bear interest at either a base rate ( 4.50% at December 31, 2017 ), plus the applicable spread, or a Eurodollar rate ( 1.56% at December 31, 2017 (1M LIBOR)), plus the applicable spread. The applicable spread at December 31, 2017 was 0.50% in the case of the base rate and 1.50% in the case of the Eurodollar rate but will vary generally based on the credit ratings in effect on Andeavor’s senior, unsecured, non-credit enhanced long-term debt. The commitment fee for the unused portion of the facility was 0.225% at December 31, 2017 .

After Andeavor achieved an investment grade credit rating from S&P Global Ratings, the subsidiary guarantees and collateral were automatically released and the Revolving Credit Facility became unsecured effective as of June 15, 2017.

The Revolving Credit Facility allows us to obtain letters of credit under separate letter of credit agreements for foreign crude oil purchases. Our uncommitted letter of credit agreements had $139 million outstanding as of December 31, 2017 . Letters of credit outstanding under these agreements incur fees ranging from 0.45% to 0.90% and are secured by the crude oil inventories for which they are issued. Capacity under these letter of credit agreements is available on an uncommitted basis and can be terminated by either party at any time.


 
 
December 31, 2017 | 99
Notes to Consolidated Financial Statements
 
 

Andeavor Logistics Revolving Credit Facility and Dropdown Credit Facility
The Andeavor Logistics Revolving Credit Facility provided for total loan availability of $600 million as of December 31, 2017 , and Andeavor Logistics may request that the loan availability be increased up to an aggregate of $2.1 billion , subject to receiving increased commitments from the lenders. The Andeavor Logistics Revolving Credit Facility is non-recourse to Andeavor, except for TLGP, and is guaranteed by all of Andeavor Logistics’ subsidiaries, with the exception of certain non-wholly owned subsidiaries acquired in the Rockies Natural Gas Business acquisition. Borrowings are available under the Andeavor Logistics Revolving Credit Facility up to the total loan availability of the facility. As of December 31, 2017 , there was $423 million in borrowings outstanding under the Andeavor Logistics Revolving Credit Facility, which had unused credit availability of approximately 29% of the borrowing capacity. The weighted average interest rate for borrowings under Andeavor Logistics Revolving Credit Facility was 3.10% at December 31, 2017 .

On January 29, 2016 , Andeavor Logistics syndicated a new $1.0 billion secured Andeavor Logistics Dropdown Credit Facility. The primary use of proceeds under this facility will be to fund asset acquisitions. The terms, covenants and restrictions under this facility are substantially the same as the amended secured Andeavor Logistics Revolving Credit Facility. The Andeavor Logistics Revolving Credit Facility and Andeavor Logistics Dropdown Credit Facility both mature on January 29, 2021.

On November 9, 2017, Andeavor Logistics entered into an agreement and consent with the lenders under the Andeavor Logistics Revolving Credit Facility and the Dropdown Credit Facility, which provided that, for purposes of such facilities, the “Investment Grade Date” (as defined in such facilities) was deemed to have occurred and resulted in the release of all collateral pledged by Andeavor Logistics and certain of its subsidiaries under the Andeavor Logistics Revolving Credit Facility and the Dropdown Credit Facility. As a result, from and following November 9, 2017, Andeavor Logistics and its subsidiaries are no longer required to secure the obligations under the Andeavor Logistics credit facilities and certain covenants and restrictions under each facility were automatically eliminated or improved. Andeavor Logistics has terminated the security interests related to the Andeavor Logistics credit facilities.

On January 5, 2018, the Partnership amended the existing Andeavor Logistics Revolving Credit Facility to, among other things, (i) increase the aggregate commitments under the Andeavor Logistics Revolving Credit Agreement from $600 million to $1.1 billion , (ii) add certain financial institutions as additional lenders under the Andeavor Logistics Revolving Credit Agreement and (iii) make certain changes to the Andeavor Logistics credit facility agreements to permit the incurrence of an additional $500 million of incremental loans under the Andeavor Logistics credit facility agreements subject to the satisfaction of certain conditions.

Andeavor Debt

5.375% Senior Notes Due 2022
In September 2012 , the Company issued $475 million aggregate principal amount of senior notes due in 2022 (“ 2022 Notes”) at 5.375% , which approximates the effective interest rate. The 2022 Notes have a ten-year maturity and may be redeemed at premiums of 2.688% through September 30, 2018; 1.792% through September 30, 2019; 0.896% through September 30, 2020; and at par thereafter, plus accrued and unpaid interest. These notes are unsecured obligations and contain customary terms and events of default.

4.750% Senior Notes Due 2023
In connection with the Western Refining acquisition, in December 2016, Andeavor completed its offering of $850 million aggregate principal amount of senior notes due in 2023 (the “ 2023 Notes”) at 4.750% , which approximates the effective interest rate, pursuant to a private placement transaction conducted under Rule 144A and Regulation S of the Securities Act of 1933, as amended. The 2023 Notes have a seven-year maturity and are subject to optional redemption by Andeavor at any time prior to October 15, 2023 at a redemption price equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payment of principal and interest on the notes to be redeemed discounted to the date of redemption on a semiannual basis at the then-current treasury rate plus 50 basis points. If the notes are redeemed on or after October 15, 2023, the Company will pay a redemption price equal to 100% of the principal amount of the notes redeemed. These notes are unsecured obligations.

Andeavor agreed to complete a registered exchange offer to exchange the 2023 Notes for debt securities with substantially identical terms. On January 17, 2018, the 2023 Notes were exchanged for a like principal amount of our outstanding registered notes.

5.125% Senior Notes Due 2024
In March 2014, we issued $300 million aggregate principal amount of senior notes due in 2024 (the “ 2024 Notes”) at 5.125% , which approximates the effective interest rate. The 2024 Notes have a ten-year maturity and are subject to optional redemption by Andeavor any time on or after April 1, 2019 at premiums of 2.563%  through March 31, 2020; 1.708% through March 31, 2021; 0.854% through March 31, 2022; and at par thereafter. Prior to April 1, 2019, the 2024 Notes may be redeemed at a make-whole price plus accrued and unpaid interest. These notes are unsecured obligations.


100  |  
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Notes to Consolidated Financial Statements
 

5.125% Senior Notes Due 2026
In connection with the Western Refining acquisition, in December 2016, Andeavor completed its offering of $750 million aggregate principal amount of senior notes due in 2026 (the “ 2026 Notes”) at 5.125% , which approximates the effective interest rate, pursuant to a private placement transaction conducted under Rule 144A and Regulation S of the Securities Act of 1933, as amended. The 2026 Notes have a ten-year maturity and are subject to optional redemption by Andeavor at any time prior to September 15, 2026 at a redemption price equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payment of principal and interest on the notes to be redeemed discounted to the date of redemption on a semiannual basis at the then-current treasury rate plus 50 basis points. If the notes are redeemed on or after September 15, 2026, the Company will pay a redemption price equal to 100% of the principal amount of the notes redeemed. These notes are unsecured obligations.

Andeavor agreed to complete a registered exchange offer to exchange the 2026 Notes for debt securities with substantially identical terms. On January 17, 2018, the 2026 Notes were exchanged for a like principal amount of our outstanding registered notes.

3.800% Senior Notes Due 2028
On December 14, 2017, the Company completed its offering of $500 million aggregate principal amount of senior notes due 2028 (the “ 2028 Notes”) at 3.800% , which approximates the effective interest rate. The 2028 Notes mature on April 1, 2028 and are subject to optional redemption by Andeavor any time prior to January 1, 2028 at the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption on a semiannual basis at the then-current treasury rate plus 25 basis points and at par thereafter. The 2028 Notes are general unsecured senior obligations and contain covenants that restrict Andeavor’s ability and the ability of Andeavor’s restricted subsidiaries to create liens and merge or consolidate with other entities. The proceeds of this offering were used to repay borrowings under the Revolving Credit Facility, to pay fees and expenses associated with the offering and for general corporate purposes.

4.500% Senior Notes Due 2048
On December 14, 2017, the Company completed its offering of $500 million aggregate principal amount of senior notes due 2048 (the “ 2048 Notes”) at 4.500% , which approximates the effective interest rate. The 2048 Notes mature on April 1, 2048 and are subject to optional redemption by Andeavor any time prior to October 1, 2047 at the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption on a semiannual basis at the then-current treasury rate plus 30 basis points and at par thereafter. The 2048 Notes are general unsecured senior obligations and contain covenants that restrict Andeavor’s ability and the ability of Andeavor’s restricted subsidiaries to create liens and merge or consolidate with other entities. The proceeds of this offering were used to repay borrowings under the Revolving Credit Facility, to pay fees and expenses associated with the offering and for general corporate purposes.

The terms of the 2023 Notes, 2024 Notes, 2026 Notes, 2028 Notes and 2048 Notes are generally less restrictive than those contained in our 2022 Notes, and exclude some limitations on restricted payments, asset sales and other transactions that are included in those senior notes.

Andeavor Logistics Debt

Andeavor Logistics 5.500% Senior Notes Due 2019
In October 2014 , Andeavor Logistics 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, that were exchanged for registered notes with substantially identical terms in April 2016. The senior notes offering consisted of $500 million of senior notes due 2019 (the “Andeavor Logistics 2019 Notes”) at 5.500% , which approximates the effective interest rate, and $800 million of 6.250% senior notes due in 2022 . The proceeds from the Andeavor Logistics 2019 Notes were used to repay amounts outstanding under the Andeavor Logistics Revolving Credit Facility related to the West Coast Logistics Asset Acquisition. The remaining net proceeds from the Andeavor Logistics 2019 Notes were used to fund the Rockies Natural Gas Business acquisition.

The Andeavor Logistics 2019 Notes have no sinking fund requirements and Andeavor Logistics may redeem some or all of the notes prior to September 15, 2019, at a make-whole price, and at par thereafter, plus accrued and unpaid interest. The Andeavor Logistics 2019 Notes are unsecured and guaranteed by all of Andeavor Logistics’ subsidiaries, with the exception of a certain non-wholly owned subsidiary acquired in the Rockies Natural Gas Business acquisition and Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Andeavor, except for TLGP. The Andeavor Logistics 2019 Notes contain customary terms, events of default and covenants for an issuance of non-investment grade securities.

Andeavor Logistics 3.500% Senior Notes Due 2022
On November 28, 2017 , Andeavor Logistics issued $500 million aggregate principal amount of senior notes due in 2022 at 3.500% (the “ Andeavor Logistics 3.500% 2022 Notes ”), which approximates the effective interest rate. The proceeds from the Andeavor Logistics 3.500% 2022 Notes were used to repay a portion of Andeavor Logistics’ 5.875% Senior Notes due in 2020 and 6.125% Senior Notes due in 2021, as well as borrowings under the Andeavor Logistics Dropdown Credit Facility.


 
 
December 31, 2017 | 101
Notes to Consolidated Financial Statements
 
 

The Andeavor Logistics 3.500% 2022 Notes will mature on December 1, 2022 and have no sinking fund requirement. The Andeavor Logistics 3.500% 2022 Notes may be redeemable in whole at any time or in part from time to time, at the option of Andeavor Logistics, prior to November 1, 2022. Andeavor Logistics may redeem the Andeavor Logistics 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 as defined in the prospectus supplement. The Andeavor Logistics 3.500% 2022 Notes are unsecured and guaranteed by all of the Partnership’s consolidated subsidiaries, with the exception of Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Andeavor, except for TLGP, and contain customary terms, events of default and covenants for an issuance of investment grade securities.

Andeavor Logistics 6.250% Senior Notes Due 2022
In connection with Andeavor Logistics’ Senior Notes Offering in October 2014 , Andeavor Logistics issued $800 million of senior notes due in 2022 (the “ Andeavor Logistics 6.250% 2022 Notes ”) at 6.250% , which approximates the effective interest rate. The proceeds from the Andeavor Logistics 6.250% 2022 Notes were used to fund a portion of the Rockies Natural Gas Business acquisition. Andeavor Logistics used the net proceeds from the sale of the Andeavor Logistics Preferred Units to primarily redeem $500 million principal amount of the Andeavor Logistics 6.250% 2022 Notes.

The Andeavor Logistics 6.250% 2022 Notes have no sinking fund requirements and Andeavor Logistics may redeem some or all of the notes prior to October 15, 2018, at a make-whole price, plus any accrued and unpaid interest. On or after October 15, 2018, the Andeavor Logistics 6.250% 2022 Notes may be redeemed at premiums equal to 3.125% through October 15, 2019; 1.563% through October 15, 2020; and at par thereafter, plus accrued and unpaid interest. The Andeavor Logistics 6.250% 2022 Notes are unsecured and guaranteed by all of Andeavor Logistics’ subsidiaries, with the exception of a certain non-wholly owned subsidiary acquired in the Rockies Natural Gas Business acquisition and Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Andeavor, except for TLGP, and contain customary terms, events of default and covenants for an issuance of non-investment grade securities.

Andeavor Logistics agreed to complete a registered exchange offer to exchange the Andeavor Logistics 6.250% 2022 Notes for debt securities with substantially identical terms within 18 months of the closing date of the senior notes offering. In April 2016, Andeavor Logistics completed the exchange of substantially all of the Andeavor Logistics 6.250% 2022 Notes .

Andeavor Logistics 6.375% Senior Notes Due 2024
In May 2016, Andeavor Logistics completed a registered offering of $450 million aggregate principal amount of senior notes due in 2024  (the “Andeavor Logistics 2024 Notes”) at 6.375% , which approximates the effective interest rate. The Partnership used the proceeds of the offering to repay amounts outstanding under the Andeavor Logistics Revolving Credit Facility and for general partnership purposes.

The Andeavor Logistics 2024 Notes have no sinking fund requirements and Andeavor Logistics may redeem some or all of the Andeavor Logistics 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 Andeavor Logistics 2024 Notes may be redeemed at premiums equal to  4.781%  through May 1, 2020;  3.188% through May 1, 2021; 1.594%  through May 1, 2022; and at par thereafter, plus accrued and unpaid interest. The Partnership 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 Andeavor Logistics 2024 Notes are unsecured and guaranteed by all of Andeavor Logistics’ subsidiaries, except Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Andeavor, except for TLGP, and contain customary terms, events of default and covenants for an issuance of non-investment grade securities.

Andeavor Logistics 5.250% Senior Notes Due 2025
In December 2016, Andeavor Logistics completed a registered offering of $750 million aggregate principal amount of senior notes due in 2025 (the “Andeavor Logistics 2025 Notes”) at 5.250% , which approximates the effective interest rate. The proceeds from this offering were used to repay amounts outstanding under Andeavor Logistics’ Dropdown Credit Facility.

The Andeavor Logistics 2025 Notes have no sinking fund requirements and Andeavor Logistics may redeem some or all of the notes prior to January 15, 2021, at a make-whole price, plus any accrued and unpaid interest. On or after January 15, 2021, the Andeavor Logistics 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. The Partnership 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 Andeavor Logistics 2025 Notes are unsecured and guaranteed by all of Andeavor Logistics’ subsidiaries, except Tesoro Logistics Finance Corp., and are non-recourse to Andeavor, except for TLGP, and contain customary terms, events of default and covenants for an issuance of non-investment grade securities.

Andeavor Logistics 4.250% Senior Notes Due 2027
On November 28, 2017 , Andeavor Logistics issued $750 million aggregate principal amount of senior notes due in 2027 (the “Andeavor Logistics 2027 Notes”) at 4.250% , which approximates the effective interest rate. The proceeds from the Andeavor Logistics 2027 Notes were used to repay a portion of Andeavor Logistics’ 5.875% Senior Notes due in 2020 and 6.125% Senior Notes due in 2021, as well as borrowings under the Andeavor Logistics Dropdown Credit Facility.


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Notes to Consolidated Financial Statements
 

The Andeavor Logistics 2027 Notes will mature on December 1, 2027 and have no sinking fund requirement. The Andeavor Logistics 2027 Notes may be redeemable in whole at any time or in part from time to time, at the option of Andeavor Logistics, prior to September 1, 2027. Andeavor Logistics may redeem the Andeavor Logistics 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 Andeavor Logistics 2027 Notes are unsecured and guaranteed by all of its consolidated subsidiaries, with the exception of Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Andeavor, except for TLGP, and contain customary terms, events of default and covenants for an issuance of investment grade securities.

Andeavor Logistics 5.200% Senior Notes Due 2047
On November 28, 2017 , Andeavor Logistics issued $500 million aggregate principal amount of senior notes due in 2047 (the “Andeavor Logistics 2047 Notes”) at 5.200% , which approximates the effective interest rate. The proceeds from the Andeavor Logistics 2047 Notes were used to repay a portion of Andeavor Logistics’ 5.875% Senior Notes due in 2020 and 6.125% Senior Notes due in 2021, as well as borrowings under the Andeavor Logistics Dropdown Credit Facility.

The Andeavor Logistics 2047 Notes will mature on December 1, 2047 and have no sinking fund requirement. The Andeavor Logistics 2047 Notes may be redeemable in whole at any time or in part from time to time, at the option of Andeavor Logistics, prior to June 1, 2047. Andeavor Logistics may redeem the Andeavor Logistics 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 Andeavor Logistics 2047 Notes are unsecured and guaranteed by all of the Partnership’s consolidated subsidiaries, with the exception of Tesoro Logistics Finance Corp., the co-issuer, and are non-recourse to Andeavor, except for TLGP, and contain customary terms, events of default and covenants for an issuance of investment grade securities.

Debt Repayments

2017 Debt Repayments
On June 1, 2017, using cash on hand and proceeds from the 2023 Notes and the 2026 Notes, we paid Western Refining’s  $532 million   5.250% term loan credit facility due 2020 ,  $350 million 6.250% senior unsecured notes due 2021 ,  $371 million   5.500% term loan credit facility due 2023 and $350 million  of Northern Tier Energy’s (“NTI”), a wholly-owned subsidiary of Western Refining, 7.125% Senior Secured Notes due 2020 along with approximately  $45 million  to pay down the outstanding credit facilities at Western Refining and NTI upon acquisition. The Western Refining and NTI revolving credit facilities were terminated upon completion of the Merger. We paid premiums of approximately  $23 million  in paying off the Western Refining and NTI senior notes, which were included in our purchase price allocation of the Western Refining Acquisition.

On  September 27, 2017 , we redeemed all of our outstanding  4.250%  Senior Notes due  2017  for approximately  $459 million , including  $9 million of accrued interest, by borrowing on the Andeavor Revolving Credit Facility.

On October 30, 2017 and in connection with the WNRL Merger, WNRL terminated all commitments and repaid all amounts outstanding under its revolving credit facility for approximately $20 million and redeemed all of the then outstanding 7.500% senior notes due 2023 for approximately $326 million , including an early payment premium and accrued interest, with borrowings from the Andeavor Logistics revolving credit facility. The WNRL revolving credit facility was terminated upon completion of the WNRL Merger.

On November 28, 2017 , Andeavor Logistics issued $1.75 billion aggregate principal amount of senior notes. The $1.75 billion of aggregate principal senior notes consists of the Andeavor Logistics 3.500% 2022 Notes , Andeavor Logistics 2027 Notes and Andeavor Logistics 2047 Notes. The proceeds from this offering were used to repay amounts outstanding under Andeavor Logistics’ 5.875% Senior Notes due in 2020 and 6.125% Senior Notes due in 2021, in addition to borrowings under the Andeavor Logistics Dropdown Credit Facility. The remaining net proceeds from this offering were used to pay applicable fees and expenses for the offering and to repay a portion of amounts outstanding under the Andeavor Logistics Revolving Credit Facility.

2016 Debt Repayment
In November 2015 , Andeavor Logistics executed a $250 million unsecured term loan facility (the “Andeavor Logistics Unsecured Term Loan Facility”) to fund a portion of the LA Storage and Handling Asset Acquisition. On February 3, 2016, Andeavor Logistics repaid the full amount of the Andeavor Logistics Unsecured Term Loan Facility, including accrued interest, with proceeds drawn from the Andeavor Logistics Dropdown Credit Facility. All commitments under the Andeavor Logistics Unsecured Term Loan Facility were terminated effective with the repayment.

2015 Debt Repayment
In August 2015 , we voluntarily repaid our obligation of $398 million under the Andeavor Logistics Term Loan Facility in its entirety with available cash on hand. The Andeavor Logistics Term Loan Facility originally funded a portion of the LA Storage and Handling Asset Acquisition and was scheduled to mature on May 30, 2016 . Amounts paid on the Andeavor Logistics Term Loan Facility cannot be re-borrowed.


 
 
December 31, 2017 | 103
Notes to Consolidated Financial Statements
 
 

Capital Lease Obligations

Our capital lease obligations relate primarily to the lease of a marine terminal near our Los Angeles refinery that expires in 2023 , leases of facilities used for trucking operations in North Dakota with initial terms of 15 years, with 5 -year renewal options, the lease of 25 retail stations with initial terms of 17 years , with four 5 -year renewal options and 49 retail stations with initial terms of 20 years. The total cost of assets under capital leases was $139 million and $60 million with accumulated amortization of $50 million and $33 million at December 31, 2017 and 2016 , respectively. We include amortization of the cost of assets under capital leases in depreciation and amortization expense.

Future Minimum Annual Lease Payments, Including Interest for Capital Leases (in millions)
 
December 31, 2017
2018
$
17

2019
17

2020
14

2021
13

2022
13

Thereafter
109

Total minimum lease payments
183

Less amount representing interest
(55
)
Capital Lease Obligations
$
128


Note 13 - Income Taxes

Components of Income Tax Expense (Benefit) from Continuing Operations (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal
$
107

 
$
195

 
$
697

State
34

 
36

 
172

Deferred:
 

 
 

 
 

Federal
(727
)
 
167

 
76

State
26

 
29

 
(9
)
Income Tax Expense (Benefit)
$
(560
)
 
$
427

 
$
936



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Notes to Consolidated Financial Statements
 

We record deferred tax assets and liabilities for future income tax consequences that are attributable to differences between the financial statement carrying amount of assets and liabilities and their income tax bases.

Deferred Tax Assets and Liabilities (in millions)
 
December 31,
 
2017
 
2016
Deferred tax assets:
 
 
 
Accrued pension and other postretirement benefits
$
113

 
$
152

Tax credit carryforwards
63

 
8

Accrued environmental remediation liabilities
51

 
79

Accrued employee compensation liabilities
38

 
90

Other accrued liabilities
38

 
34

Net operating loss carryforwards
27

 
23

Stock-based compensation
24

 
34

Asset retirement obligations
8

 
6

Other
25

 
24

Total deferred tax assets
387

 
450

Less: valuation allowance
(23
)
 
(26
)
Total deferred tax assets, net
$
364

 
$
424

 
 
 
 
Deferred tax liabilities:
 
 
 
Accelerated depreciation and property related items
$
1,234

 
$
1,357

Investment in partnerships
302

 
61

Deferred maintenance costs, including refinery turnarounds
204

 
248

Inventory
116

 
117

Amortization of intangible assets
65

 
59

Deferred Income
22

 
—

Other
12

 
10

Total deferred tax liabilities
1,955

 
1,852

Deferred Tax Liabilities, Net (a)
$
1,591

 
$
1,428


(a)
The benefit associated with the revaluation of our net deferred tax liabilities was offset by increases in deferred tax liabilities primarily related to amounts recognized in conjunction with the Western Refining Acquisition.

With the acquisition of Western Refining, we acquired state net operation loss carryforwards in certain jurisdictions, as well as federal and state tax credit carryforwards. These carryforwards are reflected as deferred tax assets in the table above and have been partially reduced by a valuation allowance for the amounts which we do not expect to realize. The realization of our other deferred tax assets depends on our ability to generate future taxable income. Although realization is not assured, we believe it is more likely than not that we will realize those deferred tax assets.

The Tax Act was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% . As of December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Tax Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances. We recognized a provisional tax benefit of $918 million which is included as a component of income tax expense from continuing operations. This benefit reflects the revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21% . We may make adjustments to the provisional amount during the SAB 118 measurement period, which could result from future changes in interpretation of the Tax Act, changes to estimates made by us and/or issuance of additional regulatory guidance.


 
 
December 31, 2017 | 105
Notes to Consolidated Financial Statements
 
 

Reconciliation of Income Tax Expense (Benefit) from Continuing Operations (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Income tax expense at U.S. federal statutory rate
$
389

 
$
447

 
$
921

Effect of:
 
 
 

 
 

State income taxes, net of federal income tax effect
39

 
45

 
105

Impact of Tax Act
(918
)
 
—

 
—

Manufacturing activities deduction
(6
)
 
(5
)
 
(43
)
Earnings attributable to noncontrolling interest
(54
)
 
(44
)
 
(53
)
Excess tax benefits from stock-based compensation arrangements
(16
)
 
(16
)
 
—

Other
6

 
—

 
6

Income Tax Expense (Benefit)
$
(560
)
 
$
427

 
$
936


Income Tax Credit and Loss Carryforwards as of December 31, 2017 (in millions)
 
Amount
 
Expiration
Federal
 
 
 
Alternative minimum tax credits
$
43

 
None
State
 
 
 
Net operating loss carryforwards (tax-effected)
$
34

 
2023 - 2031
Alternative minimum tax credits
16

 
None
Other income tax credits
9

 
2026

We are subject to income taxes in the U.S., multiple state jurisdictions and a few foreign jurisdictions. Our unrecognized tax benefits totaled $217 million and $182 million as of December 31, 2017 and 2016 , respectively, of which $35 million and $6 million each year have been recognized as tax liabilities. Included in unrecognized tax benefits as of December 31, 2017 and 2016 are $206 million and $172 million (net of the tax benefit on state issues), which would reduce the effective tax rate if recognized.

It is reasonably possible that unrecognized tax benefits could decrease by as much as $13 million in the next twelve months, related primarily to state apportionment matters, all of which is recognized as a liability. We accrued $7 million and $2 million at both December 31, 2017 and 2016 , respectively, for interest and penalties including balances from the Western Refining Acquisition. We did not recognize an increase or reduction in interest and penalties associated with unrecognized tax benefits in the statements of consolidated operations during the years ended December 31, 2017 , 2016 , or 2015 . For interest and penalties relating to income taxes we recognize accrued interest in net interest and financing costs and penalties in general and administrative expenses in the statements of consolidated operations. Andeavor’s tax years 2009 forward remain open to examination by the federal and state taxing authorities, except for California, which remains open from the year 2006 . Western and Northern Tier’s tax years 2013 forward remain open to examination by the federal and state taxing authorities, except for New Mexico, which remains open from the year 2011.

Reconciliation of Unrecognized Tax Benefits (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Balance as of Beginning of Year
$
182

 
$
181

 
$
21

Increases related to prior year tax positions
42

 
—

 
159

Increases related to current year tax positions
1

 
1

 
1

Decreases related to the lapse of applicable statute of limitations
(5
)
 
—

 
—

Decreases related to settlements with taxing authorities
(3
)
 
—

 
—

Balance as of End of Year
$
217

 
$
182

 
$
181


Unrecognized tax benefits increased by $159 million in 2015 for tax positions taken on amended returns filed for 2009- 2010 . The positions taken exclude certain tax credits for blending biofuels into refined products from taxable income. These tax credits were

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Notes to Consolidated Financial Statements
 

received from the federal government during the years being amended. However, due to the complex and uncertain nature of the issue, we are unable to conclude that it is more likely than not that we will sustain the claims. Therefore, we have neither recognized a tax benefit, nor recorded a receivable for this item.

Note 14 - Benefit Plans

Benefits Summary

We sponsor five defined benefit pension plans, including two qualified plans and three nonqualified plans, which are described below:

•
The funded, qualified employee pension plan (the “Pension Plan”) provides benefits to all eligible employees. Benefits are determined based on final average compensation and years of service through December 31, 2010, and a cash balance account based formula for service beginning January 1, 2011. Although our funded employee retirement plan fully meets all of the funding requirements under applicable laws and regulations, we contributed $87 million during 2017 and $60 million for both 2016 and 2015 ;
•
The unfunded, nonqualified restoration pension plan provides for the restoration of pension benefits to certain senior level employees that are not provided under the qualified pension plan due to limits imposed by the Internal Revenue Code;
•
The unfunded, nonqualified executive security plan provides certain executive officers with supplemental pension benefits. These benefits are provided by a nonqualified, noncontributory plan and are based on years of service and compensation. We made payments of $1 million , $15 million and $1 million during 2017 , 2016 and 2015 , respectively, for current retiree obligations under the plan;
•
The unfunded, nonqualified supplemental executive retirement plan provides eligible senior level executives a supplemental pension benefit in excess of those earned under the qualified pension plan. Effective January 1, 2015, this plan was frozen to new participants; and
•
The funded NTI defined benefit cash balance pension plan provides benefits to all eligible employees. Employer contributions are made to the cash account of the participants equal to 5.0% of eligible compensation. Participants’ cash accounts also receive interest credits each year based upon the average thirty year United States Treasury bond rate published in September preceding the respective plan year. In 2016, the Company curtailed this benefit effective January 1, 2017 whereby we will no longer credit employees for service or interest related to service years after 2016. On July 1, 2017, we announced that we are terminating this plan and we expect to distribute all plan assets during 2018.

Andeavor provides health care benefits to retirees who met certain eligibility requirements and were participating in our group health insurance program at retirement. Other medical and postretirement plans offered to certain eligible retirees of Western and NTI include:

•
The unfunded NTI retiree medical plan provides retirees with health care benefits prior to age 65 (the “NTI Retiree Medical Plan”) for eligible employees. Eligible employees may participate in the health care benefits after retirement subject to cost-sharing features. To be eligible for the NTI Retiree Medical Plan, employees must have completed at least ten years of service and be between the ages of 55 and 65 years old;
•
The unfunded Western Refining Company, L.P. Postretirement Medical, Prescription Drug and Dental Benefits Plan provides certain El Paso employees with supplemental postretirement benefits; and
•
The unfunded Western Refining Yorktown Retiree Medical Plan provides certain Yorktown employees with supplemental postretirement benefits.

In addition, Andeavor sponsors four 401(k) plans under which eligible employees may make contributions, subject to certain limitations, into designated investment funds with a contribution by Andeavor. Effective January 1, 2018, all Andeavor employees participate in either the Andeavor 401(k) Plan or the Andeavor Retail 401(k) Plan. Also effective January 1, 2018, the Western Refining 401(k) Plan and the Northern Tier Energy Retirement Savings Plan were frozen to new contributions.

 
 
December 31, 2017 | 107
Notes to Consolidated Financial Statements
 
 

Pension and Other Postretirement Financial Information

Changes in Obligations and Funded Status (in millions)
 
Pension Benefits
 
Other Postretirement
Benefits
 
2017
 
2016
 
2017
 
2016
Change in projected benefit obligation:
 
 
 
 
 
 
 
Projected benefit obligations at beginning of year
$
793

 
$
727

 
$
72

 
$
74

Service cost
50

 
46

 
3

 
3

Interest cost
33

 
30

 
2

 
2

Actuarial loss
109

 
62

 
2

 
—

Acquisitions
12

 
—

 
5

 
—

Benefits paid
(76
)
 
(72
)
 
(7
)
 
(7
)
Settlements
(1
)
 
—

 
—

 
—

Projected Benefit Obligation at End of Year
$
920

 
$
793

 
$
77

 
$
72

 
 
 
 
 
 
 
 
Changes in plan assets:
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
$
424

 
$
390

 
$
—

 
$
—

Actual return on plan assets
60

 
30

 
—

 
—

Employer contributions
91

 
76

 
7

 
7

Acquisitions
9

 
—

 
—

 
—

Benefits paid
(76
)
 
(72
)
 
(7
)
 
(7
)
Settlements
(1
)
 
—

 
—

 
—

Fair Value of Plan Assets at End of Year
507

 
424

 
—

 
—

Funded Status at End of Year
$
(413
)
 
$
(369
)
 
$
(77
)
 
$
(72
)

The accumulated benefit obligation is the present value of benefits earned to date, assuming no future salary growth. The accumulated benefit obligation for our pension benefits at December 31, 2017 and 2016 was $811 million and $704 million , respectively.

Liability Amounts Recognized in the Balance Sheet Related to Postretirement Benefits (in millions)
 
Pension Benefits
 
Other Postretirement
Benefits
 
2017
 
2016
 
2017
 
2016
Other current liabilities
$
6

 
$
2

 
$
9

 
$
9

Other noncurrent liabilities
407

 
367

 
68

 
63

Total Amount Recognized
$
413

 
$
369

 
$
77

 
$
72



108  |  
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Notes to Consolidated Financial Statements
 

Components of Pension and Other Postretirement Benefit Expense (Income) (in millions)
 
Pension Benefits
 
Other Postretirement
Benefits
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Components of net periodic benefit expense (income):
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
50

 
$
46

 
$
45

 
$
3

 
$
3

 
$
3

Interest cost
33

 
30

 
30

 
2

 
2

 
2

Expected return on plan assets
(28
)
 
(27
)
 
(27
)
 
—

 
—

 
—

Amortization of prior service cost (credit)
—

 
—

 
1

 
(35
)
 
(34
)
 
(34
)
Recognized net actuarial loss
23

 
19

 
24

 
5

 
4

 
5

Recognized curtailment and settlement loss
—

 
5

 
—

 
—

 
—

 
—

Net Periodic Benefit Expense (Income)
$
78

 
$
73

 
$
73

 
$
(25
)
 
$
(25
)
 
$
(24
)

Weighted Average Assumptions
 
Pension Benefits
 
Other Postretirement
Benefits
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Projected benefit obligation:
 
 
 
 
 
 
 
 
 
 
 
Discount rate (a)
3.65
%
 
4.12
%
 
4.40
%
 
3.21
%
 
3.38
%
 
3.42
%
Rate of compensation increase
4.33
%
 
4.33
%
 
4.25
%
 
—

 
—

 
—

Net periodic benefit expense:
 
 
 
 
 
 
 

 
 

 
 

Discount rate (a)
4.12
%
 
4.40
%
 
4.05
%
 
3.38
%
 
3.42
%
 
3.16
%
Rate of compensation increase
4.33
%
 
4.33
%
 
4.25
%
 
—

 
—

 
—

Expected long-term return on plan assets (b)
6.50
%
 
6.50
%
 
6.50
%
 
—

 
—

 
—


(a)
We determine the discount rate primarily by reference to the effective yields on high quality corporate bonds that have a comparable cash flow pattern to the expected pension and other postretirement benefit payments to be made.
(b)
The expected return on plan assets reflects the weighted-average of the expected long-term rates of return for the broad categories of investments held for the Pension Plan. The expected long-term rate of return is adjusted when there are fundamental changes in expected returns on the Pension Plan’s investments.

Assumed Health Care Cost Trend Rates to Determine Postretirement Benefit Obligation
 
December 31,
 
2017
 
2016
Health care cost trend rate assumed for next year
6.60
%
 
6.90
%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
4.80
%
 
4.80
%
Year that the rate reaches the ultimate trend rate
2024

 
2024


Assumed health care cost trend rates could have a significant effect on the amounts reported for the health care plans. However, at December 31, 2017 , a one-percentage-point change in assumed health care cost trend rates would have less than a million dollar effect on the service and interest cost components and on our postretirement benefit obligation.


 
 
December 31, 2017 | 109
Notes to Consolidated Financial Statements
 
 

Other Comprehensive Income (Loss) (in millions)
 
Pension Benefits
 
Other Postretirement
Benefits
 
Total
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Net actuarial loss
$
(375
)
 
$
(323
)
 
$
(47
)
 
$
(46
)
 
$
(422
)
 
$
(369
)
Prior service credit (cost)
(1
)
 
(2
)
 
29

 
62

 
28

 
60

Total Income (Loss)
$
(376
)
 
$
(325
)
 
$
(18
)
 
$
16

 
$
(394
)
 
$
(309
)

Amounts Recognized in Other Comprehensive Income (Loss), Before Income Taxes (in millions)
 
Pension Benefits
 
Other Postretirement
Benefits
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Net gain (loss) arising during the year:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial gain (loss)
$
(75
)
 
$
(60
)
 
$
2

 
$
(2
)
 
$
1

 
$
2

Curtailment and settlement loss
—

 
4

 
—

 
—

 
—

 
—

Curtailment - prior service cost
—

 
1

 
—

 
—

 
—

 
—

Net (gain) loss reclassified into income:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial loss
21

 
19

 
24

 
5

 
4

 
5

Prior service cost (credit)
—

 
—

 
1

 
(34
)
 
(34
)
 
(34
)
Total Gain (Loss) Recognized in Other Comprehensive Income
$
(54
)
 
$
(36
)
 
$
27

 
$
(31
)
 
$
(29
)
 
$
(27
)

Amounts Included in AOCI, Before Income Taxes, Expected to be Recognized as a Component of Net Periodic Benefit Expense (Income) within the Next 12 Months (in millions)
 
Pension
Benefits
 
Other
Postretirement
Benefits
 
Total
Net actuarial loss
$
(30
)
 
$
(3
)
 
$
(33
)
Prior service cost
—

 
30

 
30

Total Included in Accumulated Other Comprehensive Income (Loss)
$
(30
)
 
$
27

 
$
(3
)

Future Cash Flows
Our employee pension plan funding complies with all applicable laws and regulations. Our funding policy is generally to make no less than the minimum required contribution to the plan, or more than the maximum deductible contribution for the plan year. We contributed $87 million during 2017 and $60 million in 2016 , and continue to evaluate our funding strategy for 2018 .

Estimated Future Benefit Payments (in millions)
 
Pension
Benefits
 
Other Postretirement Benefits
2018
$
84

 
$
9

2019
104

 
9

2020
77

 
8

2021
78

 
8

2022
81

 
7

2023-2027
392

 
31



110  |  
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Notes to Consolidated Financial Statements
 

Pension Plan Assets

Investment Policies and Strategies
The assets supporting the Pension Plan are invested using a total return investment approach (including dividends, interest, and realized and unrealized capital appreciation) whereby a mix of equity securities, fixed income securities and other investments are used to preserve asset values, diversify risk and achieve our target investment return. Plan assets are managed in a diversified portfolio comprised of two primary components: an equity portion and a fixed income portion. The expected role of the plan’s equity investments is to maximize the long-term real growth of plan assets, while the role of fixed income investments is to generate current income, lower funded status volatility, provide for more stable periodic returns and provide protection against a prolonged decline in the equity markets. Investment strategies and asset allocation decisions are based on careful consideration of risk tolerance, plan liabilities, the plan’s funded status and our financial condition. Our target allocation is as follows: 50% long duration fixed income, 30% equity and 20% other investments comprised primarily of assets that provide protection in inflationary periods and investments, which target a return regardless of market conditions. Our actual allocation of retirement plan assets at December 31, 2017 were 46% long duration fixed income, 34% equity and 20% other investments.

Fair Value of Plan Assets
We classify plan assets into three classifications or levels in the fair value hierarchy. Our level 1 investments include equity, fixed income and other mutual funds, which are based on market quotations from national securities exchanges. The common/collective trust funds and short-term investment funds are valued at the net asset value of the fund as determined by the fund manager, using net asset value as a practical expedient. None of these investment are categorized in the fair value table below. When market prices are not readily available, the determination of fair value may rely on factors such as significant market activity or security specific events, changes in interest rates and credit quality, and developments in foreign markets. We did not hold any level 2 or level 3 assets in our investments as of December 31, 2017 or 2016 . We do not believe that there are any significant concentrations of risk within our plan assets.

Pension Plan’s Major Asset Categories Measured at Fair Value (in millions)
 
December 31, 2017
 
December 31, 2016
Asset Category
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Investments Measured at Fair Value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds (a)
$
395

 
$
—

 
$
—

 
$
395

 
$
332

 
$
—

 
$
—

 
$
332

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments Measured at Net Asset Value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common/collective trust funds (b)
 
 
 
 
 
 
107

 
 
 
 
 
 
 
91

Short-term investment funds (c)
 
 
 
 
 
 
5

 
 
 
 
 
 
 
1

Total
 
 
 
 
 
 
$
507

 
 
 
 
 
 
 
$
424


(a)
Mutual funds that invest primarily in domestic and international equity and fixed income securities. Fair values are based on market quotations from national securities exchanges. Absolute return and real return mutual funds consist of investments in mutual funds that invest in a broad set of asset classes designed to provide a target return regardless of market conditions or the potential for real returns in excess of U.S. inflation, respectively. The fixed income mutual funds provide diversified exposure to high credit quality, long-term and short-term, U.S. investment grade bonds. All mutual funds and a U.S. equity mutual fund are categorized as level 1 investments.
(b)
Common/collective trust funds that invest in primarily equity and fixed income securities. Fair values reflect the net asset value per share, as determined by the investment manager and derived from the quoted prices in active markets of the underlying securities.
(c)
The short-term investment funds provide for safety of principal and daily liquidity and is valued using the net asset value per share.

Defined Contribution Plans

401(k) Plan
We sponsor an employee 401(k) plan (formally known as the “Thrift Plan”) that provides for contributions, subject to certain limitations, by eligible employees into designated investment funds with a matching contribution by Andeavor. Employees may elect tax-deferred or Roth treatment in accordance with the provisions of Section 401(k) of the Internal Revenue Code. We match 100% of employee contributions, up to 6% of the employee’s eligible compensation (subject to applicable union collective bargaining agreements).

We began a profit-sharing contribution to the 401(k) Plan effective January 1, 2013. This discretionary contribution, calculated as a percentage of employee’s base pay based on a pre-determined target for the calendar year, can range from 0% to 4% based on actual performance. Contributions will normally be made following the performance year. All employees eligible for the 401(k) Plan who are employed on December 31 st of the year the results are achieved are qualified to receive this contribution, even if they are not contributing to the 401(k) Plan. Our contributions to the 401(k) Plan amounted to $39 million , $60 million and

 
 
December 31, 2017 | 111
Notes to Consolidated Financial Statements
 
 

$57 million in 2017 , 2016 and 2015 , respectively. For 2017 , $7 million was accrued for discretionary contributions under the profit-sharing program for payments in February 2018; however, there were no discretionary contributions accrued in 2016 for payment in 2017.

Western Refining and NTI both sponsor a 401(k) defined contribution plan under which participants may contribute a percentage of their eligible compensation to various investment choices offered by the plan. A safe harbor matching contribution is made by the Company to the account of each participant who has completed 12 months of service equal to 175% of the first 6% of compensation. We contributed $12 million during 2017 following the Merger. These plans were frozen at the end of 2017.

Retail 401(k) Plan
Effective January 1, 2018, we implemented a new Retail 401(k) Plan for our retail store employees, bakery employees and bakery drivers. Eligible employees may enroll any time after hire; however, if they do not elect to contribute a percentage of their eligible earnings, they will be deemed to have elected to contribute 3% of eligible earnings on a pre-tax basis under the Retail 401(k) Plan’s automatic enrollment feature, unless the participant responds with an election of another rate. Additionally, the Retail 401(k) Plan provides for the automatic increase of the employees’ contribution percentage by 1% each year, up to 6% of eligible earnings, unless the participant elects to opt out. The Company provides an annual contribution of 5% of earnings, regardless of participation, for eligible employees who are employed on the last day of each year.

Executive Deferred Compensation Plan

We also sponsor a non-qualified executive deferred compensation plan, which provides eligible employees the opportunity for additional pre-tax deferrals and company contributions not provided under our qualified 401(k) Plan due to compensation and deferral limitations imposed under the Internal Revenue Code.

Note 15 - Commitments and Contingencies

Operating Leases, Purchase Obligations and Other Commitments

We have various cancellable and noncancellable operating leases related to land, office and retail facilities, ship charters, tanks and equipment and other facilities used in the storage, transportation, and sale of crude oil, feedstocks and refined products. Rental expense for all operating leases, gross of sublease income, including leases with a term of one month or less, was $613 million in 2017 , $576 million in 2016 and $569 million in 2015 .

The majority of our future operating lease payments relate to marine transportation, railcar, office and retail station leases. As of December 31, 2017 , we had 18 ships on time charter used to transport crude oil and refined products. These ships have remaining time charters expiring between 2018 and 2022 , with options to renew. We also time charter tugs and product barges with terms ending in 2018 , most with options to renew and some with rate escalation clauses. Our time charters contain initial terms up to five years. Our railcar leases have varying terms ending in 2018 through 2027 and our office leases have remaining terms up to 19 years. We have operating leases for most of our retail stations with primary remaining terms up to 36 years, most of which contain renewal options and escalation clauses.

Andeavor’s contractual purchase commitments consist primarily of crude oil supply contracts for our refineries from several suppliers with noncancellable remaining terms ranging up to ten years with renewal provisions. In addition to these purchase commitments, we also have minimum contractual capital spending commitments totaling approximately $491 million in 2018 .

We have certain commitments or obligations for the transportation of crude oil refined products and NGLs as well as to purchase industrial gases, chemical processing services and utilities associated with the operation of our refineries. The minimum commitments extend as many as 14 years. We recognized expense of approximately $736 million , $620 million and $687 million in 2017 , 2016 and 2015 , respectively, under these take-or-pay contracts.


112  |  
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Notes to Consolidated Financial Statements
 

Minimum Annual Payments (in millions)
 
Minimum Annual Lease Payments (a)
 
Minimum Crude Oil Supply Commitments (b)
 
Minimum Annual Take-or-Pay Payments
2018
$
466

 
$
2,496

 
$
360

2019
371

 
1,360

 
279

2020
313

 
508

 
220

2021
305

 
441

 
163

2022
180

 
72

 
111

Thereafter
799

 
8

 
200

Total minimum lease payments
$
2,434

 
$
4,885

 
$
1,333


(a)
Includes operating leases having initial or remaining noncancellable lease terms in excess of one year.
(b)
Prices under the term agreements fluctuate due to market-responsive and other contract-specific pricing provisions. To estimate our annual commitments under these contracts, we estimated crude oil prices using exchange-traded crude future prices by crude oil type as of December 31, 2017 , with prices ranging from $52 per barrel to $65 per barrel, and volumes based on the contract’s minimum purchase requirements over the term of the contract.

Environmental Liabilities

We are incurring and expect to continue to incur expenses for environmental remediation liabilities at a number of currently and previously owned or operated refining, pipeline, terminal and retail station properties. We have accrued liabilities for these expenses and believe these accruals are adequate based on current information and projections that can be reasonably estimated. Additionally, we have recognized environmental remediation liabilities assumed in past acquisitions from the prior owners that include amounts estimated for site cleanup and monitoring activities arising from operations at refineries, certain terminals and pipelines, and retail stations prior to the dates of our acquisitions. Our environmental accruals are based on estimates including engineering assessments, and it is possible that our projections will change and that additional costs will be recorded as more information becomes available.

Changes in Environmental Liabilities (in millions)
 
December 31,
 
2017
 
2016
Balance at Beginning of Year (a)
$
227

 
$
255

Additions, net
39

 
32

Liabilities assumed in acquisitions
16

 
5

Expenditures
(71
)
 
(65
)
Balance at End of Year (a)
$
211

 
$
227


(a)
Includes $16 million and $22 million of Andeavor Logistics environmental liabilities at December 31, 2017 and 2016 , respectively.

Our environmental liabilities include $134 million and $170 million as of December 31, 2017 and 2016 , respectively, related to amounts estimated for site cleanup activities arising from operations at our Martinez refinery and operations of assets acquired in the Los Angeles Acquisition prior to their respective acquisition dates. We are at various stages of remediation with respect to these assumed liabilities, which may require additional amounts to be recognized for remediation as more information becomes available in the future or changes in scope occur. The amounts recognized to date reflect management’s best estimate of amounts determined to be estimable based on facts known at this time. Future changes in amounts recognized for these assumed liabilities may have a material impact on our results of operations. Of the $134 million accrued at December 31, 2017 , approximately $25 million is subject to a cost-share agreement for the Martinez refinery where we are responsible for 75% of the expenditures.

Our estimates for site cleanup activities reflect amounts for which we are responsible under applicable cost-sharing arrangements. On July 10, 2015, a federal court issued an order denying coverage pursuant to insurance policies for environmental remediation liabilities at our Martinez refinery and those liabilities are included in our accruals above. The insurer had filed a declaratory relief action challenging coverage of the primary policy assigned to us when we acquired the refinery. The policies provide for coverage up to $190 million for expenditures in excess of $50 million in self-insurance. We have not recognized possible insurance recoveries under the policies and have appealed the order.

Refer to Note 3 for additional environmental matters relating to Andeavor Logistics.


 
 
December 31, 2017 | 113
Notes to Consolidated Financial Statements
 
 

Legal Matters

In the ordinary course of business, we become party to lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters. We have not established accruals for these matters unless a loss is probable, and the amount of loss is currently estimable. See current legal proceedings in Part I, Item 3.

Tax

We are subject to extensive federal, state and foreign tax laws and regulations. Newly enacted tax laws and regulations, and changes in existing tax laws and regulations, could result in increased expenditures in the future. Congress and the administration continue to explore options for reform of the domestic corporate tax code. Several of these options, if enacted into law, could have a significant impact on our tax liability. We are also subject to audits by federal, state and foreign taxing authorities in the normal course of business. It is possible that tax audits could result in claims against us in excess of recorded liabilities. However, we believe that resolution of any such claim(s) would not have a material impact on our liquidity, financial position, or results of operations. It is reasonably possible that unrecognized tax benefits may decrease by as much as $13 million in the next twelve months, related primarily to state apportionment matters.

Note 16 - Stockholders' Equity

Dilutive Shares

Share Calculations (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Weighted average common shares outstanding
140.1

 
118.5

 
123.2

Common stock equivalents
1.2

 
1.4

 
1.4

Total Diluted Shares
141.3

 
119.9

 
124.6


Potentially dilutive common stock equivalents are excluded from the calculation of diluted earnings per share if the effect of including such securities in the calculation would have been anti-dilutive. Anti-dilutive securities were 0.1 million for each of the years ended December 31, 2017 and 2016 and 0.6 million for the year ended December 31, 2015 .

Issuance of Preferred Units

On December 1, 2017, Andeavor Logistics issued and sold $600 million of its 6.875% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (“Preferred Units”) at a price to the public of $1,000 per unit. The Partnership used the net proceeds from the sale of the Preferred Units (i) to primarily redeem $500 million principal amount of its 6.250% 2022 Notes, (ii) to repay a portion of the borrowings under the Andeavor Logistics Revolving Credit Facility and (iii) to pay fees and expenses associated with the foregoing. Amounts recorded related to the Preferred Unit issuance are presented in noncontrolling interest in our consolidated balance sheet.

The Preferred Units do not participate in the earnings of Andeavor Logistics, but are eligible for distributions that 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. The first such payment was made on February 15, 2018. After February 15, 2023, distributions will be made quarterly in arrears on the 15th day of February, May, August, and November of each year (each, a “Distribution Payment Date”) to holders of record as of the close of business on the first business day of the month of the applicable Distribution Payment Date. A pro-rated initial distribution on the Preferred Units will be payable on February 15, 2018 in an amount equal to approximately $14.132 per Preferred Unit. 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% .


114  |  
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Notes to Consolidated Financial Statements
 

Share Repurchases

We are authorized by our Board to purchase shares of our common stock in open market transactions at our discretion. The Board’s authorization has no time limit and may be suspended or discontinued at any time. Purchases of our common stock can also be made to offset the dilutive effect of stock-based compensation awards and to meet our obligations under employee benefit and compensation plans, including the exercise of stock options and vesting of restricted stock and to fulfill other stock compensation requirements. The current program initially authorized $1.0 billion in share repurchases. In October 2015, the Board authorized an additional $1.0 billion in share repurchases that became effective upon the full completion of the initial program. On November 16, 2016, the Board approved a further $1.0 billion of share repurchases. We purchased approximately 7.0 million and 3.2 million shares of our common stock in each year for approximately $692 million and $250 million during the years ended December 31, 2017 and 2016 , respectively.

Preferred Stock

We have 5.0 million shares of preferred stock authorized with no par value per share. No shares of preferred stock were outstanding as of December 31, 2017 and 2016 .

Cash Dividends

On February 14, 2018 , our Board declared a cash dividend of $0.590 per share, payable on March 15, 2018 to shareholders of record on February 28, 2018 .

Cash Dividends Paid
 
2017
2016
2015
 
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Annual cash dividends paid
$314 million
$249 million
$228 million
Quarterly per share amount declared
$
0.590

$
0.590

$
0.550

$
0.550

$
0.550

$
0.550

$
0.500

$
0.500

$
0.500

$
0.500

$
0.425

$
0.425


Note 17 - Stock-Based Compensation

Stock-Based Compensation Plans

We issue stock-based awards as described below to employees under the Amended and Restated 2011 Long-Term Incentive Plan (“2011 Plan”). We also have issued awards under our Amended and Restated 2006 Long-Term Incentive Plan (“2006 Plan”), Amended and Restated Executive Long-Term Incentive Plan and Non-Employee Director Stock Plan. Andeavor had 2,773,640 shares available for future grants under our plans at December 31, 2017 , assuming a 200% payout of performance-based awards. Usually, when stock options are exercised or when restricted common stock is granted, we issue new shares rather than issuing treasury shares. Our plans are described below.

•
The 2011 Plan permits the grant of stock options, SARs, restricted common stock, restricted stock units and incentive bonuses (which may be paid in cash, stock or a combination thereof), any of which may be performance-based. The 2011 Plan became effective in May 2011. No awards may be granted under the 2011 Plan on or after February 2021. Stock options may be granted at exercise prices not less than the fair market value on the date the options are granted.
•
The 2006 Plan permits the grant of options, restricted common stock, deferred stock units, performance stock awards, other stock-based awards and cash-based awards. The 2006 Plan became effective in May 2006. Stock options may be granted at exercise prices not less than the fair market value on the date the options are granted. Options granted become exercisable after one year in 33% annual increments and expire 10 years from the date of grant. No further awards may be granted under this plan.
•
The Amended and Restated Executive Long-Term Incentive Plan, which expired in May 2006, allowed grants in a variety of forms, including restricted stock, nonqualified stock options, SARs, performance share and performance unit awards. As of December 31, 2017 and 2016, we no longer have outstanding awards in this plan, although there were awards outstanding during 2015 which were all exercised.
•
The 1995 Non-Employee Director Stock Option Plan provided for the grant of nonqualified stock options over the life of the plan to eligible non-employee directors of Andeavor. These automatic, non-discretionary stock options were granted at an exercise price equal to the fair market value per share of Andeavor’s common stock at the date of grant. The term of each option is 10 years , and an option becomes exercisable six months after it is granted. The plan expired in February 2010 and no further options may be granted under this plan.


 
 
December 31, 2017 | 115
Notes to Consolidated Financial Statements
 
 

TLGP maintains a unit-based compensation plan for officers and directors of TLGP and its affiliates. The Andeavor Logistics 2011 Long-Term Incentive Plan, as amended and restated in August 2017, (“Andeavor Logistics Plan”) permits the grant of options, restricted units, phantom units, unit appreciation rights, distribution equivalent rights, unit awards and other unit-based awards. Awards granted during 2017 under the Andeavor Logistics Plan will be settled with Andeavor Logistics units. Compensation expense for these awards was not material to our consolidated financial statements for the years ended December 31, 2017 , 2016 or 2015 .

Stock-Based Compensation Expense (Benefit) (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Market stock units
$
29

 
$
29

 
$
27

Performance share awards
14

 
10

 
11

Restricted common stock
3

 
4

 
3

Restricted stock units
3

 
1

 
1

Stock appreciation rights
—

 
(14
)
 
25

Other (a)
27

 
5

 
8

Total Stock-Based Compensation Expense
$
76

 
$
35

 
$
75


(a)
We have aggregated expense for certain award types as they are not considered significant, including awards issued by Andeavor Logistics. During the year ended  December 31, 2017 , we recognized expense of  $22 million  related to pre-existing Western Refining, NTI and WNRL awards due to accelerated recognition required upon change-in-control on June 1, 2017. These Western Refining and NTI awards were converted to Andeavor shares on June 1, 2017. WNRL awards were converted to Andeavor Logistics units on the effective merger date of October 30, 2017. See Note 2 for additional information.

The income tax effect recognized in the income statement for stock-based compensation was a benefit of $46 million for the year ended December 31, 2017 and $28 million for both years ended December 31, 2016 and 2015 , respectively. Included in the tax benefit was $18 million and $16 million of tax benefit, respectively, attributable to excess tax benefits from exercises and vestings that occurred during the years, the effects of which were recorded in the Statement of Consolidated Operations pursuant to ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The reduction in current taxes payable recognized from tax deductions resulting from exercises and vestings under all of our stock-based compensation arrangements totaled $37 million for both the years ended December 31, 2017 and 2016 and $75 million for the year ended December 31, 2015 .

Performance Share Awards

Performance Conditions
We last granted performance condition performance share awards under the 2011 Plan in February 2014 and have not granted any since. A performance share award represents the right to receive shares of Andeavor common stock at the end of a 3 -year performance period depending on the Company’s achievement of pre-established performance measures. The performance share awards can range from 0% to 200% of the number of original shares granted. The value of the award ultimately paid will be based on return on capital employed, which is measured against the performance peer group over the performance period. The fair value of performance share awards tied to performance measures is estimated using the market price of our common stock on the grant date. The estimated fair value of these performance share awards is amortized over a 3 -year vesting period using the straight-line method.

Market Conditions
A market condition award represents the right to receive shares of Andeavor common stock at the end of a 3 -year performance period depending on the Company’s achievement of pre-established market conditions. The market condition awards can range from 0% to 200% of the number of original shares granted. The value of the award ultimately paid will be based on relative total shareholder return, which is measured against the performance peer group, XLE Energy Index and the S&P 500 Index over the performance period. The estimated fair value for performance share awards is estimated using a Monte Carlo simulation model as of the grant date and the related expense is amortized over a 3 -year vesting period using the straight-line method.

Expected volatilities are based on the historical volatility over the most recent three-year period. Expected dividend yield is based on annualized dividends at the date of valuation. The risk-free rate is based on the U.S. Treasury yield curve in effect at the date of valuation.


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Notes to Consolidated Financial Statements
 

Weighted Average Assumptions Used to Measure Performance Share Awards
 
Year Ended December 31,
 
2017
 
2016
 
2015
Expected volatility
35%
 
35%
 
35%
Expected dividend yield
—%
 
—%
 
—%
Risk-free interest rate
1.2%
 
1.0%
 
1.0%

Total unrecognized compensation cost related to all non-vested performance share awards totaled $13 million as of December 31, 2017 , which is expected to be recognized over a weighted average period of 1.8 years . The estimated weighted average payout percentage for these awards was approximately 89% as of December 31, 2017 . The weighted-average grant-date fair value per share of performance share awards granted during 2017 , 2016 and 2015 was $118.09 , $87.90 and $117.96 , respectively.

Summary of Performance Share Award Activity, Assuming 100% Payout (shares in thousands)
 
Number of Awards
 
Weighted-Average Grant-Date Fair Value
 
Intrinsic Value (in millions)
Nonvested at January 1, 2017
378

 
$83.53
 
$33
Granted
219

 
$118.09
 
 
Vested
(243
)
 
$53.42
 
 
Forfeited
(26
)
 
$106.75
 
 
Nonvested at December 31, 2017
328

 
$108.19
 
$38

Market Stock Units

These market stock units represent the right to receive a target number of shares that will vest at the end of a 3 -year performance period. The number of shares ultimately issued will be based on Andeavor’s stock price changes over the performance period. The market stock units’ potential payout can range from 50% to 200% of the targeted award value, unless the average closing stock price at vesting has decreased more than 50% from the average closing stock price at the grant date, then no market stock units will be paid out. The fair value of each market stock unit is estimated on the grant date using a Monte Carlo simulation model. The estimated fair value of these market stock units is amortized over a 3 -year vesting period using the straight-line method. The estimated weighted average payout percentage for these awards was 133% as of December 31, 2017 . Total unrecognized compensation cost related to non-vested market stock units totaled $41 million as of December 31, 2017 , which is expected to be recognized over a weighted average period of 1.8 years . The weighted-average grant-date fair value per share of market stock units granted during 2017 , 2016 and 2015 was $107.43 , $84.84 and $114.57 , respectively.

Summary of Market Stock Unit Award Activity, Assuming 100% Payout (units in thousands)
 
Number of Units
 
Weighted-Average Grant-Date Fair Value
 
Intrinsic Value (in millions)
Nonvested at January 1, 2017
1,070

 
$84.78
 
$94
Granted
619

 
$107.43
 
 
Vested
(665
)
 
$60.36
 
 
Forfeited
(70
)
 
$100.92
 
 
Nonvested at December 31, 2017
954

 
$102.54
 
$109

Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate employee termination within the valuation model. Expected dividend yield is based on annualized dividends at the date of grant. The risk-free rate for periods within the performance period is based on the U.S. Treasury yield curve in effect at the time of grant.


 
 
December 31, 2017 | 117
Notes to Consolidated Financial Statements
 
 

Weighted Average Assumptions Used to Measure Market Stock Units Granted
 
Year Ended December 31,
 
2017
 
2016
 
2015
Expected volatility
34%
 
35%
 
35%
Expected dividend yield
3%
 
2%
 
2%
Risk-free interest rate
1.5%
 
1.1%
 
1.1%

Restricted Common Stock

The fair value of each restricted share on the grant date is equal to the market price of our common stock on that date. The estimated fair value of our restricted common stock is amortized over the vesting period primarily using the straight-line method. These awards primarily vest in annual increments ratably over 3 years . The total fair value of restricted shares vested was $4 million , $2 million and $4 million in 2017 , 2016 and 2015 , respectively. The weighted-average grant-date fair value per share of restricted common stock granted during 2017 , 2016 and 2015 was $81.63 , $85.51 and $90.40 , respectively. Unrecognized compensation cost related to our non-vested restricted common stock totaled $1 million as of December 31, 2017 . This cost is expected to be recognized over a weighted-average period of 1.1 years . The fair value of non-vested restricted common stock, as of December 31, 2017 , totaled $5 million .

Summary of Restricted Common Stock Activity (shares in thousands)
 
Number of Restricted Shares
 
Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2017
111

 
$71.45
Granted
3

 
$81.63
Vested
(52
)
 
$67.89
Forfeited
(16
)
 
$44.70
Nonvested at December 31, 2017
46

 
$85.51

Restricted Stock Units

The fair value of each restricted unit on the grant date is equal to the market price of our common stock on that date. The estimated fair value of our restricted stock units is amortized over the vesting period primarily using the straight-line method. These awards primarily vest in annual increments ratably over 3 years . The total fair value of restricted shares vested was $2 million in 2017 and $1 million in 2015. The weighted-average grant-date fair value per share of restricted stock units granted during 2017, 2016 and 2015 was $84.88 , $79.00 and $88.82 , respectively. Unrecognized compensation cost related to our non-vested restricted stock units totaled $4 million as of December 31, 2017. This cost is expected to be recognized over a weighted-average period of 1.9 years . The fair value of non-vested restricted stock units, as of December 31, 2017, totaled $13 million .

Summary of Restricted Stock Units Activity (shares in thousands)
 
Number of Restricted Stock Units
 
Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2017
47

 
$70.51
Granted
85

 
$84.88
Vested
(20
)
 
$77.67
Forfeited
(1
)
 
$83.41
Nonvested at December 31, 2017
111

 
$80.14


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Notes to Consolidated Financial Statements
 

Stock Options

Under the terms of our stock option plans, the exercise price of options granted is equal to the market price of our common stock on the date of grant. The fair value of each option is estimated on the grant date using the Black-Scholes option-pricing model. The estimated fair value of these stock options is amortized over the vesting period using the straight-line method. There were no options granted to our employees during 2017 , 2016 and 2015 .

Our options primarily become exercisable after one year in 33% annual increments and expire 10 years from the date of grant. The total intrinsic value for options exercised during 2017 , 2016 and 2015 was $4 million , $3 million and $19 million , respectively. There were no non-vested stock options as of December 31, 2017 . The reduction in current taxes payable from tax deductions associated with stock options exercised during 2017 was $1 million .

Summary of Stock Option Activity for All Plans (options in thousands)
 
Number of Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term
 
Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2017
274

 
$23.20
 
2.5 years
 
$18
Exercised
(92
)
 
$42.02
 
 
 
 
Forfeited or expired
—

 
$—
 
 
 
 
Outstanding at December 31, 2017
182

 
$13.65
 
2.2 years
 
$18
Vested or expected to vest at December 31, 2017
182

 
$13.65
 
2.2 years
 
$18
Exercisable at December 31, 2017
182

 
$13.65
 
2.2 years
 
$18

Stock Appreciation Rights

A SAR entitles an employee to receive cash in an amount equal to the excess of the fair market value of one share of common stock on the date of exercise over the grant price of the SAR. Our SARs become exercisable after three years and expire seven years from the date of grant. The fair value of each SAR is estimated at the end of each reporting period using the Black-Scholes option-pricing model. We did not grant SARs to our employees during the years ended December 31, 2017 , 2016 and 2015 . We paid cash of $6 million , $21 million and $44 million to settle SARs exercised during 2017 , 2016 and 2015 , respectively. We had $6 million recorded in other current liabilities associated with our SARs awards in our consolidated balance sheets at December 31, 2016 . The final vesting of remaining SARs occurred during 2017.

SAR Activity for the Year (shares in thousands)
 
Number of SARs
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
Outstanding at January 1, 2017
88

 
$12.93
 
0.34 years
Exercised
(86
)
 
$12.93
 
 
Forfeited
(2
)
 
$12.93
 
 
Outstanding at December 31, 2017
—

 
$—
 
0
Vested or expected to vest at December 31, 2017
—

 
$—
 
0
Exercisable at December 31, 2017
—

 
$—
 
0

The expected life of SARs granted was based on historical data and represents the period of time that the awards were expected to be outstanding. Expected volatilities were based on the historical volatility of our stock. We used historical data to estimate SAR exercises and employee termination within the valuation model. Expected dividend yield was based on historical dividends paid. The risk-free rate of the award was based on the U.S. Treasury yield curve in effect at the date of valuation.


 
 
December 31, 2017 | 119
Notes to Consolidated Financial Statements
 
 

Weighted Average Assumptions Used to Value SARs and Recognize Expense
 
Year Ended December 31,
 
2017
 
2016
 
2015
Expected life from date of grant (years)
7
 
7
 
7
Expected volatility
41%
 
40%
 
51%
Expected dividend yield
3%
 
3%
 
2%
Risk-free interest rate
0.6%
 
0.7%
 
0.4%

Note 18 - Supplemental Cash Flow Information

Supplemental Cash Flow Disclosures (in millions)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Supplemental Cash Flow Disclosures:
 
 
 
 
 
Interest paid, net of capitalized interest
$
362

 
$
199

 
$
181

Income taxes paid, net
164

 
136

 
882

Supplemental Disclosures of Non-cash Investing Activities:
 
 
 
 
 
Capital expenditures included in accounts payable at end of period
$
266

 
$
191

 
$
137


Note 19 - Operating Segments

The Company’s revenues are derived from three operating segments: Marketing, Logistics and Refining. Refer to Note 1 for discussion of the operations included within each of our operating segments. Since we do not have significant operations in foreign countries, revenue generated and long-lived assets located in foreign countries are not material to our operations.

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. Marketing and Logistics revenues include intersegment transactions with our Refining segment. Corporate depreciation and corporate general and administrative expenses are excluded from segment operating income.

Effective for the year ended December 31, 2017, in connection with the WNRL Merger, the Wholesale operations within Andeavor Logistics are now included in the Marketing segment. The Marketing segment results have been retrospectively adjusted to include the historical results of Andeavor Logistics’ Wholesale business since the initial acquisition by Andeavor on June 1, 2017.


120  |  
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Notes to Consolidated Financial Statements
 

Segment Information Related to Continuing Operations
 
Year Ended December 31,
 
2017
 
2016
 
2015
Revenues
(in millions)
Marketing:
 
 
 
 
 
Fuel (a)
$
20,944

 
$
15,405

 
$
18,082

Merchandise
456

 
25

 
8

Other
113

 
60

 
55

Logistics:
 
 
 
 
 
Terminalling and transportation
836

 
605

 
495

Gathering and processing
1,095

 
615

 
617

Refining:
 
 
 
 
 
Refined products
29,572

 
21,213

 
25,443

Crude oil resales and other
2,009

 
1,043

 
946

Intersegment sales
(20,050
)
 
(14,384
)
 
(16,935
)
Total Revenues
$
34,975

 
$
24,582

 
$
28,711

Segment Operating Income
 
 
 
 
 
Marketing
$
788

 
$
830

 
$
899

Logistics (b)
665

 
487

 
393

Refining
785

 
535

 
1,871

Total Segment Operating Income
2,238

 
1,852

 
3,163

Corporate and unallocated costs
(713
)
 
(371
)
 
(336
)
Operating Income
1,525

 
1,481

 
2,827

Interest and financing costs, net
(439
)
 
(274
)
 
(217
)
Equity in earnings of equity method investments
23

 
13

 
7

Other income, net
6

 
57

 
13

Earnings Before Income Taxes
$
1,115

 
$
1,277

 
$
2,630

Depreciation and Amortization Expenses
 
Marketing
$
68

 
$
49

 
$
46

Logistics
276

 
190

 
187

Refining
647

 
588

 
504

Corporate
30

 
24

 
19

Total Depreciation and Amortization Expenses
$
1,021

 
$
851

 
$
756

 
 
 
 
 
 
Capital Expenditures
 
 
 
 
 
Marketing
$
73

 
$
34

 
$
34

Logistics
237

 
273

 
386

Refining
844

 
519

 
530

Corporate
199

 
122

 
56

Total Capital Expenditures
$
1,353

 
$
948

 
$
1,006


(a)
Federal and state excise taxes on certain sales by our Marketing segment are included in both revenues and cost of materials and other in our statements of consolidated operations. These taxes totaled $771 million , $577 million and $561 million for the years ended December 31, 2017 , 2016 and 2015 , respectively.
(b)
We present Logistics’ segment operating income net of general and administrative expenses totaling $54 million , $27 million and $27 million representing Andeavor Logistics’ corporate costs that are not allocated to Andeavor Logistics’ operating segments for the years ended December 31, 2017 , 2016 and 2015 , respectively.


 
 
December 31, 2017 | 121
Notes to Consolidated Financial Statements
 
 

Identifiable Assets Related to Continuing Operations (in millions; intersegment balances have been eliminated)
 
December 31,
 
2017
 
2016
Marketing
$
2,853

 
$
1,295

Logistics
7,904

 
5,759

Refining
16,654

 
10,350

Corporate
1,162

 
2,994

Total Assets
$
28,573

 
$
20,398


Note 20 - Quarterly Financial Data (Unaudited)

Summary of Quarterly Financial Data (in millions, except per share amounts)
 
Quarters
 
Total Year
 
First
 
Second
 
Third
 
Fourth
 
2017
 
 
 
 
 
 
 
 
 
Revenues
$
6,638

 
$
7,849

 
$
9,836

 
$
10,652

 
$
34,975

Cost of materials and other (a)
5,426

 
6,217

 
7,750

 
9,087

 
28,480

Lower of cost or market inventory valuation adjustment
—

 
209

 
(209
)
 
—

 
—

Operating expenses (excluding depreciation and amortization)
654

 
739

 
899

 
890

 
3,182

Operating income
195

 
218

 
954

 
158

 
1,525

Net earnings from continuing operations
87

 
87

 
593

 
908

 
1,675

Earnings from discontinued operations, net of tax
—

 
—

 
8

 
—

 
8

Net earnings
87

 
87

 
601

 
908

 
1,683

Net earnings attributable to Andeavor
50

 
40

 
559

 
879

 
1,528

Net earnings per share (b):
 
 
 
 
 
 
 
 
 
Basic
$
0.43

 
$
0.31

 
$
3.57

 
$
5.66

 
$
10.91

Diluted
$
0.42

 
$
0.31

 
$
3.54

 
$
5.61

 
$
10.81

2016
 
 
 
 
 
 
 
 
 
Revenues
$
5,101

 
$
6,285

 
$
6,544

 
$
6,652

 
$
24,582

Cost of materials and other (a)
3,866

 
5,023

 
5,236

 
5,533

 
19,658

Lower of cost or market inventory valuation adjustment
147

 
(363
)
 
(20
)
 
(123
)
 
(359
)
Operating expenses (excluding depreciation and amortization)
611

 
602

 
648

 
680

 
2,541

Operating income
179

 
718

 
360

 
224

 
1,481

Net earnings from continuing operations
98

 
449

 
202

 
101

 
850

Earnings (loss) from discontinued operations, net of tax
11

 
—

 
(1
)
 
—

 
10

Net earnings
109

 
449

 
201

 
101

 
860

Net earnings attributable to Andeavor
69

 
418

 
169

 
78

 
734

Net earnings per share (b):
 
 
 
 
 
 
 
 
 
Basic
$
0.58

 
$
3.50

 
$
1.43

 
$
0.67

 
$
6.19

Diluted
$
0.57

 
$
3.47

 
$
1.42

 
$
0.66

 
$
6.12


(a)
Excludes lower of cost or market inventory valuation adjustment, direct operating expenses incurred across our operating segments and depreciation and amortization expenses.
(b)
Includes earnings attributable to Andeavor from continuing and discontinued operations. The sum of four quarters may not equal annual results due to rounding or the quarterly number of shares outstanding.


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Changes and Disagreements, Controls and Procedures, and Other Information

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.
Controls and Procedures

Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to provide reasonable assurance that the information that we are required to disclose in reports we file under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), is accumulated and appropriately communicated to management. There have been no significant changes in our internal controls over financial reporting (as defined by applicable SEC rules) during the quarter ended  December 31, 2017 , that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

We carried out an evaluation required by Rule 13a-15(b) of the Exchange Act, except as related to disclosure controls and procedures related to Western Refining and WNRL, which were excluded from management’s assessment on internal control over financial reporting, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures at the end of the reporting period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

Management Report on Internal Control Over Financial Reporting

Management of Andeavor and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

We acquired Western Refining and WNRL on June 1, 2017, and their combined total assets and revenues constituted 30.9% and 18.6%, respectively, of our consolidated total assets and revenues as shown on our consolidated financial statements as of and for the year ended December 31, 2017. We excluded Western Refining and WNRL’s internal control over financial reporting from the scope of management’s 2017 annual assessment of the effectiveness of our internal control over financial reporting. This exclusion is in accordance with the general guidance issued by the Staff of the SEC that an assessment of a recent business combination may be omitted from management's report on internal control over financial reporting in the first year of consolidation.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017 , using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013 framework) . Based on such assessment, management concluded that, as of December 31, 2017 , the Company’s internal control over financial reporting is effective.

The independent registered public accounting firm of Ernst & Young LLP, as auditors of the Company’s consolidated financial statements, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, included herein.

Item 9B.
Other Information

None.


 
 
December 31, 2017 | 123
Internal Control
 
 

Report of Independent Registered Public Accounting Firm


To the Stockholders and Board of Directors of Andeavor


Opinion on Internal Control over Financial Reporting

We have audited Andeavor’s internal control over financial reporting as of December 31, 2017 , based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Andeavor (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017 , based on the COSO criteria.

As indicated in the accompanying Management Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Western Refining, Inc. and Western Refining Logistics, LP, which is included in the 2017 consolidated financial statements of the Company and collectively constituted 30.9% of total assets as of December 31, 2017 and 18.6% of revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Western Refining, Inc. and Western Refining Logistics, LP.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016 , the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2017 , and the related notes of the Company and our report dated February 21, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ ERNST & YOUNG LLP

San Antonio, Texas
February 21, 2018

124  |  
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Directors, Executive Officers, Corporate Governance and Security Ownership

Part III

Item 10.
Directors, Executive Officers and Corporate Governance

Information regarding our executive officers appears in Item 1 of this Annual Report on Form 10-K.

Our Code of Business Conduct and our Code of Business Conduct and Ethics for Senior Financial Executives are available on our website at www.andeavor.com .

The other information required under this Item is incorporated by reference to “Corporate Governance—The Board of Directors,” “Corporate Governance—Board Leadership and Committees” and “Stock Ownership Information” in our Proxy Statement for our 2018 Annual Meeting of Stockholders, to be filed with the SEC within 120 days of December 31, 2017 (the “2018 Proxy Statement”).

Item 11.
Executive Compensation

Information required under this Item is incorporated by reference to “Director Compensation,” “Executive Compensation—Compensation Discussion and Analysis” and “Executive Compensation—Compensation Tables and Narrative” in our 2018 Proxy Statement.

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information

Equity Compensation to Employees, Officers, Directors and Other Persons under our Equity Compensation Plans, as of December 31, 2017
Plan Category
 
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
 
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (a)
 
Number of Securities Remaining Available for Future Issuance under Equity Compensation
Plans (b)
Equity compensation plans approved by security holders (c)
 
2,705,290

 
$
16.41

 
2,773,640

Equity compensation plans not approved by security holders (d)
 
151,513

 
$
13.09

 
—

Total
 
2,856,803

 
$
13.65

 
2,773,640


(a)
Includes only the exercise price for options to purchase common stock. No value is included in this column for restricted stock units, performance share awards or market stock units since they do not have an exercise, or strike, price.
(b)
For illustrative purposes, a maximum payout (i.e., a 200% ratio) has been assumed for vesting and payout of outstanding performance share awards and market stock unit grants.
(c)
The number of securities to be issued upon exercise under these approved plans includes 30,350 options to purchase common stock, 208,214 restricted stock units, 656,138 performance share awards, and 1,907,778 market stock units. Each performance share award and market stock unit shown in the table represents a right to receive (upon vesting and payout) a specified number of our common shares. Vesting and payout may be conditioned upon achievement of pre-determined performance objectives or only upon continued service with us and our affiliates. For illustrative purposes, the maximum payout (i.e., a 200% ratio) provided by the provisions of the award agreements has been assumed for vesting and payout of performance share awards and market stock unit grants. Payout at target levels (i.e., a 100% ratio) would result in 1,520,522 securities to be issued and 4,056,544 securities remaining available for future issuance under equity compensation plans.
(d)
Stock options granted in connection with the inducement awards of the CEO Agreement were not granted under an equity compensation plan.

Additional information required under this Item is incorporated by reference to “Stock Ownership Information” in our 2018 Proxy Statement.

Item 13.
Certain Relationships and Related Transactions and Director Independence

Information required under this Item is incorporated by reference to “Corporate Governance—Director Independence” and “Transactions with Related Parties” in our 2018 Proxy Statement.

Item 14.
Principal Accounting Fees and Services

Information required under this Item is incorporated by reference to “Audit-Related Matters—Auditor Fees and Services” in our 2018 Proxy Statement.

 
 
December 31, 2017 | 125
Exhibits and Financial Statement Schedules

Part IV

Item 15.
Exhibits and Financial Statement Schedules

(a)    1. Financial Statement

The following consolidated financial statements of Andeavor and its subsidiaries are included in Part II, Item 8 of this Form 10-K:
 
Page
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP)
Statements of Consolidated Operations — Years Ended December 31, 2016, 2015 and 2014
Statements of Consolidated Comprehensive Income — Years Ended December 31, 2016, 2015 and 2014
Consolidated Balance Sheets — December 31, 2016 and 2015
Statements of Consolidated Equity — Years Ended December 31, 2016, 2015 and 2014
Statements of Consolidated Cash Flows — Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements

2. Financial Statement Schedules

No financial statement schedules are submitted because of the absence of the conditions under which they are required, the required information is insignificant or because the required information is included in the consolidated financial statements.

3. Exhibits
 
 
 
 
Incorporated by Reference
(File No. 1-3473, unless otherwise indicated)
Exhibit Number
 
Description of Exhibit
 
Form
 
Exhibit
 
Filing Date
‡ 2.1
 
 
10-Q
 
2.4
 
8/5/2013
 
 
 
 
 
 
 
 
 
‡ 2.2
 
 
8-K
 
2.1
 
11/18/2016
 
 
 
 
 
 
 
 
 
‡ 2.3
 
 
8-K
 
2.1
 
8/14/2017
 
 
 
 
 
 
 
 
 
‡ 2.4
 
 
8-K
 
2.1
 
11/8/2017
 
 
 
 
 
 
 
 
 
3.1
 
 
8-K
 
3.1
 
8/1/2017
 
 
 
 
 
 
 
 
 
3.2
 
 
8-K
 
3.2
 
8/1/2017
 
 
 
 
 
 
 
 
 
4.1
 
 
8-K
 
4.1
 
10/2/2012
 
 
 
 
 
 
 
 
 
4.2
 
 
8-K
 
4.1
 
3/18/2014
 
 
 
 
 
 
 
 
 
4.3
 
 
8-K
 
4.1
 
12/22/2016
 
 
 
 
 
 
 
 
 

126  |  
ANDVLOGOPRIMARYCOLORRGBA21.JPG
 
Exhibits and Financial Statement Schedules

 
 
 
 
Incorporated by Reference
(File No. 1-3473, unless otherwise indicated)
Exhibit Number
 
Description of Exhibit
 
Form
 
Exhibit
 
Filing Date
4.4
 
 
8-K
 
4.1
 
12/21/2017
 
 
 
 
 
 
 
 
 
4.5
 
 
8-K
 
4.2
 
12/21/2017
 
 
 
 
 
 
 
 
 
4.6
 
 
10-Q
 
4.3
 
10/31/2014
 
 
 
 
 
 
 
 
 
4.7
 
 
10-K
 
4.33
 
2/21/2017
 
 
 
 
 
 
 
 
 
4.8
 
 
10-K
 
4.34
 
2/21/2017
 
 
 
 
 
 
 
 
 
4.9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1
 
 
8-K
 
10.1
 
10/3/2016
 
 
 
 
 
 
 
 
 
10.2
 
 
8-K
 
10.1
 
12/13/2016
 
 
 
 
 
 
 
 
 
10.3
 
 
8-K
 
10.1
 
11/18/2016
 
 
 
 
 
 
 
 
 
10.4
 
 
8-K
 
10.1
 
12/2/2016
 
 
 
 
 
 
 
 
 
10.5
 
 
8-K
 
10.2
 
10/31/2017
 
 
 
 
 
 
 
 
 
10.6
 
 
8-K
 
10.1
 
11/8/2017
 
 
 
 
 
 
 
 
 
10.7
 
 
8-K
 
10.1
 
2/3/2016
 
 
 
 
 
 
 
 
 
10.8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.9
 
 
8-K
 
10.2
 
2/3/2016
 
 
 
 
 
 
 
 
 
10.10
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
December 31, 2017 | 127
Exhibits and Financial Statement Schedules

 
 
 
 
Incorporated by Reference
(File No. 1-3473, unless otherwise indicated)
Exhibit Number
 
Description of Exhibit
 
Form
 
Exhibit
 
Filing Date
10.11
 
 
8-K
 
2.1
 
11/12/2015
 
 
 
 
 
 
 
 
 
10.12
 
 
8-K
 
2.1
 
7/7/2016
 
 
 
 
 
 
 
 
 
10.13
 
 
10-Q
 
2.2
 
11/2/2016
 
 
 
 
 
 
 
 
 
10.14
 
 
10-K
 
10.11
 
12/21/2017
 
 
 
 
 
 
 
 
 
10.15
 
 
8-K
 
10.13
 
12/9/2013
 
 
 
 
 
 
 
 
 
10.16
 
 
8-K
 
10.3
 
11/12/2015
 
 
 
 
 
 
 
 
 
10.17
 
 
8-K
 
10.14
 
12/9/2013
 
 
 
 
 
 
 
 
 
10.20
 
 
8-K
 
4.2
 
12/8/2014
 
 
 
 
 
 
 
 
 
10.21
 
 
8-K
 
10.3
 
2/3/2016
 
 
 
 
 
 
 
 
 
#10.22
 
 
10-Q/A
 
10.17
 
2/22/2012
 
 
 
 
 
 
 
 
 
10.23
 
 
10-K
 
10.104
 
2/25/2016
 
 
 
 
 
 
 
 
 
10.24
 
 
8-K
 
10.2
 
11/18/2016
 
 
 
 
 
 
 
 
 
10.25
 
 
8-K
 
10.3
 
11/18/2016
 
 
 
 
 
 
 
 
 
10.26
 
 
8-K
 
10.4
 
11/18/2016
 
 
 
 
 
 
 
 
 
10.27
 
 
8-K
 
10.1
 
8/14/2017
 
 
 
 
 
 
 
 
 
10.28
 
 
8-K
 
10.2
 
8/14/2017
 
 
 
 
 
 
 
 
 
10.29
 
 
8-K
 
10.4
 
4/29/2011
 
 
 
 
 
 
 
 
 
10.30
 
 
8-K
 
10.5
 
4/29/2011
 
 
 
 
 
 
 
 
 

128  |  
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Exhibits and Financial Statement Schedules

 
 
 
 
Incorporated by Reference
(File No. 1-3473, unless otherwise indicated)
Exhibit Number
 
Description of Exhibit
 
Form
 
Exhibit
 
Filing Date
10.31
 
 
10-Q
 
10.5
 
8/5/2013
 
 
 
 
 
 
 
 
 
10.32
 
 
8-K
 
10.1
 
9/22/2016
 
 
 
 
 
 
 
 
 
10.33
 
 
10-Q
 
10.6
 
5/3/2012
 
 
 
 
 
 
 
 
 
10.34
 
 
8-K
 
10.3
 
4/3/2012
 
 
 
 
 
 
 
 
 
10.35
 
 
8-K
 
10.9
 
12/9/2013
 
 
 
 
 
 
 
 
 
10.36
 
 
8-K
 
10.5
 
9/17/2012
 
 
 
 
 
 
 
 
 
10.37
 
 
8-K
 
10.6
 
9/17/2012
 
 
 
 
 
 
 
 
 
10.38
 
 
8-K
 
10.3
 
11/15/2012
 
 
 
 
 
 
 
 
 
10.39
 
 
8-K
 
10.11
 
12/9/2013
 
 
 
 
 
 
 
 
 
10.40
 
 
8-K
 
10.4
 
6/3/2013
 
 
 
 
 
 
 
 
 
10.41
 
 
8-K
 
10.2
 
11/12/2015
 
 
 
 
 
 
 
 
 
10.42
 
 
8-K
 
10.10
 
12/9/2013
 
 
 
 
 
 
 
 
 
10.43
 
 
8-K
 
10.12
 
12/9/2013
 
 
 
 
 
 
 
 
 
10.44
 
 
8-K
 
10.5
 
12/9/2013
 
 
 
 
 
 
 
 
 
10.45
 
 
8-K
 
10.8
 
12/9/2013
 
 
 
 
 
 
 
 
 
10.46
 
Second Amended and Restated Representation and Services Agreement for Oil Spill Contingency Planning, Response and Remediation, dated as of September 16, 2016, by and among Tesoro Companies, Inc., Tesoro Maritime Company, Tesoro Refining & Marketing Company LLC, Tesoro Alaska Company LLC, Kenai Pipe Line Company, Tesoro Alaska Pipeline Company LLC, Carson Cogeneration Company, Tesoro Great Plains Midstream LLC, Tesoro Great Plains Gathering & Marketing LLC, BakkenLink Pipeline LLC, ND Land Holdings LLC, Tesoro Logistics Operations LLC, Tesoro High Plains Pipeline Company LLC, Tesoro Logistics Pipelines LLC, Tesoro Logistics Northwest Pipeline LLC, Tesoro SoCal Pipeline Company LLC, QEP Field Services, LLC, QEPM Gathering I, LLC, Green River Processing, LLC, Rendezvous Pipeline Company, LLC and Tesoro Alaska Terminals LLC
 
8-K
 
10.3
 
9/22/2016
 
 
 
 
 
 
 
 
 
10.47
 
 
8-K
 
10.4
 
12/9/2013
 
 
 
 
 
 
 
 
 

 
 
December 31, 2017 | 129
Exhibits and Financial Statement Schedules

 
 
 
 
Incorporated by Reference
(File No. 1-3473, unless otherwise indicated)
Exhibit Number
 
Description of Exhibit
 
Form
 
Exhibit
 
Filing Date
10.48
 
 
8-K
 
10.6
 
12/9/2013
 
 
 
 
 
 
 
 
 
10.49
 
 
8-K
 
10.7
 
12/9/2013
 
 
 
 
 
 
 
 
 
10.50
 
 
8-K
 
10.2
 
7/1/2014
 
 
 
 
 
 
 
 
 
10.51
 
 
8-K
 
10.3
 
7/1/2014
 
 
 
 
 
 
 
 
 
10.52
 
 
8-K
 
10.4
 
7/1/2014
 
 
 
 
 
 
 
 
 
10.53
 
 
8-K
 
10.5
 
7/1/2014
 
 
 
 
 
 
 
 
 
10.54
 
 
8-K
 
10.6
 
7/1/2014
 
 
 
 
 
 
 
 
 
10.55
 
 
8-K
 
10.3
 
10/31/2017
 
 
 
 
 
 
 
 
 
10.56
 
 
8-K
 
10.3
 
12/9/2013
 
 
 
 
 
 
 
 
 
10.57
 
 
8-K
 
10.4
 
11/12/2015
 
 
 
 
 
 
 
 
 
10.58
 
 
8-K
 
10.1
 
7/7/2016
 
 
 
 
 
 
 
 
 
10.59
 
 
8-K
 
10.3
 
7/7/2016
 
 
 
 
 
 
 
 
 
10.60
 
 
8-K
 
10.2
 
9/22/2016
 
 
 
 
 
 
 
 
 
10.61
 
 
8-K
 
10.2
 
11/21/2016
 
 
 
 
 
 
 
 
 
10.62
 
 
8-K
 
10.3
 
11/21/2016
 
 
 
 
 
 
 
 
 
10.63
 
 
8-K
 
10.4
 
11/21/2016
 
 
 
 
 
 
 
 
 
10.64
 
 
8-K
 
10.6
 
11/21/2016
 
 
 
 
 
 
 
 
 
10.65
 
 
8-K
 
10.7
 
11/21/2016
 
 
 
 
 
 
 
 
 
*†10.66
 
 
8-K
 
10.1
 
12/18/2008
 
 
 
 
 
 
 
 
 
†10.67
 
 
8-K
 
10.4
 
12/18/2008
 
 
 
 
 
 
 
 
 
*†10.68
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

130  |  
ANDVLOGOPRIMARYCOLORRGBA21.JPG
 
Exhibits and Financial Statement Schedules

 
 
 
 
Incorporated by Reference
(File No. 1-3473, unless otherwise indicated)
Exhibit Number
 
Description of Exhibit
 
Form
 
Exhibit
 
Filing Date
*†10.69
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*†10.70
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
†10.71
 
 
8-K
 
10.1
 
2/17/2015
 
 
 
 
 
 
 
 
 
†10.72
 
 
8-K
 
10.4
 
2/3/2016
 
 
 
 
 
 
 
 
 
†10.73
 
 
8-K
 
10.1
 
2/21/2017
 
 
 
 
 
 
 
 
 
†10.74
 
 
8-K
 
10.2
 
2/17/2015
 
 
 
 
 
 
 
 
 
†10.75
 
 
8-K
 
10.5
 
2/3/2016
 
 
 
 
 
 
 
 
 
†10.76
 
 
8-K
 
10.3
 
2/21/2017
 
 
 
 
 
 
 
 
 
†10.77
 
 
8-K
 
10.3
 
2/17/2015
 
 
 
 
 
 
 
 
 
†10.78
 
 
8-K
 
10.6
 
2/3/2016
 
 
 
 
 
 
 
 
 
†10.79
 
 
8-K
 
10.2
 
2/21/2017
 
 
 
 
 
 
 
 
 
†10.80
 
 
8-K
 
10.4
 
2/17/2015
 
 
 
 
 
 
 
 
 
†10.81
 
 
8-K
 
10.7
 
2/3/2016
 
 
 
 
 
 
 
 
 
†10.82
 
 
8-K
 
10.4
 
2/21/2017
 
 
 
 
 
 
 
 
 
†10.83
 
 
10-Q
 
10.2
 
5/15/2002
 
 
 
 
 
 
 
 
 
†10.84
 
 
S-4
(File No. 333-92468)
 
10.41
 
7/16/2002
 
 
 
 
 
 
 
 
 
†10.85
 
 
S-8
(File No.
333-120716)
 
4.19
 
11/23/2004
 
 
 
 
 
 
 
 
 
*†10.86
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
†10.87
 
 
10-K
 
10(v)
 
3/17/1995
 
 
 
 
 
 
 
 
 
*†10.88
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
†10.89
 
 
8-K
 
10.2
 
12/18/2008
 
 
 
 
 
 
 
 
 
†10.90
 
 
DEF 14A
 
Exh. A
 
4/1/2005
 
 
 
 
 
 
 
 
 
*†10.91
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*†10.92
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*†10.93
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
†10.94
 
 
8-K
 
10.2
 
8/4/2008
 
 
 
 
 
 
 
 
 
†10.95
 
 
10-Q
 
10.3
 
11/9/2017
 
 
 
 
 
 
 
 
 
*21.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
December 31, 2017 | 131
Exhibits and Financial Statement Schedules

 
 
 
 
Incorporated by Reference
(File No. 1-3473, unless otherwise indicated)
Exhibit Number
 
Description of Exhibit
 
Form
 
Exhibit
 
Filing Date
*23.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*31.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*31.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*32.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*32.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
**101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 

*
Filed herewith.
**
Submitted electronically herewith.
†
Compensatory plan or arrangement.
‡
Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Andeavor agrees to furnish a copy of such schedules, or any section thereof, to the SEC upon request.
#
Confidential treatment has been granted for certain portions of this Exhibit pursuant to a confidential treatment order granted by the Securities Exchange Commission. Such portions have been omitted and filed separately with the SEC.

As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant has not filed with this Annual Report on Form 10-K certain instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries because the total amount of securities authorized under any of such instruments does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees to furnish a copy of any such agreements to the SEC upon request.

Copies of exhibits filed as part of this Form 10-K may be obtained by stockholders of record at a charge of $0.15 per page, minimum $5.00 each request. Direct inquiries to the Corporate Secretary, Andeavor, 19100 Ridgewood Pkwy, San Antonio, Texas, 78259-1828.

Item 16.
Form 10-K Summary

Not applicable .


132  |  
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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Andeavor
 
 
 
 
 
/s/ GREGORY J. GOFF
 
 
Gregory J. Goff
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)

Dated: February 21, 2018


 
 
December 31, 2017 | 133

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
 
 
 
/s/ GREGORY J. GOFF
President, Chief Executive Officer and Chairman of the Board of Directors
(Principal Executive Officer)
February 21, 2018
Gregory J. Goff
 
 
 
 
/s/ STEVEN M. STERIN
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
February 21, 2018
Steven M. Sterin
 
 
 
 
/s/ BLANE W. PEERY
Vice President and Controller
(Principal Accounting Officer)
February 21, 2018
Blane W. Peery
 
 
 
 
/s/ SUSAN TOMASKY
Independent Lead Director
February 21, 2018
Susan Tomasky
 
 
 
 
/s/ RODNEY F. CHASE
Director
February 21, 2018
Rodney F. Chase
 
 
 
 
/s/ PAUL L. FOSTER
Director
February 21, 2018
Paul L. Foster
 
 
 
 
/s/ EDWARD G. GALANTE
Director
February 21, 2018
Edward G. Galante
 
 
 
 
/s/ DAVID LILLEY
Director
February 21, 2018
David Lilley
 
 
 
 
/s/ MARY PAT MCCARTHY
Director
February 21, 2018
Mary Pat McCarthy
 
 
 
 
/s/ J.W. NOKES
Director
February 21, 2018
J.W. Nokes
 
 
 
 
/s/ WILLIAM H. SCHUMANN, III
Director
February 21, 2018
William H. Schumann, III
 
 
 
 
/s/ JEFF A. STEVENS
Director
February 21, 2018
Jeff A. Stevens
 
 
 
 
/s/ MICHAEL E. WILEY
Director
February 21, 2018
Michael E. Wiley
 
 
 
 
/s/ PATRICK Y. YANG
Director
February 21, 2018
Patrick Y. Yang
 

134  |  
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Exhibit 10.66







ANDEAVOR EXECUTIVE SECURITY PLAN
AMENDED AND RESTATED EFFECTIVE AUGUST 1, 2017
 





ANDEAVOR EXECUTIVE SECURITY PLAN
PREAMBLE
The principal objective of this Executive Security Plan (the "Plan") is to ensure the payment of a competitive level of retirement income in order to attract, retain and motivate selected executives. The Plan is designed to provide a benefit which, when added to other retirement income of the executive, will meet the objective described above. This Plan was originally established as a restatement and amendment of the Tesoro Executive Post Retirement Benefit Plan and Tesoro Executive Death Benefit Plan, and subsequently amended and restated, effective January 1, 2005. The Plan was most recently amended and restated, effective January 1, 2009 (except as otherwise specifically noted herein), and is intended to conform to the requirements of Section 409A of the Code, together with the Regulations, and is intended to qualify as an unfunded plan maintained primarily for the purpose of providing benefits for a select group of management and highly compensated employees of the Company and its Subsidiaries. The Plan is hereby amended and restated, effective August 1, 2017, to incorporate a prior amendment, to reflect a change in the name of the Company and to make such other changes deemed appropriate.
 
SECTION I
DEFINITIONS
1.1
"Affiliate" means each entity that would be considered a single employer with the Company under Section 414(b) or Section 414(c) of the Code, except that the phrase "at least 50%" shall be substituted for the phrase "at least 80%" as used therein.
1.2
"Aggregated Plan" means all agreements, methods, programs and other arrangements that are aggregated with this Plan under Section 1.409A-1(c) of the Regulations.
1.3
"Basic Compensation" shall have the meaning of such term, as set forth in the Andeavor Pension Plan (formerly known as the “Tesoro Corporation Retirement Plan”), as in effect on the date of a Participant's Retirement, but determined without regard to any compensation limits imposed by the Code, and, further provided, a normal bonus otherwise includible as Basic Compensation shall be credited in the calendar year in which such bonus is earned and not in the calendar year when paid, if different.
1.4
"Beneficiary" means the person or legal entity designated in writing by a Participant to receive, after his death, any death benefits provided by the Plan. If no designation is in effect at the time of the Participant's death, or if no designated person shall survive the Participant, the Beneficiary shall be the Participant's estate.
1.5
"Board" means the Board of Directors of the Company.
1.6
"Change in Control" means (i) there shall be consummated (A) any consolidation or merger of Company in which Company is not the continuing or surviving corporation or pursuant to which shares of Company's common stock would be converted into cash, securities or

2017 Restatement     1


other property, other than a merger of Company where a majority of the board of directors of the surviving corporation are, and for a one-year period after the merger continue to be, persons who were directors of Company immediately prior to the merger or were elected as directors, or nominated for election as director, by a vote of at least two-thirds of the directors then still in office who were directors of Company immediately prior to the merger, or (B) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Company, or (ii) the shareholders of Company shall approve any plan or proposal for the liquidation or dissolution of Company, or (iii) (A) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than Company or a Subsidiary thereof or any employee benefit plan sponsored by Company or a Subsidiary thereof, shall become the beneficial owner (within the meaning of Rule 13c-3 under the Securities Exchange Act of 1934) of securities of Company representing 35 percent or more of the combined voting power of Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, and (B) at any time during a period of one-year thereafter, individuals who immediately prior to the beginning of such period constituted the Board shall cease for any reason to constitute at least a majority thereof, unless election or the nomination by the Board for election by Company's shareholders of each new director during such period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period.
1.7
"Chief Executive Officer" means the Chief Executive Officer of the Company.
1.8
"Code" means the Internal Revenue Code of 1986, as amended from time to time.
1.9
"Committee" means, prior to August 1, 2017, the Tesoro Corporation Employee Benefits Committee and, effective August 1, 2017, the Andeavor Employee Benefits Committee or such other committee designated by the Compensation Committee of the Board to discharge the duties of the Committee hereunder.
1.10
"Company" means, prior to August 1, 2017, Tesoro Corporation, a Delaware corporation, and, effective August 1, 2017, Andeavor, a Delaware corporation, or any successor thereto.
1.11
"Disabled" or "Disability" means that a Participant is entitled to benefits under the long-term disability plan of the Company or an Affiliate.
1.12
" Distribution Schedule " means the method of distributions elected (or deemed elected) by a Participant, which method may be either a lump sum payment or an annuity, pursuant to which distribution of the Participant's benefit hereunder shall be made or shall commence. Such election shall be made at the time and in the manner described in Section 3.2 hereof and shall be subject to the provisions thereof.
1.13
"Early Retirement Date" means the date on which a Participant has either: (i) both attained age 55 and is credited with at least 5 years of Service or (ii) attained age 50 and is credited

2017 Restatement     2


with at least eighty (80) points, with points credited for this purpose by adding the aggregate of a Participant's age and Service, each of which shall be determined in years and completed months rather than completed years only, and including "deemed years of age" granted pursuant to an employment agreement, change in control agreement, separation agreement or any other agreement between a Participant and the Company or an Affiliate.
1.14
"Earnings" shall mean the amount determined by dividing a Participant's aggregate Basic Compensation for the three (3) calendar years out of the last seven (7) calendar years (including the year of such Participant's Retirement) for which the Participant’s Basic Compensation was the greatest by the number of full calendar months of employment during such three (3)-calendar year period.
1.15
"Funded Plan" means the prior Tesoro Petroleum Corporation Funded Executive Security Plan. All benefits under the Funded Plan have been completely distributed and no additional benefits will be accrued or payable thereunder.
1.16
" Lump Sum Interest Rate " means the discount rate used for the Company's financial disclosure purposes under Financial Accounting Standards Statement No. 158 for the December 31 prior to or coincident with the Participant's Retirement Date.
1.17
" Lump Sum Mortality Table " means the mortality table used for the Company's financial disclosure purposes under Financial Accounting Standards Statement No. 158 for the December 31 prior to or coincident with the Participant's Retirement Date. For this purpose, the mortality table will be a unisex table based on 95% of the male rates and 5% of the female rates.
1.18
"Other Retirement Income" means the retirement income payable to a Participant from the following sources and assumed to commence at the earliest date possible coincident with or immediately following the Participant's Retirement Date:
•
Qualified and nonqualified retirement benefits from a prior employer of the Participant if said prior employer or employer facility was acquired by or merged into the Company or any Affiliate at any time and benefit service with the prior employer is recognized by the Company for any retirement plan, qualified or nonqualified, pursuant to the terms of an acquisition agreement or as otherwise provided under a separate agreement with the Company or an Affiliate.
•
Social Security Benefit as defined in Section 1.28 hereof.
1.19
"Participant" means an officer of the Company or an Affiliate with the title of Senior Vice President or above who is recommended for participation by the Chief Executive Officer and approved by the Compensation Committee of the Board as eligible to participate.
1.20
"Pension Plan" means, prior to August 1, 2017, the Tesoro Corporation Retirement Plan, as amended from time to time and, effective August 1, 2017, the Andeavor Pension Plan, as amended from time to time.

2017 Restatement     3


1.21
"Pension Plan Benefit" means the amount of monthly benefit payable from the Pension Plan to a Participant in the form of a straight life annuity and assumed to commence at the earliest date possible coincident with or immediately following the Participant's Retirement Date.
1.22
"Plan" means, prior to August 1, 2017, the Tesoro Corporation Amended and Restated Executive Security Plan, effective January 1, 2009 (except as otherwise specifically noted herein), and, effective August 1, 2017, the Andeavor Executive Security Plan, as may be amended from time to time.
1.23
"Regulations" means the Treasury Regulations promulgated under the Code.
1.24
"Retirement" means a Participant's Separation from Service on or after the earlier of: (i) his Early Retirement Date or (ii) a Change in Control.
1.25
"Retirement Date" means the date of a Participant's Retirement.
1.26
"Separation from Service" means a reasonably anticipated permanent reduction in the level of bona fide services performed by the Participant for the Company and its Affiliates to 20% or less of the average level of bona fide services performed by the Participant for the Company and its Affiliates (whether as an employee or an independent contractor) in the immediately preceding thirty-six (36) months (or the full period of service to the Company and its Affiliates if the Participant has been providing services to the Company and its Affiliates for fewer than thirty-six (36) months). The determination of whether a Separation from Service has occurred shall be made by the Committee in accordance with the provisions of Section 409A of the Code and the Regulations promulgated thereunder.
1.27
"Service" means a Participant's "Vesting Service," as such term is defined in the Pension Plan, but calculated in years and completed months rather than completed years only, and including "deemed service" granted pursuant to an employment agreement, change in control agreement, separation agreement or any other agreement between a Participant and the Company or an Affiliate.
1.28
"Social Security Benefit" means the monthly primary insurance amount estimated by the Committee to be payable to the Participant at age 65 under the federal Social Security Act, provided, however, that:
(a)
the Social Security Benefit for a Participant who terminates employment prior to age 65 will be calculated assuming:
(i)
the Participant will not receive any future wages which would be treated as wages for purposes of the federal Social Security Act, and
(ii)
the Participant will elect to begin receiving his Social Security Benefit as of the earliest age then allowable under said Social Security Act, or if later, at actual date of Retirement.

2017 Restatement     4


(b)
the Social Security Benefit, once calculated, will be frozen as of the date the Participant terminates employment.
1.29
"Subsidiary" means any entity in which the Company owns or otherwise controls, directly or indirectly, stock or other ownership interests having the voting power to elect a majority of the board of directors, or other governing group having functions similar to a board of directors, as determined by the Committee.
The masculine gender, where appearing in the Plan, will be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary.
SECTION II
ELIGIBILITY FOR BENEFITS
2.1
Each Participant is eligible to receive a benefit under this Plan upon his Retirement. Such benefit shall commence as provided in Section 4.1 hereof. Except as provided in Section V hereof, no benefit is payable hereunder in the event of a Participant's Separation from Service prior to Retirement except in the event of such Participant's Disability, as provided in Section 2.2 below, or a Change in Control, as provided in Section 4.5 below.
2.2
In the event a Participant becomes Disabled while in the active employment of the Company or an Affiliate and eligible to participate hereunder, he shall be entitled to the retirement benefit determined under Section 3.1 payable on the first day of the month following the date on which such Participant has both attained the age of 65 and is credited with at least 5 years of Service, but based upon the Service the Participant would have accrued had he remained in active employment until such date and continued at the same rate of Earnings until that date. Notwithstanding the foregoing, no Participant shall be entitled to credit for Service after the date on which such Participant is no longer considered Disabled.
2.3
Notwithstanding anything herein to the contrary, if a Participant who is receiving, or may be entitled to receive, a benefit hereunder, engages in competition with the Company (without prior authorization given by the Committee in writing) or is discharged for cause, or performs acts of willful malfeasance or gross negligence in a matter of material importance to the Company, payments thereafter payable hereunder to such Participant or such Participant's Beneficiary will, at the discretion of the Committee, be forfeited and the Company will have no further obligation hereunder to such Participant or Beneficiary.
SECTION III
AMOUNT AND FORM OF RETIREMENT BENEFIT
3.1
The monthly retirement benefit under this Plan will equal 4% of Earnings times the first 10 years of Service, plus 2% of Earnings times the next 10 years of Service, plus 1% of Earnings times the next 10 years of Service, actuarially reduced by seven percent (7%) per year from age sixty (60) for Participants who have not attained age 55 with ten (10) years of Service by December 31, 2005 and who retire prior to age sixty (60), and offset by any Pension Plan Benefit and any Other Retirement Income. Notwithstanding the foregoing, no credit will

2017 Restatement     5


be included under this Plan formula for Service in excess of 30 years. The amount payable under this Plan shall also be reduced by the amount of the vested Basic Pension paid or payable under the Funded Plan (without regard to whether a smaller, adjusted amount is in fact paid from such Funded Plan after retirement because of prior distributions made from such Funded Plan to enable the Participant to pay taxes resulting from his participation in such Funded Plan).
3.2
Each Participant may, within thirty (30) days of the date on which he is notified of his eligibility to participate in the Plan, irrevocably elect the Distribution Schedule pursuant to which benefits hereunder will be paid, subject to the restrictions of the Plan. The Participant's election shall become effective immediately following the Committee’s receipt of the Participant’s executed participation agreement. A Participant's failure to elect a Distribution Schedule in accordance with this Section 3.2 shall be deemed an election by the Participant to receive his benefits hereunder in the form of a single life annuity, payable for the Participant's lifetime, unless the Participant elects an actuarially equivalent life annuity, as provided below. The Participant’s election (or deemed election) shall become irrevocable as of the last day of the 30-day period during which the Participant is permitted to make an election in accordance with this Section 3.2, except as provided below. If a Participant has timely elected an annuity form of payment, or if the Participant has failed to elect a Distribution Schedule, resulting in a deemed election of a single life annuity, the benefit determined under this Plan will be paid in the form of a single life annuity, payable for the Participant's lifetime, unless, prior to the date on which an annuity payment has been made, and within the time and in the manner determined by the Committee, the Participant elects an actuarially equivalent life annuity, within the meaning of Section 1.409A-2(b)(2)(ii) of the Regulations. Subject to the preceding sentence. actuarially equivalent life annuities shall be calculated by using the applicable actuarial assumptions set forth in the Pension Plan. The actuarially equivalent life annuity forms available hereunder shall be those forms of life annuity set forth in the Pension Plan as in effect on the date of the Participant's Separation from Service. Lump sum amounts shall be determined by using the Lump Sum Interest Rate and the Lump Sum Mortality Table.
3.3
Notwithstanding any provision herein to the contrary, effective December 12, 2008, each Participant who is actively employed by the Company or an Affiliate and who remains actively employed through the 31 st day of December, 2008, may elect to modify an existing election (or deemed election) provided that such election: (i) may apply only to amounts that would not otherwise be payable in 2008, (ii) may not cause an amount to be paid in 2008 that would not otherwise be payable in 2008, (iii) shall be made no later than December 31, 2008 and prior to such earlier date as may be established by the Committee, and (iv) shall be made in the manner and subject to such restrictions as shall be determined by the Committee. If a Participant modifies an election (or deemed election) pursuant to this Section 3.3 and thereby elects a lump sum form of payment, such Participant will not later be eligible to elect an actuarially equivalent life annuity form of payment.

2017 Restatement     6


SECTION IV
PAYMENT OF RETIREMENT BENEFITS
4.1
Benefits payable in accordance with Section III will be calculated as of the first day of the month next following the month of the Participant's Retirement and shall commence, or in the case of a lump sum payment, be distributed in full on the first day of the seventh (7th) calendar month beginning after the Participant's Retirement Date. Benefits payable in the form of an annuity will continue to be paid on the first day of each succeeding month. The last such payment will be on the first day of the month in which the retired Participant dies unless another annuity form of payment that contemplates payments made subsequent to the Participant's death, is elected in accordance with Section 3.2. The first payment will include all amounts that would otherwise have been paid during the period commencing on the first day of the month next following the month of the Participant's Retirement and ending on such payment date, plus interest on such amounts for such period, which interest shall be calculated using the Lump Sum Interest Rate in effect on the date of the Participant's Retirement.
4.2
The Company shall be liable for all benefits due the Participants under the Plan.
4.3
Under all circumstances, the rights of the Participants to the assets held in a rabbi trust, if any, created with respect to the Plan shall be no greater than the rights expressed in this Plan. Nothing contained in the trust agreement which creates any such rabbi trust shall constitute a guarantee by the Company that the amounts transferred by it to the trust shall be sufficient to pay any benefits under the Plan or would place the Participant in a secured position ahead of judgment and/or general creditors should the Company become insolvent or bankrupt. Any trust agreement established with respect to the Plan must specifically set out these principles so it is clear in the trust agreement that the Participants are only unsecured general creditors of the Company with respect to their benefits under the Plan.
4.4
The Plan is only a general corporate commitment and each Participant must rely upon the general credit of the Company for the fulfillment of its obligations under the Plan. Under all circumstances the rights of Participants to any asset held by the Company shall be no greater than the rights expressed in this Plan. Nothing contained in this Plan shall constitute a guarantee by the Company that the assets of the Company will be sufficient to pay any benefits under the Plan or would place the Participant in a secured position ahead of general creditors and judgment creditors of the Company. Though the Company may establish or become a signatory to a rabbi trust to accumulate assets to help fulfill its obligations, the Plan and any trust created, shall not create any lien, claim, encumbrance, right, title or other interest of any kind in any Participant in any asset held by the Company, contributed to any trust created, or otherwise be designated to be used for payment of any of its obligations created in this agreement. No specific assets of the Company have been or will be set aside, or will be transferred to a trust or will be pledged for the performance of the Company's obligations under the Plan which would remove those assets from being subject to the general creditors and judgment creditors of the Company. Notwithstanding the preceding provisions of this Section 4.4 to the contrary, upon a Change in Control, the Company shall, as soon

2017 Restatement     7


as possible following the Change in Control, make an irrevocable contribution to the rabbi trust previously established, or if not so established, to a newly created rabbi trust, in an amount that is sufficient to pay each Plan Participant or Beneficiary the benefits to which each Plan Participant or Beneficiary would be entitled pursuant to the terms of the Plan as of the date on which the Change in Control occurred.
4.5
Upon a Change in Control, each Participant's benefit hereunder shall be immediately vested. Payment of such benefit shall commence as of the first day of the seventh (7 th ) calendar month following the later of such Participant's Separation from Service or Early Retirement Date. Benefits will continue to be paid on the first day of each succeeding month. The last payment will be on the first day of the month in which the Participant dies unless another form of payment is elected in accordance with Section 3.2 hereof. The first payment will include all amounts that would otherwise have been paid during the period commencing on the first day of the month next following the month of the later of the Participant's Separation from Service or Early Retirement Date.
4.6
It is intended that this Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.
4.7
Notwithstanding any provision of this Section IV to the contrary, the benefits payable hereunder may, to the extent expressly provided in this Section 4.7, be paid prior to or later than the date on which they would otherwise be paid to the Participant.
(a)
Distribution in the Event of Income Inclusion Under Code Section 409A . If any portion of a Participant's benefit hereunder is required to be included in income by the Participant prior to receipt due to a failure of this Plan or any Aggregated Plan to comply with the requirements of Section 409A of the Code or the Regulations, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the portion of his or her benefit required to be included in income as a result of the failure of the Plan or any Aggregated Plan to comply with the requirements of Section 409A of the Code or the Regulations.
(b)
Distribution Necessary to Satisfy Applicable Tax Withholding . If the Company is required to withhold amounts to pay the Participant’s portion of the Federal Insurance Contributions Act (FICA) tax imposed under Code Sections 3101, 3121(a) or 3121(v)(2) with respect to amounts that are or will be paid to the Participant under the Plan before they otherwise would be paid, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the lesser of: (i) the amount of the Participant's benefit hereunder or (ii) the aggregate of the FICA taxes imposed and the income tax withholding related to such amount.
(c)
Delay for Payments in Violation of Federal Securities Laws or Other Applicable Law . In the event the Company reasonably anticipates that the payment of benefits as specified hereunder would violate Federal securities laws or other applicable law, the Committee may delay the payment of such benefit hereunder until the earliest

2017 Restatement     8


date at which the Company reasonably anticipates that the making of such payment would not cause such violation.
(d)
Delay for Insolvency or Compelling Business Reasons. In the event the Company determines that the making of any payment of benefits on the date specified hereunder would jeopardize the ability of the Company to continue as a going concern, the Committee may delay the payment of such benefits until the first calendar year in which the Company notifies the Committee that the payment of benefits would not have such effect.
(e)
Administrative Delay in Payment . The payment of benefits hereunder shall begin at the date specified in accordance with the provisions of the foregoing paragraphs of this Section IV; provided that, in the case of administrative necessity, the payment of such benefits may be delayed up to the later of the last day of the calendar year in which payment would otherwise be made or the 15 th day of the third calendar month following the date on which payment would otherwise be made. Further, if, as a result of events beyond the control of the Participant (or following the Participant's death, the Participant's Beneficiary), it is not administratively practicable for the Committee to calculate the amount of benefits due to the Participant as of the date on which payment would otherwise be made, the payment may be delayed until the first calendar year in which calculation of the amount is administratively practicable.
(f)
No Participant Election . Notwithstanding the foregoing provisions, if the period during which payment of benefits hereunder will be made occurs, or will occur, in two calendar years, the Participant shall not be permitted to elect the calendar year in which the payment shall be made.
SECTION V
PRE-RETIREMENT DEATH BENEFITS
5.1
If a Participant should die before Retirement, the Beneficiary will receive the greatest of (1), (2) and (3) where (1) is the Participant's benefit hereunder calculated as of his date of death and payable for the life of the Beneficiary as a single life annuity, (2) is a benefit payable for the life of the Beneficiary as a single life annuity equal to the Actuarial Equivalent of 400% of the amount of the Participant's rate of annual base pay determined as of the December 1 immediately preceding the Participant's date of death, and (3) is the benefit the Participant would have received under Section 2.2 hereof if he had been determined to be Disabled on the date of his death (but payable immediately and reduced as provided in Section 3.1 hereof) and payable for the life of the Beneficiary as a single life annuity. "Actuarial Equivalence" as such term is used in this Section 5.1, shall be determined in accordance with Section 1.409A-2(b)(2)(ii) of the Regulations and, subject to the foregoing, shall be calculated by using the applicable actuarial assumptions set forth in the Pension Plan.

2017 Restatement     9


5.2
A Beneficiary's pre-retirement death benefit will be payable in accordance with the Participant's Distribution Schedule; provided, however, that a Participant's failure to elect a Distribution Schedule in accordance with Section 3.2 hereof shall be deemed an election by the Participant for the pre-retirement death benefit hereunder to be paid in the form of a single life annuity. If a Participant has timely elected an annuity form of payment, or if the Participant has failed to elect a Distribution Schedule, resulting in a deemed election of a single life annuity, the pre-retirement death benefit will be paid in the form of a single life annuity, payable for the Beneficiary's lifetime, unless, prior to the date on which an annuity payment has been made, and within the time and in the manner determined by the Committee, the Beneficiary elects an actuarially equivalent life annuity, within the meaning of Section 1.409A-2(b)(2)(ii) of the Regulations. Subject to the preceding sentence, actuarially equivalent life annuities shall be calculated by using the applicable actuarial assumptions set forth in the Pension Plan. The actuarially equivalent life annuity forms available hereunder shall be those forms of life annuity set forth in the Pension Plan as in effect on the date of the Participant's death. Lump sum amounts shall be determined by using the Lump Sum Interest Rate and the Lump Sum Mortality Table. Distribution of a Participant's pre-retirement death benefit will commence or, in the case of a lump sum payment, will be made in full within sixty (60) days of the date of the Participant's death.
5.3
Amounts otherwise payable under this Section will be reduced by any amount previously funded through any trust designated for retirement and death benefits from this Plan, and by the amount of any death benefit payable under the Funded Plan.
SECTION VI
CLAIMS PROCEDURES
6.1
Claims for Benefits . The Committee shall determine the rights of any Participant to any deferred compensation benefits hereunder. Any Participant who believes that he has not received the deferred compensation benefits to which he is entitled under the Plan may file a claim in writing with the Committee. The Committee shall, no later than 90 days after the receipt of a claim (plus an additional period of 90 days if required for processing, provided that notice of the extension of time is given to the claimant with the first 90-day period), either allow or deny the claim in writing.
A denial of a claim by the Committee, wholly or partially, shall be written in a manner intended to be understood by the claimant and shall include:
(a)
the specific reasons for the denial;
(b)
specific reference to pertinent Plan provisions on which the denial is based;
(c)
a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and

2017 Restatement     10


(d)
an explanation of the claim review procedure and the time limits applicable to such procedures, including a statement of the claimant's right to bring a civil action under Section 502(a) of ERISA.
6.2
Appeal Provisions . A claimant whose claim is denied (or his duly authorized representative) may within 60 days after receipt of denial of a claim file with the Committee a written request for a review of such claim. If the claimant does not file a request for review of his claim within such 60-day period, the claimant shall be deemed to have acquiesced in the original decision of the Committee on his claim, the decision shall become final and the claimant will not be entitled to bring a civil action under Section 502(a) of ERISA. If such an appeal is so filed within such 60-day period the Company (or its delegate) shall conduct a full and fair review of such claim. During such review, the claimant (or the claimant's authorized representative) shall be given the opportunity to review all documents that are pertinent to his claim and to submit issues and comments in writing.
The Company shall mail or deliver to the claimant a written decision on the matter based on the facts and the pertinent provisions of the Plan within 60 days after the receipt of the request for review (unless special circumstances require an extension of up to 60 additional days, in which case written notice of such extension shall be given to the claimant prior to the commencement of such extension). Such decision shall be written in a manner intended to be understood by the claimant, shall state the specific reasons for the decision and the specific Plan provisions on which the decision was based and shall, to the extent permitted by law, be final and binding on all interested persons.
SECTION VII
MISCELLANEOUS
7.1
The Board, or its delegate, may, in its sole discretion, terminate, suspend or amend this Plan at any time, in whole or in part. However, the termination, amendment or suspension of this Plan will not operate to decrease the benefit of (i) a retired Participant, (ii) a Participant who has reached his Early Retirement Date, or (iii) a Beneficiary who is entitled to receive a pre-retirement death benefit hereunder.
To the extent provided by the Board or its delegate, the Plan may be liquidated following a termination under any of the following circumstances:
(a)
the termination and liquidation of the Plan within twelve (12) months of a complete dissolution of the Company taxed under Section 331 of the Code or with the approval of a bankruptcy court pursuant to 11 U.S.C. § 503(b)(1)(A); provided that the amounts deferred under this Plan are included in the Participants' gross incomes in the latest of the following years (or, if earlier, the taxable year in which the amount is actually or constructively received): (i) the calendar year in which the Plan is terminated; (ii) the first calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the payment is administratively practicable.

2017 Restatement     11


(b)
the termination and liquidation of the Plan pursuant to irrevocable action taken by the Company within the thirty (30) days preceding or the twelve (12) months following a change of control within the meaning of Section 409A of the Code; provided that all Aggregated Plans are terminated and liquidated with respect to each Participant that experienced such change of control, so that under the terms of the termination and liquidation, all such Participants are required to receive all amounts of deferred compensation under this Plan and any other Aggregated Plans within twelve (12) months of the date the Company irrevocably takes all necessary action to terminate and liquidate this Plan and such other Aggregated Plans;
(c)
the termination and liquidation of the Plan, provided that: (i) the termination and liquidation does not occur proximate to a downturn in the Company's financial health; (2) the Company terminates and liquidates all Aggregated Plans; (3) no payments in liquidation of this Plan are made within twelve (12) months of the date the Company irrevocably takes all necessary action to terminate and liquidate this Plan, other than payments that would be payable under the terms of this Plan if the action to terminate and liquidate this Plan had not occurred; (4) all payments are made within twenty four (24) months of the date on which the Company irrevocably takes all action necessary to terminate and liquidate this Plan; and (5) the Company does not adopt a new Aggregated Plan at any time within three (3) years following the date on which the Company irrevocably takes all action necessary to terminate and liquidate the Plan.
Notwithstanding the foregoing, the Plan shall automatically terminate, without further action of the Company, upon Insolvency of the Company. For this purpose, Insolvency shall mean the inability of the Company to continue as a going concern.
7.2
Notwithstanding any provision of the Plan to the contrary, the Committee may at any time (without the consent of any Participant) modify, amend or terminate any or all of the provisions of this Plan to the extent necessary to conform the provisions of the Plan with Section 409A of the Code, regardless of whether such modification, amendment or termination of this Plan shall adversely affect the rights of a Participant under the Plan.
7.3
Nothing contained herein will confer upon any Participant the right to be retained in the service of the Company, nor will it interfere with the right of the Company to discharge or otherwise deal with a Participant without regard to the existence of this Plan.
7.4
No benefit under this Plan shall be assignable or subject to any manner of alienation, sale, transfer, claims of creditors, pledge, attachment or encumbrances of any kind.
7.5
The Committee may adopt rules and regulations to assist it in the administration of the Plan and may delegate such of its duties hereunder as it may deem advisable.
7.6
This Plan is established under and will be construed according to the laws of the State of Texas.

2017 Restatement     12


7.7
The effective date of this amended and restated Plan, as signed this 28th day of July, 2017, is August 1, 2017 (except as otherwise specifically noted herein).

ANDEAVOR (or, prior to August 1, 2017, TESORO CORPORATION)



By: /s/ Rob Patterson                    
Rob Patterson
Vice President, Compensation & Benefits



2017 Restatement     13

Exhibit 10.68
ANDEAVOR
AMENDED AND RESTATED 2011 LONG-TERM INCENTIVE PLAN
1. Purpose
The purpose of the Andeavor 2011 Long-Term Incentive Plan (the “Plan”) is to advance the interests of Andeavor (the “Company”) by stimulating the efforts of employees, officers, non-employee directors and other service providers, in each case who are selected to be participants, by heightening the desire of such persons to continue working toward and contributing to the success and progress of the Company. The Plan supersedes the existing Andeavor Amended and Restated 2006 Long-Term Incentive Plan and the Andeavor 2006 Long-Term Stock Appreciation Rights Plan with respect to future awards, and provides for the grant of Incentive and Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock and Restricted Stock Units, any of which may be performance-based, and for Incentive Bonuses, which may be paid in cash or stock or a combination thereof, as determined by the Administrator.
2. Definitions
As used in the Plan, the following terms shall have the meanings set forth below:
(a)      “2006 LTIP” means the Andeavor Amended and Restated 2006 Long-Term Incentive Plan.
(b)      “Administrator” means the Administrator of the Plan in accordance with Section 18.
(c)      “Award” means an Incentive Stock Option, Nonqualified Stock Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit or Incentive Bonus granted to a Participant pursuant to the provisions of the Plan, any of which the Administrator may structure to qualify in whole or in part as a Performance Award.
(d)      “Award Agreement” means a written or electronic agreement or other instrument as may be approved from time to time by the Administrator implementing the grant of each Award. An Agreement may be in the form of an agreement to be executed by both the Participant and the Company (or an authorized representative of the Company) or certificates, notices or similar instruments as approved by the Administrator.
(e)      “Board” means the board of directors of the Company.
(f)      “Cause” means, unless otherwise set forth in an Award Agreement or other written agreement between the Company and the applicable Participant, a finding by the Administrator that a Participant, before or after his Termination of Employment (i) committed fraud, embezzlement, theft, felony or an act of dishonesty in the course of his employment by the Company or an affiliate which conduct damaged the Company or an affiliate or (ii) disclosed trade secrets of the Company or an affiliate. The findings and decision of the Administrator with respect to such matter, including those regarding the acts of the Participant and the damage done to the Company, will be final for


all purposes. No decision of the Administrator, however, will affect the finality of the discharge of the individual by the Company or an affiliate.
(g)      “Change in Control” means (i) there shall be consummated (A) any consolidation or merger of Company in which Company is not the continuing or surviving corporation or pursuant to which shares of Company's common stock would be converted into cash, securities or other property, other than a merger of Company where a majority of the board of directors of the surviving corporation are, and for a one-year period after the merger continue to be, persons who were directors of Company immediately prior to the merger or were elected as directors, or nominated for election as director, by a vote of at least two-thirds of the directors then still in office who were directors of Company immediately prior to the merger, or (B) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Company, or (ii) the shareholders of Company shall approve any plan or proposal for the liquidation or dissolution of Company, or (iii) (A) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than Company or a Subsidiary thereof or any employee benefit plan sponsored by Company or a Subsidiary thereof, shall become the beneficial owner (within the meaning of Rule 13c-3 under the Securities Exchange Act of 1934) of securities of Company representing thirty-five percent (35%) or more of the combined voting power of Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, and (B) at any time during a period of one-year thereafter, individuals who immediately prior to the beginning of such period constituted the Board shall cease for any reason to constitute at least a majority thereof, unless election or the nomination by the Board for election by Company's shareholders of each new director during such period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period.
(h)      “Code” means the Internal Revenue Code of 1986, as amended from time to time, and the rulings and regulations issues thereunder.
(i)      “Company” means Andeavor, a Delaware corporation.
(j)      “Disability” means, as determined by the Administrator in its discretion exercised in good faith, a physical or mental condition of a Participant that would entitle him or her to payment of disability income payments under the Company’s long-term disability insurance policy or plan for employees as then in effect; or in the event that a Participant is not covered, for whatever reason under the Company’s long-term disability insurance policy or plan for employees or in the event the Company does not maintain such a long-term disability insurance policy, “Disability” means a permanent and total disability as defined in section 22(e)(3) of the Code. A determination of Disability may be made by a physician selected or approved by the Administrator and, in this respect, Participants shall submit to an examination by such physician upon request by the Administrator.
(k)      “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor Act thereto.


(l)      “Fair Market Value” means, as of any given date, the closing sales price on such date during normal trading hours (or, if there are no reported sales on such date, on the last date prior to such date on which there were sales) of the Shares on the New York Stock Exchange or, if not listed on such exchange, on any other national securities exchange on which the Shares are listed or on an inter-dealer quotation system, in any case, as reported in such source as the Administrator shall select. If there is no regular public trading market for the Shares, the Fair Market Value of the Shares shall be determined by the Administrator in good faith and in compliance with Section 409A of the Code.
(m)      “Incentive Bonus” means a bonus opportunity awarded under Section 9 pursuant to which a Participant may become entitled to receive an amount based on satisfaction of such performance criteria as are specified in the Award Agreement.
(n)      “Incentive Stock Option” means a stock option that is intended to qualify as an “incentive stock option” within the meaning of Section 422 of the Code.
(o)      “Nonemployee Director” means each person who is, or is elected to be, a member of the Board and who is not an employee of the Company or any Subsidiary.
(p)      “Nonqualified Stock Option” means a stock option that is not intended to qualify as an “incentive stock option” within the meaning of Section 422 of the Code.
(q)      “Option” means an Incentive Stock Option and/or a Nonqualified Stock Option granted pursuant to Section 6 of the Plan.
(r)      “Participant” means any individual described in Section 3 to whom Awards have been granted from time to time by the Administrator and any authorized transferee of such individual.
(s)      “Performance Award” means an Award, the grant, issuance, retention, vesting or settlement of which is subject to satisfaction of one or more performance criteria pursuant to Section 13.
(t)      “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d).
(u)      “Plan” means the Andeavor 2011 Long-Term Incentive Plan as set forth herein and as amended from time to time.
(v)      “Qualifying Performance Criteria” has the meaning set forth in Section 13(b).
(w)      “Restricted Stock” means Shares granted pursuant to Section 8 of the Plan.
(x)      “Restricted Stock Unit” means an Award granted to a Participant pursuant to Section 8 pursuant to which Shares or cash in lieu thereof may be issued in the future.
(y)      “Retirement” means, unless otherwise set forth in an Award Agreement or other written agreement between the Company and the applicable Participant, (i) for employees: retirement from


active employment with the Company and its Subsidiaries: (A) at or after age 55 with 5 years of service recognized by the Company or (B)  at or after age 50 with 80 points (with points meaning the sum of the Participant’s age and years of service recognized by the Company at the time of retirement). The determination of the Administrator as to an individual’s Retirement shall be conclusive on all parties, and (ii) for Nonemployee Directors: retirement from active service with the Company after having served as a Nonemployee Director for at least an aggregate of three full years (excluding any service while a full-time employee of the Company).
(z)      “Share” means a share of the Company’s common stock, $0.16 2 / 3 par value per share (or such other par value as may be designated by act of the Company’s stockholders), subject to adjustment as provided in Section 12.
(aa)      “Stock Appreciation Right” means a right granted pursuant to Section 7 of the Plan that entitles the Participant to receive, in cash or Shares or a combination thereof, as determined by the Administrator, value equal to or otherwise based on the excess of (i) the Fair Market Value of a specified number of Shares at the time of exercise over (ii) the exercise price of the right, as established by the Administrator on the date of grant.
(bb)      “Subsidiary” means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company where each of the corporations in the unbroken chain other than the last corporation owns stock possessing at least 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in the chain, and if specifically determined by the Administrator in the context other than with respect to Incentive Stock Options, may include an entity in which the Company has a significant ownership interest or that is directly or indirectly controlled by the Company.
(cc)      “Substitute Awards” means Awards granted or Shares issued by the Company in assumption of, or in substitution or exchange for, awards previously granted, or the right or obligation to make future awards, by a company acquired by the Company or any Subsidiary or with which the Company or any Subsidiary combines.
(dd)      “Termination of Employment” means ceasing to serve as an employee of the Company and its Subsidiaries or, with respect to a Nonemployee Director or other service provider, ceasing to serve as such for the Company, except that with respect to all or any Awards held by a Participant (i) the Administrator may determine that a leave of absence or employment on a less than full-time basis is considered a “Termination of Employment,” (ii) the Administrator may determine that a transition of employment to service with a partnership, joint venture or corporation not meeting the requirements of a Subsidiary in which the Company or a Subsidiary is a party is not considered a “Termination of Employment,” (iii) service as a member of the Board shall constitute continued employment with respect to Awards granted to a Participant while he or she served as an employee and (iv) service as an employee of the Company or a Subsidiary shall constitute continued employment with respect to Awards granted to a Participant while he or she served as a member of the Board or other service provider. The Administrator shall determine whether any corporate transaction, such as a sale or spin-off of a division or subsidiary that employs a Participant, shall be deemed to result in a Termination of Employment with the Company and its


Subsidiaries for purposes of any affected Participant’s Awards, and the Administrator’s decision shall be final and binding.
3. Eligibility
Any person who is a current or prospective officer or employee (including any director who is also an employee, in his or her capacity as such) or other service provider of the Company or of any Subsidiary shall be eligible for selection by the Administrator for the grant of Awards hereunder. To the extent provided by Section 5(d), any Nonemployee Director shall be eligible for the grant of Awards hereunder as determined by the Administrator. Options intending to qualify as Incentive Stock Options may only be granted to employees of the Company or any Subsidiary within the meaning of the Code, as selected by the Administrator.
4. Effective Date and Termination of Plan
This Plan was originally adopted by the Board on February 23, 2011 and approved by the Company’s stockholders on May 4, 2011 (the “Effective Date”). The most recent amendment and restatement of the Plan became effective on August 1, 2017 and updated references in the Plan to reflect the changes to the name of the Company and its Affiliates. The Plan shall remain available for the grant of Awards until February 23, 2021. Notwithstanding the foregoing, the Plan may be terminated at such earlier time as the Board may determine. Termination of the Plan will not affect the rights and obligations of the Participants and the Company arising under Awards theretofore granted and then in effect.
5. Shares Subject to the Plan and to Awards
(a)      Aggregate Limits . The aggregate number of Shares issuable pursuant to all Awards under this Plan shall not exceed 8,200,000, plus any Shares subject to outstanding awards under the 2006 LTIP that on or after the Effective Date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares). The aggregate number of Shares available for grant under this Plan and the number of Shares subject to outstanding Awards shall be subject to adjustment as provided in Section 12. The Shares issued pursuant to Awards granted under this Plan may be shares that are authorized and unissued or shares that were reacquired by the Company, including shares purchased in the open market.
(b)      Issuance of Shares . For purposes of Section 5(a), the aggregate number of Shares issued under this Plan at any time shall equal only the number of Shares actually issued upon exercise or settlement of an Award under this Plan. The aggregate number of Shares available for Awards under this Plan at any time shall not be reduced by (i) Shares subject to Awards that have been terminated, expired unexercised, forfeited or settled in cash, (ii) Shares subject to Awards that have been retained or withheld by the Company in payment or satisfaction of the exercise price, purchase price or tax withholding obligation of an Award, or (iii) Shares subject to Awards that otherwise do not result in the issuance of Shares in connection with payment or settlement thereof. In addition, Shares that have been delivered (either actually or by attestation) to the Company in payment or satisfaction


of the exercise price, purchase price or tax withholding obligation of an Award shall be available for Awards under this Plan.
(c)      Tax Code Limits . The aggregate number of Shares subject to Awards granted under this Plan during any calendar year to any one Participant shall not exceed 750,000, which number shall be calculated and adjusted pursuant to Section 12 only to the extent that such calculation or adjustment will not affect the status of any Award intended to qualify as “performance-based compensation” under Section 162(m) of the Code but which number shall not count any tandem SARs (as defined in Section 7). The aggregate number of Shares that may be issued pursuant to the exercise of Incentive Stock Options granted under this Plan shall not exceed 8,200,000, which number shall be calculated and adjusted pursuant to Section 12 only to the extent that such calculation or adjustment will not affect the status of any option intended to qualify as an Incentive Stock Option under Section 422 of the Code. The maximum cash amount payable pursuant to that portion of an Incentive Bonus earned for any 12-month period to any Participant under this Plan that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code shall not exceed $10,000,000.
(d)      Director Awards . The aggregate number of Shares subject to Awards granted under this Plan during any calendar year to any one Nonemployee Director shall not exceed 25,000; provided, however, that in the calendar year in which a Nonemployee Director first joins the Board of Directors or is first designated as Chairman of the Board of Directors or Lead Director, the maximum number of shares subject to Awards granted to the Participant may be up to two hundred percent (200%) of the number of shares set forth in the foregoing limits and the foregoing limits shall not count any tandem SARs (as defined in Section 7).
(e)      Substitute Awards. Substitute Awards shall not reduce the Shares authorized for issuance under the Plan or authorized for grant to a Participant in any calendar year. Additionally, in the event that a company acquired by the Company or any Subsidiary, or with which the Company or any Subsidiary combines, has shares available under a pre-existing plan approved by stockholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the holders of common stock of the entities party to such acquisition or combination) may be used for Awards under the Plan and shall not reduce the Shares authorized for issuance under the Plan; provided that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan, absent the acquisition or combination, and shall only be made to individuals who were employees, directors or other service providers of such acquired or combined company before such acquisition or combination.
6. Options
(a)      Option Awards . Options may be granted at any time and from time to time prior to the termination of the Plan to Participants as determined by the Administrator. No Participant shall have any rights as a stockholder with respect to any Shares subject to Option hereunder until said Shares have been issued. Each Option shall be evidenced by an Award Agreement. Options granted


pursuant to the Plan need not be identical but each Option must contain and be subject to the terms and conditions set forth below.
(b)      Price . The Administrator will establish the exercise price per Share under each Option, which, in no event will be less than the Fair Market Value of the Shares on the date of grant; provided, however, that the exercise price per Share with respect to an Option that is granted in connection with a merger or other acquisition as a substitute or replacement award for options held by optionees of the acquired entity may be less than 100% of the market price of the Shares on the date such Option is granted if such exercise price is based on a formula set forth in the terms of the options held by such optionees or in the terms of the agreement providing for such merger or other acquisition. The exercise price of any Option may be paid in Shares, cash or a combination thereof, as determined by the Administrator, including an irrevocable commitment by a broker to pay over such amount from a sale of the Shares issuable under an Option, the delivery of previously owned Shares and withholding of Shares otherwise deliverable upon exercise.
(c)      No Repricing without Stockholder Approval . Other than in connection with a change in the Company’s capitalization (as described in Section 12), at any time when the exercise price of an Option is above the Fair Market Value of a Share, the Company shall not, without stockholder approval, (i) reduce the exercise price of such Option, (ii) exchange such Option for cash, another Award or a new Option or Stock Appreciation Right with a lower exercise or base price or (iii) otherwise reprice such Option.
(d)      Provisions Applicable to Options . The date on which Options become exercisable shall be determined at the sole discretion of the Administrator and set forth in an Award Agreement. The Administrator shall establish the term of each Option, which in no case shall exceed a period of ten (10) years from the date of grant.
(e)      Termination of Employment : Unless an Option earlier expires upon the expiration date established pursuant to Section 6(d), upon the Participant’s Termination of Employment, his or her rights to exercise an Option then held shall be only as follows, unless the Administrator specifies otherwise (either in an Award Agreement or otherwise):
(i)      General . In general, any portion of any Option that is not vested as of the date of a Participant’s Termination of Employment shall be forfeited and returned to the Company; provided, however, that the Administrator may, in its sole discretion, in the event of a Participant’s retirement or involuntary Termination of Employment as the result of a reduction in force program (as approved by the Administrator in its sole discretion), provide for accelerated vesting of unvested Options upon such terms and the Administrator deems advisable (either in an Award Agreement or otherwise).
(ii)      Death . Upon the death of a Participant while in the employ of the Company or any Subsidiary or while serving as a member of the Board, the Participant’s Options then held shall be exercisable by his or her estate, heir or beneficiary at any time during the period ending on the earlier of the date that is one (1) year after the date of the Participant’s death or the date the Option would otherwise terminate, but only to the extent that the Options are


exercisable as of that date. Any and all Options that are not exercised during such period shall terminate as of the end of such period.
If a Participant should die following his or her Termination of Employment, any Options that remain outstanding on the date of the Participant’s death shall be exercisable by his or her estate, heir or beneficiary at any time during the period ending on the earlier of the date that is one (1) year after the date of the Participant’s death or the date the Option would otherwise terminate, but only to the extent that the Option was exercisable as of the Participant’s death. Any and all of the deceased Participant’s Options that are not exercised during the such period shall terminate as of the end of such period. A Participant’s estate shall mean his or her legal representative or other person who so acquires the right to exercise the Option by bequest or inheritance or by reason of the death of the Participant.
(iii)      Disability . Upon Termination of Employment as a result of the Participant’s Disability, the Participant’s Options then held shall be exercisable during the period ending on the earlier of the date that is one (1) year after the date of Participant’s Termination of Employment or the date the Option would otherwise terminate, but only to the extent that the Options are exercisable as of that date. Any and all Options that are not exercised during such period shall terminate as of the end of such period.
(iv)      Retirement . Upon the Participant’s Termination of Employment by reason of his or her Retirement, the Participant’s Options then held shall be exercisable during the period ending on the earlier of the date that is three (3) years after the date of the Participant’s Termination of Employment or the expiration date of such Option, but only to the extent that the Options are exercisable as of the date of the Participant’s Termination of Employment. Any and all Options that are not exercised during such period shall terminate as of the end of such period.
(v)      Cause . Upon the date of a Participant’s Termination of Employment for Cause, any Option that is unexercised prior to the date of the Participant’s Termination of Employment shall terminate as of such date.
(vi)      Other Reasons . Upon the date of a Participant’s Termination of Employment for any reason other than those stated above in Sections 6(e)(i), (e)(ii), (e)(iii), (e)(iv) and (e)(v) or as described in Section 15, the Participant’s Options then held shall be exercisable during the period ending on the earlier of the date that is three (3) months after the date of the Participant’s Termination of Employment or the expiration date of such Option, but only to the extent that the Options are exercisable as of the date of the Participant’s Termination of Employment. Any and all Options that are not exercised during such period shall terminate as of the end of such period.
(f)      Incentive Stock Options . Notwithstanding anything to the contrary in this Section 6, in the case of the grant of an Option intending to qualify as an Incentive Stock Option: (i) if the Participant owns stock possessing more than 10 percent of the combined voting power of all classes of stock of the Company (a “10% Shareholder”), the exercise price of such Option must be at least 110 percent of the Fair Market Value of the Shares on the date of grant and the Option must expire


within a period of not more than five (5) years from the date of grant, and (ii) Termination of Employment will occur when the person to whom an Award was granted ceases to be an employee (as determined in accordance with Section 3401(c) of the Code and the regulations promulgated thereunder) of the Company and its Subsidiaries. Notwithstanding anything in this Section 6 to the contrary, options designated as Incentive Stock Options shall not be eligible for treatment under the Code as Incentive Stock Options (and will be deemed to be Nonqualified Stock Options) to the extent that either (a) the aggregate Fair Market Value of Shares (determined as of the time of grant) with respect to which such Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Subsidiary) exceeds $100,000, taking Options into account in the order in which they were granted, or (b) such Options otherwise remain exercisable but are not exercised within three (3) months of Termination of Employment (or such other period of time provided in Section 422 of the Code).
7. Stock Appreciation Rights
Stock Appreciation Rights may be granted to Participants from time to time either in tandem with or as a component of other Awards granted under the Plan (“tandem SARs”) or not in conjunction with other Awards (“freestanding SARs”) and may, but need not, relate to a specific Option granted under Section 6. The provisions of Stock Appreciation Rights need not be the same with respect to each grant or each recipient. Any Stock Appreciation Right granted in tandem with an Award may be granted at the same time such Award is granted or at any time thereafter before exercise or expiration of such Award. All freestanding SARs shall be granted subject to the same terms and conditions applicable to Options as set forth in Section 6 and all tandem SARs shall have the same exercise price, vesting, exercisability, forfeiture and termination provisions as the Award to which they relate. Subject to the provisions of Section 6 and the immediately preceding sentence, the Administrator may impose such other conditions or restrictions on any Stock Appreciation Right as it shall deem appropriate. Stock Appreciation Rights may be settled in Shares, cash or a combination thereof, as determined by the Administrator and set forth in the applicable Award Agreement. Other than in connection with a change in the Company’s capitalization (as described in Section 12), at any time when the exercise price of a Stock Appreciation Right is above the Fair Market Value of a Share, the Company shall not, without stockholder approval, (i) reduce the exercise or base price of such Stock Appreciation Right, (ii) exchange such Stock Appreciation Right for cash, another Award or a new Option or Stock Appreciation Right with a lower exercise or base price or (iii) otherwise reprice such Stock Appreciation Right.
8. Restricted Stock and Restricted Stock Units
(a)      Restricted Stock and Restricted Stock Unit Awards . Restricted Stock and Restricted Stock Units may be granted at any time and from time to time prior to the termination of the Plan to Participants as determined by the Administrator. Restricted Stock is an award of Shares, the grant, issuance, retention, vesting and/or transferability of which is subject during specified periods of time to such conditions (including continued employment or performance conditions) and terms as the Administrator deems appropriate. Restricted Stock Units are Awards denominated in units of Shares under which the issuance of Shares is subject to such conditions (including continued employment or performance conditions) and terms as the Administrator deems appropriate. Each


grant of Restricted Stock and Restricted Stock Units shall be evidenced by an Award Agreement. Unless determined otherwise by the Administrator, each Restricted Stock Unit will be equal to one Share and will entitle a Participant to either the issuance of Shares or payment of an amount of cash determined with reference to the value of Shares. To the extent determined by the Administrator, Restricted Stock and Restricted Stock Units may be satisfied or settled in Shares, cash or a combination thereof. Restricted Stock and Restricted Stock Units granted pursuant to the Plan need not be identical but each grant of Restricted Stock and Restricted Stock Units must contain and be subject to the terms and conditions set forth below.
(b)      Contents of Agreement . Each Award Agreement shall contain provisions regarding (i) the number of Shares or Restricted Stock Units subject to such Award or a formula for determining such number, (ii) the purchase price of the Shares, if any, and the means of payment, (iii) the performance criteria, if any, and level of achievement versus these criteria that shall determine the number of Shares or Restricted Stock Units granted, issued, retainable and/or vested, (iv) such terms and conditions on the grant, issuance, vesting and/or forfeiture of the Shares or Restricted Stock Units as may be determined from time to time by the Administrator, (v) the term of the performance period, if any, as to which performance will be measured for determining the number of such Shares or Restricted Stock Units, and (vi) restrictions on the transferability of the Shares or Restricted Stock Units. Shares issued under a Restricted Stock Award may be issued in the name of the Participant and held by the Participant or held by the Company, in each case as the Administrator may provide.
(c)      Vesting and Performance Criteria . The grant, issuance, retention, vesting and/or settlement of shares of Restricted Stock and Restricted Stock Units will occur when and in such installments as the Administrator determines or under criteria the Administrator establishes, which may include Qualifying Performance Criteria. The grant, issuance, retention, vesting and/or settlement of Shares under any such Award that is based on performance criteria and level of achievement versus such criteria will be subject to a performance period of not less than twelve months, and the grant, issuance, retention, vesting and/or settlement of Shares under any Restricted Stock or Restricted Stock Unit Award that is based solely upon continued employment and/or the passage of time may not vest or be settled in full prior to the thirty-sixth month following its date of grant, except that the Administrator may provide for the satisfaction and/or lapse of all conditions under any such Award in the event of the Participant's death, disability, Retirement or in connection with a Change in Control, and the Administrator may provide that any such restriction or limitation will not apply in the case of a Restricted Stock or Restricted Stock Unit Award that is issued in payment or settlement of compensation that has been earned by the Participant. In addition, the Administrator may grant awards of Restricted Stock and/or Restricted Stock Units that result in issuing up to 5% of the maximum aggregate number of Shares authorized for issuance under the Plan (as set forth in Section 5(a)) without regard to the minimum vesting requirements set forth in the preceding sentence. Notwithstanding anything in this Plan to the contrary, the performance criteria for any Restricted Stock or Restricted Stock Unit that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code will be a measure based on one or more Qualifying Performance Criteria selected by the Administrator and specified when the Award is granted.


(d)      Termination of Employment : Upon the Participant’s Termination of Employment, his or her rights to unvested Restricted Stock or Restricted Stock Units then held shall be only as follows, unless the Administrator specifies otherwise (either in an Award Agreement or otherwise):
(i)      Death, Disability, Retirement . In the event of a Participant’s Termination of Employment by reason of his or her death, Disability, or Retirement, any portion of any Award of Restricted Stock and/or Restricted Stock Units that is not vested as of the date of a Participant’s Termination of Employment shall immediately be forfeited by the Participant; provided, however, that the Administrator may, in its sole discretion, provide for accelerated vesting of unvested Restricted Stock and/or Restricted Stock Units upon such terms and the Administrator deems advisable (either in an Award Agreement or otherwise).
(ii)      Other Reasons . In the event of a Participant’s Termination of Employment for any reason other than those stated above in Section 8(d)(i), any portion of any Award of Restricted Stock and/or Restricted Stock Units that is not vested as of the date of a Participant’s Termination of Employment shall immediately be forfeited by the Participant; provided, however, that the Administrator may, in its sole discretion, other than in the event of a Termination of Employment for Cause and in a manner consistent with the requirements of Section 8(c), provide for accelerated vesting of unvested Restricted Stock and/or Restricted Stock Units upon such terms and the Administrator deems advisable (either in an Award Agreement or otherwise).
(iii)      Performance Awards . Notwithstanding anything in this Section 8(d) to the contrary, with respect to any Performance Award granted pursuant to this Section 8, in the event a Participant’s Termination of Employment by reason of his or her death, Disability, Retirement, or involuntary Termination of Employment by the Company without Cause during a performance period (and, unless otherwise determined by the Administrator, in the case of a termination by the Company without Cause, at least twelve (12) months after the beginning of the performance), the Participant shall receive a prorated payout of the Performance Award. The prorated payout shall be determined by the Administrator, in its sole discretion, and shall be based upon the length of time that the Participant held the Performance Award during the performance period and the Company’s actual results during the performance period as compared to the performance criteria to which the Performance Award is subject.
(e)      Discretionary Adjustments and Limits . Subject to the limits imposed under Section 162(m) of the Code for Awards that are intended to qualify as “performance-based compensation,” notwithstanding the satisfaction of any performance goals, the number of Shares granted, issued, retainable and/or vested under an Award of Restricted Stock or Restricted Stock Units on account of either financial performance or personal performance evaluations may, to the extent specified in the Award Agreement, be reduced, but not increased, by the Administrator on the basis of such further considerations as the Administrator shall determine.
(f)      Voting Rights . Unless otherwise determined by the Administrator, Participants holding shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those shares during the period of restriction. Participants shall have no voting rights with respect to Shares


underlying Restricted Stock Units unless and until such Shares are reflected as issued and outstanding shares on the Company’s stock ledger.
(g)      Dividends and Distributions . Participants in whose name an Award of Restricted Stock and/or Restricted Stock Units is granted shall be entitled to receive all dividends and other distributions paid with respect to the Shares underlying such Award, unless determined otherwise by the Administrator. The Administrator will determine whether any such dividends or distributions will be automatically reinvested in additional Shares or will be payable in cash; provided that such additional Shares and/or cash shall subject to the same restrictions and vesting conditions as the Award with respect to which they were distributed. Notwithstanding anything herein to the contrary, in no event shall dividends or dividend equivalents be currently payable with respect to unvested or unearned Performance Awards.
9. Incentive Bonuses
(a)      General . Each Incentive Bonus Award will confer upon the Participant the opportunity to earn a future payment tied to the level of achievement with respect to one or more performance criteria established for a performance period of not less than one year.
(b)      Incentive Bonus Document . The terms of any Incentive Bonus will be set forth in an Award Agreement or other written document establishing the terms and conditions of the Award. Each such Award Agreement or other written document shall contain provisions regarding (i) the threshold, target and maximum amount payable to the Participant as an Incentive Bonus, (ii) the performance criteria and level of achievement versus these criteria that shall determine the amount of such payment, (iii) the term of the performance period as to which performance shall be measured for determining the amount of any payment, (iv) the timing of any payment earned by virtue of performance, (v) restrictions on the alienation or transfer of the Incentive Bonus prior to actual payment, (vi) forfeiture provisions and (vii) such further terms and conditions, in each case not inconsistent with this Plan as may be determined from time to time by the Administrator.
(c)      Performance Criteria . The Administrator shall establish the performance criteria and level of achievement versus these criteria that shall determine the threshold, target and maximum amount payable under an Incentive Bonus, which criteria may be based on financial performance and/or personal performance evaluations. The Administrator may specify the percentage of the target Incentive Bonus that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code. Notwithstanding anything to the contrary herein, the performance criteria for any portion of an Incentive Bonus that is intended by the Administrator to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code shall be a measure based on one or more Qualifying Performance Criteria selected by the Administrator and specified at the time the Incentive Bonus is granted. The Administrator shall certify the extent to which any Qualifying Performance Criteria has been satisfied, and the amount payable as a result thereof, prior to payment of any Incentive Bonus that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code.
(d)      Timing and Form of Payment . The Administrator shall determine the timing of payment of any Incentive Bonus. Payment of the amount due under an Incentive Bonus may be made in


cash or in Shares, as determined by the Administrator. The Administrator may provide for or, subject to such terms and conditions as the Administrator may specify, may permit a Participant to elect for the payment of any Incentive Bonus to be deferred to a specified date or event.
(e)      Discretionary Adjustments . Notwithstanding satisfaction of any performance goals the amount paid under an Incentive Bonus on account of either financial performance or personal performance evaluations may, to the extent specified in the Award Agreement or other written document establishing the terms and conditions of the Award, be reduced or increased by the Administrator on the basis of such further considerations as the Administrator shall determine; provided, however, that with respect to Awards that are intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the Administrator shall not have the discretion to increase the amount paid under an Incentive Bonus.
10. Deferral of Gains
The Administrator may, in an Award Agreement or otherwise, provide for the deferred delivery of Shares upon settlement, vesting or other events with respect to Restricted Stock or Restricted Stock Units, or in payment or satisfaction of an Incentive Bonus. Notwithstanding anything herein to the contrary, in no event will any deferral of the delivery of Shares or any other payment with respect to any Award be allowed if the Administrator determines, in its sole discretion, that the deferral would result in the imposition of the additional tax under Section 409A(a)(1)(B) of the Code. No Award shall provide for deferral of compensation that does not comply with Section 409A of the Code, unless the Board, at the time of grant, specifically provides that the Award is not intended to comply with Section 409A of the Code. The Company shall have no liability to a Participant, or any other party, if an Award that is intended to be exempt from, or compliant with, Section 409A of the Code is not so exempt or compliant or for any action taken by the Board.
11. Conditions and Restrictions Upon Securities Subject to Awards
The Administrator may provide that the Shares issued upon exercise of an Option or Stock Appreciation Right or otherwise subject to or issued under an Award shall be subject to such further agreements, restrictions, conditions or limitations as the Administrator in its discretion may specify prior to the exercise of such Option or Stock Appreciation Right or the grant, vesting or settlement of such Award, including without limitation, conditions on vesting or transferability, forfeiture or repurchase provisions and method of payment for the Shares issued upon exercise, vesting or settlement of such Award (including the actual or constructive surrender of Shares already owned by the Participant) or payment of taxes arising in connection with an Award. Without limiting the foregoing, such restrictions may address the timing and manner of any resales by the Participant or other subsequent transfers by the Participant of any Shares issued under an Award, including without limitation (i) restrictions under an insider trading policy or pursuant to applicable law, (ii) restrictions designed to delay and/or coordinate the timing and manner of sales by Participant and holders of other Company equity compensation arrangements, (iii) restrictions in connection with any underwritten public offering by the Company of the Company’s securities pursuant to an effective registration statement filed under the Securities Act of 1933, (iv) restrictions as to the use of a specified brokerage firm for such resales or other transfers, and (v) provisions requiring Shares


to be sold on the open market or to the Company in order to satisfy tax withholding or other obligations.
12. Adjustment of and Changes in the Stock
The number and kind of Shares available for issuance under this Plan (including under any Awards then outstanding), and the number and kind of Shares subject to the individual limits set forth in Section 5 of this Plan, shall be equitably adjusted by the Administrator as it determines appropriate to reflect any reorganization, reclassification, combination of shares, stock split, reverse stock split, spin-off, dividend or distribution of securities, property or cash (other than regular, quarterly cash dividends), or any other event or transaction that affects the number or kind of Shares of the Company outstanding. Such adjustment shall be designed to comply with Sections 409A and 424 of the Code or, except as otherwise expressly provided in Section 5(c) of this Plan, may be designed to treat the Shares available under the Plan and subject to Awards as if they were all outstanding on the record date for such event or transaction or to increase the number of such Shares to reflect a deemed reinvestment in Shares of the amount distributed to the Company’s securityholders. The terms of any outstanding Award shall also be equitably adjusted by the Administrator as to price, number or kind of Shares subject to such Award, vesting, and other terms to reflect the foregoing events, which adjustments need not be uniform as between different Awards or different types of Awards.
In the event there shall be any other change in the number or kind of outstanding Shares, or any stock or other securities into which such Shares shall have been changed, or for which it shall have been exchanged, by reason of a Change in Control, other merger, consolidation or otherwise, then the Administrator shall, in its sole discretion, determine the appropriate and equitable adjustment, if any, to be effected.
No right to purchase fractional shares shall result from any adjustment in Awards pursuant to this Section 12. In case of any such adjustment, the Shares subject to the Award shall be rounded down to the nearest whole share. The Company shall notify Participants holding Awards subject to any adjustments pursuant to this Section 12 of such adjustment, but (whether or not notice is given) such adjustment shall be effective and binding for all purposes of the Plan.
Unless otherwise expressly provided in the Award Agreement or another contract, including an employment agreement, or under the terms of a transaction constituting a Change in Control, the Administrator may provide that any or all of the following shall occur upon a Participant’s Termination of Employment within twenty-four (24) months following a Change in Control: (a) in the case of an Option or Stock Appreciation Right, the Participant shall have the ability to exercise any portion of the Option or Stock Appreciation Right not previously exercisable, (b) in the case of a Performance Award or Incentive Bonus, the Participant shall have the right to receive a payment equal to the target amount payable or, if greater, a payment based on performance through a date determined by the Administrator prior to the Change in Control, and (c) in the case of Shares issued in payment of an Incentive Bonus, and/or in the case of outstanding Restricted Stock and/or Restricted Stock Units, all conditions to the grant, issuance, retention, vesting or transferability of, or any other restrictions applicable to, such Award shall immediately lapse. Notwithstanding anything herein to the contrary, in the event of a Change in Control in which the acquiring or


surviving company in the transaction does not assume or continue outstanding Awards upon the Change in Control, immediately prior to the Change in Control, all Awards that are not assumed or continued shall be treated as follows effective immediately prior to the Change in Control: (a) in the case of an Option or Stock Appreciation Right, the Participant shall have the ability to exercise such Option or Stock Appreciation Right, including any portion of the Option or Stock Appreciation Right not previously exercisable, (b) in the case of a Performance Award or Incentive Bonus, the Participant shall have the right to receive a payment equal to the target amount payable or, if greater, a payment based on performance through a date determined by the Administrator prior to the Change in Control, and (c) in the case of Shares issued in payment of an Incentive Bonus, and/or in the case of outstanding Restricted Stock and/or Restricted Stock Units, all conditions to the grant, issuance, retention, vesting or transferability of, or any other restrictions applicable to, such Award shall immediately lapse.
13. Qualifying Performance-Based Compensation
(a)      General . The Administrator may establish performance criteria and level of achievement versus such criteria that shall determine the number of Shares, units, or cash to be granted, retained, vested, issued or issuable under or in settlement of or the amount payable pursuant to an Award, which criteria may be based on Qualifying Performance Criteria or other standards of financial performance and/or personal performance evaluations. A Performance Award may be identified as “Performance Share”, “Performance Equity”, “Performance Unit” or other such term as chosen by the Administrator. In addition, the Administrator may specify that an Award or a portion of an Award is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code, provided that the performance criteria for such Award or portion of an Award that is intended by the Administrator to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code shall be a measure based on one or more Qualifying Performance Criteria selected by the Administrator and specified at the time the Award is granted. The Administrator shall certify the extent to which any Qualifying Performance Criteria has been satisfied, and the amount payable as a result thereof, prior to payment, settlement or vesting of any Award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code. Notwithstanding satisfaction of any performance goals, the number of Shares issued under or the amount paid under an award may, to the extent specified in the Award Agreement, be reduced, but not increased, by the Administrator on the basis of such further considerations as the Administrator in its sole discretion shall determine.
(b)      Qualifying Performance Criteria . For purposes of this Plan, the term “Qualifying Performance Criteria” shall mean any one or more of the following performance criteria, or derivations of such performance criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit or Subsidiary, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified by the Administrator: (i) cash flow (before or after dividends), (ii) earning or earnings per share (including earnings before interest, taxes, depreciation and amortization), (iii) stock price, (iv) return on equity, (v) total stockholder return, (vi) return on capital or investment (including return on total capital, return on invested capital, or


return on investment), (vii) return on assets or net assets, (viii) market capitalization, (ix) economic value added, (x) debt leverage (debt to capital), (xi) revenue, (xii) income or net income, (xiii) operating income, (xiv) operating profit or net operating profit, (xv) operating margin or profit margin, (xvi) return on operating revenue, (xvii) cash from operations, (xviii) operating ratio, (xix) operating revenue, (xx) NSR and/or total backlog, (xxi) days sales outstanding, (xxii) customer service, (xxiii) operational safety, reliability and/or efficiency; (xxiv) environmental incidents. To the extent consistent with Section 162(m) of the Code, the Administrator (A) shall appropriately adjust any evaluation of performance under a Qualifying Performance Criteria to eliminate the effects of charges for restructurings, discontinued operations, extraordinary items and all items of gain, loss or expense determined to be extraordinary or unusual in nature or related to the acquisition or disposal of a segment of a business or related to a change in accounting principle all as determined in accordance with applicable accounting provisions, as well as the cumulative effect of accounting changes, in each case as determined in accordance with generally accepted accounting principles or identified in the Company’s financial statements or notes to the financial statements, and (B) may appropriately adjust any evaluation of performance under a Qualifying Performance Criteria to exclude any of the following events that occurs during a performance period: (i) asset write-downs, (ii) litigation, claims, judgments or settlements, (iii) the effect of changes in tax law or other such laws or provisions affecting reported results, (iv) accruals for reorganization and restructuring programs and (v) accruals of any amounts for payment under this Plan or any other compensation arrangement maintained by the Company.
14. Transferability
Each Award may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated by a Participant other than by will or the laws of descent and distribution, and each Option or Stock Appreciation Right shall be exercisable only by the Participant during his or her lifetime. Notwithstanding the foregoing, to the extent permitted by the Administrator, the person to whom an Award is initially granted (the “Grantee”) may transfer an Award to any “family member” of the Grantee (as such term is defined in Section 1(a)(5) of the General Instructions to Form S-8 under the Securities Act of 1933, as amended (“Form S-8”)), to trusts solely for the benefit of such family members and to partnerships in which such family members and/or trusts are the only partners; provided that, (i) as a condition thereof, the transferor and the transferee must execute a written agreement containing such terms as specified by the Administrator, and (ii) the transfer is pursuant to a gift or a domestic relations order to the extent permitted under the General Instructions to Form S-8. Except to the extent specified otherwise in the agreement the Administrator provides for the Grantee and transferee to execute, all vesting, exercisability and forfeiture provisions that are conditioned on the Grantee’s continued employment or service shall continue to be determined with reference to the Grantee’s employment or service (and not to the status of the transferee) after any transfer of an Award pursuant to this Section 14, and the responsibility to pay any taxes in connection with an Award shall remain with the Grantee notwithstanding any transfer other than by will or intestate succession.


15. Suspension or Termination of Awards
Except as otherwise provided by the Administrator, if at any time (including after a notice of exercise has been delivered or an award has vested) the Chief Executive Officer or any other person designated by the Administrator (each such person, an “Authorized Officer”) reasonably believes that a Participant may have committed an Act of Misconduct as described in this Section 15, the Authorized Officer, Administrator or the Board may suspend the Participant’s rights to exercise any Option, to vest in an Award, and/or to receive payment for or receive Shares in settlement of an Award pending a determination of whether an Act of Misconduct has been committed.
If the Administrator or an Authorized Officer determines a Participant has committed an act of embezzlement, fraud, dishonesty, nonpayment of any obligation owed to the Company or any Subsidiary, breach of fiduciary duty, violation of Company ethics policy or code of conduct, or deliberate disregard of the Company or Subsidiary rules resulting in loss, damage or injury to the Company or any Subsidiary, or if a Participant makes an unauthorized disclosure of any Company or Subsidiary trade secret or confidential information, solicits any employee or service provider to leave the employ or cease providing services to the Company or any Subsidiary, breaches any intellectual property or assignment of inventions covenant, engages in any conduct constituting unfair competition, breaches any non-competition agreement, induces any Company or Subsidiary customer to breach a contract with the Company or any Subsidiary or to cease doing business with the Company or any Subsidiary, or induces any principal for whom the Company or any Subsidiary acts as agent to terminate such agency relationship (any of the foregoing acts, an “Act of Misconduct”), then except as otherwise provided by the Administrator, (i) neither the Participant nor his or her estate nor transferee shall be entitled to exercise any Option or Stock Appreciation Right whatsoever, vest in or have the restrictions on an Award lapse, or otherwise receive payment of an Award, (ii) the Participant will forfeit all outstanding Awards and (iii) the Participant may be required, at the Administrator’s sole discretion, to return and/or repay to the Company any then unvested Shares previously issued under the Plan. In making such determination, the Administrator or an Authorized Officer shall give the Participant an opportunity to appear and present evidence on his or her behalf at a hearing before the Administrator or its designee or an opportunity to submit written comments, documents, information and arguments to be considered by the Administrator.
16. Compliance with Laws and Regulations
This Plan, the grant, issuance, vesting, exercise and settlement of Awards thereunder, and the obligation of the Company to sell, issue or deliver Shares under such Awards, shall be subject to all applicable foreign, federal, state and local laws, rules and regulations, stock exchange rules and regulations, and to such approvals by any governmental or regulatory agency as may be required. The Company shall not be required to register in a Participant’s name or deliver any Shares prior to the completion of any registration or qualification of such shares under any foreign, federal, state or local law or any ruling or regulation of any government body which the Administrator shall determine to be necessary or advisable. To the extent the Company is unable to or the Administrator deems it infeasible to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, the Company and its Subsidiaries shall be relieved of any liability with respect to the


failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. No Option shall be exercisable and no Shares shall be issued and/or transferable under any other Award unless a registration statement with respect to the Shares underlying such Option is effective and current or the Company has determined that such registration is unnecessary.
In the event an Award is granted to or held by a Participant who is employed or providing services outside the United States, the Administrator may, in its sole discretion, modify the provisions of the Plan or of such Award as they pertain to such individual to comply with applicable foreign law or to recognize differences in local law, currency or tax policy. The Administrator may also impose conditions on the grant, issuance, exercise, vesting, settlement or retention of Awards in order to comply with such foreign law and/or to minimize the Company’s obligations with respect to tax equalization for Participants employed outside their home country.
17. Withholding
To the extent required by applicable federal, state, local or foreign law, a Participant shall be required to satisfy, in a manner satisfactory to the Company, any withholding tax obligations that arise by reason of an Option exercise, the vesting of or settlement of an Award, an election pursuant to Section 83(b) of the Code or otherwise with respect to an Award. To the extent a Participant makes an election under Section 83(b) of the Code, within ten days of filing such election with the Internal Revenue Service, the Participant must notify the Company in writing of such election. The Company and its Subsidiaries shall not be required to issue Shares, make any payment or to recognize the transfer or disposition of Shares until all withholding tax obligations are satisfied. The Administrator may provide for or permit these obligations to be satisfied through the mandatory or elective sale of Shares and/or by having the Company withhold a portion of the Shares that otherwise would be issued to him or her upon exercise of the Option or the vesting or settlement of an Award, or by tendering Shares previously acquired. In addition, the Company shall be entitled to deduct from other compensation payable to each Participant any withholding tax obligations that arise in connection with an Award or require the Participant to pay such sums directly to the Company in cash or by check.
18. Administration of the Plan
(a)      Administrator of the Plan . The Plan shall be administered by the Administrator who shall be the Compensation Committee of the Board or, in the absence of a Compensation Committee, the Board itself. Any power of the Administrator may also be exercised by the Board, except to the extent that the grant or exercise of such authority would cause any Award or transaction to become subject to (or lose an exemption under) the short-swing profit recovery provisions of Section 16 of the Securities Exchange Act of 1934 or cause an Award designated as a Performance Award not to qualify for treatment as performance-based compensation under Section 162(m) of the Code. To the extent that any permitted action taken by the Board conflicts with action taken by the Administrator, the Board action shall control. The Compensation Committee may by resolution authorize one or more officers of the Company to perform any or all things that the Administrator is authorized and empowered to do or perform under the Plan, and for all purposes under this Plan, such officer or officers shall be treated as the Administrator; provided, however, that the resolution so authorizing such officer or officers shall specify the total number of Awards


(if any) such officer or officers may award pursuant to such delegated authority. No such officer shall designate himself or herself as a recipient of any Awards granted under authority delegated to such officer. In addition, the Compensation Committee may delegate any or all aspects of the day-to-day administration of the Plan to one or more officers or employees of the Company or any Subsidiary, and/or to one or more agents.
(b)      Powers of Administrator . Subject to the express provisions of this Plan, the Administrator shall be authorized and empowered to do all things that it determines to be necessary or appropriate in connection with the administration of this Plan, including, without limitation: (i) to prescribe, amend and rescind rules and regulations relating to this Plan and to define terms not otherwise defined herein; (ii) to determine which persons are Participants, to which of such Participants, if any, Awards shall be granted hereunder and the timing of any such Awards; (iii) to grant Awards to Participants and determine the terms and conditions thereof, including the number of Shares subject to Awards and the exercise or purchase price of such Shares and the circumstances under which Awards become exercisable or vested or are forfeited or expire, which terms may but need not be conditioned upon the passage of time, continued employment, the satisfaction of performance criteria, the occurrence of certain events, or other factors; (iv) to establish and verify the extent of satisfaction of any performance goals or other conditions applicable to the grant, issuance, exercisability, vesting and/or ability to retain any Award; (v) to prescribe and amend the terms of the agreements or other documents evidencing Awards made under this Plan (which need not be identical) and the terms of or form of any document or notice required to be delivered to the Company by Participants under this Plan; (vi) to approve such further actions as it determines necessary or appropriate to the administration of the Plan and Awards, such as correcting a defect or supplying any omission, or reconciling any inconsistency so that the Plan or any agreement or other documents evidencing Awards made under this Plan complies with applicable law, regulations and listing requirements and so as to avoid unanticipated consequences or address unanticipated events (including any temporary closure of the New York Stock Exchange, disruption of communications or natural catastrophe) deemed by the Administrator to be inconsistent with the purposes of the Plan or any agreement or other documents evidencing Awards made under this Plan, provided that no such action shall be taken absent stockholder approval to the extent required under Section 19; (vii) to determine whether, and the extent to which, adjustments are required pursuant to Section 12; (viii) to interpret and construe this Plan, any rules and regulations under this Plan and the terms and conditions of any Award granted hereunder, and to make exceptions to any such provisions if the Administrator, in good faith, determines that it is necessary to do so in light of extraordinary circumstances and for the benefit of the Company; (ix) to approve corrections in the documentation or administration of any Award; and (x) to make all other determinations deemed necessary or advisable for the administration of this Plan. The Administrator may, in its sole and absolute discretion, without amendment to the Plan, waive or amend the operation of Plan provisions respecting exercise after Termination of Employment or service to the Company or an affiliate and, except as otherwise provided herein, adjust any of the terms of any Award.
(c)      Determinations by the Administrator . All decisions, determinations and interpretations by the Administrator regarding the Plan, any rules and regulations under the Plan and the terms and conditions of or operation of any Award granted hereunder, shall be final and binding on all Participants, beneficiaries, heirs, assigns or other persons holding or claiming rights under the Plan


or any Award. The Administrator shall consider such factors as it deems relevant, in its sole and absolute discretion, to making such decisions, determinations and interpretations including, without limitation, the recommendations or advice of any officer or other employee of the Company and such attorneys, consultants and accountants as it may select.
(d)      Subsidiary Awards . In the case of a grant of an Award to any Participant employed by a Subsidiary, such grant may, if the Administrator so directs, be implemented by the Company issuing Shares to the Subsidiary, for such lawful consideration as the Administrator may determine, upon the condition or understanding that the Subsidiary will transfer the Shares to the Participant in accordance with the terms of the Award specified by the Administrator pursuant to the provisions of the Plan. Notwithstanding any other provision hereof, such Award may be issued by and in the name of the Subsidiary and shall be deemed granted on such date as the Administrator shall determine.
19. Amendment of the Plan or Awards
The Board may amend, alter or discontinue this Plan and the Administrator may amend, or alter any agreement or other document evidencing an Award made under this Plan but, except as provided pursuant to the provisions of Section 12, no such amendment shall, without the approval of the stockholders of the Company amend the Plan in any manner requiring stockholder approval by law or under the New York Stock Exchange listing requirements.
No amendment or alteration to the Plan or an Award or Award Agreement shall be made which would impair the rights of the holder of an Award, without such holder’s consent, provided that no such consent shall be required if the Administrator determines in its sole discretion and prior to the date of any Change in Control that such amendment or alteration either is required or advisable in order for the Company, the Plan or the Award to satisfy any law or regulation or to meet the requirements of or avoid adverse financial accounting consequences under any accounting standard.
20. No Liability of Company
The Company and any Subsidiary or affiliate which is in existence or hereafter comes into existence shall not be liable to a Participant or any other person as to: (i) the non-issuance or sale of Shares as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder; and (ii) any tax consequence expected, but not realized, by any Participant or other person due to the receipt, exercise or settlement of any Award granted hereunder.
21. Non-Exclusivity of Plan
Neither the adoption of this Plan by the Board nor the submission of this Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board or the Administrator to adopt such other incentive arrangements as either may deem desirable, including without limitation, an arrangement not intended to qualify under Section 162(m) of the Code, and such arrangements may be either generally applicable or applicable only in specific cases.


22. Governing Law
This Plan and any agreements or other documents hereunder shall be interpreted and construed in accordance with the laws of the Texas to the extent not preempted by federal law. Any reference in this Plan or in the agreement or other document evidencing any Awards to a provision of law or to a rule or regulation shall be deemed to include any successor law, rule or regulation of similar effect or applicability.
23. No Right to Employment, Reelection or Continued Service
Nothing in this Plan or an Award Agreement shall interfere with or limit in any way the right of the Company, its Subsidiaries and/or its affiliates to terminate any Participant’s employment, service on the Board or service for the Company at any time or for any reason not prohibited by law, nor shall this Plan or an Award itself confer upon any Participant any right to continue his or her employment or service for any specified period of time. Neither an Award nor any benefits arising under this Plan shall constitute an employment contract with the Company, any Subsidiary and/or its affiliates. Subject to Sections 4 and 19, this Plan and the benefits hereunder may be terminated at any time in the sole and exclusive discretion of the Board without giving rise to any liability on the part of the Company, its Subsidiaries and/or its affiliates.
24. Unfunded Plan
The Plan is intended to be an unfunded plan. Participants are and shall at all times be general creditors of the Company with respect to their Awards. If the Administrator or the Company chooses to set aside funds in a trust or otherwise for the payment of Awards under the Plan, such funds shall at all times be subject to the claims of the creditors of the Company in the event of its bankruptcy or insolvency.
25. Section 409A
It is intended that any Options, Stock Appreciation Rights, and Restricted Stock issued pursuant to this Plan and any Award Agreement shall not constitute “deferrals of compensation” within the meaning of Section 409A of the Code and, as a result, shall not be subject to the requirements of Section 409A of the Code. It is further intended that any Restricted Stock Units and Incentive Bonuses issued pursuant to this Plan and any Award Agreement or other written document establishing the terms and conditions of the Award (which may or may not constitute “deferrals of compensation,” depending on the terms of each Award) shall avoid any “plan failures” within the meaning of Section 409A(a)(1) of the Code. The Plan and each Award Agreement or other written document establishing the terms and conditions of an Award is to be interpreted and administered in a manner consistent with these intentions. However, no guarantee or commitment is made that the Plan, any Award Agreement or any other written document establishing the terms and conditions of an Award shall be administered in accordance with the requirements of Section 409A of the Code, with respect to amounts that are subject to such requirements, or that the Plan, any Award Agreement or any other written document establishing the terms and conditions of an Award shall be administered in a manner that avoids the application of Section 409A of the Code, with respect to amounts that are not subject to such requirements.


26. Required Delay in Payment on Account of a Separation from Service
Notwithstanding any other provision in this Plan, any Award Agreement or any other written document establishing the terms and conditions of an Award, if any Award recipient is a “specified employee,” as defined in Treasury Regulations Section 1.409A-1(i), as of the date of his or her “Separation from Service” (as defined in authoritative IRS guidance under Section 409A of the Code), then, to the extent required by Treasury Regulations Section 1.409A-3(i)(2), any payment made to the Award recipient on account of his or her Separation from Service shall not be made before a date that is six months after the date of his or her Separation from Service. The Administrator may elect any of the methods of applying this rule that are permitted under Treasury Regulations section 1.409A-3(i)(2)(ii).




Exhibit 10.69
ANDEAVOR
EXECUTIVE DEFERRED COMPENSATION PLAN
ARTICLE I
GENERAL PROVISIONS
1.1      Establishment and Purpose.
WHEREAS, Tesoro Corporation (the "Company") previously established the Tesoro Corporation Executive Deferred Compensation Plan (the "Plan"), as amended, primarily for the purpose of providing benefits for a select group of management and highly compensated employees of the Company and its Subsidiaries so as to provide benefits comparable to those not provided under the Andeavor 401(k) Plan (previously known as the “Tesoro Corporation Thrift Plan”) due to salary and deferral limitations imposed under the Code;
WHEREAS, the Plan is intended to qualify as a "top hat" plan under Sections 201(2), 301(a)(3) and 401(a)(l) of ERISA; and
WHEREAS, the Company previously amended and restated the Plan, effective January 1, 2009, to comply with Regulations under Section 409A of the Code and to clarify certain provisions of the Plan relating to Supplemental Discretionary Awards;
WHEREAS, the Company most recently amended and restated the Plan, effective January 1, 2016 to incorporate Amendments No.1-4 and to effectuate certain design changes, effective for contributions made to the Plan on account of a Participant’s service on or after January 1, 2016;
WHEREAS, the Company desires to amend and restate the Plan, effective August 1, 2017, to incorporate prior amendments, to reflect a change in the name of the Company and to make such changes as are deemed appropriate;
NOW, THEREFORE, the Company adopts this amended and restated Andeavor Executive Deferred Compensation Plan, effective August 1, 2017, as follows:
1.2      Definitions.
"Affiliate" means each entity that would be considered a single employer with the Company under Section 414(b) or Section 414(c) of the Code, except that the phrase "at least 50%" shall be substituted for the phrase "at least 80%" as used therein.
"Aggregated Plan" means all agreements, methods, programs and other arrangements that are aggregated with this Plan under Section 1.409A-1(c) of the Regulations.
"Beneficiary" means the person or persons designated by a Participant as his beneficiary hereunder in accordance with the provisions of Article V.




"Board" means the Board of Directors of the Company.
"Bonus Compensation" means, as determined in the sole discretion of the Committee, such annual bonus or other bonus paid to a Participant including, but not limited to, executive bonus and long-term incentive bonus, but excluding special compensation, bonuses paid because of service overseas, expense allowances, all other extraordinary compensation, and, except as permitted with the prior written consent of the Committee, excluding Sign-On Bonus and Retention Bonus. For the avoidance of doubt, the Committee shall have the sole discretion to determine at any time which types of Bonus Compensation are deferrable under the Plan.
"Chief Executive Officer" means the Chief Executive Officer of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to time.
"Committee" means the Employee Benefits Committee appointed by the Compensation Committee of the Board, or such other committee designated by the Compensation Committee of the Board to discharge the duties of the Committee hereunder.
"Company" means, prior to August 1, 2017, Tesoro Corporation, a Delaware corporation and, effective August 1, 2017, Andeavor, a Delaware corporation, or any successor thereto.
"Company Matching Contribution" means the employer matching contributions allocated to the Participant's account under the Qualified Plan for the Plan Year.
"Compensation" shall, unless otherwise determined by the Committee, for purposes of Sections 2.1 and 2.2 of the Plan, have the meaning assigned thereto in the Qualified Plan (determined without regard to any limits imposed on Compensation by the Code, but including amounts voluntarily deferred under the terms of this Plan and any 401(k) deferrals under the Qualified Plan) and shall, as applicable, include Bonus Compensation.
"Corporate Change in Control" means (i) there shall be consummated (A) any consolidation or merger of Company in which Company is not the continuing or surviving corporation or pursuant to which shares of Company's Common Stock would be converted into cash, securities or other property, other than a merger of Company where a majority of the board of directors of the surviving corporation are, and for a one-year period after the merger continue to be, persons who were directors of Company immediately prior to the merger or were elected as directors, or nominated for election as director, by a vote of at least two-thirds of the directors then still in office who were directors of Company immediately prior to the merger, or (B) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Company, or (ii) the shareholders of Company shall approve any plan or proposal for the liquidation or dissolution of Company, or (iii) (A) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than Company or a Subsidiary or any employee benefit plan sponsored by Company or a Subsidiary, shall become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of securities of Company representing 35 percent or more of the combined voting power of Company's then outstanding securities ordinarily (and apart from rights accruing in special


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circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, and (B) at any time during a period of one-year thereafter, individuals who immediately prior to the beginning of such period constituted the Board shall cease for any reason to constitute at least a majority thereof, unless election or the nomination by the Board for election by Company's shareholders of each new director during such period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period.
"Deferral Account" means the bookkeeping account(s) established on behalf of a Participant to track the Participant's supplemental benefits as described in Article II hereof. A Deferral Account can refer to either a Termination Account or Specified Date Account as defined herein.
"Deferral Election" means an election by a Participant to defer Compensation in accordance with the provisions of Section 2.1 of the Plan, including an election as to the Distribution Date and Distribution Option.
"Deferrals" shall have the meaning ascribed thereto in Section 2.1(b) hereof.
"Disability" means disability as determined under the Pension Plan.
"Disability Date" means the date on which a Participant's Separation from Service due to Disability occurs.
"Distribution Date" means the date on which distribution of the applicable portion of a Participant's Deferral Account (other than the portion, if any, of such Deferral Account that is attributable to Supplemental Discretionary Awards) is to commence. Distribution Dates are determined according to each Participant's Deferral Elections for each Deferral Account or as otherwise provided under the terms of the Plan.
"Distribution Option" means the form in which distribution of the applicable portion of a Participant's Deferral Account (other than the portion, if any, of such Participant's Deferral Account that is attributable to Supplemental Discretionary Awards) is to be made. Distribution Options are determined according to each Participant's Deferral Elections for each Plan Year or as otherwise provided under the terms of the Plan.
"Earnings" shall have the meaning ascribed thereto in Section 2.4(b) of the Plan.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time.
“409A Change in Control” means any of the following events: (i) a change in the ownership of the Company, (ii) a change in the effective control of the Company, or (iii) a change in the ownership of a substantial portion of the assets of the Company.
For purposes of this definition, a change in the ownership of the Company occurs on the date on which any one person, or more than one person acting as a group, acquires ownership of


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stock of the Company that, together with stock held by such person or group constitutes more than 50% of the total fair market value or total voting power of the stock of the Company. A change in the effective control of the Company occurs on the date on which either: (i) a person, or more than one person acting as a group, acquires ownership of stock of the Company possessing 30% or more of the total voting power of the stock of the Company, taking into account all such stock acquired during the 12-month period ending on the date of the most recent acquisition, or (ii) a majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election, but only if no other corporation is a majority shareholder of the Company . A change in the ownership of a substantial portion of assets occurs on the date on which any one person, or more than one person acting as a group, other than a person or group of persons that is related to the Company, acquires assets from the Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions, taking into account all such assets acquired during the 12-month period ending on the date of the most recent acquisition.
An event constitutes a 409A Change in Control with respect to a Participant only if the Participant performs services for the Company that has experienced the 409A Change in Control, or the Participant’s relationship to the affected Company otherwise satisfies the requirements of Treasury Regulation Section 1.409A-3(i)(5)(ii).
The determination as to the occurrence of a 409A Change in Control shall be based on objective facts and in accordance with the requirements of Section 409A of the Code.
"Insolvency" means, with respect to the Company: (1) an adjudication of bankruptcy; (2) an assignment for the benefit of creditors of or by the Company; (3) a material part or all of the property of the Company becomes subject to the control and direction of a receiver, which receivership is not dismissed within sixty (60) days of such receiver's appointment; or (4) the filing by the Company of a petition for relief under any federal or other bankruptcy or other insolvency law or for an arrangement with creditors.
"Participant" means any employee who has satisfied the eligibility requirements set forth in Section 1.4 of the Plan and has a credit to a Deferral Account or has completed a Deferral Election.
"Pension Plan" means, prior to August 1, 2017, the Tesoro Corporation Retirement Plan, as amended, and, effective August 1, 2017, the Andeavor Pension Plan, as amended.
"Performance-Based Compensation" means the total amounts payable to a Participant as remuneration based upon the Participant's performance of services for the Company over a period of not less than twelve (12) months, the payment of which or the amount of which is contingent on the satisfaction of established organizational or individual performance criteria, and that otherwise meets the definition of "performance-based compensation", as that term is defined in Section 1.409A-2(a)(7) of the Regulations. For these purposes, Performance-Based Compensation shall be based upon criteria established no later than 90 days following commencement of the applicable performance period.


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"Person" means any individual, corporation, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.
"Plan Year" means the twelve-month period beginning each January 1.
"Qualified Plan" means, prior to August 1, 2017, the Tesoro Corporation Thrift Plan, as amended and, effective August 1, 2017, the Andeavor 401(k) Plan, as amended.
"Regulations" means the Treasury Regulations promulgated under the Code.
“ Retention Bonus ” means a cash-based award outside of an employee's regular compensation that is offered as an incentive to keep such employee on the job during a particularly important business cycle (such as a merger or acquisition).
"Separation from Service" means a reasonably anticipated permanent reduction in the level of bona fide services performed by the Participant for the Company and its Affiliates to 20% or less of the average level of bona fide services performed by the Participant for the Company and its Affiliates (whether as an employee or an independent contractor) in the immediately preceding thirty-six (36) months (or the full period of service to the Company and its Affiliates if the Participant has been providing services to the Company and its Affiliates for fewer than thirty-six (36) months). The determination of whether a Separation from Service has occurred shall be made by the Committee in accordance with the provisions of Section 409A of the Code and the Regulations promulgated thereunder.
“ Sign-On Bonus” means a cash-based award that is payable to an eligible individual pursuant to the terms and conditions of such individual’s offer of employment to induce him or her to become an employee of the Company, or any similar item of compensation.
“Specified Date Account” means a Deferral Account established by the Committee to record the amounts payable to a Participant at a future date as specified in such Participant’s Deferral Election or, as applicable, pursuant to a Supplemental Discretionary Award. Unless otherwise permitted by the Committee, a Participant may maintain no more than five Specified Date Accounts. A Specified Date Account may be identified herein and in enrollment materials as an “In-Service Account”, “Fixed Date Account” or such other name as established by the Committee without affecting the meaning thereof.
"Subsidiary" means any entity in which the Company owns or otherwise controls, directly or indirectly, stock or other ownership interests having the voting power to elect a majority of the board of directors, or other governing group having functions similar to a board of directors, as determined by the Committee.
"Supplemental Discretionary Award" means a discretionary amount, if any, credited to a Participant's Deferral Account pursuant to Section 2.2(b).


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“ Supplemental Discretionary Profit Sharing Award ” means a discretionary amount, if any, credited to a Participant’s Deferral Account pursuant to Section 2.2(c).
"Supplemental Match" means an amount credited to the Participant's Deferral Account pursuant to Section 2.2(a).
“Termination Account” means a Deferral Account established by the Committee to record the amounts payable to a Participant upon Separation from Service. Unless a Specified Date Account has been established by or on behalf of a Participant, all Deferrals and Company contributions shall be allocated to a Termination Account on behalf of the Participant.
"Unforeseeable Emergency" means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant's spouse, or a dependent (as determined under Section 152 of the Code, but without regard to subsections (b)(1), (b)(2) and (d)(1)(B) of Section 152) of the Participant, loss of the Participant's property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance), or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.
1.3      Administration.
(a)      The Committee shall administer the Plan and have sole and absolute authority and discretion to decide all matters relating to the administration of the Plan, including, without limitation, determining the rights and status of Participants or their Beneficiaries under the Plan. The Committee is authorized to interpret the Plan, to adopt administrative rules, regulations, and guidelines for the Plan, and may correct any defect, supply any omission or reconcile any inconsistency or conflict in the Plan. The Committee's determinations under the Plan need not be uniform among all Participants, or classes or categories of Participants, and may be applied to such Participants, or classes or categories of Participants, as the Committee, in its sole and absolute discretion, considers necessary, appropriate or desirable. All determinations by the Committee shall be final, conclusive and binding on the Company, the Participant and any and all interested parties.
(b)      The Committee may delegate such of its powers and authority under the Plan to the Company's officers or such other person(s) as it deems necessary or appropriate. In the event of such delegation, all references to the Committee in this Plan shall be deemed references to such officers or such other person(s) as it relates to those aspects of the Plan that have been delegated.
(c)      Any action taken by the Committee with respect to the rights or benefits under the Plan of any Participant shall be subject to correction by the Committee as to payments not yet made to such person, and acceptance of any deferred compensation benefits under the Plan constitutes acceptance of and agreement to the Committee's or the Company's making any appropriate adjustments in future payments to such person (or to recover from such person) any excess payment or underpayment previously made to him.


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(d)      Notwithstanding any provision of the Plan to the contrary, if any benefit provided under this Plan is subject to the provisions of Section 409A of the Code and the Regulations issued thereunder, the provisions of the Plan shall be administered, interpreted and construed in a manner necessary to comply with Section 409A and the Regulations issued thereunder (or disregarded to the extent such provision cannot be so administered, interpreted or construed).
1.4      Eligibility and Participation.
(a)      Participation in the Plan is limited to those individuals who are eligible to participate in the Qualified Plan and are within the category of a select group of management and highly compensated employees as referred to in Sections 201(2), 301(a)(3) and 401(a)(l) of ERISA, and who are within those classifications of officers and key management employees of the Company and its Subsidiaries as determined in the sole discretion of the Compensation Committee of the Board for each Plan Year. Plan eligibility for new participants shall commence as of the first day of the Plan Year or the first day of the 7th month of the Plan Year (each, a "semi-annual entry date") as determined by the Compensation Committee of the Board. Employees hired, promoted or reclassified to a category of officer and key management employees of the Company and/or its Subsidiaries eligible for participation shall become eligible as of the semi-annual entry date determined by the Compensation Committee of the Board. A newly eligible Participant shall make his or her Deferral Elections within the designated time periods as set forth in Section 2.1 hereof.
(b)      A Participant shall cease to be a Participant upon receiving payment for the full amount of benefits to which the Participant is entitled under the Plan. A Participant who becomes ineligible to participate based on eligibility status as determined pursuant to Section 1.4(a) of this Plan shall become an ineligible Participant at the time determined by the Committee. Once a Participant is no longer eligible to actively participate in the Plan, he shall not be entitled to defer Compensation pursuant to Section 2.1 or receive a Supplemental Match, Supplemental Discretionary Profit Sharing Award or Supplemental Discretionary Award (except to the extent otherwise provided in an Award Agreement) under Section 2.2.
ARTICLE II
SUPPLEMENTAL BENEFITS
2.1      Supplemental Deferral Elections.
(a)      Each Participant shall be eligible to elect to defer Compensation under the Plan with respect to a Plan Year in accordance with the terms of the Plan and the rules and procedures established by the Committee. Deferral Elections under the Plan are entirely voluntary and, with respect to the Plan Year to which they relate, following the end of the election period established under Section 2.1(b), are irrevocable, except as provided in Sections 2.1(e) and 3.5 hereof.


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(b)      A Participant may make a Deferral Election by filing a written or electronic election with the Committee or its designee directing the Company to reduce the Participant's Compensation, including as applicable, Bonus Compensation and to credit the amount of any such reduction (the "Deferrals") to the Deferral Account established and maintained for such Participant pursuant to Section 2.4 of the Plan. Each Deferral Election shall specify whether to allocate Deferrals to a Termination Account or one or more Specified Date Accounts (and if no such designation is made, Deferrals shall automatically be allocated to the Termination Account). Each Deferral Election shall be partitioned for each available deferral source (e.g. salary and each type of bonus). The Committee may, in its sole discretion, establish a minimum deferral period for the establishment of a Specified Date Account (e.g. the third Plan Year following the year that the Deferral is allocated to such account). Deferral Elections hereunder shall be made in accordance with the terms of the Plan and the rules established by the Committee and, except as provided below, must be filed not later than December 31 of the calendar year preceding the Plan Year to which the election relates (or at such earlier times as may be established by the Committee) (such period established by the Committee on an annual basis shall be the “Annual Enrollment Period”). With regard to Performance-Based Compensation, such Deferral Elections shall initially be permitted to be made in the Annual Enrollment Period preceding the Plan Year(s) to which such election relates and subsequently may be changed, elected or withdrawn on or before June 30 of the calendar year that coincides with the applicable performance period in accordance with Section 409A of the Code and the Regulations. A Participant may revoke or modify such election up until the end of the election period established by the Committee under this Section 2.1(b). Notwithstanding the preceding, for the first Plan Year in which a Participant is eligible to participate in the Plan, a Participant's initial Deferral Election may be made within thirty (30) days after the date the Participant becomes eligible to participate in the Plan and shall apply only to Compensation and Bonus Compensation paid for services to be performed after the election for such Plan Year in accordance with Section 409A of the Code. Unless otherwise determined by the Committee, a Deferral Election must be filed each Plan Year, and will not carry over from Plan Year to Plan Year.
(c)      Deferrals shall be credited to each Participant's Deferral Account at such time or times as determined by the Committee; provided, however, that Deferrals shall be credited to each Participant's Deferral Account not later than thirty (30) days after the date on which such Compensation would have otherwise been paid, without regard to whether or not the Participant has reached the limit on 401(k) deferrals under the Qualified Plan. Deferrals shall be deemed to be invested in accordance with a Participant's investment designations as permitted under Section 2.4(b).
(d)      Unless otherwise determined by the Committee, a Participant may elect to defer up to 50% of Compensation (exclusive of Bonus Compensation) and up to 100% of Bonus Compensation payable to the Participant. Notwithstanding the foregoing, the Committee may implement additional conditions with respect to a Participant’s Deferral Election, including but not limited to applying deferral percentages only to amounts in excess of certain thresholds.


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(e)      Notwithstanding the foregoing and unless otherwise determined by the Committee, a Deferral Election shall automatically terminate on the earliest to occur of: (1) the end of the Plan Year to which the Deferral Election applies; (2) the termination of a Participant's employment for any reason; (3) the Committee's determination that the Participant is no longer eligible to participate in the Plan; or (4) the termination or discontinuance of the Plan.
(f)      Each Participant shall at all times be vested in the portion of his Deferral Account attributable to Deferrals, including Earnings thereon.
2.2
Supplemental Match, Discretionary Profit Sharing Awards and Discretionary Awards.
(a)      With respect to each Plan Year and to the extent provided under this Section 2.2, the Company shall credit a supplemental matching award ("Supplemental Match") to each eligible Participant's Deferral Account. The Supplemental Match shall be in such percentage of the Participants’ Compensation (excluding Bonus Compensation) deferred under this Plan as shall be determined by the Compensation Committee of the Board in its sole discretion from year to year. The Supplemental Match shall apply to each Participant as of the first payroll period during the Plan Year in which such Participant’s Compensation (including Bonus Compensation) exceeds the limitations imposed under Section 401(a)(17) of the Code and shall be credited to the Participant’s Deferral Account for such payroll period and each subsequent payroll period during the Plan Year in which the Participant is eligible for the Supplemental Match. The Supplemental Match shall be credited to such Participant’s Termination Account or, as applicable, Specified Date Account (determined by the Deferral Election of such Participant for the Deferral to which such Supplemental Match relates) within thirty (30) days of such Deferral (recognizing that the Supplemental Match relates only to Deferrals of Compensation exceeding the statutory limit set forth above.
Those Participants eligible to participate in the Company's Executive Security Plan, or who, through the terms of an individual employment agreement have an entitlement to supplemental retirement benefits, shall not be eligible to participate in the Supplemental Match. In the event a Participant subsequently loses eligibility to participate in the Executive Security Plan or his employment agreement is amended to eliminate supplemental retirement benefits, such Participant shall regain eligibility to share in the Supplemental Match for that portion of the Plan Year following such Participant's loss of eligibility to participate in the Executive Security Plan or elimination of supplemental retirement benefits as set forth herein. Participants who become eligible for participation in the Executive Security Plan, or who are granted supplemental retirement benefits through an individual employment agreement will be allowed to retain the Supplemental Match contributed up to such eligibility, subject to the normal vesting provisions in Section 2.2(e).
(b)      With respect to any Plan Year and to the extent provided under this Section 2.2, the Company may credit a Supplemental Discretionary Award (the "Supplemental Discretionary Award") to any eligible Participant's Deferral Account. The determination of


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a Participant to whom such Supplemental Discretionary Award applies, as well as the amount of such award, if any, shall be in the sole discretion of the Chief Executive Officer, pursuant to an agreement between the Company and such Participant (the "Award Agreement"), provided, however, that deferrals of Supplemental Discretionary Awards may be negotiated with a Participant prior to the date the Participant has a legally binding right to such award. A Supplemental Discretionary Award shall be credited to a Participant’s Termination Account or, as applicable, Specified Date Account in accordance with the provisions of the applicable Award Agreement.
(c)      With respect to any Plan Year for which the Company makes a profit sharing contribution to the Qualified Plan and for which a Participant has Compensation (including Bonus Compensation) that exceeds the limitations imposed under Section 401(a)(17) of the Code, to the extent provided under this Section 2.2, the Company may credit to such Participant’s Deferral Account a discretionary profit sharing award. Such award, if any, shall be a percentage of such excess compensation that may or may not be equal to the percentage of compensation contributed for such Plan Year as a profit sharing contribution on behalf of participants in the Qualified Plan. Further, for any Plan Year in which a Participant is not able to receive the entire allocation to which such Participant would otherwise be entitled under the terms of the Qualified Plan due solely to the limitations of Section 415 of the Code, the Company may credit to such Participant’s Deferral Account the amount by which such Participant’s allocation to the Qualified Plan would otherwise exceed the limits of Section 415 for such Plan Year. Amounts, if any, credited under this section 2.2(c) shall be “Supplemental Discretionary Profit Sharing Awards”. Supplemental Discretionary Profit Sharing Awards, if any, will be credited to the Participant's Termination Account or, as applicable, Specified Date Account in accordance with the Deferral Election of such Participant for the Plan Year to which such Supplemental Discretionary Profit Sharing Award relates.
(d)      Supplemental Match, Supplemental Discretionary Awards, and Supplemental Discretionary Profit Sharing Awards shall be credited to a Participant’s Termination Account or, as applicable, Specified Date Account as provided above and shall be deemed invested in the same manner in which the remainder of such account is deemed to be invested under Section 2.4(b).
(e)      Subject to Section 2.3 and Exhibit 1 hereof, each Participant shall vest in the portion of his Deferral Account attributable to a Supplemental Match upon the completion of three (3) years of service and to that portion of his Deferral Account attributable to a Supplemental Discretionary Profit Sharing Award upon the completion of one (1) year of service. Years of service shall be determined in accordance with the methodology set forth in the Qualified Plan for determining years of service for vesting purposes thereunder. Each Participant shall vest in that portion of his Deferral Account attributable to a Supplemental Discretionary Award in accordance with the provisions of the Award Agreement pursuant to which such Supplemental Discretionary Award is credited.



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2.3      Change in Control.
In the event of a Corporate Change in Control, the portion of a Participant's Deferral Account attributable to any Supplemental Match, Supplemental Discretionary Profit Sharing Award, and any Supplemental Discretionary Award shall become fully vested. A Corporate Change in Control is not an event which triggers an automatic distribution of benefits.
2.4      Deferral Accounts/Earnings.
(a)      Unless otherwise determined by the Committee, the Company shall maintain on behalf of each Participant separate Deferral Account(s), which shall consist of a Termination Account and, as applicable, Specified Date Accounts up to the maximum permitted under this Plan.
(b)      The Participant's Termination Account and, as applicable, Specified Date Accounts shall be adjusted by an amount equal to the amount that would have been earned (or lost) if the Deferrals of such Participant and Company contributions credited on behalf of such Participant under this Plan had been invested in hypothetical investments designated by the Participant from time to time, based on a list of hypothetical investments provided by the Committee from time to time (such hypothetical earnings or losses shall be referred to as "Earnings"); provided, however, in no event shall the common stock of the Company or any Subsidiary ever constitute a hypothetical investment maintained under the Plan. The Participant shall designate the investments used to measure Earnings from the list of authorized investments provided by the Committee by completing the appropriate form (or electronically via the website made available for such purpose) or in such other manner as the Committee may designate from time to time. The Participant may change such designations at such times as are permitted by the Committee, provided that the Participant shall be entitled to change such designations at least quarterly. Earnings shall be credited to the Participant's Deferral Account at least annually (or more frequently at the discretion of the Committee). Earnings shall be credited to a Deferral Account until all payments with respect to such account have been made under this Plan. Neither the Company nor the Committee shall act as a guarantor, or be liable or otherwise responsible for the investment performance of the designated investments (including any losses sustained by a Participant) with respect to a Participant's Deferral Account.
(c)      Each Participant shall be vested in his Deferral Account balances in accordance with the vesting designated in Sections 2.1(f), 2.2(e) and 2.3 hereof, or, as applicable, pursuant to Exhibit 1.
ARTICLE III
DISTRIBUTIONS
3.1      Termination Account Distribution Dates.
Except in the event of death or a Separation from Service due to Disability, distributions of a Participant’s Termination Account upon such Participant’s Separation from Service shall be made


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or, as applicable, commence on (i) the first business day of the January immediately following such Separation from Service or (ii) if later, the first business day of the seventh month following the month in which such Separation from Service occurs. Notwithstanding the foregoing, distribution of that portion of a Participant's Termination Account that is attributable to Supplemental Discretionary Awards shall be made at such time as may be designated and set forth in the Award Agreement pursuant to which such Supplemental Discretionary Award is credited. Each distribution shall be valued as of the last business day of the month immediately preceding the month in which such distribution occurs.
3.2      Termination Account Distribution Option/Manner of Payment.
The Distribution Option for a Participant’s Termination Account shall be determined in accordance with such election procedures as are established by the Committee and distributions shall, in accordance with such Participant’s Deferral Election, be paid in the form of a lump sum or in installments over a period of 2-to-15 years; provided, however, that the Distribution Option must be established at the time of such Participant's Deferral Election, in accordance with the requirements of Section 2.1 hereof, and must be in a form acceptable to the Committee as determined from time to time. Notwithstanding the preceding provisions of this Section 3.2, if a Participant fails to designate a form of distribution, or if the balance in the Participant's Deferral Account(s) in the aggregate is less than $100,000 at such Participant’s Separation from Service, the distribution will be paid in the form of a lump sum regardless of the Participant's Deferral Election. Notwithstanding the foregoing, distribution of that portion of a Participant's Termination Account that is attributable to Supplemental Discretionary Awards shall be made in such manner as may be designated and set forth in the Award Agreement pursuant to which such Supplemental Discretionary Award is credited. All payments under the Plan shall be made in cash.
3.3      Specified Date Account Distribution Dates.
Distribution Dates for a Participant's Specified Date Account(s) shall be established and determined in accordance with the Participant's Deferral Elections. A Participant must choose a designated Distribution Date for each Specified Date Account among the following: (i) benefits to be paid or, as applicable, commence on the designated Distribution Date regardless of whether such Participant’s employment status with the Company or any Affiliate (a “Future Date Account”) or (ii) benefits to be paid or, as applicable, commence at the earlier of the designated Distribution Date or such Participant’s Separation from Service (an “In-Service Account”). Notwithstanding the foregoing, distribution of that portion of a Participant's Specified Date Account that is attributable to Supplemental Discretionary Awards shall be made at such time as may be designated and set forth in the Award Agreement pursuant to which such Supplemental Discretionary Award is credited. Payment of each Specified Date Account will be made or, as applicable, commence on the first business day of the month immediately following the month in which the Distribution Date or, as applicable, the date set forth in the Award Agreement occurs and shall be valued as of the last business day of the month immediately preceding the month in which such distribution occurs.
With respect to a Future Date Account, the vested portion of such account will be paid only in accordance with the Distribution Date elected by the Participant or, as applicable, the date set


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forth in the Award Agreement, notwithstanding any intervening Separation from Service of such Participant prior to such Distribution Date.
With respect to an In-Service Account, the vested portion of such account will be paid or, as applicable, commence in accordance with the Distribution Date elected by the Participant or, as applicable, the date set forth in the Award Agreement, unless there is an intervening Separation from Service of such Participant prior to the commencement of the distribution of such In-Service Account, in which case, such In-Service Account shall be paid at the same time as such Participant’s Termination Account.
Any Specified Date Account of a Participant for which distribution has commenced prior to such Participant’s Separation from Service shall continue distributions in the manner originally elected by the Participant for such account, or, as applicable, set forth in such Participant’s Award Agreement, notwithstanding any subsequent Separation from Service of such Participant.
3.4      Specified Date Account Distribution Option/Manner of Payment.
Subject to Section 3.3, a Participant’s Distribution Option for a Specified Date Account shall be determined in accordance with such election procedures as are established by the Committee and distributions shall, in accordance with such Participant’s Deferral Election, be paid in the form of a lump sum or in installments over a period of 2-to-5 years; provided, however, that the Distribution Option must be established at the time of the Participant's Deferral Election, in accordance with the requirements of Section 2.1 hereof, and must be in a form acceptable to the Committee as determined from time to time. Notwithstanding the preceding provisions of this Section 3.4, if a Participant fails to designate a form of distribution, or if the balance in the Participant's Deferral Account(s) in the aggregate is less than $100,000 at such Participant’s Separation from Service, the distribution will be paid in the form of a lump sum regardless of the Participant's Deferral Election. Notwithstanding the foregoing, distribution of that portion of a Participant's Specified Date Account that is attributable to Supplemental Discretionary Awards shall be made in such manner as may be designated and set forth in the Award Agreement pursuant to which such Supplemental Discretionary Award is credited. All payments under the Plan shall be made in cash.
3.5      Modification of Distribution Elections.
A Participant may elect to delay any Distribution Date or change the Distribution Option associated with the Deferral Account previously designated by the Participant in one or more Deferral Elections pursuant to this Article III; provided, however, that: (1) the Participant must file an election designating the new Distribution Date and Distribution Option at least one year prior to the first scheduled payment under the Distribution Date previously designated; (2) the new election must also provide that the new Distribution Date be a minimum of five years later than the existing Distribution Date; and (3) any such election shall be made in accordance with such rules and procedures as are established by the Committee and shall not take effect for at least twelve (12) months after the date on which such election is made.



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3.6      Separation from Service.
Notwithstanding the foregoing provisions, in the event of a Participant's Separation from Service for any reason other than death or Disability, the Participant will receive a payment of all vested amounts credited to the Participant's Deferral Accounts (other than Future Date Accounts and In-Service Accounts that have commenced distribution) as elected by the Participant pursuant to Section 3.2, subject to any modifications elected by the Participant pursuant to Section 3.5, or as otherwise provided in Section 3.2 hereof. Any portion of a Participant's Deferral Account attributable to a Supplemental Match, Supplemental Discretionary Profit Sharing Award, or a Supplemental Discretionary Award that is not vested on the date of such Participant's Separation from Service shall be forfeited by the Participant should he or she fail to satisfy the vesting conditions of Sections 2.1(f), 2.2(e) or 2.3. Such forfeited amount shall revert to the Company and shall remain a general corporate asset to be used for any purpose determined by the Company.
3.7      Death.
Notwithstanding the foregoing provisions, the Beneficiary or Beneficiaries of a Participant shall be entitled to receive the entire amount credited to such Participant's Deferral Accounts (including all Specified Date Accounts) at the time of such Participant's death, valued as of the last business day of the month in which such Participant’s death occurred. Any unvested amounts remaining in such Participant's Deferral Accounts shall immediately become fully vested upon the Participant's death. The value of the Participant's Deferral Accounts will be paid to the Participant's Beneficiary, including the Participant's estate if designated as the Beneficiary, in a lump sum within ninety (90) days following the Participant's death. The Participant shall designate his Beneficiary in accordance with the provisions of Article V hereof.
3.8      Disability.
Notwithstanding the foregoing provisions, in the event of Disability, a Participant shall continue to accrue vesting service until fully vested in his Deferral Accounts or, if earlier, until his Disability Date. The Participant will receive a payment of all vested amounts credited to such Participant's Deferral Accounts (including all Specified Date Accounts) as of his Disability Date, in the manner provided in his Deferral Election (or, as applicable Award Agreement) or, if earlier, on his Distribution Date. Any portion of a Participant's Deferral Account attributable to a Supplemental Match, Supplemental Discretionary Profit Sharing Award, or a Supplemental Discretionary Award that is not vested on such Participant's Disability Date shall be forfeited by the Participant should he or she fail to satisfy the vesting conditions of Sections 2.1(f), 2.2(e) or 2.3. Such forfeited amount shall revert to the Company and shall remain a general corporate asset to be used for any purpose determined by the Company.
3.9      Unforeseeable Emergency.
The Committee may, upon request of a Participant, cause to be paid to such Participant an amount equal to all or any part of the amounts credited to such Participant's Deferral Account if the Committee determines, in its absolute discretion based on such reasonable evidence that it shall require, that such a payment or payments is necessary for the purpose of alleviating the consequences


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of an Unforeseeable Emergency occurring with respect to the Participant. The amounts distributed with respect to an Unforeseeable Emergency may not exceed the amount necessary to satisfy the emergency plus amounts necessary to pay taxes on the distribution, after taking into account the extent to which the hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent liquidation would not itself cause severe financial hardship). The amount of emergency payment shall be subtracted first from the vested portion of such Participant’s Termination Account until depleted and then from the vested portion of such Participant’s Specified Date Accounts, beginning with the Specified Date Account with the latest payment commencement date. Any such distribution upon an Unforeseeable Emergency shall result in a termination of Deferrals that would otherwise be credited on behalf of such Participant for the Plan Year in which the distribution on account of an Unforeseeable Emergency occurs, together with any Supplemental Match associated with such Deferrals.
3.10      Change in Time of Payments.
Notwithstanding any provision of this Article III to the contrary, the benefits payable hereunder may, to the extent expressly provided in this Section 3.10, be paid prior to or later than the date on which they would otherwise be paid to the Participant.
(a)      Distribution in the Event of Income Inclusion Under Code Section 409A . If any portion of a Participant's Deferral Accounts is required to be included in income by the Participant prior to receipt due to a failure of this Plan or any Aggregated Plan to comply with the requirements of Code Section 409A and the Regulations, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the lesser of: (i) the portion of his or her Deferral Account required to be included in income as a result of the failure of the Plan or any Aggregated Plan to comply with the requirements of Code Section 409A and the Regulations, or (ii) the balance of the Participant's Deferral Account.
(b)      Distribution Necessary to Satisfy Applicable Tax Withholding . If the Company is required to withhold amounts to pay the Participant’s portion of the Federal Insurance Contributions Act (FICA) tax imposed under Code Sections 3101, 3121(a) or 3121(v)(2) with respect to amounts that are or will be paid to the Participant under the Plan before they otherwise would be paid, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the lesser of: (i) the amount in the Participant's Deferral Accounts or (ii) the aggregate of the FICA taxes imposed and the income tax withholding related to such amount.
(c)      Delay for Payments in Violation of Federal Securities Laws or Other Applicable Law . In the event the Company reasonably anticipates that the payment of benefits as specified hereunder would violate Federal securities laws or other applicable law, the Committee may delay the payment under this Article III until the earliest date at which the Company reasonably anticipates that the making of such payment would not cause such violation.


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(d)      Delay for Insolvency or Compelling Business Reasons. In the event the Company determines that the making of any payment of benefits on the date specified hereunder would jeopardize the ability of the Company to continue as a going concern, the Committee may delay the payment of benefits under this Article III until the first calendar year in which the Company notifies the Committee that the payment of benefits would not have such effect.
(e)      Administrative Delay in Payment . The payment of benefits hereunder shall begin at the date specified in accordance with the provisions of the foregoing paragraphs of this Article III; provided that, in the case of administrative necessity, the payment of such benefits may be delayed up to the later of the last day of the calendar year in which payment would otherwise be made or the 15 th day of the third calendar month following the date on which payment would otherwise be made. Further, if, as a result of events beyond the control of the Participant (or following the Participant's death, the Participant's Beneficiary), it is not administratively practicable for the Committee to calculate the amount of benefits due to Participant as of the date on which payment would otherwise be made, the payment may be delayed until the first calendar year in which calculation of the amount is administratively practicable.
(f)      No Participant Election . Notwithstanding the foregoing provisions, if the period during which payment of benefits hereunder will be made occurs, or will occur, in two calendar years, the Participant shall not be permitted to elect the calendar year in which the payment shall be made.

3.11      409A Change in Control.
If a 409A Change in Control occurs before all Deferral Account(s) have been fully distributed, the remaining balance of all such Deferral Account(s) (including all Specified Date Accounts) shall be distributed in the form of a single lump sum payable at the end of the fifteenth (15th) month following the month in which such 409A Change in Control is effective, unless a Participant makes a timely election during the first three (3) months following the 409A Change in Control, in compliance with Section 3.5, to delay commencement of benefits from such Participant’s Deferral Account(s) by a minimum of five (5) years and to receive the benefits in the form of a lump sum, in which case distribution shall be made in accordance with such Participant’s modified election.
ARTICLE IV
FUNDING
4.1      Unsecured Obligation of Company.
(a)      Any benefit payable pursuant to this Plan shall be paid from the general assets of the Company. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create a trust of any kind or a fiduciary relationship between any Participant


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(or any other interested person) and the Company or the Committee, or require the Company to maintain or set aside any specific funds for the purpose of paying any benefit hereunder. To the extent that a Participant or any other person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company.
(b)      If the Company maintains a separate fund or makes specific investments, including the purchase of insurance on the life of the a Participant, to assure its ability to pay any benefits due under this Plan, neither the Participant nor the Participant's Beneficiary shall have any legal or equitable ownership interest in, or lien on, such fund, policy, investment or any other asset of the Company. The Company, in its sole discretion, may determine the exact nature and method of informal funding (if any) of the obligations under this Plan. If the Company elects to maintain a separate fund or makes specific investments to fund its obligations under this Plan, the Company reserves the right, in its sole discretion, to terminate such method of funding at any time, in whole or in part. In addition, the Company may, in its sole and absolute discretion, set aside or earmark funds in an amount, determined by the Committee, equal to the total amounts necessary to provide benefits under the Plan. The Committee may, at its discretion direct the Company to establish one or more grantor trusts to provide for the ultimate payment of the Company's obligations under this Plan, but the trust instrument for any such trust must specifically provide that its assets are subject to the claims of the Company's creditors. Such grantor trust may require that the Company fully fund said trust with respect to benefits accrued through the date of a Corporate Change in Control following such a Corporate Change in Control.
4.2      Cooperation of Participant.
If the Company, in its sole discretion, elects to invest in a life insurance, disability or annuity policy on the life of a Participant to assist with the informal funding of its obligations under this Plan, the Participant shall assist the Company, from time to time, promptly upon the request of the Company, in obtaining such insurance policy by supplying any information necessary to obtain such policy as well as submitting to any physical examinations required therefore. The Company shall be responsible for the payment of all premiums with respect to any whole life, variable, or universal life insurance policy purchased in connection with this Plan unless otherwise expressly agreed.
ARTICLE V
BENEFICIARIES
5.1      Beneficiary Designations.
Each Participant may, from time to time, designate one or more Beneficiaries and alternate Beneficiaries to receive the benefit that may be payable under the Plan in the event of the death of such Participant. Such designation shall be made in the manner prescribed by the Committee and shall only be effective when received by the Committee. The last such designation filed with the Committee shall control. Notwithstanding the foregoing, divorce after the filing of a designation or designations that name the spouse as beneficiary shall be deemed to revoke such designation or


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designations if written notice of such divorce is received by the Committee, or such other person as is designated by the Committee to receive such written notice, and such written notice is submitted in the manner prescribed by the Committee before payment has been made in accordance with the existing designation or designations on file with the Committee. If two or more persons designated as a Participant's Beneficiary are in existence with respect to a single benefit, the amount of any payment to the Beneficiary under this Plan shall be divided equally among such persons, unless the Participant's designation specifically provides to the contrary.
5.2    Default Beneficiaries.
If a Participant dies without a designated Beneficiary surviving him, or if all his Beneficiaries die before receiving the payment to which they are entitled, then the Committee is hereby empowered to designate a Beneficiary or Beneficiaries on his behalf, but only from among the following with priority in the order named herein, which shall include persons legally adopted:
(a)    his spouse;
(b)    his children and children of deceased children, per stirpes (by right of representation);
(c)    his parents; and
(d)    his legal representative properly appointed by the appropriate court upon his death.
Neither the Company nor any Subsidiary shall be named as Beneficiary. For the purpose of this Plan, the production of a certified copy of the death certificate of any Participant or other person shall be sufficient evidence of death, and the Committee shall be fully protected in relying thereon. In the absence of such proof, the Committee may rely upon such other evidence of death as it deems necessary or advisable.
Payment to a deceased Participant's Beneficiary or Beneficiaries shall operate as a complete discharge of all obligations under the Plan with respect to such deceased Participant and shall be final, binding and conclusive on all persons interested hereunder.

ARTICLE VI
CLAIMS PROCEDURES
6.1      Claims for Benefits.
The Committee shall determine the rights of any Participant to any deferred compensation benefits hereunder. Any Participant who believes that he has not received the deferred compensation benefits to which he is entitled under the Plan may file a claim in writing with the Committee. The Committee shall, no later than 90 days after the receipt of a claim (plus an additional period of 90 days if required for processing, provided that notice of the extension of time is given to the claimant with the first 90-day period), either allow or deny the claim in writing.


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A denial of a claim by the Committee, wholly or partially, shall be written in a manner intended to be understood by the claimant and shall include:
(a)      the specific reasons for the denial;
(b)      specific reference to pertinent Plan provisions on which the denial is based;
(c)      a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and
(d)      an explanation of the claim review procedure and the time limits applicable to such procedures, including a statement of the claimant's right to bring a civil action under Section 502(a) of ERISA.
6.2      Appeal Provisions.
A claimant whose claim is denied (or his duly authorized representative) may within 60 days after receipt of denial of a claim file with the Committee a written request for a review of such claim. If the claimant does not file a request for review of his claim within such 60-day period, the claimant shall be deemed to have acquiesced in the original decision of the Committee on his claim, the decision shall become final and the claimant will not be entitled to bring a civil action under Section 502(a) of ERISA. If such an appeal is so filed within such 60-day period the Company (or its delegate) shall conduct a full and fair review of such claim. During such review, the claimant (or the claimant's authorized representative) shall be given the opportunity to review all documents that are pertinent to his claim and to submit issues and comments in writing.
The Company shall mail or deliver to the claimant a written decision on the matter based on the facts and the pertinent provisions of the Plan within 60 days after the receipt of the request for review (unless special circumstances require an extension of up to 60 additional days, in which case written notice of such extension shall be given to the claimant prior to the commencement of such extension). Such decision shall be written in a manner intended to be understood by the claimant, shall state the specific reasons for the decision and the specific Plan provisions on which the decision was based and shall, to the extent permitted by law, be final and binding on all interested persons.
ARTICLE VII
MISCELLANEOUS
7.1      Withholding.
The Company shall be required to withhold from any distribution payable under the Plan an amount sufficient to satisfy all federal, state and local tax withholding requirements.
7.2      No Guarantee of Employment.


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Nothing in this Plan shall be construed as guaranteeing future employment to any Participant. Without limiting the generality of the preceding sentence, except as otherwise set forth in a written agreement, a Participant continues to be an employee of the Company solely at the will of the Company subject to discharge at any time, with or without cause. The benefits provided for herein for a Participant shall not be deemed to modify, affect or limit any salary or salary increases, bonuses, profit sharing or any other type of compensation of a Participant in any manner whatsoever. Nothing contained in this Plan shall affect the right of a Participant to participate in or be covered by or under any qualified or nonqualified pension, profit sharing, group, bonus or other supplemental compensation, retirement or fringe benefit Plan constituting any part of the Company's compensation structure whether now or hereinafter existing.
7.3      Payment to Guardian.
If a benefit payable hereunder is payable to a minor, to a person declared incompetent or to a person incapable of handling the disposition of his property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or person. The Committee may require such proof of incompetency, minority, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit.
7.4      Assignment.
No right or interest under this Plan of any Participant or Beneficiary shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of the Participant or Beneficiary.
7.5      Severability.
If any provision of this Plan or the application thereof to any circumstance(s) or person(s) is held to be invalid by a court of competent jurisdiction, the remainder of the Plan and the application of such provision to other circumstances or persons shall not be affected thereby.
7.6      Amendment and Termination.
The Company may at any time (without the consent of any Participant) modify, amend or terminate any or all of the provisions of this Plan; provided, however, that no modification, amendment or termination of this Plan shall adversely affect the rights of a Participant under the Plan without the consent of such Participant. Notwithstanding the foregoing or any provision of the Plan to the contrary, the Company may at any time (without the consent of any Participant) modify, amend or terminate any or all of the provisions of this Plan to the extent necessary to conform the provisions of the Plan with Section 409A of the Code regardless of whether such modification, amendment or termination of this Plan shall adversely affect the rights of a Participant under the Plan. Any amendment or termination of the Plan shall be at the direction of the Compensation Committee of the Board. Notwithstanding the foregoing, the Plan shall automatically terminate, without further action of the Company, upon Insolvency of the Company.


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7.7      Effect of Termination.
If the Plan is terminated, all deferrals shall thereupon cease, but Earnings shall continue to be credited to the Deferral Accounts in accordance with Section 2.4 hereof. Notwithstanding the foregoing, to the extent provided by the Company in accordance with Section 7.6, the Plan may be liquidated following a termination under any of the following circumstances:
(a)      the termination and liquidation of the Plan within twelve (12) months of a complete dissolution of the Company taxed under Section 331 of the Code or with the approval of a bankruptcy court pursuant to 11 U.S.C. § 503(b)(1)(A); provided that the amounts deferred under this Plan are included in the Participants' gross incomes in the latest of the following years (or, if earlier, the taxable year in which the amount is actually or constructively received): (i) the calendar year in which the Plan is terminated; (ii) the first calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the payment is administratively practicable.
(b)      the termination and liquidation of the Plan pursuant to irrevocable action taken by the Company within the thirty (30) days preceding or the twelve (12) months following a 409A Change of Control; provided that all Aggregated Plans are terminated and liquidated with respect to each Participant that experienced such change of control, so that under the terms of the termination and liquidation, all such Participants are required to receive all amounts of deferred compensation under this Plan and any other Aggregated Plans within twelve (12) months of the date the Company irrevocably takes all necessary action to terminate and liquidate this Plan and such other Aggregated Plans;
(c)      the termination and liquidation of the Plan, provided that: (i) the termination and liquidation does not occur proximate to a downturn in the Company's financial health; (2) the Company terminates and liquidates all Aggregated Plans; (3) no payments in liquidation of this Plan are made within twelve (12) months of the date the Company irrevocably takes all necessary action to terminate and liquidate this Plan, other than payments that would be payable under the terms of this Plan if the action to terminate and liquidate this Plan had not occurred; (4) all payments are made within twenty four (24) months of the date on which the Company irrevocably takes all action necessary to terminate and liquidate this Plan; and (5) the Company does not adopt a new Aggregated Plan at any time within three (3) years following the date on which the Company irrevocably takes all action necessary to terminate and liquidate the Plan.
7.8      Exculpation and Indemnification.
The Company shall indemnify and hold harmless the members of the Committee from and against any and all liabilities, costs and expenses incurred by such persons as a result of any act, or omission to act, in connection with the performance of such person's duties, responsibilities and obligations under the Plan, other than such liabilities, costs and expenses as may result from the gross negligence, willful misconduct, and/or criminal acts of such persons.



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7.9      Confidentiality.
In further consideration of the benefits available to each Participant under this Plan, each Participant shall agree that, except as such may be disclosed in financial statements and tax returns, or in connection with estate planning, all terms and provisions of this Plan, and any agreement between the Company and the Participant entered into pursuant this Plan, are and shall forever remain confidential until the death of Participant; and the Participant shall not reveal the terms and conditions contained in this Plan or any such agreement at any time to any person or entity, other than his respective financial and professional advisors unless required to do so by a court of competent jurisdiction or as otherwise may be required by law.
7.10      Gender and Number.
For purposes of interpreting the provisions of this Plan, the masculine gender shall be deemed to include the feminine, the feminine gender shall be deemed to include the masculine, and the singular shall include the plural unless otherwise clearly required by the context.
7.11      Governing Law.
Except as otherwise preempted by the laws of the United States, this Plan shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to its conflict of law provisions.




7.12      Effective Date.
Executed this _______ day of _________________, 2017, to be effective August 1, 2017.
ANDEAVOR (or, if prior to August 1, 2017, TESORO CORPORATION)
By:                         
Rob Patterson
VP, Compensation & Benefits



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ANDEAVOR
EXECUTIVE DEFERRED COMPENSATION PLAN
Exhibit 1

Notwithstanding any provision of the Plan to the contrary, each Participant who was employed by Tesoro Hawaii, LLC as of September 25, 2013, the date of the sale by the Company of all of its interest in Tesoro Hawaii, LLC, shall be immediately 100% vested in his Deferral Account as of such date.

































4815-1583-0558v.11 47436-12


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Exhibit 10.70
ANDEAVOR RESTORATION
PENSION PLAN
ARTICLE I
GENERAL PROVISIONS
1.1      Establishment and Purpose.
WHEREAS, Tesoro Corporation (the "Company") previously established the Tesoro Corporation Restoration Retirement Plan (the "Prior Plan") primarily for the purpose of providing benefits for a select group of management and highly compensated employees of the Company and its Subsidiaries that will restore benefits that may not otherwise be provided under the Pension Plan solely by reason of the limitations under Sections 401(a)(17) and 415 of the Code;
WHEREAS, the Plan is intended to qualify as a "top hat" plan under Sections 201(2), 301(a)(3) and 401(a)(l) of ERISA; and
WHEREAS, the Company previously amended and restated the Plan, effective January 1, 2009, to comply with Regulations under Section 409A of the Code and the Regulations promulgated thereunder and to clarify certain operational provisions of the Plan;
WHEREAS, the Company desires to amend and restate the Prior Plan, effective August 1, 2017, to incorporate prior amendments, to reflect a change in the name of the Company and to make such other changes as deemed appropriate;
NOW, THEREFORE, the Company adopts this amended, restated and renamed Andeavor Restoration Pension Plan (the “Plan”), effective August 1, 2017, as follows:
1.2      Definitions.
" Affiliate " means each entity that would be considered a single employer with the Company under Section 414(b) or Section 414(c) of the Code, except that the phrase "at least 50%" shall be substituted for the phrase "at least 80%" as used therein.
" Aggregated Plan " means all agreements, methods, programs and other arrangements that are aggregated with this Plan under Section 1.409A-1(c) of the Regulations.
" Beneficiary " means the person or persons designated to receive the Participant's Restoration Pension Benefit in the event of his death.
" Board " means the Board of Directors of the Company.
" Change in Control " means (i) there shall be consummated (A) any consolidation or merger of Company in which Company is not the continuing or surviving corporation or pursuant to which shares of Company's Common Stock would be converted into cash, securities or other property,


1


other than a merger of Company where a majority of the board of directors of the surviving corporation are, and for a one-year period after the merger continue to be, persons who were directors of Company immediately prior to the merger or were elected as directors, or nominated for election as director, by a vote of at least two-thirds of the directors then still in office who were directors of Company immediately prior to the merger, or (B) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Company, or (ii) the shareholders of Company shall approve any plan or proposal for the liquidation or dissolution of Company, or (iii) (A) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than Company or a Subsidiary or any employee benefit plan sponsored by Company or a Subsidiary, shall become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of securities of Company representing 35 percent or more of the combined voting power of Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, and (B) at any time during a period of one-year thereafter, individuals who immediately prior to the beginning of such period constituted the Board shall cease for any reason to constitute at least a majority thereof, unless election or the nomination by the Board for election by Company's shareholders of each new director during such period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period.
" Chief Executive Officer " means the Chief Executive Officer of the Company.
" Code " means the Internal Revenue Code of 1986, as amended from time to time.
" Committee " means, prior to August 1, 2017, the Tesoro Corporation Employee Benefits Committee and, effective August 1, 2017, the Andeavor Employee Benefits Committee appointed by the Compensation Committee of the Board, or such other committee designated by the Compensation Committee of the Board to discharge the duties of the Committee hereunder. Notwithstanding the foregoing, with respect to the investment of Plan assets held in the Trust, the term “Committee” means, prior to August 1, 2017, the Tesoro Corporation Pension Finance Committee and, effective August 1, 2017, the Andeavor Pension Finance Committee appointed by the Compensation Committee of the Board, or such other committee designated by the Compensation Committee of the Board to manage the investment of Plan assets held in the Trust.
" Company " means, prior to August 1, 2017, Tesoro Corporation, a Delaware corporation and, effective August 1, 2017, Andeavor, a Delaware corporation, or any successor thereto.
" Compensation " shall, unless otherwise determined by the Committee, have the same meaning as the term "Basic Compensation" in the Pension Plan (determined without regard to any limits imposed on compensation under the Code).
" Disability " means Disability as such term is defined under the Pension Plan.
" Distribution Date " means the date on which distributions to a Participant are to commence hereunder. Distribution Dates are determined as provided under the terms of the Plan.


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" Distribution Option " means the form in which payments to a Participant are to be paid. Distribution Options are determined as provided in Article 3 of the Plan.
" Insolvency " means, with respect to the Company: (1) an adjudication of bankruptcy; (2) the assignment for the benefit of creditors of or by the Company; (3) a material part or all of the property of the Company becomes subject to the control and direction of a receiver, which receivership is not dismissed within sixty (60) days of such receiver's appointment; or (4) the filing by the Company of a petition for relief under any federal or other bankruptcy or other insolvency law or for an arrangement with creditors.
" Participant " means any employee who has satisfied the eligibility requirements set forth in Section 1.4 of the Plan.
" Pension Benefit " means the benefit payable to a Participant under the Pension Plan.
" Pension Plan " means, prior to August 1, 2017, the Tesoro Corporation Retirement Plan, as amended, and, effective August 1, 2017, the Andeavor Pension Plan, as may be amended from time to time.
" Plan " means, prior to August 1, 2017, the Tesoro Corporation Restoration Retirement Plan, as amended from time to time, and, effective August 1, 2017, the Andeavor Restoration Pension Plan, effective August 1, 2017, as may be amended from time to time.
" Plan Year " means the twelve-month period beginning each January 1.
" Regulations " means the Treasury Regulations promulgated under the Code.
" Restoration Pension Benefit " means the annual benefit payable to the Participant as provided in Article 2.
" Separation from Service " means a reasonably anticipated permanent reduction in the level of bona fide services performed by the Participant for the Company and its Affiliates, for any reason, to 20% or less of the average level of bona fide services performed by the Participant for the Company and its Affiliates (whether as an employee or an independent contractor) in the immediately preceding thirty-six (36) months (or the full period of service to the Company and its Affiliates if the Participant has been providing services to the Company and its Affiliates for fewer than thirty-six (36) months), or the Participant's death. The determination of whether a Separation from Service has occurred shall be made by the Committee in accordance with the provisions of Section 409A of the Code and the Regulations promulgated thereunder.
" Subsidiary " means any entity in which the Company owns or otherwise controls, directly or indirectly, stock or other ownership interests having the voting power to elect a majority of the board of directors, or other governing group having functions similar to a board of directors, as determined by the Committee.
" Supplemental Executive Retirement Plan " or " SERP " means, prior to August 1, 2017, the Tesoro Corporation Supplemental Executive Retirement Plan, as amended, and, effective August


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1, 2017, the Andeavor Supplemental Executive Retirement Plan, as may be amended from time to time.
1.3      Administration.
(a)      The Committee shall administer the Plan and have sole and absolute authority and discretion to decide all matters relating to the administration of the Plan, including, without limitation, determining the rights and status of Participants or their Beneficiaries under the Plan. The Committee is authorized to interpret the Plan, to adopt administrative rules, regulations, and guidelines for the Plan, and may correct any defect, supply any omission or reconcile any inconsistency or conflict in the Plan. The Committee's determinations under the Plan need not be uniform among all Participants, or classes or categories of Participants, and may be applied to such Participants, or classes or categories of Participants, as the Committee, in its sole and absolute discretion, considers necessary, appropriate or desirable. All determinations by the Committee shall be final, conclusive and binding on the Company, the Participant and any and all interested parties.
(b)      The Committee may delegate such of its powers and authority under the Plan to the Company's officers or such other person(s) as it deems necessary or appropriate. In the event of such delegation, all references to the Committee in this Plan shall be deemed references to such officers or such other person(s) as it relates to those aspects of the Plan that have been delegated.
(c)      Any action taken by the Committee with respect to the rights or benefits under the Plan of any Participant shall be subject to correction by the Committee as to payments not yet made to such person, and acceptance of any deferred compensation benefits under the Plan constitutes acceptance of and agreement to the Committee's or the Company's making any appropriate adjustments in future payments to such person (or to recover from such person) any excess payment or underpayment previously made to him.
(d)      Notwithstanding any provision of the Plan to the contrary, if any benefit provided under this Plan is subject to the provisions of Section 409A of the Code and the Regulations issued thereunder, the provisions of the Plan shall be administered, interpreted and construed in a manner necessary to comply with Section 409A and the Regulations issued thereunder (or disregarded to the extent such provision cannot be so administered, interpreted or construed).
1.4      Eligibility and Participation.
(a)      Participation in the Plan is limited to those individuals who are within the category of a select group of management and highly compensated employees as referred to in Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, and who are within the group of officers and key management employees of the Company and its Subsidiaries that is set forth on Exhibit 1 attached hereto. Notwithstanding the foregoing, individuals who are first employed by the Company or a Subsidiary on or after January 1, 2011 and who are eligible to participate in the SERP upon their employment shall not be eligible to participate in the


4


Plan unless they subsequently become ineligible to participate in the SERP and are otherwise eligible to participate herein as described above.
(b)      A Participant shall cease to be a Participant upon receiving payment for the full amount of benefits to which the Participant is entitled under the Plan or becomes ineligible to participate based on eligibility status as determined in Section 1.4(a) of this Plan. Once a Participant is no longer eligible to actively participate in the Plan, he shall not be entitled to any further accrual of a Restoration Pension Benefit hereunder.
ARTICLE 2
RESTORATION PENSION BENEFITS
2.1      Benefit Determination
Subject to Section 3.3, upon a Participant's Separation from Service, such Participant shall be entitled to receive a Restoration Pension Benefit in the event the Pension Benefit of such Participant is limited by the application of Section 401(a)(17) or Section 415 of the Code. The Restoration Pension Benefit shall be equal to the difference between: (1) the Pension Benefit paid to the Participant; and (2) the benefit that would have otherwise been paid to the Participant under the Pension Plan, without regard to the limitations of Section 401(a)(17) and Section 415 of the Code, reduced by the amount of any qualified and nonqualified retirement benefits from a prior employer of the Participant if said prior employer or employer facility was previously acquired by or merged into the Company or any Affiliate and benefit service with such prior employer is recognized by the Company under any qualified or nonqualified retirement plan, pursuant to the terms of an acquisition agreement or as otherwise provided under a separate agreement with the Company or an Affiliate. Such benefit shall be calculated as of the first day of the calendar month next following the month of the Participant's Separation from Service. Any amount payable hereunder will be subject to the same actuarial assumptions and discounts for early retirement as are specified in the Pension Plan. The Restoration Pension Benefit described above shall be payable to the Participant upon his Separation from Service, as provided in Article 3 hereof.
2.2      Additional Time Recognition
If an event occurs for a Participant who has an employment agreement or a management stability agreement with the Company that causes the recognition of additional service credit under the terms of such agreement, the additional service will be recognized only for purposes of calculating the Restoration Pension Benefit.
ARTICLE 3
DISTRIBUTIONS
3.1      Distribution of Benefits.
Except as otherwise provided in this Article 3, a Participant's Restoration Pension Benefit shall be paid in accordance with this Section 3.1.


5


(a)      General Payment Rules . Benefits will be paid on the first day of each month. The last payment will be on the first day of the month in which the Participant dies except as otherwise provided under another form of payment elected under Section 3.2.
(b)      Commencement of Benefits .
(i)      Death of Participant . In the event of the Participant's death, the Participant's Restoration Pension Benefit shall be paid or commence within ninety (90) days of the Participant's death.
(ii)      Separation from Service . In the event of the Participant's Separation from Service for any reason other than due to the Participant's death, the Participant's Restoration Pension Benefit shall be paid or commence on the first day of the seventh (7th) calendar month beginning after such Separation from Service. The first payment shall include all amounts that would otherwise have been paid had distribution commenced on the first day of the calendar month next following the calendar month of the Participant's Separation from Service, together with interest, which shall be calculated by using the interest rate used for purposes of determining the present value of a lump sum payment under Section 3.2 and in effect on the date of the Participant's Separation from Service.
3.2      Distribution Option/Manner of Payment.
In the absence of an affirmative election to the contrary, each Participant's Restoration Pension Benefit shall be made in a form of a straight life annuity; provided, however, if the present lump sum value of the Participant's Restoration Pension Benefit (determined in accordance with the applicable actuarial assumptions set forth in the Pension Plan, as in effect prior to its amendment and restatement effective January 1, 2008) is less than $100,000, the Restoration Pension Benefit will be paid in a single-lump sum. All payments under the Plan shall be made in cash. Subject to the foregoing, each Participant may elect the Distribution Option for his Restoration Pension Benefit, in accordance with such election procedures as are established by the Committee, which Distribution Options shall include any actuarially equivalent annuity form of payment permitted under the Pension Plan, but shall not include a lump sum payment. Actuarial equivalence shall be determined in accordance with the applicable actuarial assumptions set forth in the Pension Plan. Notwithstanding any provision herein to the contrary, in the event of a Participant's death, the form of payment of the Restoration Pension Benefit shall be determined in accordance with Section 3.5.
3.3      Vesting.
Subject to the full vesting of a Participant's Restoration Pension Benefit following a Change in Control, as set forth in Section 3.4, Restoration Pension Benefits will only be paid to a Participant who has been credited with three (3) years of vesting service (the calculation of such vesting service to be determined in accordance with the provisions of the Pension Plan and to include service credited under Section 3.6 as applicable). A Participant who is not credited with the requisite vesting service will not be entitled to a Restoration Pension Benefit.


6


3.4      Change in Control.
Notwithstanding the foregoing provisions of Article 3, upon a Change in Control, a Participant will become fully vested in his Restoration Pension Benefit accrued as of the date of the Change in Control. The payment of Restoration Pension Benefits will not be accelerated following a Change in Control and will only be paid in accordance with Section 3.1 to the Participant following Separation from Service. All Restoration Pension Benefits payable to a Participant following a Change in Control will be paid in the form determined in accordance with the provisions of Section 3.2.
3.5      Death.
In the event that a Participant dies following completion of three (3) years of vesting service and prior to the commencement of his Restoration Pension Benefit, his Beneficiary will, subject to the mandatory lump sum distribution provisions of Section 3.2, receive the Restoration Pension Benefit, payable in a single life annuity for the life of the Beneficiary; provided, however, in lieu of payment of such benefit in the form of a single life annuity, the benefit may be paid in the form of an actuarially equivalent form of benefit permitted under the Pension Plan, if elected by the Beneficiary, provided, however, that a lump sum benefit may not be elected. Notwithstanding the foregoing, in the event that the Beneficiary is not the spouse of the deceased Participant (as determined in accordance with the Pension Plan), the benefit will be paid in a lump-sum payment calculated as if the Beneficiary were the same age as the Participant. Death prior to completion of the requisite three (3) years of vesting service will result in no Restoration Pension Benefit being payable to the Beneficiary.
3.6      Disability.
In the event of a Participant's Disability, for purposes of determining the Participant's Restoration Pension Benefit and calculating vesting service, the Participant shall be deemed to have remained in active employment with the Company or a Subsidiary at the same rate of Compensation until the earlier of the Participant's attainment of his Normal Retirement Date (as defined under the Pension Plan) or the date the Participant no longer suffers from a Disability. The Participant's Restoration Pension Benefit shall be paid as set forth in Sections 3.1 and 3.2.
3.7      Change in Time of Payments.
Notwithstanding any provision of this Article III to the contrary, the benefits payable hereunder may, to the extent expressly provided in this Section 3.7, be paid prior to or later than the date on which they would otherwise be paid to the Participant.
(a)      Distribution in the Event of Income Inclusion Under Code Section 409A . If any portion of a Participant's Restoration Pension Benefit is required to be included in income by the Participant prior to receipt due to a failure of this Plan or any Aggregated Plan to comply with the requirements of Code Section 409A and the Regulations, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the lesser of: (i) the portion of his or her Restoration Pension Benefit required to


7


be included in income as a result of the failure of the Plan or any Aggregated Plan to comply with the requirements of Code Section 409A and the Regulations, or (ii) the remainder of the Participant's Restoration Pension Benefit.
(b)      Distribution Necessary to Satisfy Applicable Tax Withholding . If the Company is required to withhold amounts to pay the Participant's portion of the Federal Insurance Contributions Act (FICA) tax imposed under Code Sections 3101, 3121(a) or 3121(v)(2) with respect to amounts that are or will be paid to the Participant under the Plan before they otherwise would be paid, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the lesser of: (i) the amount of the Participant's Restoration Pension Benefit or (ii) the aggregate of the FICA taxes imposed and the income tax withholding related to such amount.
(c)      Delay for Payments in Violation of Federal Securities Laws or Other Applicable Law . In the event the Company reasonably anticipates that the payment of benefits as specified hereunder would violate Federal securities laws or other applicable law, the Committee may delay the payment under this Article III until the earliest date at which the Company reasonably anticipates that the making of such payment would not cause such violation.
(d)      Delay for Insolvency or Compelling Business Reasons. In the event the Company determines that the making of any payment of benefits on the date specified hereunder would jeopardize the ability of the Company to continue as a going concern, the Committee may delay the payment of benefits under this Article III until the first calendar year in which the Company notifies the Committee that the payment of benefits would not have such effect.
(e)      Administrative Delay in Payment . The payment of benefits hereunder shall begin at the date specified in accordance with the provisions of the foregoing paragraphs of this Article III; provided that, in the case of administrative necessity, the payment of such benefits may be delayed up to the later of the last day of the calendar year in which payment would otherwise be made or the 15 th day of the third calendar month following the date on which payment would otherwise be made. Further, if, as a result of events beyond the control of the Participant (or following the Participant's death, the Participant's Beneficiary or Beneficiaries), it is not administratively practicable for the Committee to calculate the amount of benefits due to Participant as of the date on which payment would otherwise be made, the payment may be delayed until the first calendar year in which calculation of the amount is administratively practicable.
(f)      Impermissible Designation . Notwithstanding the foregoing provisions, if the period during which payment of benefits hereunder will be made occurs, or will occur, in two calendar years, the Participant shall not be permitted to designate the calendar year in which the payment shall be made.



8


ARTICLE 4
FUNDING BY COMPANY
4.1      Unsecured Obligation of Company.
(a)      Any benefit payable pursuant to this Plan shall be paid from the general assets of the Company. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create a trust of any kind or a fiduciary relationship between any Participant (or any other interested person) and the Company or the Committee, or require the Company to maintain or set aside any specific funds for the purpose of paying any benefit hereunder. To the extent that a Participant or any other person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company.
(b)      If the Company maintains a separate fund or makes specific investments, including the purchase of insurance insuring the life of a Participant, to assure its ability to pay any benefits due under this Plan, neither the Participant nor the Participant's Beneficiary or Beneficiaries shall have any legal or equitable ownership interest in, or lien on, such fund, policy, investment or any other asset of the Company. The Company, in its sole discretion, may determine the exact nature and method of informal funding (if any) of the obligations under this Plan. If the Company elects to maintain a separate fund or makes specific investments to fund its obligations under this Plan, the Company reserves the right, in its sole discretion, to terminate such method of funding at any time, in whole or in part.
4.2      Cooperation of Participant.
If the Company, in its sole discretion, elects to invest in a life insurance, disability or annuity policy on the life of Participant to assist it with the informal funding of its obligations under this Plan, Participant shall assist the Company, from time to time, promptly upon the request of the Company, in obtaining such insurance policy by supplying any information necessary to obtain such policy as well as submitting to any physical examinations required therefore. The Company shall be responsible for the payment of all premiums with respect to any whole life, variable, or universal life insurance policy purchased in connection with this Plan unless otherwise expressly agreed.
ARTICLE 5
BENEFICIARIES
The Participant's designated Beneficiary under the Plan shall be determined in accordance with the beneficiary designation made by the Participant under the Pension Plan.



9


ARTICLE 6
CLAIMS PROCEDURES
6.1      Claims for Benefits.
The Committee shall determine the rights of any Participant to any deferred compensation benefits hereunder. Any Participant who believes that he has not received the deferred compensation benefits to which he is entitled under the Plan may file a claim in writing with the Committee. The Committee shall, no later than 90 days after the receipt of a claim (plus an additional period of 90 days if required for processing, provided that notice of the extension of time is given to the claimant within the first 90-day period), either allow or deny the claim in writing. If a claimant does not receive written notice of the Committee's decision on his claim within the above-mentioned period, the claim shall be deemed to have been denied in full.
A denial of a claim by the Committee, wholly or partially, shall be written in a manner calculated to be understood by the claimant and shall include:
(a)      the specific reasons for the denial;
(b)      specific reference to pertinent Plan provisions on which the denial is based;
(c)      a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and
(d)      (an explanation of the claim review procedure and the time limits applicable to such procedures, including a statement of the claimant's right to bring a civil action under Section 502(a) of ERISA.
6.2      Appeal Provisions.
A claimant whose claim is denied (or his duly authorized representative) may within 60 days after receipt of denial of a claim file with the Committee a written request for a review of such claim. If the claimant does not file a request for review of his claim within such 60-day period, the claimant shall be deemed to have acquiesced in the original decision of the Committee on his claim, the decision shall become final and the claimant will not be entitled to bring a civil action under Section 502(a) of ERISA. If such an appeal is so filed within such 60-day period) the Company (or its delegate) shall conduct a full and fair review of such claim. During such review, the claimant (or the claimant's authorized representative) shall be given the opportunity to review all documents that are pertinent to his claim and to submit issues and comments in writing.
The Company shall mail or deliver to the claimant a written decision on the matter based on the facts and the pertinent provisions of the Plan within 60 days after the receipt of the request for review (unless special circumstances require an extension of up to 60 additional days, in which case written notice of such extension shall be given to the claimant prior to the commencement of such extension). Such decision shall be written in a manner calculated to be understood by the


10


claimant, shall state the specific reasons for the decision and the specific Plan provisions on which the decision was based and shall, to the extent permitted by law, be final and binding on all interested persons. If the decision on review is not furnished to the claimant within the above-mentioned time period, the claim shall be deemed to have been denied on review.
ARTICLE 7
MISCELLANEOUS
7.1      Withholding.
The Company shall have the right to withhold from any Restoration Pension Benefits payable under the Plan or other wages payable to a Participant an amount sufficient to satisfy all federal, state and local tax withholding requirements, if any, arising from or in connection with the Participant's receipt or vesting of deferred compensation benefits under the Plan.
7.2      No Guarantee of Employment.
Nothing in this Plan shall be construed as guaranteeing future employment to any Participant. Without limiting the generality of the preceding sentence, except as otherwise set forth in a written agreement, a Participant continues to be an employee of the Company solely at the will of the Company subject to discharge at any time, with or without cause. The benefits provided for herein for a Participant shall not be deemed to modify, affect or limit any salary or salary increases, bonuses, profit sharing or any other type of compensation of a Participant in any manner whatsoever. Nothing contained in this Plan shall affect the right of a Participant to participate in or be covered by or under any qualified or nonqualified pension, profit sharing, group, bonus or other supplemental compensation, retirement or fringe benefit Plan constituting any part of the Company's compensation structure whether now or hereinafter existing.
7.3      Payment to Guardian.
If a benefit payable hereunder is payable to a minor, to a person declared incompetent or to a person incapable of handling the disposition of his property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or person. The Committee may require such proof of incompetency, minority, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit.
7.4      Assignment.
No right or interest under this Plan of any Participant or Beneficiary shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of the Participant or Beneficiary.
7.5      Severability.


11


If any provision of this Plan or the application thereof to any circumstance(s) or person(s) is held to be invalid by a court of competent jurisdiction, the remainder of the Plan and the application of such provision to other circumstances or persons shall not be affected thereby.
7.6      Amendment and Termination.
The Company may at any time (without the consent of any Participant) modify, amend or terminate any or all of the provisions of this Plan; provided, however, that no modification, amendment or termination of this Plan shall adversely affect the rights of a Participant under the Plan without the consent of such Participant. Notwithstanding the foregoing or any provision of the Plan to the contrary, the Company may at any time (without the consent of any Participant) modify, amend or terminate any or all of the provisions of this Plan to the extent necessary to conform the provisions of the Plan with Section 409A of the Code regardless of whether such modification, amendment or termination of this Plan shall adversely affect the rights of a Participant under the Plan.
7.7      Effect of Termination.
If the Plan is terminated, the accrual of all benefits hereunder shall thereupon cease. Notwithstanding the foregoing, to the extent provided by the Company in accordance with Section 7.6, the Plan may be liquidated following a termination under any of the following circumstances:
(a)      the termination and liquidation of the Plan within twelve (12) months of a complete dissolution of the Company taxed under Section 331 of the Code or with the approval of a bankruptcy court pursuant to 11 U.S.C. § 503(b)(1)(A); provided that the benefits under this Plan are included in the Participants' gross incomes in the latest of the following years (or, if earlier, the taxable year in which the amount is actually or constructively received): (i) the calendar year in which the Plan is terminated; (ii) the first calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the payment is administratively practicable.
(b)      the termination and liquidation of the Plan pursuant to irrevocable action taken by the Company within the thirty (30) days preceding or the twelve (12) months following a change of control within the meaning of Section 409A of the Code; provided that all Aggregated Plans are terminated and liquidated with respect to each Participant that experienced such change of control, so that under the terms of the termination and liquidation, all such Participants are required to receive all amounts of deferred compensation under this Plan and any other Aggregated Plans within twelve (12) months of the date the Company irrevocably takes all necessary action to terminate and liquidate this Plan and such other Aggregated Plans;
(c)      the termination and liquidation of the Plan, provided that: (i) the termination and liquidation does not occur proximate to a downturn in the Company's financial health; (2) the Company terminates and liquidates all Aggregated Plans; (3) no payments in liquidation of this Plan are made within twelve (12) months of the date the Company irrevocably takes all necessary action to terminate and liquidate this Plan, other than


12


payments that would be payable under the terms of this Plan if the action to terminate and liquidate this Plan had not occurred; (4) all payments are made within twenty four (24) months of the date on which the Company irrevocably takes all action necessary to terminate and liquidate this Plan; and (5) the Company does not adopt a new Aggregated Plan at any time within three (3) years following the date on which the Company irrevocably takes all action necessary to terminate and liquidate the Plan.
7.8      Exculpation and Indemnification.
The Company shall indemnify and hold harmless the members of the Committee from and against any and all liabilities, costs and expenses incurred by such persons as a result of any act, or omission to act, in connection with the performance of such person's duties, responsibilities and obligations under the Plan, other than such liabilities, costs and expenses as may result from the gross negligence, willful misconduct, and/or criminal acts of such persons.
7.9      Leave of Absence.
The Company may, in its sole discretion, permit a Participant to take a leave of absence for a period. Any such leave of absence must be approved by the Company. During this time, the Participant will still be considered to be employed by the Company for purposes of this Plan, unless otherwise provided by the Company in accordance with applicable policies and procedures.
7.10      Gender and Number.
For purposes of interpreting the provisions of this Plan, the masculine gender shall be deemed to include the feminine, the feminine gender shall be deemed to include the masculine, and the singular shall include the plural unless otherwise clearly required by the context.
7.11      Governing Law.
Except as otherwise preempted by the laws of the United States, this Plan shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to its conflict of law provisions.
7.12      Effective Date.
The effective date of the amended and restated Plan, as signed this 28th day of July, 2017, is August 1, 2017.

ANDEAVOR (or, prior to August 1, 2017, TESORO CORPORATION)


By: /s/ Rob Patterson                    
Rob Patterson
Vice President, Compensation & Benefits


13


ANDEAVOR RESTORATION
PENSION PLAN
Exhibit 1


Effective as of January 1, 2011 and continuing for purposes of this amended and restated Plan, the following is the group of officers and key management employees of the Company eligible to participate in the Andeavor Restoration Pension Plan, except as otherwise provided in Section 1.4(a) of the Plan:
Each Employee whose Pension Benefit is limited by the application of Section 401(a)(17) or Section 415 of the Internal Revenue Code, but only if such Employee is a member of a select group of management and highly compensated employees, as determined by the Committee, and is not designated for participation in the Andeavor Executive Security Plan or is not otherwise provided a separate supplemental retirement benefit as a part of an employment agreement with the Company or a Subsidiary.































4842-3746-9726v.8 47436-9


14


Exhibit 10.86
ANDEAVOR
BOARD OF DIRECTORS
DEFERRED COMPENSATION PLAN
(as amended and restated effective August 1, 2017)









ANDEAVOR
BOARD OF DIRECTORS
DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS................................................................................................................     1

1.1    ACCOUNT........................................................................................................................    1
1.2    AGGREGATED PLAN.....................................................................................................    1
1.3    BENEFICIARY..................................................................................................................    1
1.4    BOARD.............................................................................................................................    2
1.5    CHANGE OF CONTROL................................................................................................    2
1.6    CODE................................................................................................................................    2
1.7    COMMITTEE...................................................................................................................    2
1.8    COMMON STOCK..........................................................................................................    2
1.9    CORPORATION...............................................................................................................    2
1.10    DEFERRAL LEDGER.....................................................................................................    2
1.11    DEFERRED CASH ACCOUNT......................................................................................    3
1.12    DEFERRED PHANTOM STOCK ACCOUNT .............................................................    3
1.13    DEFERRED RESTRICTED UNIT ACCOUNT .............................................................    3
1.14    DISABILITY ...................................................................................................................    3
1.15    DISTRIBUTION SCHEDULE .......................................................................................    3
1.16    EFFECTIVE DATE .........................................................................................................    3
1.17    FAIR MARKET VALUE ................................................................................................    3
1.18    LONG-TERM INCENTIVE PLAN ................................................................................    3
1.19    PARTICIPANT ................................................................................................................    4
1.20    PLAN ..............................................................................................................................    4
1.21    PLAN YEAR ..................................................................................................................    4
1.22    REGULATIONS .............................................................................................................    4
1.23    RESTRICTED STOCK UNIT ........................................................................................    4
1.24    SEPARATION FROM SERVICE ...................................................................................    4
1.25    SPOUSE ..........................................................................................................................    4
1.26    TRUST ...........................................................................................................................    4
1.27    UNIT ...............................................................................................................................    4
1.28    VALUATION DATE ......................................................................................................    4

ARTICLE II ELIGIBILITY AND PARTICIPATION......................................................................     4

2.1    ELIGIBILITY ..................................................................................................................    4
2.2    PARTICIPATION .............................................................................................................    5

ARTICLE III DEFERRED CASH ACCOUNT ELECTIONS........................................................     5

3.1    ELECTIVE DEFERRALS UPON COMMENCEMENT OF PARTICIPATION.............    5
3.2    ANNUAL ELECTIVE DEFERRALS...............................................................................    5
3.3    SUBSEQUENT ELECTIONS REGARDING TIMING AND METHOD OF PAYMENT    5
3.4    RESTRICTIONS ON DEFERRAL AMOUNT................................................................    6


i

TABLE OF CONTENTS
(continued)
Page

ARTICLE IV DEFERRED PHANTOM STOCK ACCOUNT ELECTIONS...............................     6

4.1    DEFERRALS..................................................................................................................     6
4.2    SUBSEQUENT ELECTIONS REGARDING METHOD OF PAYMENT.....................    6

ARTICLE V DEFERRED RESTRICTED UNIT ACCOUNT ELECTIONS ...............................    6

5.1    ELECTIVE DEFERRALS ...............................................................................................    6

ARTICLE VI CREDITING ACCOUNTS ........................................................................................     7

6.1    ESTABLISHING A PARTICIPANT’S ACCOUNT ........................................................    7
6.2    CREDITS TO THE DEFERRED CASH ACCOUNT .....................................................    7
6.3    CREDITS TO THE DEFERRED PHANTOM STOCK ACCOUNT ..............................    7
6.4    CREDITS TO THE DEFERRED RESTRICTED UNIT ACCOUNT .............................    8

ARTICLE VII VESTING ....................................................................................................................    8

ARTICLE VIII DISTRIBUTIONS ....................................................................................................    8

8.1    GENERAL .......................................................................................................................    8
8.2    DISTRIBUTION UPON DEATH ...................................................................................    9
8.3    DISABILITY ...................................................................................................................    9
8.4    CHANGE OF CONTROL .............................................................................................    10
8.5    UNFORESEEABLE EMERGENCY .............................................................................    10
8.6    CONVERSION OF UNITS TO CASH .........................................................................    10
8.7    CASHOUT DISTRIBUTIONS ......................................................................................    10
8.8    CHANGE IN TIME OF PAYMENTS ............................................................................    11

ARTICLE IX ADMINISTRATION .................................................................................................    12

9.1    COMMITTEE APPOINTMENT ...................................................................................    12
9.2    COMMITTEE ORGANIZATION AND VOTING .......................................................    12
9.3    POWERS OF THE COMMITTEE ................................................................................    12
9.4    COMMITTEE DISCRETION .......................................................................................    13
9.5    COMMITTEE DISCRETION ON CHANGE OF CONTROL .....................................    13
9.6    ANNUAL STATEMENTS .............................................................................................    13
9.7    REIMBURSEMENT OF EXPENSES ...........................................................................    13
9.8    INDEMNIFICATION .....................................................................................................    13

ARTICLE X AMENDMENT AND/OR TERMINATION .............................................................    13

10.1    AMENDMENT OR TERMINATION OF THE PLAN .................................................    13
10.2    NO RETROACTIVE EFFECT ON ACCOUNT ...........................................................    13
10.3    EFFECT OF TERMINATION .......................................................................................    13

ARTICLE XI UNFUNDED PLAN ...................................................................................................    14

11.1    BENEFITS FROM GENERAL ASSETS OF CORPORATION ...................................    14
11.2    NO REQUIREMENT TO FUND ..................................................................................    15
11.3    ADOPTION OF TRUST ...............................................................................................    15
11.4    STATUS AS UNSECURED CREDITOR .....................................................................    15

ARTICLE XII MISCELLANEOUS .................................................................................................    15

12.1    DISTRIBUTIONS TO INCOMPETENTS OR MINORS ..............................................    15


ii

TABLE OF CONTENTS
(continued)
Page

12.2    NONALIENATION OF BENEFITS ..............................................................................    15
12.3    RELIANCE UPON INFORMATION ............................................................................    16
12.4    SEVERABILITY ............................................................................................................    16
12.5    NOTICE ..........................................................................................................................    16
12.6    GENDER AND NUMBER .............................................................................................    16
12.7    GOVERNING LAW .......................................................................................................    16


iii



ANDEAVOR
BOARD OF DIRECTORS
DEFERRED COMPENSATION PLAN
WHEREAS, Tesoro Corporation (the “Corporation”) previously established the Tesoro Corporation Board of Directors Deferred Compensation Plan, effective April 1, 1995, as subsequently amended and restated effective January 1, 2009 (the “Deferred Compensation Plan”), to permit non-employee members of the Board to voluntarily defer any part or all of the cash portion of their directors’ fees;
WHEREAS, the Corporation also previously established the Tesoro Corporation Board of Directors Deferred Phantom Stock Plan, effective March 6, 1997, as subsequently amended and restated effective January 1, 2009 (the “Deferred Phantom Stock Plan”), for the benefit of non-employee members of the Board, pursuant to which certain director fees, together with voluntary deferrals, were credited annually on behalf of said non-employee members of the Board as units of beneficial interest; and
WHEREAS, the Corporation previously merged the Deferred Phantom Stock Plan into the Deferred Compensation Plan, effective May 1, 2009, and, accordingly, amended and restated the Deferred Compensation Plan to incorporate the changes contemplated in connection with said merger;
WHEREAS, the Corporation most recently amended and restated the Deferred Compensation Plan (the “Plan”) effective January 1, 2013 to reflect changes to director compensation;
WHEREAS, effective August 1, 2017, the name of the Corporation changed to “Andeavor” and, as a result thereof, the Corporation wishes to again amend and restate the Plan to reflect the change in the name of the Corporation and to make such other changes as determined appropriate;
NOW, THEREFORE, the Plan is hereby amended and restated in its entirety, effective August 1, 2017, the terms and conditions of which are as follows:
ARTICLE I
DEFINITIONS
1.1      Account . “Account” means a bookkeeping account in the Deferral Ledger that reflects the benefits to which a Participant is entitled under this Plan.
1.2      Aggregated Plan . “Aggregated Plan” means all agreements, methods, programs, and other arrangements sponsored by the Corporation that would be aggregated with this Plan under Section 1.409A-1(c) of the Regulations.
1.3      Beneficiary . “Beneficiary” means a person or entity designated by the Participant in accordance with Section 8.2(b) hereof to receive amounts credited to his Account following his death.




1.4      Board . “Board” means the Board of Directors of the Corporation.
1.5      Change of Control . “Change of Control” means the occurrence of any one of the following events:
(a)      any one person, or more than one person acting as a group, acquires ownership of stock of the Corporation that, together with stock held by such person or group, constitutes more than 50% of the total Fair Market Value or total voting power of the stock of the Corporation;
(b)      any one person, or more than one person acting as a group, acquires (or has acquired during any twelve (12) month period) ownership of stock of the Corporation possessing 30% or more of the total voting power of the stock of the Corporation;
(c)      a majority of the members of the Board is replaced during any twelve (12) month period by directors whose appointment is not endorsed by a majority of the members of the Board before the date of the appointment or election; or
(d)      any one person, or more than one person acting as a group, acquires (or has acquired during any twelve (12) month period) assets from the Corporation that have a total gross Fair Market Value equal to or more than 40% of the total gross Fair Market Value of all of the assets of the Corporation immediately before such acquisition or acquisitions.
The determination of whether a Change of Control has occurred shall be made by the Committee in accordance with the provisions of Code Section 409A and the Regulations promulgated thereunder.
1.6      Code . “Code” means the Internal Revenue Code of 1986, as amended from time to time.
1.7      Committee . “Committee” means the committee designated by the Corporation to administer the Plan.
1.8      Common Stock . “Common Stock” means the common stock, $.16 par value, of the Corporation.
1.9      Corporation . “Corporation” means, prior to August 1, 2017, Tesoro Corporation and, effective August 1, 2017, Andeavor, or any successor entity that maintains the Plan.
1.10      Deferral Ledger . “Deferral Ledger” means the ledger established and maintained by the Committee or, as applicable, a delegate of the Committee, to reflect each Participant’s Account under the Plan. Such Deferral Ledger shall contain, as applicable, a Deferred Phantom Stock Account, a Deferred Cash Account and a Deferred Restricted Unit Account, to reflect the benefit of each Participant under the Plan. The Deferral Ledger may be maintained separately as to a Participant’s Deferred Restricted Unit Account.


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1.11      Deferred Cash Account. “Deferred Cash Account” means a bookkeeping account in the Deferral Ledger which reflects a Participant’s deferrals under Article III. The Deferred Cash Account shall include all amounts previously credited to the Deferred Cash Account of a Participant prior to the Effective Date.
1.12      Deferred Phantom Stock Account. “Deferred Phantom Stock Account” means a bookkeeping account in the Deferral Ledger which reflects a Participant’s deferrals under Article IV prior to the Effective Date. The Deferred Phantom Stock Account shall include all amounts previously credited to the Deferred Phantom Stock Account of a Participant prior to the Effective Date.
1.13      Deferred Restricted Unit Account . “Deferred Restricted Unit Account” means a bookkeeping account in the Deferral Ledger which reflects Restricted Stock Units, the distribution of which a Participant has elected to defer under the Long-Term Incentive Plan, together with the dividend equivalents attributable thereto.
1.14      Disability . “Disability” means a Participant’s inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months. The determination of whether a Participant suffers from a Disability shall be made by the Committee in accordance with the provisions of Code Section 409A and the Regulations promulgated thereunder.
1.15      Distribution Schedule . “Distribution Schedule” shall mean the time and method of distributions elected (or deemed elected) by a Participant, which method may be either a lump sum payment or installment payments, pursuant to which distribution of the Participant’s Deferred Cash Account and Deferred Phantom Stock Account shall be made or shall commence. Such election shall be made at the time and in the manner described in Articles III and IV hereof; provided, however, that a Distribution Schedule elected by the Participant pursuant to which installment payments are to be made must require annual installments for a period not to exceed ten (10) years.
1.16      Effective Date. “Effective Date” means August 1, 2017, the date on which this amended and restated Plan is effective, except as otherwise specifically set forth herein. The Plan shall be effective only with respect to those non-employee directors of the Corporation who are in active service on the Effective Date.
1.17      Fair Market Value . “Fair Market Value” means the closing price of the Common Stock on the New York Stock Exchange on the determination date, or if the Common Stock is not traded on that date, then the closing price on the immediately preceding date on which the Common Stock is traded.
1.18      Long-Term Incentive Plan . “Long-Term Incentive Plan” means, prior to August 1, 2017, the Tesoro Corporation 2011 Long-Term Incentive Plan and, effective August 1, 2017, the Andeavor 2011 Long-Term Incentive Plan, as amended from time to time, and, as applicable, any successor plan.


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1.19      Participant . “Participant” means a non-employee member of the Board with respect to which all or any portion of his directors’ fees are deferred or otherwise credited under this Plan.
1.20      Plan . “Plan” means, prior to August 1, 2017, the amended and restated Tesoro Corporation Board of Directors Deferred Compensation Plan, effective January 1, 2013, and, effective August 1, 2017, this Andeavor Board of Directors Deferred Compensation Plan, as set forth in this document and as may be amended from time to time.
1.21      Plan Year . “Plan Year” means the calendar year.
1.22      Regulations . “Regulations” means the Treasury Regulations promulgated under the Code.
1.23      Restricted Stock Unit . “Restricted Stock Unit” means a restricted stock unit granted to a Participant under the Long-Term Incentive Plan.
1.24      Separation from Service . “Separation from Service” means the date on which the Participant ceases to be a director of the Corporation; provided that a Separation from Service shall not have occurred if the Corporation anticipates that the Participant will continue to provide services to the Corporation or a subsidiary, whether as an employee or consultant or in any other capacity. The determination of whether a Separation from Service has occurred shall be made by the Committee in accordance with Section 1.409A-1(h) of the Regulations, or such other guidance with respect to Code Section 409A that may be in effect on the date of determination.
1.25      Spouse. “Spouse” means, for purposes of Section 8.5, an individual of the opposite sex who is married to a Participant and, for all other purposes, an individual who is married to the Participant in a legal union recognized by the state in which the Participant resides.
1.26      Trust . “Trust” means, prior to August 1, 2017, the Tesoro Corporation Board of Directors Deferred Compensation Trust and, effective August 1, 2017, the Andeavor Board of Directors Deferred Compensation Trust created by separate agreement.
1.27      Unit . “Unit” means a unit of beneficial interest credited to a Participant’s Deferred Phantom Stock Account pursuant to Article IV hereunder. The value of a Unit for purposes of this Plan shall be determined by the Committee, based upon the closing quotation of the Common Stock on the New York Stock Exchange on the date of the determination. Where applicable, such cash shall be converted into Units and vice versa in accordance with Section 6.3(b) and Section 8.6.
1.28      Valuation Date . “Valuation Date” means the day on which the financial markets are open and that is closest in proximity to the last business day of each calendar quarter.
ARTICLE II
ELIGIBILITY AND PARTICIPATION
2.1      Eligibility . All members of the Board who are not otherwise employed by the Corporation or a subsidiary of the Corporation shall be eligible to participate in this Plan.


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2.2      Participation . An eligible member of the Board shall automatically become a Participant in this Plan as of the date on which his service as a member of the Board commences.
ARTICLE III
DEFERRED CASH ACCOUNT ELECTIONS
3.1      Elective Deferrals Upon Commencement of Participation . A Participant may elect to defer all or any portion of his director fees, including his Annual Retainer fee, Board Chairman fee and Committee Chairman fees, that are payable in cash by executing a participation agreement in such form and at such time as the Committee shall require, provided that the participation agreement shall be executed within thirty (30) days of the date on which his service as a member of the Board commences. The Participant’s election shall become effective immediately following the Committee’s receipt of the Participant’s executed participation agreement. The Participant may, at such time, also irrevocably elect the Distribution Schedule under which amounts credited to his Deferred Cash Account shall be paid, subject to the restrictions of the Plan. A Participant’s failure to timely submit a participation agreement in accordance with this Section 3.1 shall be deemed an election by the Participant to defer zero percent (0%) of the cash portion of his director fees into a Deferred Cash Account for the Plan Year during which the Participant first becomes eligible to participate. A Participant’s failure to elect a Distribution Schedule in accordance with this Section 3.1 shall be deemed an election by the Participant to receive amounts credited to his Deferred Cash Account in a lump sum payment within the ninety (90) day period following such Participant’s Separation from Service. The Participant’s elections (or deemed elections) shall become irrevocable as of the last day of the (thirty) 30 day period during which the Participant is permitted to make an election in accordance with this Section 3.1.
3.2      Annual Elective Deferrals . A Participant’s elections (or deemed elections) under this Article III shall remain effective for each subsequent Plan Year for which the Participant is eligible to participate in the Plan, unless and until such elections (or deemed elections) are modified or revoked by the Participant in accordance with this Section 3.2. A Participant may modify or revoke an election (including a deemed election) with respect to the deferral of (or the Distribution Schedule applicable to) the cash portion of his director fees to be earned in a subsequent Plan Year by submitting an executed agreement to the Committee, in such form as the Committee shall require, no later than the last day of the Plan Year immediately preceding the Plan Year in which such director fees will be earned. In any case in which the date elected on a Distribution Schedule predates or coincides with the date on which a deferred amount would otherwise have been paid, the date of distribution shall instead be the date of the Participant’s Separation from Service.
3.3      Subsequent Elections Regarding Timing and Method of Payment. The Committee may, in its sole and absolute discretion, permit a Participant to subsequently modify a prior election (or deemed election) under this Article III in order to change the timing or method of payment to be received hereunder, provided that (i) such subsequent election shall not take effect for at least twelve (12) months following the date on which the subsequent election is made; (ii) with respect to a payment that the Participant is entitled to receive following his Separation from Service or pursuant to a Distribution Schedule, the payment with respect to which such subsequent election is made is deferred at least five (5) years from the date on which such payment would otherwise have been made absent such subsequent election (or in the case of installment payments,


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five (5) years from the date the first payment was scheduled to be made); and (iii) with respect to the payment of benefits hereunder pursuant to a Distribution Schedule, such subsequent election is made no less than twelve (12) months prior to the date the payment is scheduled to be made (or in the case of installment payments, five (5) years from the date the first payment was scheduled to be made).
3.4      Restrictions on Deferral Amount . A Participant may elect to defer into the Deferred Cash Account up to one hundred percent (100%) of the cash portion of his director fees; provided, however, as to each such fee , the election must be made in ten percent (10%) increments and must be made with respect to at least twenty percent (20%) of each such fee subject to the deferral.
ARTICLE IV
DEFERRED PHANTOM STOCK ACCOUNT ELECTIONS
4.1      Deferrals . Effective as of the Effective Date, neither non-elective nor elective deferrals to a Participant’s Deferred Phantom Stock Account are permitted.
4.2      Subsequent Elections Regarding Method of Payment. The Committee may, in its sole and absolute discretion, permit a Participant to subsequently modify a prior election (or deemed election) to his Deferred Phantom Stock Account in order to change the timing or method of payment to be received hereunder, provided that (i) such subsequent election shall not take effect for at least twelve (12) months following the date on which the subsequent election is made; (ii) with respect to a payment that the Participant is entitled to receive following his Separation from Service or pursuant to a Distribution Schedule, the payment with respect to which such subsequent election is made is deferred at least five (5) years from the date on which such payment would otherwise have been made absent such subsequent election (or in the case of installment payments, five (5) years from the date the first payment was scheduled to be made); and (iii) with respect to the payment of benefits hereunder pursuant to a Distribution Schedule, such subsequent election is made no less than twelve (12) months prior to the date the payment is scheduled to be made (or in the case of installment payments, five (5) years from the date the first payment was scheduled to be made).
ARTICLE V
DEFERRED RESTRICTED UNIT ACCOUNT ELECTIONS
5.1      Elective Deferrals. A Participant may elect to defer the distribution of all, but not less than all of the Restricted Stock Units awarded to him for a particular year under the Long-Term Incentive Plan by making a written deferral election in such form and at such time as the Committee shall require, but in no event later than the day preceding the grant date of the applicable Restricted Stock Unit under the Long-Term Incentive Plan. The Participant’s election shall become effective immediately following the Committee’s receipt of the Participant’s executed deferral election and shall apply to any dividend equivalents attributable thereto. The Participant may, at such time, also irrevocably elect the distribution date, which, subject to the restrictions of the Plan, shall be either the date that is five (5) years from the vesting date of the Restricted Stock Unit or the date of the Participant’s Separation from Service. A Participant’s failure to timely submit a deferral election form or to elect a distribution date in accordance with this Section 5.1 shall be deemed an election


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by the Participant not to defer the Restricted Stock Unit(s). The Participant’s elections (or deemed elections) shall become irrevocable as of the last day preceding the grant date of the applicable Restricted Stock Units.
ARTICLE VI
CREDITING ACCOUNTS
6.1      Establishing a Participant’s Account . The Committee shall establish and maintain an Account for each Participant, which shall be reflected in the Deferral Ledger.
6.2      Credits to the Deferred Cash Account.
(a)      Deferral Amounts . The Committee shall credit the amount of a Participant’s deferrals under Article III to the Participant’s Deferred Cash Account as of the Valuation Date applicable to the date on which the fees subject to such deferral would otherwise have been paid.
(b)      Crediting of Interest . Except as otherwise provided herein, the Committee shall credit interest to a Participant’s Deferred Cash Account as of each Valuation Date. Interest shall be calculated at the prime rate published in The Wall Street Journal on such Valuation Date plus two percentage points.
6.3      Credits to the Deferred Phantom Stock Account.
(a)      Earnings and Losses . As of each Valuation Date, the Committee shall adjust each Participant’s Deferred Phantom Stock Account to reflect the increase or decrease in the value of the Units credited to such Deferred Phantom Stock Account.
(b)      Dividends and Dividend Equivalents . As of the date on which dividends or dividend equivalents are paid with respect to Common Stock, the Committee shall credit each Participant’s Deferred Phantom Stock Account with an amount equal to the value of such dividends or dividend equivalents as if paid with respect to the Units credited to the Participant’s Deferred Phantom Stock Account on such date. If dividends or dividend equivalents are paid in the form of shares of Common Stock, the Participant’s Deferred Phantom Stock Account shall be credited with a number of Units equal to the number of shares deemed distributed with respect to each Unit credited to his Deferred Phantom Stock Account on such date. If dividends or dividend equivalents are paid in any other form, the Participant’s Deferred Phantom Stock Account shall be credited with a number of Units equal in value to the amounts deemed distributed with respect to each Unit credited to his Deferred Phantom Stock Account on such date. The value of any dividend or dividend equivalent that is not paid in cash or shares of Common Stock shall be determined by the Committee in its sole and absolute discretion.
(c)      Voting Rights . No Participant shall have voting rights with respect to any Units credited to his Deferred Phantom Stock Account.


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6.4      Credits to the Deferred Restricted Unit Account . The Committee shall credit Restricted Stock Units, the distribution of which a Participant has elected to defer under Article V hereof, to the Participant’s Deferred Restricted Unit Account as of the grant date of such Restricted Stock Units under the Long-Term Incentive Plan. As of each date on which dividend equivalents are declared with respect to such Restricted Stock Units, the Committee shall credit each Participant’s Deferred Restricted Unit Account with an amount equal to the value of such dividend equivalents. No Participant shall have voting rights with respect to any Restricted Stock Units credited to his Deferred Restricted Unit Account.
ARTICLE VII
VESTING
Each Participant shall be immediately 100% vested in all amounts that are credited to his Deferred Cash Account and Deferred Phantom Stock Account. Amounts credited to a Participant’s Deferred Restricted Unit Account shall be vested on the date on which the Restricted Stock Unit(s) are vested in accordance with the provisions of the Long-Term Incentive Plan.
ARTICLE VIII
DISTRIBUTIONS
8.1      General. All distributions of a Participant’s Deferred Cash Account and Deferred Phantom Stock Account, as well as dividend equivalents credited to a Participant’s Deferred Restricted Unit Account, shall be made in cash. Restricted Stock Units shall be distributed in shares of Common Stock.
(a)      Timing of Distribution of Deferred Cash Account and Deferred Phantom Stock Account . Except as otherwise provided in this Article VIII, distribution of a Participant’s Deferred Cash Account and Deferred Phantom Stock Account shall commence on the earlier of: (i) March 31 st of the year in which the date elected (or deemed elected) by such Participant on a Distribution Schedule falls or (ii) within the ninety (90) day period following the date of the Participant’s Separation from Service. The amount credited to a Participant’s Deferred Cash Account and Deferred Phantom Stock Account for purposes of a distribution hereunder shall be determined as of the Valuation Date that applies to such March 31 st or, if applicable, the date of the Participant’s Separation from Service.
(b)      Timing of Distribution of Deferred Restricted Unit Account . Except as otherwise provided in this Article VIII, distribution of a Participant’s Deferred Restricted Unit Account shall occur on the date elected in accordance with Article V hereof; provided, however, that notwithstanding a Participant’s election to defer distribution until the date that is five (5) years from the vesting date of a Restricted Stock Unit, distribution shall be made in any event within the ninety (90) day period following a Participant’s earlier Separation from Service.


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8.2      Distribution Upon Death.
(a)      Timing . Any distribution of a Participant’s Account that is made on account of such Participant’s death while serving as a director shall be made in a lump sum payment to his Beneficiary(ies) within the ninety (90) day period following the Participant’s death. In the event of the Participant’s death during a period of installment payments, the remainder of the applicable portion of the Participant’s Account shall be paid to his Beneficiary(ies) in a lump sum within the ninety (90) day period following the Participant’s death. The amount credited to a Participant’s Account for purposes of a distribution under this Section 8.2 shall be determined as of the Valuation Date coincident with or immediately preceding the date of distribution; provided, however, that the Participant’s Deferred Cash Account shall be credited with interest, prorated from such Valuation Date to the date of the Participant’s death based on the rate in effect on such Valuation Date.
(b)      Designation of Beneficiary . Each Participant, upon notification of his eligibility to participate in the Plan, must file with the Committee a designation of one or more Beneficiaries to whom distributions otherwise due the Participant shall be made in the event of his death prior to the complete distribution of the amount credited to his Account. The designation shall be effective upon receipt by the Committee of a properly executed form which the Committee has approved for that purpose. The Participant may from time to time revoke or change any designation of Beneficiary by filing another approved Beneficiary designation form with the Committee. If there is no valid designation of Beneficiary on file with the Committee at the time of the Participant’s death, or if all of the Beneficiaries designated in the last Beneficiary designation have predeceased the Participant or otherwise ceased to exist, the Beneficiary shall be the Participant’s Spouse, if the Spouse survives the Participant, or otherwise, the Participant’s estate. A Beneficiary must survive the Participant by sixty (60) days in order to be considered to be living on the date of the Participant’s death. If any Beneficiary survives the Participant but dies or otherwise ceases to exist before receiving all amounts due to the Beneficiary from the Participant’s Account, the balance of the amount that would have been paid to that Beneficiary shall, unless the Participant’s designation provides otherwise, be distributed to the individual deceased Beneficiary’s estate or to the Participant’s estate in the case of a Beneficiary which is not an individual.
8.3      Disability. Distribution of a Participant’s Account on account of Disability while serving as a director shall be made in a lump sum payment to him within the ninety (90) day period following the Committee’s determination of his Disability. In the event of the Participant’s Disability during a period of installment payments, the remainder of the applicable portion of the Account shall be paid to him in a lump sum within the ninety (90) day period following the Committee’s determination of his Disability. The amount credited to a Participant’s Account for purposes of a distribution under this Section 8.3 shall be determined as of the Valuation Date coincident with or immediately preceding the date of distribution; provided, however, that the Participant’s Deferred Cash Account shall be credited with interest, prorated from such Valuation Date to the date of the Committee’s determination of Disability, based on the rate in effect on such Valuation Date.


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8.4      Change of Control. Notwithstanding any provision herein to the contrary, in the event of a Change of Control, each Participant’s Account shall be adjusted as of the date of such Change of Control, but otherwise as provided in Article VI, and, subject to Section 10.3 hereof, shall be distributed to the Participants as a lump sum payment within thirty (30) days after the date of the Change of Control.
8.5      Unforeseeable Emergency. Any Participant who is in pay status may request a withdrawal from his Deferred Cash Account and Deferred Phantom Stock Account on account of an unforeseeable emergency. For these purposes, an unforeseeable emergency is a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s Spouse or the Participant’s dependent (as defined in Code Section 152, without regard to Section 152(b)(1), (b)(2), and (d)(1)(B)); loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance); or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Whether a Participant is faced with an unforeseeable emergency permitting a withdrawal under this Section is to be determined in the sole and absolute discretion of the Committee based on the relevant facts and circumstances of each case, but, in any case, a withdrawal on account of unforeseeable emergency may not be made to the extent that such emergency is or may be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not cause a severe financial hardship), or by cessation of deferrals under the Plan. The amount of the hardship withdrawal may not exceed the lesser of (a) the amount credited to the Participant’s Deferred Cash Account and Deferred Phantom Stock Account or (b) the amount reasonably necessary to satisfy the emergency need, including any Federal, state, local or foreign income taxes or penalties reasonably anticipated to result from the distribution. The Committee shall have the authority to require a Participant to provide such proof as it deems necessary to establish the existence and nature of the Participant’s unforeseeable emergency. The decision of the Committee regarding the existence of an unforeseeable emergency of a Participant shall be final and binding. A withdrawal on account of the Participant’s unforeseeable emergency that is approved by the Committee shall be paid to the Participant within ten (10) days of the Committee’s determination.
8.6      Conversion of Units to Cash. Upon distribution, the Units credited to a Participant’s Deferred Phantom Stock Account shall be converted to cash. Such conversion shall be accomplished by multiplying the number of Units by the Fair Market Value of one share of Common Stock as of the applicable Valuation Date, and rounding to the nearest two decimal points. In the event of a distribution on account of a Participant’s death or Disability, Fair Market Value shall be determined as of the date of the Participant’s death or, as applicable, the date of the Committee’s determination of Disability, for purposes of such conversion.
8.7      Cashout Distributions. If, at the time an installment distribution of a Participant’s Deferred Cash Account or Deferred Phantom Stock Account is scheduled to commence, or at any time thereafter, the Fair Market Value of such Account does not exceed the amount specified in Section 402(g)(1)(B) of the Code, then distribution of such Deferred Cash Account or Deferred Phantom Stock Account may, in the sole and absolute discretion of the Committee, be made in the form of a single lump sum payment, provided that such payment will result in the complete distribution of the Participant’s benefit under this Plan and all Aggregated Plans.


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8.8      Change in Time of Payments . Notwithstanding any provision of this Article VIII or otherwise in the Plan to the contrary, the benefits payable hereunder may, to the extent expressly provided in this Section 8.8, be paid prior to or later than the date on which they would otherwise be paid to the Participant.
(a)      Distribution in the Event of Income Inclusion Under Code Section 409A . If any portion of a Participant’s Account is required to be included in income by the Participant prior to receipt due to a failure of this Plan or any Aggregated Plan to comply with the requirements of Code Section 409A and the Regulations, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the lesser of: (i) the portion of his or her Account required to be included in income as a result of the failure of the Plan or any Aggregated Plan to comply with the requirements of Code Section 409A and the Regulations, or (ii) the balance of the Participant’s Account.
(b)      Distribution Necessary to Satisfy Applicable Tax Withholding . If the Corporation is required to withhold amounts to pay the Participant’s portion of the Federal Insurance Contributions Act (FICA) tax imposed under Code Sections 3101, 3121(a) or 3121(v)(2) with respect to amounts that are or will be paid to the Participant under the Plan before they otherwise would be paid, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the lesser of: (i) the amount in the Participant’s Account or (ii) the aggregate of the FICA taxes imposed and the income tax withholding related to such amount.
(c)      Delay for Payments in Violation of Federal Securities Laws or Other Applicable Law . In the event the Corporation reasonably anticipates that the payment of benefits as specified hereunder would violate Federal securities laws or other applicable law, the Committee may delay the payment under this Article VII until the earliest date at which the Corporation reasonably anticipates that making of such payment would not cause such violation.
(d)      Delay for Insolvency or Compelling Business Reasons. In the event the Corporation determines that the making of any payment of benefits on the date specified hereunder would jeopardize the ability of the Corporation to continue as a going concern, the Committee may delay the payment of benefits under this Article VIII until the first calendar year in which the Corporation notifies the Committee that the payment of benefits would not have such effect.
(e)      Administrative Delay in Payment . The payment of benefits hereunder shall begin at the date specified in accordance with the provisions of the foregoing paragraphs of this Article VIII; provided that, in the case of administrative necessity, the payment of such benefits may be delayed up to the later of the last day of the calendar year in which payment would otherwise be made or the 15 th day of the third calendar month following the date on which payment would otherwise be made. Further, if, as a result of events beyond the control of the Participant (or following the Participant’s death, the Participant’s Beneficiary), it is not administratively practicable for the Committee to calculate the amount of benefits due to Participant as of the date on which payment would otherwise


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be made, the payment may be delayed until the first calendar year in which calculation of the amount is administratively practicable.
(f)      No Participant Election . Notwithstanding the foregoing provisions, if the period during which payment of benefits hereunder will be made occurs, or will occur, in two calendar years, the Participant shall not be permitted to elect the calendar year in which the payment shall be made.
ARTICLE IX
ADMINISTRATION
9.1      Committee Appointment . Members of the Committee shall be appointed by the Board. The Board shall have the sole discretion to remove any one or more Committee members and appoint one or more replacement or additional Committee members from time to time.
9.2      Committee Organization and Voting . The Committee shall select from among its members a chairman who shall preside at all of its meetings and shall elect a secretary without regard to whether that person is a member of the Committee. The secretary shall keep all records, documents and data pertaining to the Committee’s supervision and administration of the Plan. A majority of the members of the Committee will constitute a quorum for the transaction of business and the vote of a majority of the members present at any meeting will decide any question brought before the meeting. In addition, the Committee may decide any question by vote, taken without a meeting, of a majority of its members. A member of the Committee who is also a Participant will not vote or act on any matter relating solely to himself.
9.3      Powers of the Committee . The Committee will have the exclusive responsibility for the general administration of the Plan according to the terms and provisions of the Plan and will have all powers necessary to accomplish those purposes, including but not by way of limitation the right, power and authority:
(a)      To make rules and regulations for the administration of the Plan;
(b)      To construe all terms, provisions, conditions and limitations of the Plan;
(c)      To correct any defect, supply any omission or reconcile any inconsistency that may appear in the Plan in the manner and to the extent it deems expedient to carry the Plan into effect for the greatest benefit of all parties at interest;
(d)      To determine all controversies relating to the administration of the Plan, including but not limited to:
(i)      Differences of opinion arising between Corporation and a Participant except when the difference of opinion relates to the entitlement to, the amount of or the method or timing of payment of a benefit affected by a Change of Control; and
(ii)      Any question relating to the uniform administration of the Plan;


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(e)      To delegate those clerical and recordation duties of the Committee, as it deems necessary or advisable for the proper and efficient administration of the Plan.
9.4      Committee Discretion . The Committee in exercising any power or authority granted under this Plan or in making any determination under this Plan shall perform, or refrain from performing, those acts using its sole discretion and judgment. Any decision made by the Committee or any refraining to act or any act taken by the Committee in good faith shall be final and binding on all parties. The Committee’s decision shall be final and binding on the parties and shall not be subject to review.
9.5      Committee Discretion on Change of Control . Notwithstanding the foregoing, the Committee’s decisions, refraining to act or acting is to be subject to review by the Corporation for those incidents occurring during the Plan Year in which a Change of Control occurs.
9.6      Annual Statements . The Committee will cause each Participant to receive an annual statement of amounts credited to his Deferred Cash Account and Deferred Phantom Stock Account as soon as administratively practicable after the conclusion of each Plan Year, which statement shall describe the amounts credited to his Deferred Cash Account and Deferred Phantom Stock Account for that Plan Year and the total amount credited to his Deferred Cash Account and Deferred Phantom Stock Account at the end of the Plan Year.
9.7      Reimbursement of Expenses . The members of the Committee will serve without compensation for their services, but will be reimbursed by the Corporation for all expenses properly and actually incurred, in the performance of their duties under the Plan.
9.8      Indemnification . To the extent permitted by applicable law, the Corporation shall indemnify and hold harmless each member of the Committee from and against any and all claims and expenses (including, without limitation, attorney’s fees and related costs), in connection with the performance by such member of his duties in that capacity, other than any of the foregoing arising in connection with the willful neglect or willful misconduct of the person so acting.
ARTICLE X
AMENDMENT AND/OR TERMINATION
10.1      Amendment or Termination of the Plan . The Corporation may amend or terminate this Plan at any time by written instrument adopted by the members of the Board who are not eligible to participate in the Plan.
10.2      No Retroactive Effect on Account . No amendment will affect the rights of any Participant to the amounts credited to his Account or to change the method of calculating the interest to be credited with respect to amounts previously deferred by him prior to the date of the amendment without the Participant’s consent.
10.3      Effect of Termination . If the Plan is terminated, all deferrals shall thereupon cease, but interest, earnings and losses shall continue to be credited to the Accounts in accordance with Article VI as if the Participant began receiving installment payments on the date the Plan terminated.


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Notwithstanding the foregoing, to the extent provided by the Corporation in accordance with Section 10.1, the Plan may be liquidated following a termination under any of the following circumstances:
(a)      the termination and liquidation of the Plan within twelve (12) months of a complete dissolution of the Corporation taxed under Section 331 of the Code or with the approval of a bankruptcy court pursuant to 11 U.S.C. § 503(b)(1)(A); provided that the amounts deferred under this Plan are included in the Participants’ gross incomes in the latest of the following years (or, if earlier, the taxable year in which the amount is actually or constructively received): (i) the calendar year in which the Plan is terminated; (ii) the first calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the payment is administratively practicable.
(b)      the termination and liquidation of the Plan pursuant to irrevocable action taken by the Corporation within the thirty (30) days preceding or the twelve (12) months following a Change of Control; provided that all Aggregated Plans are terminated and liquidated with respect to each Participant that experienced the Change of Control, so that under the terms of the termination and liquidation, all such Participants are required to receive all amounts of deferred compensation under this Plan and any other Aggregated Plans within twelve (12) months of the date the Corporation irrevocably takes all necessary action to terminate and liquidate this Plan and such other Aggregated Plans;
(c)      the termination and liquidation of the Plan, provided that: (i) the termination and liquidation does not occur proximate to a downturn in the Corporation’s financial health; (ii) the Corporation terminates and liquidates all Aggregated Plans; (iii) no payments in liquidation of this Plan are made within twelve (12) months of the date the Corporation irrevocably takes all necessary action to terminate and liquidate this Plan, other than payments that would be payable under the terms of this Plan if the action to terminate and liquidate this Plan had not occurred; (iv) all payments are made within twenty four (24) months of the date on which the Corporation irrevocably takes all action necessary to terminate and liquidate this Plan; and (v) the Corporation does not adopt a new Aggregated Plan at any time within three (3) years following the date on which the Corporation irrevocably takes all action necessary to terminate and liquidate the Plan.
ARTICLE XI
UNFUNDED PLAN
11.1      Benefits from General Assets of Corporation . The Corporation may establish a Trust for the purpose of retaining assets set aside by the Corporation pursuant to the trust agreement for payment of all or a portion of the benefits payable pursuant to Article VIII of the Plan. Any such benefits not paid from a Trust shall be paid from the Corporation’s general assets. The Trust, if such shall be established, shall be subject to the claims of general creditors of the Corporation in the event the Corporation is Insolvent (as defined in a related trust agreement, if any).
11.2      No Requirement to Fund . The Corporation is not required to set aside any assets for payment of the benefits provided under this Plan; however, it may do so as provided in the trust agreement, if any. A Participant shall have no security interest in any such amounts.


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11.3      Adoption of Trust . All benefits under the Plan shall be the unsecured obligations of the Corporation and, except for those assets that may be placed in a Trust established in connection with this Plan, no assets will be placed in trust or otherwise segregated from the general assets of the Corporation for the payment of obligations hereunder. If assets are placed in a Trust, the trust agreement, to the extent required by the Code, shall conform in all material respects to the model trust set forth in Internal Revenue Service Revenue Procedure 92-64. To the extent that any person acquires a right to receive payments hereunder, such right shall be no greater than the right of any unsecured general creditor of the Corporation.
11.4      Status as Unsecured Creditor . The establishment of this Plan shall not be construed as giving to any Participant or Beneficiary or any person whomsoever, any legal, equitable or other rights against the Corporation, or its officers, directors, agents or shareholders, or as giving to any Participant or Beneficiary any equity or other interest in the assets or business of the Corporation or shares of Corporation stock or as giving any director the right to be retained in the service of the Corporation. All directors shall be subject to discharge to the same extent they would have been if this Plan had never been adopted. The rights of a Participant hereunder shall be solely those of an unsecured general creditor of the Corporation.
ARTICLE XII
MISCELLANEOUS
12.1      Distributions to Incompetents or Minors . Should a Participant become incompetent or should a Participant designate a Beneficiary who is a minor or incompetent, the Committee is authorized to pay the funds due to the parent of the minor or to the guardian of the minor or incompetent or directly to the minor or to apply those funds for the benefit of the minor or incompetent in any manner the Committee determines in its sole discretion.
12.2      Nonalienation of Benefits . No right or benefit provided in this Plan will be transferable by the Participant except, upon his death, to a named Beneficiary as provided in this Plan. No right or benefit under this Plan will be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge the same will be void. No right or benefit under this Plan will in any manner be liable for or subject to any debts, contracts, liabilities or torts of the person entitled to such benefits. If any Participant or any Beneficiary becomes bankrupt or attempts to anticipate, alienate, sell, assign, pledge, encumber or charge any right or benefit under this Plan, that right or benefit will, in the discretion of the Committee, cease. In that event, the Committee may have the Corporation hold or apply the right or benefit or any part of it to the benefit of the Participant or Beneficiary, his or her spouse, children or other dependents or any of them in any manner and in any proportion the Committee believes to be proper in its sole and absolute discretion, but is not required to do so.
12.3      Reliance Upon Information . The Committee will not be liable for any decision or action taken in good faith in connection with the administration of this Plan. Without limiting the generality of the foregoing, any decision or action taken by the Committee when it relies upon information supplied it by any officer of the Corporation, the Corporation’s legal counsel, the


15


Corporation’s independent accountants or other advisors in connection with the administration of this Plan will be deemed to have been taken in good faith.
12.4      Severability . If any term, provision, covenant or condition of the Plan is held to be invalid, void or otherwise unenforceable, the rest of the Plan will remain in full force and effect and will in no way be affected, impaired or invalidated.
12.5      Notice . Any notice or filing required or permitted to be given to the Committee will be sufficient if in writing and hand delivered or sent by U.S. mail to the principal office of the Corporation, attention of the individual to whom responsibility for Board compensation has been delegated, or emailed to an email address specified by the Committee. Any notice or filing required or permitted to be given to a Participant will be sufficient if in writing and hand delivered or sent by U.S. mail to the last known residential mailing address of the Participant or emailed to the last known email address of the Participant. Notice will be deemed to be given as of the date of hand delivery, or if delivery is by mail, as of the date shown on the postmark or if delivery is by email, as of the date such email is delivered.
12.6      Gender and Number . Words used in this Plan of one gender are to be construed as though they were also used in another gender in all cases where they would so apply and likewise words in the singular or plural are to be construed as though they also included the other in all cases where they would so apply.
12.7      Governing Law . The Plan will be construed, administered and governed in all respects by the laws of the State of Texas.
IN WITNESS WHEREOF , the Corporation has executed this document on this _____ day of __________________________, 2017, to be effective as of August 1, 2017.

ANDEAVOR


By:                             
Kim Rucker
Executive Vice President, General Counsel &
Secretary











4822-7461-9166v.4


16


Exhibit 10.88
FIRST AMENDMENT TO
TESORO PETROLEUM CORPORATION
BOARD OF DIRECTORS DEFERRED COMPENSATION TRUST
THIS FIRST AMENDMENT , dated as of the 17th day of August, 2017, is hereby adopted by Andeavor (the “Sponsor”) to be effective as of August 1, 2017;
WITNESSETH:
WHEREAS , the Sponsor (previously known as “Tesoro Petroleum Corporation”) and Frost National Bank (the “Trustee”) entered into the Tesoro Petroleum Corporation Board of Directors Deferred Compensation Trust (the “Agreement”), dated February 23, 1995, to fund deferred compensation benefits under the Tesoro Petroleum Corporation Board of Directors Deferred Compensation Plan (which, effective August 1, 2017, is known as the “Andeavor Board of Directors Deferred Compensation Plan”) (the “Plan”); and
WHEREAS , the Sponsor wishes to amend the Agreement, effective August 1, 2017, to reflect a change in the name of the Sponsor and to make such other changes deemed appropriate; and
WHEREAS , the proposed amendment does not affect the rights or duties of the Trustee; and
WHEREAS , the Agreement may be amended by the Sponsor for this purpose without the consent of the Trustee as provided for in Section 10.1 thereof;
NOW THEREFORE , in consideration of the above premises, the Sponsor hereby amends the Agreement by:
(1)    Replacing all references to “Tesoro Petroleum Corporation” with “Andeavor”.
(2)    Replacing all reference to “Tesoro Petroleum Corporation Board of Directors Deferred Compensation Plan” with “Andeavor Board of Directors Deferred Compensation Plan.”
IN WITNESS WHEREOF , the Sponsor has caused this First Amendment to be executed by its duly authorized officer effective as of August 1, 2017. By signing below, the undersigned represents that he or she is authorized to execute this document on behalf the Sponsor. Notwithstanding any contradictory provision of the Agreement, the Trustee may rely without duty of inquiry on the foregoing representation.

ANDEAVOR

By:     /s/ Kim K.W. Rucker                
Kim Rucker
Executive Vice President General Counsel &
Secretary



Exhibit 10.91
ANDEAVOR
NON-EMPLOYEE DIRECTOR COMPENSATION PROGRAM
(Effective January 1, 2018)

Andeavor’s director compensation program for 2018 provides for an annual retainer of $295,000, payable $135,000 in cash and $160,000 in restricted stock units (“RSUs”) representing the right to receive shares of common stock with dividend equivalent rights. The RSUs vest one year from the date of grant, which is typically the date of our annual meeting of stockholders.

In addition to the annual cash and equity retainers, the Board’s independent Lead Director and Committee Chairs receive the following annual cash retainers:

Independent Lead Director

$75,000

Audit Committee Chair Retainer

$30,000

Compensation Committee Chair Retainer

$20,000

Environmental, Health, Safety and Security Committee Chair Retainer

$15,000

Governance Committee Chair Retainer

$15,000


Directors may elect to defer all or a portion of their cash retainers under the Andeavor Board of Directors Deferred Compensation Plan. Amounts deferred under such plan accrue interest at the prime rate published in the Wall Street Journal on the last business day of the quarter plus two percentage points.

We reimburse our directors for travel and lodging expenses they incur in connection with their attendance at meetings of the Board, meetings of our Board committees and our annual meeting of stockholders.

We do not pay management directors for Board service in addition to their regular employee compensation.





Exhibit 10.92
ANDEAVOR EXECUTIVE SEVERANCE
AND CHANGE IN CONTROL PLAN

(as AMENDED AND RESTATED EFFECTIVE AUGUST 1, 2017)
 





ANDEAVOR EXECUTIVE SEVERANCE
AND CHANGE IN CONTROL PLAN
PREAMBLE
The principal objective of this Executive Severance and Change in Control Plan (the "Plan") is to reduce uncertainty to select executives of the Company and its Subsidiaries in the event of certain fundamental events involving the control or existence of the Company as well as to provide a benefit in the event of an executive’s termination of employment under certain conditions that are beyond the executive’s control. The Plan is designed to provide a benefit that will meet the objectives described above. This Plan was originally established effective January 12, 2011, and was subsequently amended and restated, effective May 1, 2013. The Plan is intended to conform to the requirements of Section 409A of the Code, together with the Regulations, and is intended to qualify as an unfunded plan maintained primarily for the purpose of providing benefits for a select group of management and highly compensated employees of the Company and its Subsidiaries.
 
SECTION I
DEFINITIONS
1.1
"Affiliate" means each entity that would be considered a single employer with the Company under Section 414(b) or Section 414(c) of the Code, except that the phrase "at least 50%" shall be substituted for the phrase "at least 80%" as used therein.
1.2
"Aggregated Plan" means all agreements, methods, programs and other arrangements that are aggregated with this Plan under Section 1.409A-1(c) of the Regulations.
1.3
"Base Salary" means the rate of base pay as in effect for a Participant on the effective date of such Participant’s eligibility for a benefit hereunder, as provided in Section II hereof.
1.4
"Board" means the Board of Directors of the Company.
1.5
"Bonus" means (i) for purposes of determining the amount of a Participant’s Change in Control Benefit, as provided in Section 3.1 hereof, the target bonus applicable to a Participant under the Company’s annual incentive program for the year in which such Participant’s employment terminates under conditions that result in the eligibility of such Participant for a Change in Control Benefit hereunder or (ii) for purposes of determining the amount of the Severance Benefit for each Participant other than the Chief Executive Officer, as provided in Section 3.2 hereof, the average of the actual bonuses paid under the Company’s annual incentive program during the three (3)-year period ending on the date of the Participant’s termination of employment under conditions that result in the eligibility of such Participant for a Severance Benefit hereunder; provided, however, in the event that the Participant has been employed for fewer than three (3) years from the date of his most recent employment to the date of such termination of employment, the Bonus will be calculated by adding the total amount of the annualized actual bonuses paid during the Participant’s most recent

2


period of employment and dividing that amount by the number of years with respect to which a bonus was actually paid or (iii) for purposes of determining the amount of the Chief Executive Officer’s Severance Benefit, as provided in Section 3.2 hereof, the greater of: (a) the highest annual bonus earned under the Company’s annual incentive compensation program during the three (3)-year period ending on the date of the Chief Executive’s Officer’s termination of employment under conditions that result in the eligibility of such Chief Executive Officer for a Severance Benefit hereunder or (b) $450,000.
1.6
"Cause" means the conviction of or a plea of nolo contendere to the charge of a felony (which, through lapse of time or otherwise, is not subject to appeal); a willful refusal without proper legal cause to perform, or gross negligence in performing, the Participant’s duties and responsibilities; a material breach of fiduciary duty to the Company through the misappropriation of Company funds or property; or the unauthorized absence of the Participant from work (other than for sick or approved disability leave or leave under the Family Medical Leave Act) for a period of thirty (30) or more working days out of a consecutive forty-five (45)-working day period.
1.7
"Change in Control" means (i) there shall be consummated (A) any consolidation or merger of Company in which Company is not the continuing or surviving corporation or pursuant to which shares of Company's common stock would be converted into cash, securities or other property, other than a merger of Company where a majority of the board of directors of the surviving corporation are, and for a one-year period after the merger continue to be, persons who were directors of Company immediately prior to the merger or were elected as directors, or nominated for election as director, by a vote of at least two-thirds of the directors then still in office who were directors of Company immediately prior to the merger, or (B) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Company, or (ii) the shareholders of Company shall approve any plan or proposal for the liquidation or dissolution of Company, or (iii) (A) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than Company or a Subsidiary thereof or any employee benefit plan sponsored by Company or a Subsidiary thereof, shall become the beneficial owner (within the meaning of Rule 13c-3 under the Securities Exchange Act of 1934) of securities of Company representing thirty-five percent (35%) or more of the combined voting power of Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, and (B) at any time during a period of one-year thereafter, individuals who immediately prior to the beginning of such period constituted the Board shall cease for any reason to constitute at least a majority thereof, unless election or the nomination by the Board for election by Company's shareholders of each new director during such period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period.

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1.8
"Change in Control Benefit" means the benefit payable under Section 3.1 hereof in the event of an involuntary termination of employment without Cause or a voluntary termination of employment for Good Reason following a Change in Control.
1.9
"Chief Executive Officer" means the Chief Executive Officer of the Company.
1.10
"Code" means the Internal Revenue Code of 1986, as amended from time to time.
1.11
"Committee" means the Compensation Committee of the Board.
1.12
"Company" means, prior to August 1, 2017, Tesoro Corporation, a Delaware corporation, and, effective August 1, 2017, Andeavor, a Delaware corporation, or any successor thereto.
1.13
"Compensation" means a Participant’s Base Salary and Bonus.
1.14
"Death/Disability Benefit" means the benefit payable under Section 3.3 hereof in the event of the Chief Executive Officer’s termination of employment by reason of death or Total Disability.
1.15
"Good Reason" means the occurrence of any of the following:
(a)
without Participant's express written consent, the assignment to Participant of any duties inconsistent with the employment of Participant immediately prior to the Change in Control, or a significant diminution of Participant's positions, duties, responsibilities and status with the Company from those immediately prior to a Change in Control or a diminution in Participant's titles or offices as in effect immediately prior to a Change in Control, or any removal of Participant from, or any failure to reelect Participant to, any of such positions;
(b)
a material reduction by the Company in Participant's Base Salary, as in effect immediately prior to a Change in Control;
(c)
the failure by the Company to continue benefits, including but not limited to, 401(k), pension, life insurance, and health plans, substantially equal in value, in the aggregate, to those in which Participant is participating or is eligible to participate at the time of the Change in Control except as otherwise required by the terms of such plans as in effect at the time of any Change in Control;
(d)
the failure by the Company to continue in effect any incentive plan or arrangement in which Participant is participating at the time of a Change in Control (or to substitute and continue other plans or arrangements providing the Participant with substantially similar benefits), except as otherwise required by the terms of such plans as in effect at the time of any Change in Control;
(e)
the occurrence of an event that meets the criteria set forth under the Company's relocation policy, as in effect from time to time, with respect to which either (i) the

4


Participant fails to provide express written consent to the relocation or (ii) the Company fails to provide the relocation benefit set forth in such policy; or
(f)
any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company;
1.16
"Participant" means an individual who, on the date of his or her termination of employment under the circumstances described in Section II hereof, is either: (i) an officer of the Company or a Subsidiary with the title of Senior Vice President or above whose compensation is approved by the Committee or (ii) an officer of the Company or a Subsidiary with the title of Vice President who is approved for participation by the Chief Executive Officer, and, in each case, who is not otherwise entitled to a change in control or severance benefit, as applicable, under an employment agreement, management stability agreement, or similar type of agreement.
1.17
"Plan" means, prior to August 1, 2017, the Tesoro Corporation Executive Severance and Change in Control Plan, effective May 1, 2013, and effective August 1, 2017, the Andeavor Executive Severance and Change in Control Plan, as may be amended from time to time.
1.18
"Regulations" means the Treasury Regulations promulgated under the Code.
1.19
"Separation from Service" means a termination of employment of a Participant under the circumstances described in Section II hereof that will result in a reasonably anticipated permanent reduction in the level of bona fide services performed by the Participant for the Company and its Affiliates to 20% or less of the average level of bona fide services performed by the Participant for the Company and its Affiliates (whether as an employee or an independent contractor) in the immediately preceding thirty-six (36) months (or the full period of service to the Company and its Affiliates if the Participant has been providing services to the Company and its Affiliates for fewer than thirty-six (36) months). The determination of whether a Separation from Service has occurred shall be made by the Committee in accordance with the provisions of Section 409A of the Code and the Regulations.
1.20
"Severance Benefit" means the benefit payable under Section 3.2 hereof in the absence of a Change in Control but in the event of an involuntary termination of employment without Cause.
1.21
"Subsidiary" means any entity in which the Company owns or otherwise controls, directly or indirectly, stock or other ownership interests having the voting power to elect a majority of the board of directors, or other governing group having functions similar to a board of directors, as determined by the Committee.
1.22
"Total Disability" means the physical or mental incapacity of the Chief Executive Officer so as to render him incapable of performing his material, usual and customary duties, with or without reasonable accommodation as required by law, for six (6) consecutive months (even if such consecutive absence is interrupted by the Chief Executive Officer’s return to

5


service for fewer than ten (10) consecutive business days if absent thereafter for the same illness or disability). Any termination on account of Total Disability shall be upon thirty (30) days written notice given at any time thereafter while the Chief Executive Officer remains Totally Disabled, provided that a termination for Total Disability hereunder shall not be effective if the Chief Executive Officer returns to the full performance of his duties within such thirty (30) day period.
The masculine gender, where appearing in the Plan, will be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary.
SECTION II
ELIGIBILITY FOR BENEFITS
2.1
Eligibility for Change in Control Benefit . Each Participant is eligible to receive a Change in Control Benefit if, within the two-year period following a Change in Control, such Participant’s employment with the Company or a Subsidiary is terminated by reason of: (i) involuntary termination other than for Cause or by reason of death, or (ii) voluntary termination by the Participant for Good Reason. The determination of whether a termination of employment shall be for Cause or Good Reason shall be made in the sole and absolute discretion of the Committee. Such benefit shall commence as provided in Section 4.1 hereof, but shall be contingent upon the Committee’s prior receipt of a release executed by the Participant in the form determined by and in the manner prescribed by the Committee.
2.2
Eligibility for Severance Benefit .
(a)
Chief Executive Officer . Subject to paragraph (d) below, the Chief Executive Officer is eligible to receive a Severance Benefit if his employment with the Company or a Subsidiary is terminated in the absence of a Change in Control by reason of either: (i) involuntary termination other than for Cause or (ii) voluntary termination following the occurrence or failure of any of the following circumstances, without his express written consent: (A) a material adverse change in the governing body to which the Chief Executive Officer regularly reports, including a requirement that the Chief Executive Officer report to another corporate officer rather than to the Board; (B) a material adverse change in the Compensation plans, programs or arrangements in which the Chief Executive Officer is entitled to participate (the “Compensation Plans”) other than a material adverse change in the Compensation Plans that adversely affects other similarly situated executives in a manner proportionate to the material adverse effect of such change on the Chief Executive Officer; (C) Chief Executive Officer’s failure to be elected or reelected to the Board; or (D) the failure of any successor to the Company (whether direct or indirect and whether by merger, acquisition, consolidation or otherwise) to assume in a writing delivered to the Chief Executive Officer upon the successor becoming such, the obligations of the Company hereunder.
(b)
Executive Vice-Presidents . Subject to paragraph (d) below, each Participant who is an Executive Vice-President of the Company is eligible to receive a Severance

6


Benefit if such Participant’s employment with the Company or a Subsidiary is terminated in the absence of a Change in Control by reason of either: (i) involuntary termination other than for Cause or by reason of death or (ii) voluntary termination following a material adverse change in the level of executive officer to whom the Executive Vice President regularly reports.
(c)
Senior Vice Presidents . Subject to paragraph (d) below, each Participant who is a Senior Vice President of the Company is eligible to receive a Severance Benefit if such Participant’s employment with the Company or a Subsidiary is terminated in the absence of a Change in Control by reason of involuntary termination other than for Cause or by reason of death.
(d)
Committee Discretion and Executed Release . The determination of whether a termination of employment shall be for Cause or whether a material adverse change in the reporting relationship has occurred under Section 2.2 (a), (b) or (c) shall be made in the sole and absolute discretion of the Committee. Benefits payable hereunder shall commence as provided in Section 4.1 hereof, but shall be contingent upon the Committee’s prior receipt of a release executed by the Participant in the form determined by and in the manner prescribed by the Committee.
2.3
Eligibility for Death/Disability Benefit . The Chief Executive Officer is eligible to receive a Death/Disability Benefit if his employment with the Company or a Subsidiary is terminated in the absence of a Change in Control by reason of his death or Total Disability. Such Death/Disability Benefit is mutually exclusive of any Severance Benefit or Change in Control Benefit hereunder.

SECTION III
AMOUNT AND FORM OF BENEFIT
3.1
Change in Control Benefit . The Change in Control Benefit to which an eligible Participant shall be entitled shall be as follows:
(a)
Chief Executive Officer . The Chief Executive Officer shall be entitled to a Change in Control Benefit, payable in cash, equal to three (3) times his Compensation. Furthermore, the Chief Executive Officer and his or her eligible dependents shall be entitled to participate in the Company's group medical plan (excluding dental and vision benefits) for the thirty (30)-month period commencing on the date of the Chief Executive Officer's Separation from Service.
(b)
Executive Vice-Presidents . Each Executive Vice-President shall be entitled to a Change in Control Benefit, payable in cash, equal to two and one-half (2.5) times his Compensation. Furthermore, the Executive Vice-President and his or her eligible dependents shall be entitled to participate in the Company's group medical plan

7


(excluding dental and vision benefits) for the thirty (30)-month period commencing on the date of the Executive Vice-President's Separation from Service.
(c)
Senior Vice-Presidents . Each Senior Vice-President shall be entitled to a Change in Control Benefit, payable in cash, equal to two (2) times his Compensation. Furthermore, the Senior Vice-President and his or her eligible dependents shall be entitled to participate in the Company's group medical plan (excluding dental and vision benefits) for the twenty-four (24)-month period commencing on the date of the Senior Vice-President's Separation from Service.
(d)
Vice-Presidents . Each Vice-President who is a Participant in this Plan shall be entitled to a Change in Control Benefit, payable in cash, equal to either one (1) times or one and one-half (1.5) times his Compensation, as determined by the Chief Executive Officer in his sole and absolute discretion. Furthermore, the Vice-President and his or her eligible dependents shall be entitled to participate in the Company's group medical plan (excluding dental and vision benefits) for a period of either twelve (12) or eighteen (18) months (as determined by the Chief Executive Officer in his sole and absolute discretion) commencing on the date of the Vice-President's Separation from Service.
3.2
Severance Benefit . The Severance Benefit to which an eligible Participant shall be entitled shall be as follows:
(a)
Chief Executive Officer . The Chief Executive Officer shall be entitled to a Severance Benefit, payable in cash, equal to two (2) times his Compensation, together with the benefits described in Section 3.2(d) (i) and (ii) hereof. Furthermore, except to the extent prohibited by law, and applicable only until May 1, 2015, the Chief Executive Officer shall be deemed vested under the Tesoro Corporation Amended and Restated Executive Security Plan ("ESP") (known as the Andeavor Executive Security Plan as of August 1, 2017) as of the date of the Chief Executive Officer’s eligibility for a Severance Benefit hereunder and the benefit to which the Chief Executive Officer is entitled under the ESP shall be calculated, to the extent applicable, by granting the Chief Executive Officer deemed years of age and service up to the earliest date on which the Chief Executive Officer would be eligible for an early retirement benefit, as determined under the Tesoro Corporation Retirement Plan (known as the Andeavor Pension Plan as of August 1, 2017).
(b)
Executive Vice-Presidents . Each Executive Vice-President shall be entitled to a Severance Benefit, payable in cash, equal to one and three-fourths (1.75) times his Compensation, together with the benefits described in Section 3.2(d) (i) and (ii) hereof.
(c)
Senior Vice-Presidents . Each Senior Vice-President shall be entitled to a Severance Benefit, payable in cash, equal to one and one-half (1.5) times his Compensation, together with the benefits described in Section 3.2(d) (i) and (ii) hereof.

8


(d)
Additional Benefits . The foregoing eligible Participants set forth in this Section 3.2 shall be entitled to the following benefits, as applicable, in addition to the benefits described in (a), (b) and (c) above:
(i)
participation in the Company's medical plan (excluding dental and vision benefits) for a period of eighteen (18) months commencing on the date of the Participant’s Separation from Service;
(ii)
receipt of reasonable outplacement services, at no cost to the Participant, for up to twelve (12) months, such twelve (12)-month period to commence on the date of the Participant’s Separation from Service; and
(iii)
Chief Executive Officer and Chief Executive Officer’s spouse and eligible dependents shall continue to be eligible to participate in, and receive group health coverage under, the Company’s group health plans that provide group health coverage to active employees of the Company from time to time, but only to the extent such plans continue to be available to the Company’s employees and only until the earliest to occur of (A) two and one-half (2½) years after the date of termination of the Chief Executive Officer’s employment, (B) Chief Executive Officer’s death (or in the case of coverage for a qualified beneficiary of Chief Executive Officer, the death of that qualified beneficiary), or (C) the date on which Chief Executive Officer (or in the case of coverage for a qualified beneficiary of Executive, the qualified beneficiary) becomes eligible for coverage under any other group health plan of another employer providing comparable coverage (the “Continuation Coverage Period”); provided that the Company shall pay for one hundred percent (100%) of the premiums for such group health coverage, and the premiums that otherwise would be charged to the Chief Executive Officer for such coverage but for this Section 3.2(d)(iii) shall be included as imputed income; and provided further that the group health plan coverage benefits provided by the Company under this Section 3.2(d)(iii) during any taxable year of the Chief Executive Officer will not affect such benefits provided by the Company in another taxable year during the period of continued coverage and the right to the benefits provided under this Section 3.2(d)(iii) is not subject to liquidation or exchange for another benefit.
3.3
Death/Disability Benefit . The Chief Executive Officer or, in the event of the Chief Executive Officer’s death, the estate of the Chief Executive Officer shall be entitled to a Death/Disability Benefit, payable in cash, equal to one (1) times his Base Salary. In the event of the Chief Executive Officer’s termination of employment on account of Total Disability, this benefit shall be reduced by any payments to the Chief Executive Officer under any long-term disability plan or arrangement of the Company.


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SECTION IV
PAYMENT OF BENEFITS
4.1
Benefits payable in accordance with Section III as cash payments will be paid in a single lump sum payment on the first day of the seventh (7th) calendar month beginning after the Participant's Separation from Service. If a Participant who is entitled to continued coverage under the Company’s group medical plan elects to continue such participation, the Company shall pay the applicable premium for such coverage (which amount shall be the employer-subsidized portion of the premium that applies to active employees of the Company) in accordance with the Company's standard payroll practices for the period of coverage that applies under Section III hereof. The continued medical plan coverage described herein and the payment of the applicable premium in connection therewith may not affect the benefit to be provided in any other taxable year and may not be liquidated or exchanged for any other benefit.
4.2
The Company will be liable for all benefits due the Participants under the Plan.
4.3
The Plan is a general corporate commitment and each Participant must rely upon the general credit of the Company for the fulfillment of its obligations under the Plan. Under all circumstances the rights of Participants to any asset held by the Company shall be no greater than the rights expressed in this Plan. Nothing contained in this Plan shall constitute a guarantee by the Company that the assets of the Company will be sufficient to pay any benefits under the Plan or would place the Participant in a secured position ahead of general creditors and judgment creditors of the Company. Though the Company may establish or become a signatory to a rabbi trust to accumulate assets to help fulfill its obligations, the Plan and any trust created, shall not create any lien, claim, encumbrance, right, title or other interest of any kind in any Participant in any asset held by the Company, contributed to any trust created, or otherwise be designated to be used for payment of any of its obligations created in this agreement. No specific assets of the Company have been or will be set aside, or will be transferred to a trust or will be pledged for the performance of the Company's obligations under the Plan which would remove those assets from being subject to the general creditors and judgment creditors of the Company.
4.4
It is intended that this Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.
4.5
Notwithstanding any provision of this Section IV to the contrary, the benefits payable hereunder may, to the extent expressly provided in this Section 4.5, be paid prior to or later than the date on which they would otherwise be paid to the Participant.
(a)
Distribution in the Event of Income Inclusion Under Code Section 409A . If any portion of a Participant's benefit hereunder is required to be included in income by the Participant prior to receipt due to a failure of this Plan or any Aggregated Plan to comply with the requirements of Section 409A of the Code or the Regulations, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the portion of his or her benefit required to be included

10


in income as a result of the failure of the Plan or any Aggregated Plan to comply with the requirements of Section 409A of the Code or the Regulations.
(b)
Distribution Necessary to Satisfy Applicable Tax Withholding . If the Company is required to withhold amounts to pay the Participant’s portion of the Federal Insurance Contributions Act (FICA) tax imposed under Code Sections 3101, 3121(a) or 3121(v)(2) with respect to amounts that are or will be paid to the Participant under the Plan before they otherwise would be paid, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the lesser of: (i) the amount of the Participant's benefit hereunder or (ii) the aggregate of the FICA taxes imposed and the income tax withholding related to such amount.
(c)
Delay for Payments in Violation of Federal Securities Laws or Other Applicable Law . In the event the Company reasonably anticipates that the payment of benefits as specified hereunder would violate Federal securities laws or other applicable law, the Committee may delay the payment of such benefit hereunder until the earliest date at which the Company reasonably anticipates that the making of such payment would not cause such violation.
(d)
Delay for Insolvency or Compelling Business Reasons. In the event the Company determines that the making of any payment of benefits on the date specified hereunder would jeopardize the ability of the Company to continue as a going concern, the Committee may delay the payment of such benefits until the first calendar year in which the Company notifies the Committee that the payment of benefits would not have such effect.
(e)
Administrative Delay in Payment . The payment of benefits hereunder shall begin at the date specified in accordance with the provisions of the foregoing paragraphs of this Section IV; provided that, in the case of administrative necessity, the payment of such benefits may be delayed up to the later of the last day of the calendar year in which payment would otherwise be made or the 15 th day of the third calendar month following the date on which payment would otherwise be made. Further, if, as a result of events beyond the control of the Participant, it is not administratively practicable for the Committee to calculate the amount of benefits due to the Participant as of the date on which payment would otherwise be made, the payment may be delayed until the first calendar year in which calculation of the amount is administratively practicable.
SECTION V
CLAIMS PROCEDURES
5.1
Claims for Benefits . The Committee shall determine the rights of any Participant to any benefits hereunder. Any Participant who believes that he has not received the benefits to which he is entitled under the Plan may file a claim in writing with the Committee. The Committee shall, no later than 90 days after the receipt of a claim (plus an additional period

11


of 90 days if required for processing, provided that notice of the extension of time is given to the claimant with the first 90-day period), either allow or deny the claim in writing.
A denial of a claim by the Committee, wholly or partially, shall be written in a manner intended to be understood by the claimant and shall include:
(a)
the specific reasons for the denial;
(b)
specific reference to pertinent Plan provisions on which the denial is based;
(c)
a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and
(d)
an explanation of the claim review procedure and the time limits applicable to such procedures, including a statement of the claimant's right, if applicable, to bring a civil action under Section 502(a) of ERISA.
5.2
Appeal Provisions . A claimant whose claim is denied (or his duly authorized representative) may within 60 days after receipt of denial of a claim file with the Committee a written request for a review of such claim. If the claimant does not file a request for review of his claim within such 60-day period, the claimant shall be deemed to have acquiesced in the original decision of the Committee on his claim, the decision shall become final and the claimant will not be entitled to bring a civil action under Section 502(a) of ERISA. If such an appeal is so filed within such 60-day period the Committee (or its delegate) shall conduct a full and fair review of such claim. During such review, the claimant (or the claimant's authorized representative) shall be given the opportunity to review all documents that are pertinent to his claim and to submit issues and comments in writing.
The Committee shall mail or deliver to the claimant a written decision on the matter based on the facts and the pertinent provisions of the Plan within 60 days after the receipt of the request for review (unless special circumstances require an extension of up to 60 additional days, in which case written notice of such extension shall be given to the claimant prior to the commencement of such extension). Such decision shall be written in a manner intended to be understood by the claimant, shall state the specific reasons for the decision and the specific Plan provisions on which the decision was based and shall, to the extent permitted by law, be final and binding on all interested persons.
SECTION VI
MISCELLANEOUS
6.1
The Board, or its delegate, may, in its sole discretion, terminate, suspend or amend this Plan at any time, in whole or in part. However, the termination, amendment or suspension of this Plan will not operate to decrease the benefit to which a Participant has become entitled but which has not yet been paid. Notwithstanding the foregoing, the Plan shall automatically terminate, without further action of the Company, upon Insolvency of the Company. For

12


this purpose, Insolvency shall mean the inability of the Company to continue as a going concern.
6.2
Notwithstanding any provision of the Plan to the contrary, the Committee may at any time (without the consent of any Participant) modify, amend or terminate any or all of the provisions of this Plan to the extent necessary to conform the provisions of the Plan with Section 409A of the Code, regardless of whether such modification, amendment or termination of this Plan shall adversely affect the rights of a Participant under the Plan.
6.3
Nothing contained herein will confer upon any Participant the right to be retained in the service of the Company, nor will it interfere with the right of the Company to discharge or otherwise deal with a Participant without regard to the existence of this Plan.
6.4
No benefit under this Plan shall be assignable or subject to any manner of alienation, sale, transfer, claims of creditors, pledge, attachment or encumbrances of any kind.
6.5
The Committee may adopt rules and regulations to assist it in the administration of the Plan and may delegate such of its duties hereunder as it may deem advisable.
6.6
This Plan is established under and will be construed according to the laws of the State of Texas, except to the extent preempted by federal law.
6.7
This amendment and restatement is signed this ______ day of _____, 2017, to be effective as of August 1, 2017.

ANDEAVOR



By:                             
Kim Rucker
Executive Vice President, General Counsel and
Secretary








4820-9229-9806v.17

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Exhibit 10.93



ANDEAVOR SUPPLEMENTAL
EXECUTIVE RETIREMENT PLAN
AMENDED AND RESTATED EFFECTIVE AUGUST 1, 2017
 





ANDEAVOR SUPPLEMENTAL
EXECUTIVE RETIREMENT PLAN
PREAMBLE
The principal objective of this Supplemental Executive Retirement Plan (the "Plan") is to ensure the payment of a competitive level of retirement income in order to attract, retain and motivate selected executives. The Plan was designed to provide a benefit which, when added to other retirement income of the executive, will meet the objective described above. Effective January 1, 2015, this Plan is frozen to new participants. The Plan is intended to conform to the requirements of Section 409A of the Code, together with the Regulations, and is intended to qualify as an unfunded plan maintained primarily for the purpose of providing benefits for a select group of management and highly compensated employees of the Company and its Subsidiaries. The Plan is hereby amended and restated, effective August 1, 2017, to reflect a change in the name of the Company and to make such other changes deemed appropriate.
SECTION I
DEFINITIONS
1.1      "Account Balance" means:
The notational account established under this Plan for each Participant and maintained according to the provisions set forth herein. The Participant's Account Balance is a recordkeeping account only, and does not represent a statement of the interest of the Participant in actual assets of the Plan.
A Participant's Account Balance, including Interest Credits, Contribution Credits and other adjustments, shall be determined in the same manner as a Participant's

"Account Balance" (as such term is defined in the Pension Plan) is determined under applicable provisions of the Pension Plan, unless otherwise set forth herein.
1.2      "Affiliate" means each entity that would be considered a single employer with the Company under Section 414(b) or Section 414(c) of the Code, except that the phrase "at least 50%" shall be substituted for the phrase "at least 80%" as used therein.
1.3      "Aggregated Plan" means all agreements, methods, programs and other arrangements that are aggregated with this Plan under Section 1.409A-1(c) of the Regulations.
1.4      "Basic Compensation" means "Basic Compensation" (as such term is defined in the Pension Plan), but determined without regard to any dollar limits on compensation imposed by the Code.

1


1.5      "Beneficiary" means the person or legal entity designated in writing by a Participant to receive, after his death, any death benefits provided by the Plan. If no designation is in effect under this Plan at the time of the Participant's death, or if no designated person shall survive the Participant, the Beneficiary shall be determined under the beneficiary default provisions set forth in the Pension Plan.
1.6      "Board" means the Board of Directors of the Company.
1.7      "Change in Control" means (i) there shall be consummated (A) any consolidation or merger of Company in which Company is not the continuing or surviving corporation or pursuant to which shares of Company's common stock would be converted into cash, securities or other property, other than a merger of Company where a majority of the board of directors of the surviving corporation are, and for a one-year period after the merger continue to be, persons who were directors of Company immediately prior to the merger or were elected as directors, or nominated for election as director, by a vote of at least two-thirds of the directors then still in office who were directors of Company immediately prior to the merger, or (B) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Company, or (ii) the shareholders of Company shall approve any plan or proposal for the liquidation or dissolution of Company, or (iii) (A) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than Company or a Subsidiary thereof or any employee benefit plan sponsored by Company or a Subsidiary thereof, shall become the beneficial owner (within the meaning of Rule 13c-3 under the Securities Exchange Act of 1934) of securities of Company representing 35 percent or more of the combined voting power of Company's then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, and (B) at any time during a period of one-year thereafter, individuals who immediately prior to the beginning of such period constituted the Board shall cease for any reason to constitute at least a majority thereof, unless election or the nomination by the Board for election by Company's shareholders of each new director during such period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period.
1.8      "Chief Executive Officer" means the Chief Executive Officer of the Company.
1.9      "Code" means the Internal Revenue Code of 1986, as amended from time to time.
1.10      "Committee" means the Compensation Committee of the Board or such other committee designated by the Compensation Committee of the Board to discharge the duties of the Committee hereunder.
1.11      "Company" means, prior to August 1, 2017, Tesoro Corporation, a Delaware corporation, and, effective August 1, 2017, Andeavor, a Delaware corporation, or any successor thereto.
1.12      "Contribution Credit" means the amount credited as of each Contribution Valuation Date to the Account Balance of each Participant, which amount shall equal the product

2


determined by multiplying the Participant's Basic Compensation for that portion of the calendar quarter ending on such Contribution Valuation Date during which the Participant is eligible to participate in the Plan by the Contribution Credit Rate, but reduced by the contribution credits, if any, credited on behalf of the Participant for the same period under the Pension Plan and the Restoration Plan.
1.13      "Contribution Credit Rate" means the percentage of the Participant's Basic Compensation utilized to determine the Participant's Contribution Credit, which percentage shall equal fifteen percent (15%) unless another percentage is established by the Committee.
1.14      "Contribution Valuation Date" means the "Contribution Valuation Date" (as such term is defined in the Pension Plan).
1.15      "Disabled" or "Disability" means a physical or mental condition of the Participant the occurrence of which has entitled the Participant to benefits under the long-term disability plan of the Company or an Affiliate.
1.16      " Distribution Schedule " means the method of distribution elected (or deemed elected) by a Participant, which method may be either a lump sum payment or an annuity, pursuant to which distribution of the Participant's benefit hereunder shall be made or shall commence. Such election shall be made at the time and in the manner described in Section 2.2 hereof and shall be subject to the provisions thereof.
1.17      "Early Retirement Date" means the date on which a Participant has either: (i) both attained age 55 and is credited with at least 5 years of Service or (ii) attained age 50 and is credited with at least eighty (80) points, with points credited for this purpose by adding the aggregate of a Participant's age and Service, each of which shall be determined in years and completed months rather than completed years only, and including "deemed years of age" granted pursuant to an employment agreement, change in control agreement, separation agreement or any other agreement between a Participant and the Company or an Affiliate.
1.18      "Interest Credit" means the amount of interest credited to the Account Balance of each Participant as of each Interest Valuation Date, which amount shall be determined by applying the Interest Credit Rate to the Participant's Account Balance, based on the methodology specified in the Pension Plan.
1.19      "Interest Credit Rate" means the "Interest Credit Rate" (as such term is defined in the Pension Plan).
1.20      "Interest Valuation Date" means the "Interest Valuation Date" (as such term is defined in the Pension Plan).
1.21      " "Participant" means an officer of the Company or an Affiliate with the title of Senior Vice President or above who is recommended for participation by the Chief Executive Officer and approved by the Compensation Committee of the Board as eligible to participate.

3


1.22      "Pension Plan" means, prior to August 1, 2017, the Tesoro Corporation Retirement Plan and, effective August 1, 2017, the Andeavor Pension Plan, as may be amended from time to time.
1.23      "Plan" means, prior to August 1, 2017, the Tesoro Corporation Supplemental Executive Retirement Plan, and, effective August 1, 2017, the Andeavor Supplemental Executive Retirement Plan, effective August 1, 2017, as may be amended from time to time.
1.24      "Regulations" means the Treasury Regulations promulgated under the Code.
1.25      "Restoration Plan" means, prior to August 1, 2017, the Tesoro Corporation Restoration Retirement Plan and, effective August 1, 2017, the Andeavor Restoration Pension Plan, as may be amended from time to time.
1.26      "Retirement" means a Participant's Separation from Service on or after the earlier of: (i) his Early Retirement Date or (ii) a Change in Control.
1.27      "Retirement Date" means the date of a Participant's Retirement.
1.28      "Separation from Service" means a reasonably anticipated permanent reduction in the level of bona fide services performed by the Participant for the Company and its Affiliates to 20% or less of the average level of bona fide services performed by the Participant for the Company and its Affiliates (whether as an employee or an independent contractor) in the immediately preceding thirty-six (36) months (or the full period of service to the Company and its Affiliates if the Participant has been providing services to the Company and its Affiliates for fewer than thirty-six (36) months). The determination of whether a Separation from Service has occurred shall be made by the Committee in accordance with the provisions of Section 409A of the Code and the Regulations promulgated thereunder.
1.29      "Service" means a Participant's "Vesting Service," as such term is defined in the Pension Plan, but calculated in years and completed months rather than completed years only, and including "deemed service" granted pursuant to an employment agreement, change in control agreement, separation agreement or any other agreement between a Participant and the Company or an Affiliate.
1.30      "Subsidiary" means any entity in which the Company owns or otherwise controls, directly or indirectly, stock or other ownership interests having the voting power to elect a majority of the board of directors, or other governing group having functions similar to a board of directors, as determined by the Committee.
1.31      "Vested Account Balance" means that portion of a Participant's Account Balance that has vested in accordance with the provisions of this Section. A Participant shall be one hundred percent (100%) vested in his or her Account Balance upon such Participant's Early Retirement Date or, if earlier, upon the earliest of such Participant's death, Disability or a Change in Control.

4


The masculine gender, where appearing in the Plan, will be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary.
SECTION II
ELIGIBILITY FOR BENEFITS
2.1      Eligibility to Receive Benefits . Each Participant is eligible to receive a benefit under this Plan upon his Retirement. Such benefit shall commence as provided in Section III hereof. Except as provided in Section IV hereof, no benefit is payable hereunder in the event of a Participant's Separation from Service prior to Retirement.
2.2      Form of Benefit . Each Participant may, within thirty (30) days of the date on which he is notified of his eligibility to participate in the Plan, irrevocably elect the Distribution Schedule pursuant to which benefits hereunder will be paid, subject to the restrictions of the Plan. The Participant's election shall become effective immediately following the Committee's receipt of the Participant's executed participation agreement. A Participant's failure to elect a Distribution Schedule in accordance with this Section 2.2 shall be deemed an election by the Participant to receive his benefits hereunder in the form of a single lump sum distribution. The Participant's election (or deemed election) shall become irrevocable as of the last day of the 30-day period during which the Participant is permitted to make an election in accordance with this Section 2.2, except as provided below. If a Participant has timely elected an annuity form of payment, the benefit determined under this Plan will be paid in the form of a single life annuity, payable for the Participant's lifetime, unless, prior to the date on which an annuity payment has been made, and within the time and in the manner determined by the Committee, the Participant elects an actuarially equivalent life annuity, within the meaning of Section 1.409A-2(b)(2)(ii) of the Regulations. Subject to the preceding sentence, actuarially equivalent life annuities, including the conversion of the amount of a Participant's Vested Account Balance to a single life annuity, shall be calculated by using the applicable actuarial assumptions set forth in the Pension Plan. The actuarially equivalent life annuity forms available hereunder shall be those forms of life annuity set forth in the Pension Plan as in effect on the date of the Participant's Separation from Service.
2.3      Forfeiture of Benefit . Notwithstanding anything herein to the contrary, if a Participant who is receiving, or may be entitled to receive, a benefit hereunder, engages in competition with the Company (without prior authorization given by the Committee in writing) or is discharged for cause, or performs acts of willful malfeasance or gross negligence in a matter of material importance to the Company, payments thereafter payable hereunder to such Participant or such Participant's Beneficiary will, at the discretion of the Committee, be forfeited and the Company will have no further obligation hereunder to such Participant or Beneficiary.
SECTION III
RETIREMENT BENEFIT
The retirement benefit payable under this Plan will equal the Participant's Vested Account Balance, determined as of the Payment Date, as such term is defined below, and payable in the form determined under the provisions of Section 2.2 hereof. Retirement benefits shall commence, or in the case of a lump sum payment, be distributed in full on the first day of the seventh (7th) calendar

5


month (the "Payment Date") beginning after the Participant's Retirement Date. Benefits payable in the form of an annuity will continue to be paid on the first day of each succeeding month. The last such payment will be on the first day of the month in which the retired Participant dies unless another annuity form of payment that contemplates payments made subsequent to the Participant's death is elected in accordance with Section 2.2.
SECTION IV
PRE-RETIREMENT DEATH BENEFIT AND DISABILITY BENEFIT
4.1      Pre-Retirement Death Benefit . If a Participant should die prior to Retirement while in the active employment of the Company or an Affiliate and eligible to participate hereunder, such Participant’s Beneficiary will receive the amount of the Participant's Vested Account Balance, determined as of the date of distribution hereunder. A Beneficiary's pre-retirement death benefit will be payable in the form determined under the provisions of Section 2.2 hereof; provided, however, that if a Participant has timely elected an annuity form of payment, the pre-retirement death benefit will be paid in the form of a single life annuity, payable for the Beneficiary's lifetime, unless, prior to the date on which an annuity payment has been made, and within the time and in the manner determined by the Committee, the Beneficiary elects an actuarially equivalent life annuity, within the meaning of Section 1.409A-2(b)(2)(ii) of the Regulations. Subject to the preceding sentence, actuarially equivalent life annuities shall be calculated by using the applicable actuarial assumptions set forth in the Pension Plan. The actuarially equivalent life annuity forms available hereunder shall be those forms of life annuity set forth in the Pension Plan as in effect on the date of the Participant's death. Distribution of a Participant's pre-retirement death benefit will commence or, in the case of a lump sum payment, will be made in full within sixty (60) days of the date of the Participant's death.
4.2      Disability Benefit . In the event a Participant becomes Disabled while in the active employment of the Company or an Affiliate and eligible to participate hereunder, he shall be entitled to receive the amount of his Vested Account Balance, determined as of the date of distribution hereunder, and payable in the form determined under the provisions of Section 2.2 hereof. Disability benefits shall commence, or in the case of a lump sum payment, be distributed in full on the first day of the month following the date on which such Participant has both attained the age of sixty-five (65) and is credited with at least five (5) years of Service. Contribution Credits and Interest Credits shall continue to be credited on behalf of the Participant to the date of distribution, based upon the Basic Compensation of the Participant had he remained in active employment until such date and continued at the same rate of Basic Compensation until that date. Notwithstanding the foregoing, no Participant shall be entitled to Contribution Credits after the date on which such Participant is no longer considered Disabled. Benefits payable in the form of an annuity will continue to be paid on the first day of each succeeding month. The last such payment will be on the first day of the month in which the Participant dies unless another annuity form of payment that contemplates payments made subsequent to the Participant's death is elected in accordance with Section 2.2.
SECTION V
CLAIMS PROCEDURES

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5.1      Claims for Benefits . The Committee shall determine the rights of any Participant to any deferred compensation benefits hereunder. Any Participant who believes that he has not received the deferred compensation benefits to which he is entitled under the Plan may file a claim in writing with the Committee. The Committee shall, no later than 90 days after the receipt of a claim (plus an additional period of 90 days if required for processing, provided that notice of the extension of time is given to the claimant with the first 90-day period), either allow or deny the claim in writing.
A denial of a claim by the Committee, wholly or partially, shall be written in a manner intended to be understood by the claimant and shall include:
(a)    the specific reasons for the denial;
(b)    specific reference to pertinent Plan provisions on which the denial is based;
(c)    a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and
(d)    an explanation of the claim review procedure and the time limits applicable to such procedures, including a statement of the claimant's right to bring a civil action under Section 502(a) of ERISA.
5.2      Appeal Provisions . A claimant whose claim is denied (or his duly authorized representative) may within 60 days after receipt of denial of a claim file with the Committee a written request for a review of such claim. If the claimant does not file a request for review of his claim within such 60-day period, the claimant shall be deemed to have acquiesced in the original decision of the Committee on his claim, the decision shall become final and the claimant will not be entitled to bring a civil action under Section 502(a) of ERISA. If such an appeal is so filed within such 60-day period the Company (or its delegate) shall conduct a full and fair review of such claim. During such review, the claimant (or the claimant's authorized representative) shall be given the opportunity to review all documents that are pertinent to his claim and to submit issues and comments in writing.
The Company shall mail or deliver to the claimant a written decision on the matter based on the facts and the pertinent provisions of the Plan within 60 days after the receipt of the request for review (unless special circumstances require an extension of up to 60 additional days, in which case written notice of such extension shall be given to the claimant prior to the commencement of such extension). Such decision shall be written in a manner intended to be understood by the claimant, shall state the specific reasons for the decision and the specific Plan provisions on which the decision was based and shall, to the extent permitted by law, be final and binding on all interested persons.
SECTION VI
MISCELLANEOUS

7


6.1      Termination and Amendment of Plan . The Board, or its delegate, may, in its sole discretion, terminate, suspend or amend this Plan at any time, in whole or in part. However, the termination, amendment or suspension of this Plan will not operate to decrease the benefit of (i) a retired Participant, (ii) a Participant who has a Vested Account Balance, or (iii) a Beneficiary who is entitled to receive a pre-retirement death benefit hereunder. Notwithstanding the foregoing, the Plan shall automatically terminate, without further action of the Company, upon Insolvency of the Company. For this purpose, Insolvency shall mean the inability of the Company to continue as a going concern.
To the extent provided by the Board or its delegate, the Plan may be liquidated following a termination under any of the following circumstances:
(a)    the termination and liquidation of the Plan within twelve (12) months of a complete dissolution of the Company taxed under Section 331 of the Code or with the approval of a bankruptcy court pursuant to 11 U.S.C. § 503(b)(1)(A); provided that the amounts deferred under this Plan are included in the Participants' gross incomes in the latest of the following years (or, if earlier, the taxable year in which the amount is actually or constructively received): (i) the calendar year in which the Plan is terminated; (ii) the first calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the payment is administratively practicable.
(b)    the termination and liquidation of the Plan pursuant to irrevocable action taken by the Company within the thirty (30) days preceding or the twelve (12) months following a change of control within the meaning of Section 409A of the Code; provided that all Aggregated Plans are terminated and liquidated with respect to each Participant that experienced such change of control, so that under the terms of the termination and liquidation, all such Participants are required to receive all amounts of deferred compensation under this Plan and any other Aggregated Plans within twelve (12) months of the date the Company irrevocably takes all necessary action to terminate and liquidate this Plan and such other Aggregated Plans;
(c)    the termination and liquidation of the Plan, provided that: (i) the termination and liquidation does not occur proximate to a downturn in the Company's financial health; (2) the Company terminates and liquidates all Aggregated Plans; (3) no payments in liquidation of this Plan are made within twelve (12) months of the date the Company irrevocably takes all necessary action to terminate and liquidate this Plan, other than payments that would be payable under the terms of this Plan if the action to terminate and liquidate this Plan had not occurred; (4) all payments are made within twenty four (24) months of the date on which the Company irrevocably takes all action necessary to terminate and liquidate this Plan; and (5) the Company does not adopt a new Aggregated Plan at any time within three (3) years following the date on which the Company irrevocably takes all action necessary to terminate and liquidate the Plan.
6.2      Compliance with Section 409A . Notwithstanding any provision of the Plan to the contrary, the Committee may at any time (without the consent of any Participant) modify, amend or terminate any or all of the provisions of this Plan to the extent necessary to conform the provisions of the Plan with Section 409A of the Code, regardless of whether such modification, amendment or termination of this Plan shall adversely affect the rights of a Participant under the Plan.

8


6.3      Permitted Adjustments to Distribution Dates . Notwithstanding any provision hereunder to the contrary, the benefits payable hereunder may, to the extent expressly provided in this Section 6.3, be paid prior to or later than the date on which they would otherwise be paid to the Participant.
(a)     Distribution in the Event of Income Inclusion Under Code Section 409A . If any portion of a Participant's benefit hereunder is required to be included in income by the Participant prior to receipt due to a failure of this Plan or any Aggregated Plan to comply with the requirements of Section 409A of the Code or the Regulations, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the portion of his or her benefit required to be included in income as a result of the failure of the Plan or any Aggregated Plan to comply with the requirements of Section 409A of the Code or the Regulations.
(b)     Distribution Necessary to Satisfy Applicable Tax Withholding . If the Company is required to withhold amounts to pay the Participant's portion of the Federal Insurance Contributions Act (FICA) tax imposed under Code Sections 3101, 3121(a) or 3121(v)(2) with respect to amounts that are or will be paid to the Participant under the Plan before they otherwise would be paid, the Committee may determine that such Participant shall receive a distribution from the Plan in an amount equal to the lesser of: (i) the amount of the Participant's benefit hereunder or (ii) the aggregate of the FICA taxes imposed and the income tax withholding related to such amount.
(c)     Delay for Payments in Violation of Federal Securities Laws or Other Applicable Law . In the event the Company reasonably anticipates that the payment of benefits as specified hereunder would violate Federal securities laws or other applicable law, the Committee may delay the payment of such benefit hereunder until the earliest date at which the Company reasonably anticipates that the making of such payment would not cause such violation.
(d)     Delay for Insolvency or Compelling Business Reasons. In the event the Company determines that the making of any payment of benefits on the date specified hereunder would jeopardize the ability of the Company to continue as a going concern, the Committee may delay the payment of such benefits until the first calendar year in which the Company notifies the Committee that the payment of benefits would not have such effect.
(e)     Administrative Delay in Payment . The payment of benefits hereunder shall begin at the date specified in accordance with the provisions of Sections III and IV hereunder; provided that, in the case of administrative necessity, the payment of such benefits may be delayed up to the later of the last day of the calendar year in which payment would otherwise be made or the 15 th day of the third calendar month following the date on which payment would otherwise be made. Further, if, as a result of events beyond the control of the Participant (or following the Participant's death, the Participant's Beneficiary), it is not administratively practicable for the Committee to calculate the amount of benefits due to the Participant as of the date on which payment would otherwise be made, the payment may be delayed until the first calendar year in which calculation of the amount is administratively practicable.

9


(f)     No Participant Election . Notwithstanding the foregoing provisions, if the period during which payment of benefits hereunder will be made occurs, or will occur, in two calendar years, the Participant shall not be permitted to elect the calendar year in which the payment shall be made.
6.4      Liability for Benefits . The Company shall be liable for all benefits due the Participants under the Plan. It is intended that this Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.
6.5      Unfunded Plan . The Plan is only a general corporate commitment and each Participant must rely upon the general credit of the Company for the fulfillment of its obligations under the Plan. Under all circumstances the rights of Participants to any asset held by the Company shall be no greater than the rights expressed in this Plan. Nothing contained in this Plan shall constitute a guarantee by the Company that the assets of the Company will be sufficient to pay any benefits under the Plan or would place the Participant in a secured position ahead of general creditors and judgment creditors of the Company. Though the Company may establish or become a signatory to a rabbi trust to accumulate assets to help fulfill its obligations, the Plan and any trust created, shall not create any lien, claim, encumbrance, right, title or other interest of any kind in any Participant in any asset held by the Company, contributed to any trust created, or otherwise be designated to be used for payment of any of its obligations created in this agreement. No specific assets of the Company have been or will be set aside, or will be transferred to a trust or will be pledged for the performance of the Company's obligations under the Plan which would remove those assets from being subject to the general creditors and judgment creditors of the Company. Under all circumstances, the rights of the Participants to the assets held in a rabbi trust, if any, created with respect to the Plan shall be no greater than the rights expressed in this Plan. Nothing contained in the trust agreement which creates any such rabbi trust shall constitute a guarantee by the Company that the amounts transferred by it to the trust shall be sufficient to pay any benefits under the Plan or would place the Participant in a secured position ahead of judgment and/or general creditors should the Company become insolvent or bankrupt. Any trust agreement established with respect to the Plan must specifically set out these principles so it is clear in the trust agreement that the Participants are only unsecured general creditors of the Company with respect to their benefits under the Plan.
6.6      No Additional Employment Rights . Nothing contained herein will confer upon any Participant the right to be retained in the service of the Company, nor will it interfere with the right of the Company to discharge or otherwise deal with a Participant without regard to the existence of this Plan.
6.7      Assignment and Alienation . No benefit under this Plan shall be assignable or subject to any manner of alienation, sale, transfer, claims of creditors, pledge, attachment or encumbrances of any kind.
6.8      Administration and Delegation . The Committee may adopt rules and regulations to assist it in the administration of the Plan and may delegate such of its duties hereunder as it may deem advisable.

10


6.9      Construction . This Plan is established under and will be construed according to the laws of the State of Texas.
6.10      Effective Date . The effective date of this amended and restated Plan, as signed this 17th day of August, 2017, is August 1, 2017.
ANDEAVOR
By: /s/ Kim K.W. Rucker                
Kim Rucker
Executive Vice President, General Counsel and
Secretary

























4850-1749-9166v.9

11
Exhibit 21.1





SUBSIDIARIES OF THE COMPANY

Andeavor is publicly held and has no parent. Certain omitted subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a “significant subsidiary” at the end of the year ended December 31, 2017.

Name of Subsidiary
 
Incorporated or Organized under Laws of
2Go Tesoro Company
 
Delaware
Andeavor
 
Delaware
Andeavor Field Services LLC
 
Delaware
Andeavor Foundation, Inc.
 
Texas
Andeavor Gathering I LLC
 
Delaware
Andeavor Logistics LP
 
Delaware
Andeavor Midstream Partners GP LLC
 
Delaware
Andeavor Midstream Partners LP
 
Delaware
Andeavor Midstream Partners Operating LLC
 
Delaware
Andeavor Servicios de Mexico, S. de R.L. de C.V.
 
Mexico
Ascarate Group LLC
 
Delaware
BakkenLink Pipeline LLC
 
Delaware
BEH Holding LLC
 
Delaware
Carson Cogeneration Company
 
Delaware
Ciniza Production Company
 
New Mexico
Dakota Prairie Refining, LLC
 
Delaware
Dial Oil Co., LLC
 
New Mexico
Empire Oil Co.
 
California
Giant Four Corners, LLC
 
Delaware
Giant Industries, Inc.
 
Delaware
Giant Stop-N-Go of New Mexico, LLC
 
New Mexico
Gold Star Maritime Company
 
Delaware
Green River Processing, LLC
 
Delaware
Interior Fuels Company
 
Alaska
Kenai Pipe Line Company
 
Delaware
Navajo Convenient Stores Co., LLC
 
New Mexico
ND Land Holdings LLC
 
Delaware
Northern Tier Bakery LLC
 
Delaware
Northern Tier Energy GP LLC
 
Delaware
Northern Tier Energy LLC
 
Delaware
Northern Tier Energy LP
 
Delaware
Northern Tier Finance Corporation
 
Delaware
Northern Tier Oil Transport LLC
 
Delaware
Northern Tier Retail Holdings LLC
 
Delaware
Northern Tier Retail, LLC
 
Delaware
Redland Vision, LLC
 
Delaware
Rendezvous Pipeline Company, LLC
 
Colorado
Ridgewood Association
 
Texas


Exhibit 21.1

Name of Subsidiary
 
Incorporated or Organized under Laws of
Ridgewood Insurance Company
 
Vermont
RW Land Company
 
Delaware
San Juan Refining Company, LLC
 
New Mexico
St. Paul Park Refining Co. LLC
 
Delaware
SuperAmerica Franchising LLC
 
Delaware
Tahoe Merger Sub 2, LLC
 
Delaware
Tesoro Alaska Company LLC
 
Delaware
Tesoro Alaska Pipeline Company LLC
 
Delaware
Tesoro Alaska Terminals LLC
 
Delaware
Tesoro Aviation Company
 
Delaware
Tesoro Canada Supply & Distribution Ltd.
 
Canada
Tesoro Companies, Inc.
 
Delaware
Tesoro Environmental Resources Company
 
Delaware
Tesoro Far East Maritime Company
 
Delaware
Tesoro Great Plains Gathering & Marketing LLC
 
Delaware
Tesoro Great Plains Holdings Company LLC
 
Delaware
Tesoro Great Plains Midstream LLC
 
Delaware
Tesoro High Plains Pipeline Company LLC
 
Delaware
Tesoro Insurance Holding Company
 
Delaware
Tesoro Logistics Finance Corp.
 
Delaware
Tesoro Logistics GP, LLC
 
Delaware
Tesoro Logistics Northwest Pipeline LLC
 
Delaware
Tesoro Logistics Operations LLC
 
Delaware
Tesoro Logistics Pipelines LLC
 
Delaware
Tesoro Maritime Company
 
Delaware
Tesoro Mexico Supply & Marketing, S. de R.L. de C.V.
 
Mexico
Tesoro Northstore Company
 
Alaska
Tesoro Panama Company, S.A.
 
Panama/ Delaware
Tesoro Petroleum (Singapore) Pte. Ltd.
 
Singapore
Tesoro Refining & Marketing Company LLC
 
Delaware
Tesoro Renewables Company LLC
 
Delaware
Tesoro Savage Petroleum Terminal LLC
 
Delaware
Tesoro Sierra Properties, LLC
 
Delaware
Tesoro SoCal Cogen Company LLC
 
Delaware
Tesoro SoCal Pipeline Company LLC
 
Delaware
Tesoro South Coast Company, LLC
 
Delaware
Tesoro Trading Company
 
Delaware
Tesoro Wasatch, LLC
 
Delaware
Tesoro West Coast Company, LLC
 
Delaware
Trans-Foreland Pipeline Company LLC
 
Delaware
Treasure Card Company LLC
 
Arizona
Treasure Franchise Company LLC
 
Delaware
Uinta Express Pipeline Company LLC
 
Delaware
Virent Renewables Holding Company LLC
 
Delaware
Virent Renewables LLC
 
Delaware


Exhibit 21.1

Name of Subsidiary
 
Incorporated or Organized under Laws of
Virent, Inc.
 
Delaware
Western Acquisition Holdings, LLC
 
Delaware
Western Refining Company, L.P.
 
Delaware
Western Refining Conan Gathering Holdings, LLC
 
Delaware
Western Refining Conan Gathering, LLC
 
Delaware
Western Refining de Mexico, S. de R.L. de C.V.
 
Mexico
Western Refining Delaware Basin Storage, LLC
 
Delaware
Western Refining GP, LLC
 
Delaware
Western Refining Logistics GP, LLC
 
Delaware
Western Refining Logistics, LP
 
Delaware
Western Refining LP, LLC
 
Delaware
Western Refining Pipeline, LLC
 
New Mexico
Western Refining Product Transport, LLC
 
Delaware
Western Refining Retail, LLC
 
Delaware
Western Refining Southwest, Inc.
 
Arizona
Western Refining Terminals, LLC
 
Delaware
Western Refining Texas Retail Services, LLC
 
Texas
Western Refining TRS I, LLC
 
Texas
Western Refining TRS II, LLC
 
Texas
Western Refining Wholesale, LLC
 
Delaware
Western Refining Yorktown Holding Company
 
Delaware
Western Refining Yorktown, Inc.
 
Delaware
Western Refining, Inc.
 
Delaware
Wingate-Gallup Pipeline, LLC
 
Delaware
WNR Mexico 1, LLC
 
Delaware
WNR Mexico 2, LLC
 
Delaware
WNRL Energy GP, LLC
 
Delaware
WNRL Energy, LLC
 
Delaware
WNRL Finance Corp.
 
Delaware
York River Fuels, LLC
 
Delaware

Certain subsidiaries are not listed since, considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary at December 31, 2017.



Exhibit 23.1

Consent of Independent Registered Public Accounting Firm



We consent to the incorporation by reference in the following Registration Statements:

(1)
Registration Statement (Form S-8 No. 333-25379) pertaining to the Tesoro Corporation 1995 Non-Employee Director Stock Option Plan
(2)
Registration Statement (Form S-8 No. 333-39070) pertaining to the Tesoro Corporation 1993 Long-Term Incentive Plan
(3)
Registration Statement (Form S-8 No. 333-112427) pertaining to the Tesoro Corporation 1995 Non-Employee Director Stock Option Plan
(4)
Registration Statement (Form S-8 No. 333-120716) pertaining to the Tesoro Corporation 1995 Non-Employee Director Stock Option Plan
(5)
Registration Statement (Form S-8 No. 333-156268) pertaining to the Tesoro Corporation 2006 Long-Term Incentive Plan
(6)
Registration Statement (Form S-8 No. 333-174132) pertaining to the Tesoro Corporation 2011 Long-Term Incentive Plan
(7)
Registration Statement (Form S-8 No. 333-176132) pertaining to the Tesoro Corporation Thrift Plan
(8)
Registration Statement (Form S-8 No. 333-176132) pertaining to the Tesoro Corporation Retail Savings Plan
(9)
Registration Statement (Form S-8 No. 333-188405) pertaining to the Tesoro Corporation Amended and Restated 2011 Long-Term Incentive Plan
(10)
Registration Statement (Form S-8 No. 333-207843) pertaining to the Tesoro Corporation Executive Deferred Compensation Plan
(11)
Registration Statement (Form S-4 No. 333-215080) pertaining to the issuance of shares in connection with the Western Refining merger

of our reports dated February 21, 2018 , with respect to the consolidated financial statements of Andeavor, and the effectiveness of internal control over financial reporting of Andeavor included in this Annual Report (Form 10-K ) of Andeavor for the year ended December 31, 2017 .



/s/ ERNST & YOUNG LLP


San Antonio, Texas
February 21, 2018





Exhibit 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Gregory J. Goff, certify that:

1.
I have reviewed this Annual Report on Form 10-K of Andeavor;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

(d)
Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:
February 21, 2018
/s/ GREGORY J. GOFF
 
 
Gregory J. Goff
 
 
Chief Executive Officer





Exhibit 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Steven M. Sterin, certify that:

1.
I have reviewed this Annual Report on Form 10-K of Andeavor;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

(d)
Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:
February 21, 2018
/s/ STEVEN M. STERIN
 
 
Steven M. Sterin
 
 
Chief Financial Officer





Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of Andeavor (the “Company”) on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory J. Goff, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ GREGORY J. GOFF
 
Gregory J. Goff
 
Chief Executive Officer
 
February 21, 2018
 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.





Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of Andeavor (the “Company”) on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven M. Sterin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ STEVEN M. STERIN
 
Steven M. Sterin
 
Chief Financial Officer
 
February 21, 2018
 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.