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EX-32.2 - EXHIBIT 32.2 - Western Refining Logistics, LPexhibit322-wnrlx63017.htm
EX-32.1 - EXHIBIT 32.1 - Western Refining Logistics, LPexhibit321-wnrlx63017.htm
EX-31.2 - EXHIBIT 31.2 - Western Refining Logistics, LPexhibit312-wnrlx63017.htm
EX-31.1 - EXHIBIT 31.1 - Western Refining Logistics, LPexhibit311-wnrlx63017.htm


 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 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: 001-36114
wnrlcolora16.jpg
WESTERN REFINING LOGISTICS, LP
(Exact name of registrant as specified in its charter)
Delaware
 
46-3205923
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
212 N. Clark St.
 
79905
El Paso, Texas
 
(Zip Code)
(Address of principal executive offices)
 
 
Registrant’s telephone number, including area code: (915) 775-3300
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
 
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
As of August 4, 2017, there were 61,023,278 common units outstanding.
 
 
 
 
 




WESTERN REFINING LOGISTICS, LP

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101




FORWARD-LOOKING STATEMENTS
Certain statements included throughout this Quarterly Report on Form 10-Q and in particular under the section entitled Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations relating to matters that are not historical fact are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. These forward-looking statements relate to matters such as our industry including the regulation of our industry, the expected outcomes of legal proceedings involving us, Andeavor (formerly Tesoro Corporation) or Western Refining, Inc. ("Western"), business strategies, future operations, acquisition opportunities, volatility of crude oil prices, gross margins, volumes, taxes, capital expenditures, liquidity and capital resources, sources of financing for acquisitions, maintenance capital expenditures, distributions and other financial and operating information. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition or forecasts of future events. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “position,” “potential,” “predict,” “project,” “strategy,” “will,” “future” and similar terms and phrases to identify forward-looking statements in this report.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect or that are affected by unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. In addition, our business and operations involve numerous risks and uncertainties, many that are beyond our control that could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.
When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-Q. Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to predict or identify all of these factors, they include, among others, the following:
changes in the business strategy or activity levels of Andeavor or Western that may be impacted by a variety of factors, including changes in crack spreads, changes in the spread between West Texas Intermediate ("WTI") crude oil and West Texas Sour ("WTS") crude oil, also known as the sweet/sour spread, changes in the spread between Western Canadian Select ("WCS") and WTI crude oil, changes in the spread between WTI crude oil and Dated Brent crude oil and changes in the spread between WTI Cushing crude oil and WTI Midland crude oil, Western's post-merger integration with Northern Tier Energy LP and, Western's post-merger integration with Andeavor;
the uncertainty of our merger negotiations with Andeavor Logistics LP;
changes in general economic conditions, including the price volatility of crude oil;
competitive conditions in our industry;
actions taken by third-party operators, processors and transporters;
the demand for crude oil, refined and other products and transportation and storage services;
the supply of crude oil in the regions in which we, Andeavor and Western operate;
interest rates;
labor relations;
changes in the availability and cost of capital;
changes in tax status;
operating hazards, natural disasters, weather-related delays, casualty losses and other matters, including those that may result in a force majeure event under our commercial agreements with Western, that may be beyond our control;
the effects of existing and future laws and governmental regulations and the manner in which they are interpreted and implemented;
changes in insurance markets impacting costs and the level and types of coverage available;
disruptions due to equipment interruption or failure at our facilities, Western’s facilities or third-party facilities on which our business is dependent;
our ability to successfully implement our business plan;
the effects of future litigation; and

i


other factors discussed in more detail herein and under Part I. — Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016.
Any one of these factors or a combination of these factors could materially affect our financial condition, results of operations or cash flows and could influence whether any forward-looking statements ultimately prove to be accurate. You are urged to consider these factors carefully in evaluating our forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements.
Although we believe the forward-looking statements we make in this report related to our plans, intentions and expectations are reasonable, we can provide no assurance that such plans, intentions or expectations will be achieved. These statements are based on assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in the circumstances. Such statements are subject to a number of risks and uncertainties, many that are beyond our control. The forward-looking statements included herein are made only as of the date of this report and we are not required to (and will not) update any information to reflect events or circumstances that may occur after the date of this report, except as required by applicable law.


ii


Part I. Financial Information

Item 1.
Financial Statements
WESTERN REFINING LOGISTICS, LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except unit data)
 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
10,531

 
$
14,652

Restricted cash
14,347

 

Accounts receivable:
 
 
 
Affiliate
56,353

 
48,798

Third-party, net of a reserve for doubtful accounts of $121 and $132, respectively
52,334

 
65,240

Inventories
64

 
68

Prepaid expenses
4,980

 
6,421

Other current assets
4,362

 
6,403

Assets held for sale
3,451

 
17,354

Total current assets
146,422

 
158,936

Property, plant and equipment, net
409,370

 
412,170

Intangible assets, net
6,104

 
6,515

Other assets
2,975

 
3,233

Total assets
$
564,871

 
$
580,854

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable:
 
 
 
Affiliate
$
118,967

 
$
120,063

Third-party
10,253

 
9,186

Accrued liabilities
41,249

 
39,599

Total current liabilities
170,469

 
168,848

Long-term liabilities:
 
 
 
Long-term debt
314,022

 
313,032

Deferred income tax liability, net
119

 
641

Other liabilities
9

 
9

Total long-term liabilities
314,150

 
313,682

Commitments and contingencies


 


Equity:
 
 
 
General Partner
(10,741
)
 
(5,532
)
TexNew Mex unitholders (80,000 units issued and outstanding)
(310
)
 
(310
)
Common unitholders - Public (28,993,863 and 28,866,477 units issued and outstanding, respectively)
594,052

 
600,100

Common unitholders - Affiliate (Andeavor - 32,018,847 and Western - 9,207,847 units issued and outstanding, respectively)
(502,749
)
 
(132,802
)
Subordinated unitholders - Affiliate (Andeavor - 0 and Western - 22,811,000 units issued and outstanding, respectively)

 
(363,132
)
Total equity
80,252

 
98,324

Total liabilities and equity
$
564,871

 
$
580,854



The accompanying notes are an integral part of these condensed consolidated financial statements.
1



WESTERN REFINING LOGISTICS, LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per unit data)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Fee based:
 
 
 
 
 
 
 
Affiliate
$
67,783

 
$
53,965

 
$
133,260

 
$
105,893

Third-party
703

 
677

 
1,322

 
1,367

Product sales based:
 
 
 
 
 
 
 
Affiliate
139,770

 
126,525

 
264,837

 
224,054

Third-party
419,253

 
397,435

 
832,782

 
715,327

Total revenues
627,509

 
578,602

 
1,232,201


1,046,641

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of products sold:
 
 
 
 
 
 
 
Affiliate
137,150

 
123,870

 
259,849

 
219,019

Third-party
403,180

 
380,386

 
797,780

 
680,827

Operating and maintenance expenses
47,269

 
42,991

 
92,116

 
87,649

Selling, general and administrative expenses
8,023

 
6,007

 
14,766

 
11,371

Gain on disposal of assets, net
(2,936
)
 
(802
)
 
(3,227
)
 
(901
)
Depreciation and amortization
9,784

 
9,553

 
19,516

 
18,891

Total operating costs and expenses
602,470

 
562,005

 
1,180,800

 
1,016,856

Operating income
25,039

 
16,597

 
51,401

 
29,785

Other income (expense):
 
 
 
 
 
 
 
Interest and debt expense
(6,576
)
 
(6,414
)
 
(13,184
)
 
(13,466
)
Other income (expense), net
15

 
14

 
37

 
(104
)
Net income before income taxes
18,478

 
10,197

 
38,254

 
16,215

Benefit (provision) for income taxes
250

 
(217
)
 
360

 
(478
)
Net income
18,728

 
9,980

 
38,614

 
15,737

Less net loss attributable to General Partner

 
(7,894
)
 

 
(16,144
)
Net income attributable to limited partners
$
18,728

 
$
17,874

 
$
38,614

 
$
31,881

 
 
 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
 
 
Common - basic
$
0.24

 
$
0.33

 
$
0.52

 
$
0.61

Common - diluted
0.24

 
0.33

 
0.52

 
0.61

Subordinated - basic and diluted

 
0.36

 
0.51

 
0.64

 
 
 
 
 
 
 
 
Weighted-average limited partner units outstanding:
 
 
 
 
 
 
 
Common - basic
60,962

 
26,409

 
53,364

 
25,429

Common - diluted
60,971

 
26,427

 
53,372

 
25,441

Subordinated - basic and diluted

 
22,811

 
7,562

 
22,811

 
 
 
 
 
 
 
 
Cash distributions declared per common unit
$
0.4525

 
$
0.4025

 
$
0.8900

 
$
0.7950


Prior-period financial information has been retrospectively adjusted for the St. Paul Park Logistics Transaction.
The accompanying notes are an integral part of these condensed consolidated financial statements.
2



WESTERN REFINING LOGISTICS, LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Six Months Ended
 
June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
38,614

 
$
15,737

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
19,516

 
18,891

Reserve for doubtful accounts
(11
)
 
126

Amortization of deferred financing costs
989

 
685

Unit-based compensation expense
3,732

 
1,312

Deferred income taxes
(522
)
 

Gain on disposal of assets, net
(3,227
)
 
(901
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable - Third-party
12,917

 
(7,750
)
Accounts receivable - Affiliate
(6,802
)
 
(3,142
)
Inventories
4

 
3,109

Prepaid expenses
1,441

 
(539
)
Other assets
4,597

 
2,057

Accounts payable and accrued liabilities
409

 
18,379

Net cash provided by operating activities
71,657

 
47,964

Cash flows from investing activities:
 
 
 
Capital expenditures
(14,317
)
 
(16,088
)
Increase in restricted cash
(14,347
)
 

Proceeds from sale of assets
14,769

 
977

Net cash used in investing activities
(13,895
)
 
(15,111
)
Cash flows from financing activities:
 
 
 
Payments on revolving credit facility

 
(125,000
)
Proceeds from issuance of common units

 
92,460

Offering costs for issuance of common units

 
(330
)
Deferred financing costs
(78
)
 

Quarterly distributions to affiliate
(33,705
)
 
(26,947
)
Quarterly distributions to common unitholders - public
(26,467
)
 
(12,633
)
Payments of tax withholdings for unit-based compensation
(1,633
)
 
(548
)
Contributions from affiliate

 
13,102

Net cash used in financing activities
(61,883
)

(59,896
)
Net change in cash and cash equivalents
(4,121
)
 
(27,043
)
Cash and cash equivalents at beginning of period
14,652

 
44,605

Cash and cash equivalents at end of period
$
10,531

 
$
17,562

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
12,285

 
$
13,111

Income taxes paid
89

 
94

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Accrued capital expenditures
$
4,617

 
$
4,938

Conversion of subordinated units
367,766

 


Prior-period financial information has been retrospectively adjusted for the St. Paul Park Logistics Transaction.
The accompanying notes are an integral part of these condensed consolidated financial statements.
3



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Organization
Western Refining Logistics, LP ("WNRL" or the "Partnership"), "we," "us," and "our" refer to Western Refining Logistics, LP, and, unless the context otherwise requires, our subsidiaries. WNRL is a Delaware limited partnership formed in July 2013 by Western Refining Logistics GP, LLC ("WRGP" or the "General Partner"), our general partner. References to “Western” refer to Western Refining, Inc.
WNRL is principally a growth-oriented partnership that was formed to own, operate, develop and acquire logistics and related assets and businesses including terminals, storage tanks, pipelines and other logistics assets related to the terminalling, transportation, storage and distribution of crude oil and refined products. WNRL's businesses include 705 miles of pipelines, approximately 12.4 million barrels of active shell storage capacity, distribution of wholesale petroleum products and crude oil and asphalt trucking.
On June 1, 2017, Tesoro Corporation (renamed Andeavor on August 1, 2017) completed its acquisition of Western. Tahoe Merger Sub 1, Inc., a Delaware corporation and wholly-owned subsidiary of Andeavor, merged into Western, with Western surviving as a wholly-owned subsidiary of Andeavor (the "Andeavor Acquisition"). WNRL's agreements with Western have not changed as a result of the Andeavor Acquisition as such discussion about our affiliate agreements continue to refer to Western. See Note 17, Related Party Transactions, for additional information regarding these agreements.
As of June 30, 2017, Andeavor owned 52.5% of the limited partner interest in WNRL and public unitholders held the remaining 47.5%. WRGP is indirectly wholly-owned by Andeavor and holds all of the non-economic general partner interests in WNRL. See Note 11, Equity, for additional information.
On April 17, 2017, Andeavor filed an Amendment to Schedule 13D with the Securities and Exchange Commission (the "SEC") stating that the board of directors of Andeavor authorized the management of Andeavor to work with the board of directors and management of Andeavor Logistics LP, formerly known as Tesoro Logistics LP ("Andeavor Logistics"), to consider, discuss and endeavor to negotiate a merger, consolidation or combination (in whatever form) of assets held by and securities issued by Andeavor Logistics and its affiliates and assets held by and securities issued by WNRL. On July 20, 2017, the chairman of the conflicts committee of the WRGP board of directors (the "WNRL Board") received a proposal from Andeavor Logistics to acquire WNRL in an all-stock transaction at an exchange ratio of 0.4906 common units of Andeavor Logistics ("Andeavor Logistics Common Units") for each WNRL common unit.
There can be no assurance that any discussions that may occur between Andeavor Logistics and WNRL will contain transaction terms consistent with those described above or result in the entry into a definitive agreement concerning a transaction or, if such a definitive agreement is reached, will result in the consummation of a transaction provided for in such definitive agreement. Discussions concerning a possible transaction may be terminated at any time and without prior notice. Entry into a definitive agreement concerning a potential transaction and the consummation of any such transaction is subject to a number of contingencies, which are beyond the control of WNRL and Andeavor Logistics, including the satisfactory completion of due diligence, the approval of the WNRL Board and the board of directors of the general partner of Andeavor Logistics (the “Andeavor Logistics Board”), the approval of the conflicts committees established by the WNRL Board and the Andeavor Logistics Board, respectively, and the satisfaction of any conditions to the consummation of a transaction set forth in any such definitive agreement.
On March 2, 2017, the requirements for the conversion of all WNRL subordinated units into common units were satisfied under the partnership agreement. As a result, the 22,811,000 subordinated units converted into common units on a one-for-one basis and thereafter participated on terms equal with all other common units in distributions of available cash. See Note 11, Equity, for additional information.
On September 15, 2016, we acquired certain terminalling, transportation and storage assets from a wholly-owned subsidiary of Western consisting of the Cottage Grove tank farm and certain terminals, storage assets, pipelines and other logistics assets located at Western's St. Paul Park refinery ("St. Paul Park Logistics Assets"). The financial statements presented in this Quarterly Report on Form 10-Q have been retrospectively adjusted to include the combined financial results of the St. Paul Park Logistics Assets prior to our acquisition on September 15, 2016 ("St. Paul Park Logistics Transaction"). The historical operations of the St. Paul Park Logistics Assets prior to the St. Paul Park Logistics Transaction generally recorded operating costs and other expenses associated with storage and terminalling services and recorded no revenue. For periods subsequent to the St. Paul Park Logistics Transaction, the results of operations for the St. Paul Park Logistics Assets reflect

4



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

revenues based on contractual rates set forth in our commercial agreements with Western. See Note 3, Acquisitions of Common Control Assets and Note 17, Related Party Transactions, for additional information.
Our operations include two reportable segments: the logistics segment and the wholesale segment. See Note 5, Segment Information, for further discussion of our reportable segments.
2. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or for any other period. We have not reported comprehensive income due to the absence of items of other comprehensive income or loss during the periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016. The condensed consolidated financial statements do not reflect the push-down accounting of the purchase price adjustments resulting from the Andeavor Acquisition.
Restricted Cash
Restricted cash reported in our Condensed Consolidated Balance Sheet at June 30, 2017 relates to net proceeds from the sale of our lubricant operations located in Arizona and Nevada during the second quarter of 2017. This cash is restricted through June 30, 2018 and must be used to reinvest in assets used in our business or as a prepayment of debt.
Financial Instruments and Fair Value
Financial instruments that potentially subject us to concentrations of credit risk consist of accounts receivable. We believe that our credit risk is minimized as a result of the credit quality of our customer base. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, which we consider Level 1 assets, approximated their fair values at June 30, 2017 and December 31, 2016, due to their short-term maturities. The carrying amount of our debt is the amount reflected in the Condensed Consolidated Balance Sheets, including the current portion. The fair value of the debt was determined based on prices from recent trade activity and is categorized in Level 2 of the fair value hierarchy. See Note 10, Debt, for additional information.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Effective January 1, 2017, we adopted the accounting and reporting requirements included in the Accounting Standards Codification ("ASC") for employee share-based payment accounting. We have applied the new standard prospectively, except for the cash flow considerations, which we applied retrospectively. The adoption of these revised standards was not material to our financial position or results of operations. The presentation of our Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016, has been retrospectively adjusted to include payments of $0.5 million for tax withholdings for stock-based compensation in net cash used in financing activities that was previously reported in net cash provided by operating activities as a change in accounts payable and accrued liabilities.
Accounting Standards Update 2017-03 addresses the disclosure requirements in regards to the impact that recently issued accounting standards will have on the financial statements of a registrant when such standards are adopted in a future period. The specific impact of this guidance will be determined by the respective changes in GAAP.
From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on our accounting and reporting. We are currently evaluating the effect that certain of these new accounting requirements may have on our accounting and related reporting and disclosures in our condensed consolidated financial statements.

5



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Recognition and reporting of revenues - the requirements were amended to remove inconsistencies in revenue requirements and to provide a more complete framework for addressing revenue issues across a broad range of industries and transaction types. The revised standard’s core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised standard also addresses principal versus agent considerations and indicators related to transfer of control over specified goods. These provisions are effective January 1, 2018, and can be adopted using either a full retrospective approach or a modified approach, with early adoption permitted for periods beginning after December 15, 2016, and interim periods thereafter.
We have been evaluating and continue to evaluate the provisions of this standard and its impact on our business processes, business and accounting systems, and financial statements and related disclosures. A multi-disciplined implementation team has gained an understanding of the standard’s revenue recognition model, is reviewing and documenting our contracts, and is analyzing whether enhancements are needed to our business and accounting systems. Thus far in our review and analysis, we have not identified any material differences in our existing revenue recognition methods that would require modification under the new standard. We expect to complete this phase of our implementation plan within the next several months after which we will implement any changes to existing business processes and systems to accommodate the new standard. We will adopt this standard as of January 1, 2018. We preliminarily expect to transition to the new standard under the modified retrospective transition method, whereby a cumulative effect adjustment is recognized upon adoption and the guidance is applied prospectively.
Lease accounting - the requirements were amended with regard to recognizing lease assets and lease liabilities on the balance sheet and disclosing information about leasing arrangements. The core principle is that a lessee should recognize the assets and liabilities that arise from leases. These provisions are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We have been evaluating and continue to evaluate the provisions of this standard and its impact on our business processes, business and accounting systems, and financial statements and related disclosures.
Cash flow statement - the requirements address certain classification issues related to the statement of cash flows. These provisions are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted in any interim or annual period.
Business combinations - the requirements clarify the definition of a business and provide a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. This guidance is effective in annual periods beginning after December 15, 2017, including interim periods therein. It must be applied prospectively on or after the effective date with early adoption permitted subject to certain requirements, and no disclosures for a change in accounting principle are required at transition.
3. Acquisitions of Common Control Assets
On September 15, 2016, we completed the St. Paul Park Logistics Transaction with a wholly-owned subsidiary of Western in exchange for $195 million in cash and 628,224 common units representing limited partner interests in WNRL.
The St. Paul Park Logistics Assets acquired by WNRL included approximately 4.0 million barrels of refined product and crude oil storage capacity, a light products terminal, a heavy products loading rack and certain rail and barge facilities. The St. Paul Park Logistics Assets also include other related logistics assets including two crude oil pipeline segments and one pipeline segment not currently in service, each of which is 2.5 miles and extends from Western's refinery in St. Paul Park, Minnesota to Western's tank farm in Cottage Grove, Minnesota.
In connection with the St. Paul Park Logistics Transaction, we entered into a terminalling, transportation and storage services agreement with Western (the "St. Paul Park Terminalling Agreement"). Pursuant to the St. Paul Park Terminalling Agreement, we agreed to provide product storage services, product throughput services and product additive and blending services at the terminal facilities located at or near Western's refinery in St. Paul Park, Minnesota. In exchange for such services, Western agreed to certain minimum volume commitments and to pay certain fees. The St. Paul Park Terminalling Agreement has an initial term of ten years, which may be extended for up to two renewal terms of five years each upon the mutual agreement of the parties. See Note 17, Related Party Transactions, for additional information.

6



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Divestitures
We completed an evaluation of our lubricant operations and concluded that lubricants are not strategic to our core operations. We have taken steps to divest the remaining assets associated with our lubricant operations and have executed asset purchase agreements with third parties. On June 30, 2017, we sold our lubricant operations located in Arizona and Nevada for $14.7 million resulting in a gain on disposal of assets of $2.8 million. Due to provisions in our senior secured revolving credit facility agreement and 7.5% Senior Notes indenture, the proceeds received from the sale of our lubricant operations must be used in our business or as a prepayment of debt. Restricted cash reported in our Condensed Consolidated Balance Sheet at June 30, 2017, was $14.3 million. This cash is restricted through June 30, 2018. We anticipate completing a sale of the remaining assets during the third quarter of 2017.
In connection with the disposal of our lubricant operations, we reported employee severance costs of $0.4 million and $0.5 million within direct operating expenses and selling, general and administrative expenses in our Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2017, respectively. Assets held for sale in our Condensed Consolidated Balance Sheet at June 30, 2017 and December 31, 2016, respectively, include $1.1 million and $10.1 million in inventories and $2.4 million and $7.3 million in property, plant and equipment. These assets and associated results from operations are presented in our Wholesale segment.
During the second and third quarters of 2016, we disposed of certain assets related to our lubricant sales in California. In connection with this asset disposal, we reported employee severance costs of $0.4 million within direct operating expenses and selling, general and administrative expenses in our Condensed Consolidated Statement of Operations for the three months ended June 30, 2016. A gain of $0.6 million was included in gain on disposal of assets, net for the three and six months ended June 30, 2016 in the Condensed Consolidated Statements of Operations.

5. Segment Information
Our operations are organized into two reportable segments based on marketing criteria, the nature of our products and services and our types of customers. These segments are logistics and wholesale.
Logistics. Our pipeline and gathering assets are positioned to support crude oil supply for Western'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. These systems gather and transport crude oil by pipeline from various production locations to Western’s refineries utilizing 705 miles of pipeline; 33 crude oil storage tanks with a total combined active shell storage capacity of approximately 959,000 barrels, eight truck loading and unloading locations and 15 pump stations.
Our terminalling, transportation and storage assets support crude oil supply and refined product distribution for Western's El Paso, Gallup and St. Paul Park refineries as well as third parties and primarily consist of storage tanks, terminals, transportation and other assets located in El Paso, Texas; Gallup, Bloomfield and Albuquerque, New Mexico; Phoenix and Tucson, Arizona and St. Paul Park, Minnesota. These assets include crude oil, feedstock, blendstock, refined product and asphalt storage tanks with a total combined shell storage capacity of 11.4 million barrels; truck, railcar and barge loading racks; pump stations and pipeline and related logistics assets to service Western’s operations.
Wholesale. Our wholesale segment includes the operations of several lubricant and bulk petroleum distribution facilities and a fleet of crude oil, refined product, asphalt and lubricant delivery trucks. Our wholesale segment distributes commercial wholesale petroleum products primarily in Arizona, Colorado, Nevada, New Mexico and Texas. The wholesale segment purchases petroleum fuels and lubricants from Western's refining segment and from third-party suppliers.
Segment Accounting Principles. Operating income for each segment consists of net revenues less cost of products sold; direct operating expenses; selling, general and administrative expenses; net impact of the disposal of assets and depreciation and amortization.
Activities of our business that are not included in the two segments mentioned above are included in the "Other" category. These activities consist primarily of corporate staff operations and other items that are not specific to the normal business of any one of our two reportable segments.
The total assets of each segment consist primarily of cash and cash equivalents; inventories; net accounts receivable; net property, plant and equipment; net intangible assets and other assets directly associated with the individual segment’s

7



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

operations. Included in the total assets of the corporate operations are cash and cash equivalents, various net accounts receivable, prepaid expenses, other current assets, net deferred income tax items and other long-term assets.

8



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Disclosures regarding our reportable segments with reconciliations to consolidated totals for the three and six months ended June 30, 2017 and 2016, are presented below.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Operating Results:
 
 
 
 
 
 
 
Logistics revenues:
 
 
 
 
 
 
 
Affiliate
$
53,567

 
$
43,053

 
$
103,204

 
$
83,969

Third-party
703

 
677

 
1,322

 
1,367

Total logistics revenues
54,270

 
43,730

 
104,526

 
85,336

Wholesale revenues:
 
 
 
 
 
 
 
Affiliate
153,986

 
137,437

 
294,893

 
245,978

Third-party
419,253

 
397,435

 
832,782

 
715,327

Total wholesale revenues
573,239

 
534,872

 
1,127,675

 
961,305

 
 
 
 
 
 
 
 
Consolidated revenues
$
627,509

 
$
578,602

 
$
1,232,201

 
$
1,046,641

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
Logistics
$
17,611

 
$
11,064

 
$
32,641

 
$
16,977

Wholesale
13,180

 
8,797

 
28,154

 
18,750

Other
(5,752
)
 
(3,264
)
 
(9,394
)
 
(5,942
)
Operating income from segments
25,039

 
16,597

 
51,401

 
29,785

Other expense, net
(6,561
)
 
(6,400
)
 
(13,147
)
 
(13,570
)
Consolidated income before income taxes
$
18,478

 
$
10,197

 
$
38,254

 
$
16,215

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Logistics
$
8,781

 
$
8,347

 
$
17,362

 
$
16,502

Wholesale
1,003

 
1,206

 
2,154

 
2,389

Consolidated depreciation and amortization
$
9,784

 
$
9,553

 
$
19,516

 
$
18,891

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
Logistics
$
8,703

 
$
6,703

 
$
14,154

 
$
14,687

Wholesale
144

 
1,029

 
163

 
1,401

Consolidated capital expenditures
$
8,847

 
$
7,732

 
$
14,317

 
$
16,088

 
June 30,
2017
 
June 30,
2016
 
(In thousands)
Total assets:
 
 
 
Logistics
$
411,581

 
$
414,872

Wholesale
126,345

 
156,067

Other
26,945

 
18,017

Consolidated total assets
$
564,871

 
$
588,956



9



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. Earnings Per Unit
Earnings in excess of distributions are allocated to the limited partners in accordance with our partnership agreement. Payments made to our unitholders are determined in relation to actual distributions declared and are not based on the net income allocations used in the calculation of earnings per unit.
Diluted earnings per unit includes the effects of potentially dilutive units of our common units that consist of unvested phantom units. These units are non-participating securities due to the forfeitable nature of their associated distribution equivalent rights, prior to vesting. We do not consider these units in the two-class method when calculating earnings per unit. Basic and diluted earnings per unit applicable to subordinated limited partners are the same because there were no potentially dilutive subordinated units outstanding.
In accordance with our partnership agreement, our subordinated units converted to common units once we met specified distribution targets and successfully completed other tests set forth in our Second Amended and Restated Agreement of Limited Partnership ("Second A&R Partnership Agreement"). On March 2, 2017, the requirements for the conversion of all WNRL subordinated units into common units were satisfied under the partnership agreement. As a result, the 22,811,000 subordinated units converted into common units on a one-for-one basis and, thereafter, participated on terms equal with all other common units in distributions of available cash. The conversion of the subordinated units did not impact the amount of cash distributions paid by us or the total number of outstanding units. Refer to Note 11, Equity, for further information.
In addition to the common and subordinated units, we have identified the general partner interest, incentive distribution rights and distributions associated with the TexNew Mex Units as participating securities and use the two-class method when calculating earnings per unit applicable to limited partners that is based on the weighted-average number of common units outstanding during the period. We make incentive distribution payments to our General Partner when our per unit distribution amount exceeds the target distribution. During the three and six months ended June 30, 2017 and 2016, we made incentive distribution right payments to our General Partner of $3.1 million, $5.2 million, $0.9 million and $1.7 million, respectively. Refer to Note 11, Equity, for further information regarding incentive distribution rights.
To the extent there is sufficient available cash from operating surplus under the Second A&R Partnership Agreement, the holder of the TexNew Mex Units will be entitled to receive a distribution equal to 80% of the excess of TexNew Mex Shared Segment Distributable Cash Flow over the TexNew Mex Base Amount (as such terms are defined in the Second A&R Partnership Agreement). To the extent the holder of a TexNew Mex Unit is entitled to such a distribution, that distribution will be preferential to all other unit holder distributions. During the three and six months ended June 30, 2017 and 2016, the TexNew Mex unitholders were not entitled to any distributions. Refer to Note 11, Equity, for further information.

10



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The calculation of net income per unit for the three and six months ended June 30, 2017 and 2016, respectively, is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per unit data)
Net income
$
18,728

 
$
9,980

 
$
38,614

 
$
15,737

Net loss attributable to General Partner (1)

 
(7,894
)
 

 
(16,144
)
Net income attributable to limited partners
18,728

 
17,874

 
38,614

 
31,881

General Partner distributions
(3,981
)
 
(921
)
 
(7,044
)
 
(1,682
)
Limited partners' distributions on common units
(29,252
)
 
(9,858
)
 
(49,930
)
 
(19,453
)
Limited partners' distributions on subordinated units

 
(9,181
)
 
(6,992
)
 
(18,135
)
Distributions greater than earnings
$
(14,505
)
 
$
(2,086
)
 
$
(25,352
)
 
$
(7,389
)
 
 
 
 
 
 
 
 
General Partners' earnings:
 
 
 
 
 
 
 
Distributions
$
3,981

 
$
921

 
$
7,044

 
$
1,682

Net loss attributable to General Partner (1)

 
(7,894
)
 

 
(16,144
)
Total General Partners' earnings (loss)
$
3,981

 
$
(6,973
)
 
$
7,044

 
$
(14,462
)
 
 
 
 
 
 
 
 
Limited partners' earnings on common units:
 
 
 
 
 
 
 
Distributions
$
29,252

 
$
9,858

 
$
49,930

 
$
19,453

Allocation of distributions greater than earnings
(14,505
)
 
(1,119
)
 
(22,205
)
 
(3,895
)
Total limited partners' earnings on common units
$
14,747

 
$
8,739

 
$
27,725

 
$
15,558

 
 
 
 
 
 
 
 
Limited partners' earnings on subordinated units (2):
 
 
 
 
 
 
 
Distributions
$

 
$
9,181

 
$
6,992

 
$
18,135

Allocation of distributions greater than earnings

 
(967
)
 
(3,147
)
 
(3,494
)
Total limited partners' earnings on subordinated units
$

 
$
8,214

 
$
3,845

 
$
14,641

 
 
 
 
 
 
 
 
Weighted-average limited partner units outstanding:
 
 
 
 
 
 
 
 Common units - basic
60,962

 
26,409

 
53,364

 
25,429

 Common units - diluted
60,971

 
26,427

 
53,372

 
25,441

 Subordinated units - basic and diluted

 
22,811

 
7,562

 
22,811

 
 
 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
 
 
 Common - basic
$
0.24

 
$
0.33

 
$
0.52

 
$
0.61

 Common - diluted
0.24

 
0.33

 
0.52

 
0.61

 Subordinated - basic and diluted

 
0.36

 
0.51

 
0.64

(1)
We apply the two-class method to calculate earnings per unit and allocate the results of operations of the St. Paul Park Logistics Assets prior to the St. Paul Park Logistics Transaction entirely to our general partner. The limited partners had no rights to the results of operations before the acquisition.
(2)
On March 2, 2017, the 22,811,000 subordinated units converted into common units on a one-for-one basis and thereafter participated on terms equal with all other common units in distributions of available cash. Distributions greater than earnings were allocated to the subordinated units through March 2, 2017.

11



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Property, Plant and Equipment, Net
Property, plant and equipment, net was as follows:
 
June 30,
2017
 
December 31,
2016
 
(In thousands)
Buildings and improvements
$
28,061

 
$
26,463

Pipelines and related assets
270,853

 
264,398

Terminals and related assets
250,857

 
245,512

Asphalt plant, terminals and related assets
26,969

 
26,861

Wholesale and related assets
24,231

 
24,879

 
600,971

 
588,113

Accumulated depreciation
(201,077
)
 
(182,743
)
 
399,894

 
405,370

Construction in progress
9,476

 
6,800

Property, plant and equipment, net
$
409,370

 
$
412,170

Assets held for sale in our Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016 include $2.4 million and $7.3 million, respectively, in net property, plant and equipment. See Note 4, Divestitures, for further discussion.
Depreciation expense was $9.5 million, $18.9 million, $9.3 million and $18.3 million for the three and six months ended June 30, 2017 and 2016, respectively. Capitalized interest expense related to capital projects was $0.07 million and $0.09 million for the three and six months ended June 30, 2017, respectively, and $0.3 million for the three and six months ended June 30, 2016.
8. Intangible Assets, Net
A summary of intangible assets, net, is presented in the table below:
 
June 30, 2017
 
December 31, 2016
 
Weighted-Average Amortization Period (Years)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
 
(In thousands)
 
 
Customer relationships
$
7,172

 
$
(4,499
)
 
$
2,673

 
$
7,172

 
$
(4,234
)
 
$
2,938

 
5.0
Pipeline rights-of-way
6,564

 
(3,133
)
 
3,431

 
6,527

 
(2,950
)
 
3,577

 
6.0
Intangible assets, net
$
13,736

 
$
(7,632
)
 
$
6,104

 
$
13,699

 
$
(7,184
)
 
$
6,515

 
 
Intangible asset amortization expense was $0.3 million and $0.6 million for the three and six months ended June 30, 2017 and June 30, 2016, respectively, based upon estimates of useful lives ranging from 1 to 35 years.
Estimated amortization expense for the indicated periods is as follows (in thousands):
Remainder of 2017
$
677

2018
1,286

2019
1,252

2020
958

2021
805

2022
691


12



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9. Accrued Liabilities
Accrued liabilities were as follows:
 
June 30,
2017
 
December 31,
2016
 
(In thousands)
Deferred revenue - affiliate
$
19,598

 
$
19,132

Interest
8,439

 
8,439

Excise and other taxes
7,155

 
6,329

Property taxes
2,862

 
2,454

Payroll and related costs
2,629

 
2,703

Other
566

 
542

Accrued liabilities
$
41,249

 
$
39,599

10. Debt
Revolving Credit Facility
In connection with the St. Paul Park Logistics Transaction, on September 15, 2016, we entered into a Commitment Increase and First Amendment to Credit Agreement (the “Amendment”) to our senior secured revolving credit facility (the "Revolving Credit Facility") to bring the total commitment to $500.0 million. The Revolving Credit Facility will mature on October 16, 2018. We have the ability to increase the total commitment of our Revolving Credit Facility by up to $150.0 million for a total facility size of up to $650.0 million, subject to receiving increased commitments from lenders and to the satisfaction of certain conditions. The Revolving Credit Facility includes a $25.0 million sub-limit for standby letters of credit and a $10.0 million sub-limit for swing line loans. Obligations under the Revolving Credit Facility and certain cash management and hedging obligations are guaranteed by all of our subsidiaries and are secured by a first priority lien on substantially all of our and our subsidiaries' significant assets. Our creditors under the Revolving Credit Facility have no recourse to Western's or Andeavor's assets. Borrowings under our Revolving Credit Facility bear interest at either a base rate plus an applicable margin ranging from 0.75% to 1.75%, or at LIBOR plus an applicable margin ranging from 1.75% to 2.75%. The applicable margin will vary based on our Consolidated Total Leverage Ratio, as defined in the Revolving Credit Facility.
Pursuant to the Amendment, certain existing lenders and new lenders agreed to provide incremental commitments in an aggregate principal amount of $200.0 million. In addition, the Amendment amended the Revolving Credit Facility by, among other things, (a) adding an anti-cash hoarding provision and (b) permitting the Partnership to increase the total leverage ratio permitted thereunder from 4.50:1.00 to 5.00:1.00 following any material permitted acquisition through the last day of the second full fiscal quarter following such acquisition. The incremental commitments established by the Amendment benefit from the same covenants, events of default, guarantees and security as the existing commitments under the Revolving Credit Facility. We incurred financing costs associated with the Amendment of $1.2 million.
On October 30, 2015, we borrowed $145.0 million under the Revolving Credit Facility to partially fund the purchase of the TexNew Mex Pipeline system from a wholly-owned subsidiary of Western. During the year ended December 31, 2016, we repaid these direct borrowings using the net proceeds generated from our equity offering during the second quarter of 2016 and from cash-on-hand. On September 15, 2016, we borrowed $20.3 million under the Revolving Credit Facility, to partially fund the St. Paul Park Logistics Transaction.
As of June 30, 2017, the availability under the Revolving Credit Facility was $479.0 million. This availability is net of $20.3 million in direct borrowings and $0.7 million in outstanding letters of credit. We had no swing line borrowings outstanding under our Revolving Credit Facility as of June 30, 2017. The estimated fair value of the Revolving Credit Facility approximates its carrying amount. The interest rate for the borrowings under the Revolving Credit Facility was 3.26% as of June 30, 2017. The unamortized financing costs of $1.5 million and $2.0 million as of June 30, 2017 and December 31, 2016, respectively, are included in long-term debt in the Condensed Consolidated Balance Sheets. The effective rate of interest, including contractual interest and amortization of loan fees, on the Revolving Credit Facility was 3.49% as of June 30, 2017.
The Revolving Credit Facility contains covenants that limit or restrict our ability to make cash distributions. We are required to maintain certain financial ratios; each tested on a quarterly basis for the immediately preceding four quarter period. We were in compliance with our debt covenants as of and for the six months ended June 30, 2017.

13



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7.5% Senior Notes
On February 11, 2015, we entered into an Indenture (the “Indenture”) among the Partnership, WNRL Finance Corp., a Delaware corporation and 100% owned subsidiary of the Partnership (“Finance Corp.” and together with the Partnership, the “Issuers”), the Guarantors named therein and U.S. Bank National Association, as trustee (the “Trustee”) under which the Issuers issued $300.0 million in aggregate principal amount of 7.5% Senior Notes due 2023 (the "WNRL 2023 Senior Notes"). The Partnership will pay interest on the WNRL 2023 Senior Notes semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2015. The WNRL 2023 Senior Notes will mature on February 15, 2023. The estimated fair value of the WNRL 2023 Senior Notes was $324.0 million as of June 30, 2017. We incurred financing costs associated with the issuance of the WNRL 2023 Senior Notes of $6.8 million.
Unamortized financings costs of $4.8 million and $5.2 million as of June 30, 2017 and December 31, 2016, respectively, are included in long-term debt in the Condensed Consolidated Balance Sheets. The effective rate of interest, including contractual interest and amortization of loan fees, on the 7.5% Senior Notes was 7.78% as of June 30, 2017.
The WNRL 2023 Senior Notes are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by all of WNRL's current 100% owned subsidiaries, with the exception of Finance Corp. Finance Corp. is a minor subsidiary of WNRL and is a co-issuer of the WNRL 2023 Senior Notes. The co-issuance between WNRL and Finance Corp. is on a joint and several basis. WNRL has no independent assets or operations. There are no significant restrictions on the ability of WNRL or its subsidiary guarantors and Finance Corp. to obtain or transfer funds from its subsidiary guarantors by dividend or loan. None of the subsidiary guarantors’ or Finance Corp.'s assets represent restricted assets.
The subsidiary guarantees of the WNRL 2023 Senior Notes are subject to certain automatic customary releases, including upon the sale, disposition or transfer of capital stock or all or substantially all of the assets (including by way of merger or consolidation) of a subsidiary guarantor to a person other than the Partnership or one of its restricted subsidiaries, designation of a subsidiary guarantor as an unrestricted subsidiary in accordance with the Indenture, a legal defeasance or covenant defeasance, liquidation or dissolution of the subsidiary guarantor and a subsidiary guarantor ceasing to guarantee debt of the Partnership, Finance Corp. or any other guarantor under a credit facility other than the WNRL 2023 Senior Notes. The Partnership’s subsidiaries may not sell or otherwise dispose of all or substantially all of their properties or assets to, or consolidate with or merge into, another company if such a sale would cause a default under the Indenture.
The Indenture contains covenants that limit WNRL’s and its restricted subsidiaries’ ability to, among other things: (i) incur, assume or guarantee additional indebtedness or issue preferred units, (ii) create liens to secure indebtedness, (iii) pay distributions on equity securities, repurchase equity securities or redeem subordinated indebtedness, (iv) make investments, (v) effect distributions, loans or other asset transfers from the Partnership’s restricted subsidiaries, (vi) consolidate with or merge with or into, or sell substantially all of the Partnership’s properties to, another person, (vii) sell or otherwise dispose of assets, including equity interests in subsidiaries and (viii) enter into transactions with affiliates. These covenants are subject to a number of limitations and exceptions. The Indenture would permit or require the principal, premium, if any, and interest on all the then outstanding WNRL 2023 Senior Notes to be due and payable immediately in the event of default. We were in compliance with our debt covenants as of and for the six months ended June 30, 2017.
11. Equity
We had 28,993,863 publicly held outstanding common units as of June 30, 2017, including the net settlement and issuance of 127,386 common units upon the vesting of phantom units from our Western Refining Logistics, LP 2013 Long-Term Incentive Plan (the "LTIP") during the six months ended June 30, 2017. Andeavor owned 32,018,847 of our common units constituting an aggregate limited partner interest of 52.5% as of June 30, 2017.
In accordance with our partnership agreement, our subordinated units converted to common units once we met specified distribution targets and successfully completed other tests set forth in our Second A&R Partnership Agreement. On March 2, 2017, the requirements for the conversion of all WNRL subordinated units into common units were satisfied under the partnership agreement. As a result, the 22,811,000 subordinated units converted into common units on a one-for-one basis and, thereafter, participated on terms equal with all other common units in distributions of available cash. The conversion of the subordinated units did not impact the amount of cash distributions paid by us or the total number of outstanding units.
On September 15, 2016, we issued 628,224 common units to Western in connection with the St. Paul Park Logistics Transaction. See Note 3, Acquisitions of Common Control Assets, for further information.

14



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

On September 7, 2016, we entered into an underwriting agreement relating to the issuance and sale by the Partnership of 7,500,000 common units representing limited partner interests in the Partnership. The closing of the offering occurred on September 13, 2016. We also granted the underwriter an option to purchase additional common units on the same terms, which was exercised in full and closed on September 30, 2016, for 1,125,000 additional common units.
On May 16, 2016, we entered into an underwriting agreement relating to the issuance and sale by the Partnership of 3,750,000 common units representing limited partner interests in the Partnership. The closing of the offering occurred on May 20, 2016. We also granted the underwriters an option to purchase up to 562,500 additional common units on the same terms, which was exercised in full and closed on June 1, 2016.
Changes to equity during the six months ended June 30, 2017, were as follows:
 
 
 
TexNew Mex -
 
 
 
Common -
 
 
 
 
 
General
 
Andeavor /
 
Common -
 
Andeavor /
 
Subordinated -
 
 
 
Partner
 
Western
 
Public
 
Western
 
Western
 
Total
 
(In thousands)
Balance at December 31, 2016
$
(5,532
)
 
$
(310
)
 
$
600,100

 
$
(132,802
)
 
$
(363,132
)
 
$
98,324

Unit-based compensation

 

 
2,099

 

 

 
2,099

Conversion of subordinated units

 

 

 
(367,766
)
 
367,766

 

Distributions to partners declared
(5,209
)
 

 
(26,467
)
 
(18,517
)
 
(9,979
)
 
(60,172
)
Net income attributable to limited partners

 

 
18,320

 
14,949

 
5,345

 
38,614

Contributions

 

 

 
1,387

 

 
1,387

Balance at June 30, 2017
$
(10,741
)
 
$
(310
)
 
$
594,052

 
$
(502,749
)
 
$

 
$
80,252

TexNew Mex Units
The Second A&R Partnership Agreement created the TexNew Mex Shared Segment and the TexNew Mex Units. The TexNew Mex units are generally entitled to participate in 80% of the economics attributable to the TexNew Mex Shared Segment resulting from crude oil throughput on the TexNew Mex shared segment above 13,000 bpd. To the extent there is sufficient available cash from operating surplus under the Second A&R Partnership Agreement, the holder of the TexNew Mex Units will be entitled to receive a distribution equal to 80% of the excess of TexNew Mex Shared Segment Distributable Cash Flow over the TexNew Mex Base Amount (as such terms are defined in the Second A&R Partnership Agreement). To the extent the holder of a TexNew Mex Unit is entitled to such a distribution, that distribution will be preferential to all other unit holder distributions. We declared no distributions to TexNew Mex unitholders related to our operating results for the three and six months ended June 30, 2017 and 2016.
Holders of TexNew Mex Units generally do not have voting rights, except for limited voting rights related to amendments to the rights of holders of the TexNew Mex Units, the issuance of additional TexNew Mex Units or partnership securities with distribution rights senior to or on a parity with the TexNew Mex Units, the sale of any material portion of the TexNew Mex Pipeline and the reservation by the Partnership of any distribution amounts to which the holders of TexNew Mex Units are otherwise entitled.
The TexNew Mex Units are perpetual and have no rights of redemption or conversion. No holder of any TexNew Mex Unit may transfer any or all of the TexNew Mex Units held by such holder without the prior written approval of the General Partner, unless the transfer either is to an affiliate of the holder or is to any person who is, or will be substantially concurrently with the completion of the transfer, an affiliate of the General Partner.
Issuance of Additional Interests
Our partnership agreement authorizes us to issue additional partnership interests for consideration and on the terms and conditions determined by our General Partner without the approval of the unitholders. We may fund future acquisitions through the issuance of additional common units or other partnership interests. Holders of any additional common units we issue will be entitled to share proportionally in accordance with their respective percentage interests with the then-existing common unitholders in our distributions of available cash.

15



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Allocations of Net Income and Loss
The Second A&R Partnership Agreement contains provisions for the allocation of net income and loss to the unitholders and the General Partner. For purposes of maintaining partner capital accounts, the Second A&R Partnership Agreement specifies that items of income and loss shall be allocated among the partners in accordance with their respective percentage interest. Normal allocations according to percentage interests are made after giving effect, if any, to priority income allocations in an amount equal to incentive distribution right payments allocated 100% to the General Partner and distributions to the TexNew Mex unitholders.
Percentage Allocations of Available Cash from Operating Surplus
The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our General Partner (as the holder of our incentive distribution rights) based on the specified target distribution levels, subject to the preferential distribution rights of holders of the TexNew Mex Units. The amounts set forth under the column heading "Marginal Percentage Interest in Distributions" are the percentage interests of our General Partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column "Total Quarterly Distribution per Unit Target Amount." The percentage interests shown for our unitholders and our General Partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below assume our General Partner has not transferred its incentive distribution rights and there are no arrearages on common units.
 
 
Total Quarterly Distribution
per Unit Target Amount
 
Marginal Percentage
Interest in Distributions
 
 
Unitholders
 
General Partner
Minimum Quarterly Distribution
 
$0.2875
 
100.0
%
 

First Target Distribution
 
above $0.2875 up to $0.3306
 
100.0
%
 

Second Target Distribution
 
above $0.3306 up to $0.3594
 
85.0
%
 
15.0
%
Third Target Distribution
 
above $0.3594 up to $0.4313
 
75.0
%
 
25.0
%
Thereafter
 
above $0.4313
 
50.0
%
 
50.0
%
Distributions
Our Second A&R Partnership Agreement sets forth the calculation to be used to determine the amount and priority of cash distributions that the common unitholders and general partner will receive. We declare distributions subsequent to quarter end. The table below summarizes our 2017 quarterly distribution declarations, payments and scheduled payments:
Declaration Date
 
Record Date
 
Payment Date
 
Distribution per Unit
January 31, 2017
 
February 13, 2017
 
March 1, 2017
 
$
0.4375

April 28, 2017
 
May 9, 2017
 
May 23, 2017
 
0.4525

July 25, 2017
 
August 4, 2017
 
August 18, 2017
 
0.4675

Total
 
$
1.3575


16



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

During the three and six months ended June 30, 2017 and 2016, we paid distributions to unitholders as shown in the table below:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per unit data)
TexNew Mex Unit distributions:
 
 
 
 
 
 
 
TexNew Mex Unit distributions
$

 
$

 
$

 
$
310

Total TexNew Mex Unit distributions
$

 
$

 
$

 
$
310

 
 
 
 
 
 
 
 
General Partner's distributions:
 
 
 
 
 
 
 
General Partner's incentive distribution rights
$
3,062

 
$
921

 
$
5,209

 
$
1,682

Total General Partner's distributions
$
3,062

 
$
921

 
$
5,209

 
$
1,682

 
 
 
 
 
 
 
 
Limited partners' distributions:
 
 
 
 
 
 
 
Common
$
28,327

 
$
9,858

 
$
44,984

 
$
19,453

Subordinated

 
9,181

 
9,979

 
18,135

 Total limited partners' distributions
28,327

 
19,039

 
54,963

 
37,588

Total cash distributions
$
31,389

 
$
19,960

 
$
60,172

 
$
39,580

 
 
 
 
 
 
 
 
Cash distributions per limited partner unit
$
0.4525

 
$
0.4025

 
$
0.8900

 
$
0.7950

We have an effective universal shelf Registration Statement on Form S-3 that provides for the registration and sale of up to $1 billion of equity or debt securities of us and certain of our subsidiaries. We may over time, and subject to market conditions, in one or more offerings, offer and sell any combination of the securities described in the prospectus. During the second and third quarter of 2016, we completed equity offerings pursuant to the shelf registration statement and resulted in reduced availability. The current availability under our shelf Registration Statement on Form S-3 is $713.8 million.
12. Equity-Based Compensation
Our General Partner's board of directors adopted the LTIP for the benefit of employees, consultants and non-employee directors of our General Partner and its affiliates. Awards granted under the LTIP vest over a scheduled vesting period and their market value at the date of the grant is amortized over the restricted period on a straight-line basis. At June 30, 2017, there were 4,111,827 WNRL common units reserved for future grants under the LTIP.
The only equity awards that have been granted pursuant to the LTIP are phantom units. The fair value of the phantom units is determined based on the closing price of WNRL common units on the grant date. The estimated fair value of the phantom units is amortized on a straight-line basis over the scheduled vesting periods of individual awards. We incurred unit-based compensation expense of $3.1 million, $3.7 million, $0.8 million and $1.3 million for the three and six months ended June 30, 2017 and 2016, respectively. Upon completion of the Andeavor Acquisition on June 1, 2017, we incurred $2.3 million of additional unit-based compensation expense due to the acceleration of certain phantom unit awards upon Western's change in control.
The aggregate grant date fair value of nonvested phantom units outstanding as of June 30, 2017, was $3.7 million. The aggregate intrinsic value of such phantom units was $3.7 million. Total unrecognized compensation cost related to our non-vested phantom units totaled $3.1 million at June 30, 2017, which we expect to recognize over a weighted-average period of approximately 2.3 years.

17



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A summary of our unit award activity for the six months ended June 30, 2017, is set forth below:
 
Number of Phantom Units
 
Weighted-Average
Grant Date
Fair Value
Not vested at December 31, 2016
285,155

 
$
26.42

Awards granted
52,654

 
24.70

Awards vested (1)
(193,499
)
 
26.52

Awards forfeited

 

Not vested at June 30, 2017
144,310

 
25.65

(1) Upon completion of the Andeavor Acquisition on June 1, 2017, 107,487 phantom units vested upon Western's change in control.

13. Risk Concentration
We are part of the consolidated operations of Andeavor and we derive a significant portion of our revenue from transactions with Western, a wholly-owned subsidiary of Andeavor. Western and Andeavor accounted for 33.1%, 32.3%, 31.2% and 31.5%, respectively, of our consolidated revenues for the three and six months ended June 30, 2017 and 2016.
We sell a variety of refined products to a diverse customer base. Sales to Kroger Company accounted for 21.4%, 21.5%, 20.5% and 20.8% of total revenues for the three and six months ended June 30, 2017 and 2016, respectively. Sales to Western’s retail and unmanned fleet fueling sites and Andeavor accounted for 23.0%, 22.7%, 23.2% and 23.4% of total revenues for the three and six months ended June 30, 2017 and 2016, respectively.
See Note 17, Related Party Transactions, for detailed information on our agreements with Western.
14. Income Taxes
WNRL is treated as a publicly-traded partnership for federal and state income tax purposes, however, Western Refining Product Transport, LLC ("WRPT") (a wholly-owned subsidiary) is taxed as a corporation for federal and state tax purposes. Taxes on net income for WNRL and its subsidiaries generally are borne by our partners through the allocation of taxable income. The aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined as we do not have access to information about each partner's tax attributes in us. Our deferred income tax liabilities and income tax expense result from our taxable subsidiary, WRPT. In addition, tax expense is recorded as it relates to state laws that apply to entities organized as partnerships, primarily in the state of Texas. Our deferred income tax liability as of June 30, 2017 and December 31, 2016 was $0.1 million and $0.6 million, respectively. For the three and six months ended June 30, 2017 and 2016, we had an income tax benefit of $0.3 million and $0.4 million and income tax expense of $0.2 million and $0.5 million, respectively. Our effective tax rates for the three and six months ended June 30, 2017 and 2016, were (1.4)%, (0.9)%, 2.1% and 2.9%, respectively.
As of June 30, 2017 and December 31, 2016, we had no unrecognized tax benefit liability. No interest or penalties were recognized related to income taxes during the three and six months ended June 30, 2017 and 2016.

18



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

15. Commitments
We have commitments under various operating leases with initial terms greater than one year for property, machinery and facilities. These leases have terms that will expire on various dates through 2026. We expect that in the normal course of business, these leases will be renewed or replaced by other leases. Rent expense for operating leases that provide for periodic rent escalations or rent holidays over the term of the lease is recognized on a straight-line basis. We also have commitments to purchase minimum volumes of refined product from Western under commercial agreements that we have entered into with Western. See Note 17, Related Party Transactions, for further discussion of these agreements.
The following table presents our annual minimum rental payments under non-cancelable operating leases that have lease terms of one year or more (in thousands) as of June 30, 2017:
Remaining 2017
$
3,320

2018
4,568

2019
2,376

2020
702

2021
349

2022 and thereafter
369

 
$
11,684

Total rental expense was $2.1 million, $4.1 million, $2.4 million and $4.9 million for the three and six months ended June 30, 2017 and 2016, respectively. Contingent rentals and subleases were not significant in any year.
16. Contingencies
Like other operators of petroleum-related storage and transportation facilities, our operations are subject to extensive and periodically changing federal and state environmental regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. Many of these regulations are becoming increasingly stringent and we expect the cost of compliance to increase over time. Our policy is to accrue environmental and clean-up related costs of a non-capital nature when it is probable that a liability exists and when we can reasonably estimate the amount. We may revise such estimates in the future as regulations and other conditions change. We may receive communications from various federal, state and local governmental authorities asserting violations of environmental laws and/or regulations. These governmental entities may also propose or assess fines or require corrective action for such asserted violations. We intend to respond in a timely manner to all such communications and to take appropriate corrective action.
We are not currently aware of any environmental or other asserted or unasserted claims against us that would be expected to have a material effect on our financial condition, results of operations or cash flows.
17. Related Party Transactions
Certain of our employees are shared employees with Western and Andeavor. At the closing of our initial public offering, we entered into a services agreement with Western under which Western agreed to share certain employees with us. These employees are responsible for operation, maintenance and other services related to the assets we own and operate. Western employees provide these services under our direction, supervision and control pursuant to this services agreement. Western also provides us with support for accounting, legal, human resources and various other administrative functions.

19



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We have incurred charges from Western for the allocation of services including executive oversight, accounting, treasury, tax, legal, procurement, engineering, logistics, maintenance, information technology and similar items. We classify these charges between operating and maintenance expenses and selling, general and administrative expenses based on the functional nature of the employee and other services that Western provides for our operations. Charges from Western that we include within our selling, general and administrative and operating and maintenance expenses were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Operating and maintenance expenses
$
17,933

 
$
15,667

 
$
35,439

 
$
31,633

Selling, general and administrative expenses
3,063

 
2,346

 
6,081

 
4,461

Total charges
$
20,996

 
$
18,013

 
$
41,520

 
$
36,094

Our management believes the charges allocated to us from Western are a reasonable reflection of the utilization of Western's service to our operations. We also incur direct charges to our operations and administration. The allocations noted above may not fully reflect the additional expenses that we would have incurred had we been a stand-alone company during the periods presented.
Commercial Agreements with Western
Logistics Segment Agreements
We derive substantially all of our logistics revenues from ten-year, fee-based agreements with Western supported by minimum volume commitments and annual adjustments to fees that we and Western may renew for two additional five-year periods upon mutual agreement. Western has committed to provide us with minimum fees based on minimum monthly throughput volumes of crude oil and refined and other products and reserved storage capacity.
Pipeline and Gathering Services Agreement
We are party to a pipeline and gathering services agreement, as amended, with Western under which we transport crude oil on our Permian Basin system primarily for use at Western's El Paso refinery and on our Four Corners system to Western's Gallup refinery. We charge Western fees for pipeline movements, truck offloading and product storage.
WNRL entered into an amendment to the Pipeline Agreement which, among other things, amends the scope of the existing agreement to include the provision of storage services and a minimum volume commitment of 80,000 barrels of storage at the Star Lake storage tank. In the amendment to the Pipeline Agreement, Western also agreed to provide a minimum volume commitment of 13,000 bpd of crude oil on the TexNew Mex Pipeline for 10 years from the date of the amendment to the Pipeline Agreement.
The General Partner adopted certain amendments to the First Amended and Restated Agreement of Limited Partnership of the Partnership by adopting the Second A&R Partnership Agreement. The amendments contained in the Second A&R Partnership Agreement create a new class of limited partner interests in the Partnership, referred to as the TexNew Mex Units, and set forth the rights, preferences and obligations of the TexNew Mex Units.
The Second A&R Partnership Agreement provides for the creation of the “TexNew Mex Shared Segment” that will reflect the financial and operating results of the TexNew Mex Pipeline. The TexNew Mex Units are generally entitled to participate in 80% of the economics attributable to the TexNew Mex Shared Segment resulting from crude oil throughput on the TexNew Mex shared segment above 13,000 bpd. To the extent there is sufficient available cash from operating surplus under the Second A&R Partnership Agreement, the holder of the TexNew Mex Units will be entitled to receive a distribution equal to 80% of the excess of TexNew Mex Shared Segment Distributable Cash Flow over the TexNew Mex Base Amount (as such terms are defined in the Second A&R Partnership Agreement). To the extent the holder of a TexNew Mex Unit is entitled to such a distribution, that distribution will be preferential to all other unit holder distributions.

20



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Terminalling, Transportation and Storage Services Agreements
Southwest
We entered into a terminalling, transportation and storage services agreement, as amended, with Western under which we have agreed to, among other things, distribute products produced at Western’s refineries, connect Western’s refineries to third-party pipelines and systems and provide fee-based asphalt terminalling and processing services. At our network of crude oil and refined products terminals and related assets and storage facilities, we charge Western fees for crude oil, blendstock and refined product storage, shipments into and out of storage and additive and blending services. At our asphalt plant and terminal in El Paso and our three stand-alone asphalt terminals, we charge Western fees for asphalt storage, shipments into and out of asphalt storage and asphalt processing and blending.
St. Paul Park
In connection with the St. Paul Park Logistics Transaction, we entered into the St. Paul Park Terminalling Agreement. Pursuant to the St. Paul Park Terminalling Agreement, we agreed to provide product storage services, product throughput services and product additive and blending services at the terminal facilities located at or near Western's refinery in St. Paul Park, Minnesota. In exchange for such services, Western has agreed to certain minimum volume commitments and to pay certain fees. The St. Paul Park Terminalling Agreement has an initial term of ten years, which may be extended for up to two renewal terms of five years each upon the mutual agreement of the parties.
Wholesale Segment Agreements
We entered into the following 10-year agreements with Western. These agreements include certain minimum volume commitments by Western.
Product Supply Agreement
Under the product supply agreement, as amended, Western supplies, and we purchase, approximately 79,000 bpd of refined products. The price per barrel is based upon OPIS or Platts indices on the day of delivery. Pricing is subject to annual revision based on mutual agreement between us and Western. The agreement provides for make-up payments to us in any month that our average margin on non-delivered rack sales is less than a certain amount.
Fuel Distribution and Supply Agreement
Western agreed to purchase all of its retail requirements for branded and unbranded motor fuels for its retail and unmanned fleet fueling sites at a price per gallon that is $0.03 above our cost. Western purchases a minimum of 645,000 barrels per month of branded and unbranded motor fuels for its retail and unmanned fleet fueling sites. In any month that Western doesn’t purchase the minimum volume, Western pays us $0.03 per gallon shortfall. In any month in which Western purchases volumes in excess of the minimum, we pay Western $0.03 per gallon over the minimum until the balance of the trailing twelve month shortfall payments is reduced to $0.
Crude Oil Trucking Transportation Services Agreement
Under the crude oil trucking and transportation services agreement, as amended, Western pays a flat rate per mile per barrel plus monthly fuel adjustments and customary applicable surcharges. The rates are subject to adjustment annually based on mutual agreement between us and Western. Western has agreed to contract a minimum of 1.525 million barrels of crude oil to us for hauling each month.
Asphalt Trucking Transportation Services Agreement
Our wholesale segment operates a fleet of asphalt trucks, which are utilized to deliver asphalt to Western's asphalt terminals and third party customers. We have entered into an asphalt trucking transportation services agreement with Western under which we have agreed to, among other things, transport and deliver asphalt from the El Paso refinery to asphalt terminals in Texas, New Mexico and Arizona. Volumes of asphalt transported pursuant to this agreement will be credited, on a barrel per barrel basis, towards Western’s contract minimum under the Crude Oil Trucking Transportation Services Agreement. Under this Agreement, Western has given us the first option to transport all asphalt volumes Western transports by truck.
In exchange for the transportation services performed under the asphalt trucking transportation agreement, Western has agreed to pay us a flat rate per ton (with market adjustments) based on the distance between the applicable pick-up and delivery points, plus monthly fuel adjustments and customary applicable surcharges.

21



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Western’s obligations under these commercial agreements will not terminate if Western no longer controls our general partner. Our commercial agreements include provisions that permit Western to suspend, reduce or terminate its obligations under the applicable agreement if certain events occur. These events include Western deciding to permanently or indefinitely suspend refining operations at one or all of its refineries, as well as our being subject to certain force majeure events that would prevent us from performing required services under the applicable agreement.
Other Agreements with Western
Omnibus Agreement
We entered into an omnibus agreement with Western, certain of its subsidiaries and our general partner. The omnibus agreement addresses the following items:
our obligation to reimburse Western for the provision by Western of certain general and administrative services (this reimbursement is in addition to certain expenses of our general partner and its affiliates that are reimbursed under our partnership agreement and services agreement), as well as certain other direct or allocated costs and expenses incurred by Western on our behalf;
our rights of first offer to acquire certain logistics assets from Western;
an indemnity by Western for certain environmental and other liabilities, and our obligation to indemnify Western for events and conditions associated with the operation of our assets that occur after closing of the Offering and for environmental liabilities related to our assets to the extent Western is not required to indemnify us;
Western’s transfer of certain environmental permits related to our assets to us and our use of such permits prior to the transfer thereof; and
the granting of a license from Western to us with respect to use of certain Western trademarks and our granting of a license to Western with respect to use of certain of our trademarks.
The omnibus agreement generally terminates in the event of a change of control of us or our general partner.
Contribution, Conveyance and Assumption Agreement dated September 7, 2016
We entered into a Contribution, Conveyance and Assumption Agreement with Western under which WNRL acquired approximately 4.0 million barrels of refined product and crude oil storage tanks, a light products terminal, a heavy products loading rack, certain rail and barge facilities, certain other related logistics assets, and two crude oil pipeline segments and one pipeline segment not currently in service, each of which is approximately 2.5 miles and extends from Western's refinery in St. Paul Park, Minnesota to Western’s tank farm in Cottage Grove, Minnesota. Western made certain representations and warranties regarding the acquired assets, including with respect to environmental matters, and agreed to indemnify us for breaches of those representations and warranties, subject to specified deductibles, caps and other limitations.
Contribution, Conveyance and Assumption Agreement dated October 30, 2015
We entered into a Contribution, Conveyance and Assumption Agreement with Western under which we acquired (i) a segment of the TexNew Mex Pipeline system that currently extends from our crude oil station in Star Lake, New Mexico, in the Four Corners region, to our T station in Eddy County, New Mexico, and (ii) an 80,000 barrel crude oil storage tank located at our crude oil pumping station in Star Lake, New Mexico and certain other related assets (the “TexNew Mex Pipeline Acquisition”). Western made certain representations and warranties regarding the acquired assets, including with respect to environmental matters, and agreed to indemnify us for breaches of those representations and warranties, subject to specified deductibles, caps and other limitations.
Contribution, Conveyance and Assumption Agreement dated September 25, 2014
We entered into a contribution agreement with Western on September 25, 2014 under which we acquired all of the outstanding limited liability company interests of Western Refining Wholesale, LLC (“WRW”), which owned substantially all of Western’s southwest wholesale assets. Among other things, Western agreed to indemnify us with respect to liabilities related to certain historical assets and operations of WRW that were not contributed to us in our acquisition of WRW. In addition, Western made certain representations and warranties regarding the assets of WRW, including with respect to environmental matters, and agreed to indemnify us for breaches of those representations and warranties, subject to specified deductibles, caps and other limitations.

22



WESTERN REFINING LOGISTICS, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Services Agreements
We entered into a services agreement with Western under which we reimburse Western for its provision to us of certain personnel to provide operational services to us and under our supervision in support of our pipelines and gathering assets and terminalling and storage facilities, including routine and emergency maintenance and repair services, routine operational activities, routine administrative services, construction and related services and such other services as we and Western may mutually agree upon from time to time. Western will prepare a maintenance, operating and capital budget on an annual basis subject to our approval. Western submits actual expenditures for reimbursement on a monthly basis, and we reimburse Western for providing these services.
We may terminate any of the services provided by the personnel provided by Western upon 30 days prior written notice. Either party may terminate this agreement upon prior written notice if the other party is in material default under the agreement and such party fails to cure the material default within 20 business days. The services agreement has an initial term of ten years and may be renewed by two additional five-year terms upon our agreement with Western evidenced in writing prior to the end of the initial term of ten years or the first renewal term of five years. If a force majeure event prevents a party from carrying out its obligations (other than to make payments due) under the agreement, such obligations, to the extent affected by force majeure, will be suspended during the continuation of the force majeure event. These force majeure events include acts of God, strikes, lockouts or other industrial disturbances, wars, riots, fires, floods, storms, orders of courts or governmental authorities, explosions, terrorist acts, accidental disruption of service, breakage, breakdown of machinery, storage tanks or lines of pipe and inability to obtain or unavoidable delays in obtaining material or equipment and any other circumstances not reasonably within the control of the party claiming suspension and that by the exercise of due diligence such party is unable to prevent or overcome.
On May 4, 2015, we entered into a Joinder Agreement with Western and Northern Tier Energy LP ("NTI") that joined us as a party to the Shared Services Agreement, dated October 30, 2014, between Western and NTI and under which Western and NTI provide services to each other in support of their operations. Under the Joinder Agreement, we provide certain scheduling and other services in support of NTI’s operations and NTI reimburses us for the costs associated with providing such services. During the three and six months ended June 30, 2017 and 2016, we incurred expenses of $0.2 million, $0.4 million, $0.1 million and $0.2 million, respectively, that are reimbursable from NTI under the Shared Services Agreement.
Leasing Agreements
We entered into three separate ground lease and access agreements with Western. All three agreements are for 10-year terms with provision for automatic renewal of up to four consecutive 10-year periods. Under each separate agreement, WNRL pays nominal annual rents. Rents due under these three agreements in the aggregate are less than $0.1 million over the initial term of the agreements.

23



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with the financial statements and the notes thereto included elsewhere in this report. This discussion contains forward-looking statements that are based on current expectations, estimates and projections about our business and operations. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under Part I, Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2016 ("2016 Form 10-K") and elsewhere in this report. You should read "Risk Factors" and "Forward-Looking Statements" in this report. In this quarterly report, all references to "WNRL," "the Partnership," "we," "us," and "our" or like terms refer to Western Refining Logistics, LP and its consolidated subsidiaries, unless the context otherwise requires or where otherwise indicated. References to “Western” refer to Western Refining, Inc.

Overview
WNRL is a Delaware master limited partnership that commenced operations in October 2013. Western Refining Logistics GP, LLC ("WRGP"), our general partner, holds all of the non-economic general partner interests in WNRL and is indirectly wholly-owned by Andeavor (formerly Tesoro Corporation). Effective August 1, 2017, Tesoro Corporation changed its name to Andeavor.
WNRL is principally a growth-oriented partnership that owns, operates, develops and acquires logistics and related assets and businesses including terminals, storage tanks, pipelines and other logistics assets related to the terminalling, transportation, storage and distribution of crude oil and refined products. WNRL's assets and operations include 705 miles of pipelines, approximately 12.4 million barrels ("bbls") of active shell storage capacity, distribution of wholesale petroleum products and crude oil and asphalt trucking.
On June 1, 2017, Andeavor completed its acquisition of Western. Tahoe Merger Sub 1, Inc., a Delaware corporation and wholly-owned subsidiary of Andeavor, merged into Western, with Western surviving as a wholly-owned subsidiary of Andeavor (the "Andeavor Acquisition"). WNRL's agreements with Western have not changed as a result of the Andeavor Acquisition as such discussion about our affiliate agreements continue to refer to Western. See Note 17, Related Party Transactions, in the Notes to Condensed Consolidated Financial Statements for additional information regarding these agreements.
Andeavor's limited partner interest in WNRL was 52.5% at June 30, 2017. Our units trade on the New York Stock Exchange ("NYSE") under the symbol "WNRL."
On April 17, 2017, Andeavor filed an Amendment to Schedule 13D with the Securities and Exchange Commission (the "SEC") stating that the board of directors of Andeavor authorized the management of Andeavor to work with the board of directors and management of Andeavor Logistics LP, formerly known as Tesoro Logistics LP ("Andeavor Logistics"), to consider, discuss and endeavor to negotiate a merger, consolidation or combination (in whatever form) of assets held by and securities issued by Andeavor Logistics and its affiliates and assets held by and securities issued by WNRL. On July 20, 2017, the chairman of the conflicts committee of the WRGP board of directors (the "WNRL Board") received a proposal from Andeavor Logistics to acquire WNRL in an all-stock transaction at an exchange ratio of 0.4906 common units of Andeavor Logistics ("Andeavor Logistics Common Units") for each WNRL common unit.
There can be no assurance that any discussions that may occur between Andeavor Logistics and WNRL will contain transaction terms consistent with those described above or result in the entry into a definitive agreement concerning a transaction or, if such a definitive agreement is reached, will result in the consummation of a transaction provided for in such definitive agreement. Discussions concerning a possible transaction may be terminated at any time and without prior notice. Entry into a definitive agreement concerning a potential transaction and the consummation of any such transaction is subject to a number of contingencies, which are beyond the control of WNRL and Andeavor Logistics, including the satisfactory completion of due diligence, the approval of the WNRL Board and the board of directors of the general partner of Andeavor Logistics (the “Andeavor Logistics Board”), the approval of the conflicts committees established by the WNRL Board and the Andeavor Logistics Board, respectively, and the satisfaction of any conditions to the consummation of a transaction set forth in any such definitive agreement.
On March 2, 2017, the requirements for the conversion of all WNRL subordinated units into common units were satisfied under the partnership agreement. As a result, the 22,811,000 subordinated units converted into common units on a one-for-one basis and, thereafter, participated on terms equal with all other common units in distributions of available cash. See Note 11, Equity, in the Notes to Condensed Consolidated Financial Statements for further discussion.
On September 15, 2016, we acquired certain terminalling, transportation and storage assets from a wholly-owned subsidiary of Western consisting of the Cottage Grove tank farm and certain terminals and storage assets located on site at

24



Western's St. Paul Park refinery ("St. Paul Park Logistics Assets"). We refer to this transaction as the "St. Paul Park Logistics Transaction." See Note 3, Acquisitions of Common Control Assets, in the Notes to Condensed Consolidated Financial Statements for further discussion.
We recorded the purchase of the St. Paul Park Logistics Assets at Western's historical book value. U.S. generally accepted accounting principles ("GAAP") require that we treat the purchase as a transaction between entities under common control. We have retrospectively adjusted the financial information for WNRL, to include the historical results of the assets acquired, for periods prior to the effective date of the transaction.
Major Influences on Results of Operations
Supply and Demand for Crude Oil and Refined Products. We generate revenues under fee-based agreements with Western. These contracts generally provide for stable and predictable cash flows and limit our direct exposure to commodity price fluctuations related to the loss allowance provisions in our commercial agreements. We typically do not have exposure to variability in the prices of the hydrocarbons and other products we handle on Western's behalf, although these risks indirectly influence our activities and results of operations over the long term because of their impact on Western's operations. Our terminal throughput volumes depend primarily on the volume of refined and other products produced at Western’s refineries that, in turn, is ultimately dependent on Western’s refining margins.
Refining margins depend on both the price of crude oil or other feedstock and the price of refined products. Factors affecting the prices of petroleum based commodities include supply and demand in crude oil, gasoline and other refined products. Supply and demand for these products depend on changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, logistics constraints, availability of imports, marketing of competitive fuels, crude oil price differentials and government regulation.
A significant portion of our wholesale fuel sales and all of our lubricants sales are to third-party customers. We purchase substantially all of our fuel from Western on the same day that we sell it, which minimizes our exposure to commodity price fluctuations. The margins we earn on these sales are dependent on a number of factors that are outside of our control, including the overall supply of refined products and lubricants as well as the demand for these products by our customers. Among other circumstances, the margins we earn through these activities would likely be adversely impacted in the event of excess supply of refined products or lubricants and corresponding customer demand that is below historical norms. These supply and demand dynamics are subject to day-to-day variability and may result in volatility in the margins that our wholesale business achieves. Extended periods of market conditions that result in earning margins that are lower than anticipated could adversely affect our financial condition, results of operations and cash flows.
Acquisition Opportunities. We may acquire additional logistics assets from Western or third parties. Under our omnibus agreement, subject to certain exceptions, we have rights of first offer on certain logistics assets owned by Western to the extent Western decides to sell, transfer or otherwise dispose of any of those assets. We also have rights of first offer to acquire additional logistics assets in the Permian Basin or the Four Corners area that Western may construct or acquire in the future. We plan to pursue strategic asset acquisitions from third parties to the extent such acquisitions complement our or Western’s existing asset base or provide attractive potential returns in new areas within our geographic footprint. We believe that we are well-positioned to acquire logistics assets from Western and third parties should such opportunities arise. Identifying and executing acquisitions is a key part of our strategy. If we do not make acquisitions on economically acceptable terms, our future growth will be limited and the acquisitions we do make may reduce, rather than increase, our cash available for distribution. These acquisitions could also affect the comparability of our results from period to period. We expect to fund future growth capital expenditures primarily from a combination of cash-on-hand, borrowings under our Revolving Credit Facility and the issuance of additional equity or debt securities. To the extent we issue additional units to fund future acquisitions or discretionary capital expenditures, the payments of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level.
Factors Affecting the Comparability of Our Financial Results
Andeavor Transaction
On June 1, 2017, Andeavor completed its acquisition of Western and Merger Sub 1 with Western surviving as a wholly-owned subsidiary of Andeavor. The condensed consolidated financial statements do not reflect the push-down accounting of the purchase price adjustments resulting from the Andeavor Acquisition.

25



We incurred unit-based compensation expense of $3.1 million, $3.7 million, $0.8 million and $1.3 million for the three and six months ended June 30, 2017 and 2016, respectively. The increase in unit-based compensation expense was due to the acceleration of certain phantom unit awards resulting from the Andeavor Acquisition on June 1, 2017.
Revenues
We did not record revenue related to the operations of the St. Paul Park Logistics Assets prior to the St. Paul Park Logistics Transaction on September 15, 2016. In connection with the St. Paul Park Logistics Transaction, we entered into the St. Paul Park Terminalling Agreement. Pursuant to the St. Paul Park Terminalling Agreement, we agreed to provide product storage services, product throughput services and product additive and blending services at the terminal facilities located at or near Western's refinery in St. Paul Park, Minnesota. In exchange for such services, Western has agreed to certain minimum volume commitments and to pay certain fees.
Issuance of Additional Interests
On March 2, 2017, the requirements for the conversion of all WNRL subordinated units into common units were satisfied under the partnership agreement. As a result, the 22,811,000 subordinated units converted into common units on a one-for-one basis and thereafter participated on terms equal with all other common units in distributions of available cash.
On September 7, 2016, we entered into an underwriting agreement relating to the issuance and sale by the Partnership of 7,500,000 common units representing limited partner interests in the Partnership. The closing of the offering occurred on September 13, 2016. We also granted the underwriter an option to purchase additional common units on the same terms, which was exercised in full and closed on September 30, 2016, for 1,125,000 additional common units. We used the net proceeds from this offering to repay the borrowings outstanding under our revolving credit facility and fund the cash portion of the purchase price for the St. Paul Park Logistics Transaction.
On May 16, 2016, we entered into an underwriting agreement relating to the issuance and sale by the Partnership of 3,750,000 common units representing limited partner interests in the Partnership. The closing of the offering occurred on May 20, 2016. We also granted the underwriter an option to purchase up to 562,500 additional common units on the same terms, which was exercised in full and closed on June 1, 2016. We used the net proceeds from this offering to repay a portion of the borrowings outstanding under our Revolving Credit Facility.
Lubricant Operations
On June 30, 2017, we sold our lubricant operations located in Arizona and Nevada for $14.7 million resulting in a gain on disposal of assets of $2.8 million. In connection with this asset disposal, we reported employee severance costs of $0.4 million and $0.5 million within direct operating expenses and selling, general and administrative expenses in our Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2017, respectively. Assets held for sale in our Condensed Consolidated Balance Sheet at June 30, 2017 and December 31, 2016, respectively, include $1.1 million and $10.1 million in inventories and $2.4 million and $7.3 million in property, plant and equipment.
Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with GAAP. In order to apply these principles, we must make judgments, assumptions and estimates based on the best available information at the time. Actual results may differ based on the continuing development of the information utilized and subsequent events, some of which we may have little or no control over. Our critical accounting policies could materially affect the amounts recorded in our financial statements. Our critical accounting policies, estimates and recent accounting pronouncements that potentially impact us are discussed in detail under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2016 Form 10-K.
Recent Accounting Pronouncements. From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on our accounting and reporting. We are currently evaluating the effect that certain of these new accounting requirements may have on our accounting and related reporting and disclosures in our condensed consolidated financial statements. For further discussion on recent accounting pronouncements, see Note 2, Basis of Presentation and Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements included in this quarterly report.
How We Evaluate Our Operations
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include but are not limited to pipeline throughput and terminal volumes; wholesale volumes and margins; operating and maintenance expenses; EBITDA and distributable cash flow.

26



Logistics Volumes. The amount of revenue we generate depends on the volumes of crude oil and refined and other products that we handle with our pipeline and gathering operations and our terminalling, transportation and storage assets. These volumes are primarily affected by the supply of and demand for crude oil, refined products and asphalt in the markets served directly or indirectly by our assets. Although Western has committed to minimum volumes under our commercial agreements, we expect over time that Western will ship volumes in excess of its minimum volume commitment on our pipeline and gathering systems and will terminal volumes in excess of its minimum volume commitments at our terminals. Our results of operations will be impacted by whether or not Western ships and terminals such incremental volumes and by the amount of volumes we handle for third parties.
Wholesale Volumes and Margins. Revenues, earnings and cash flows from our wholesale business are primarily affected by sales volumes and margins for gasoline, diesel fuel and lubricants sold and crude oil and asphalt trucking volumes. We primarily use fuel margin per gallon and fuel gallons sold to evaluate the operating results of the wholesale segment. Our fuel margin per gallon is not generally correlated with changes in absolute price per gallon. Sales volumes of gasoline, diesel fuel and lubricants are affected primarily by demand and competition. Crude oil and asphalt trucking volumes can fluctuate based on local production, competition and demand. Refined product margins are equal to the sales price, net of discounts, less total cost of sales and are measured on a cents per gallon basis. Factors that influence margins include local supply, demand and competition, and the impact to margin of our commercial agreements with Western.
Operating and Maintenance Expenses. Our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses primarily consist of labor and employee expenses, lease costs, utility costs, cost of insurance, maintenance materials, supplies, repairs and related expenses and property taxes. These expenses generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the level of maintenance related activities performed during that period and the timing of such expenses.
Our maintenance costs are generally cyclical in nature. Our terminal facilities are subject to recurring maintenance for normal wear and related maintenance costs are generally consistent from period to period. Our routine service cycle for tank inspections and maintenance at our storage facilities is generally every 10 years. Our pipelines are also subject to routine periodic inspections. When a storage tank change in service occurs, maintenance costs will generally be greater due to increased costs of tank cleaning and hazardous material disposal. The cost of our maintenance is dependent upon the level of repairs deemed necessary as a result of the inspection of the specific asset. We manage our maintenance expenditures on our pipelines, terminals, truck fleet and other distribution assets by scheduling maintenance over time to avoid significant variability and minimize impact on our cash flows.

27



Results of Operations
The following tables summarize our consolidated and reportable segment financial data and key operating statistics for the three and six months ended June 30, 2017 and 2016, respectively. The following data should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this quarterly report.
Our operations are organized into two reportable segments based on marketing criteria and the nature of our products and services and our types of customers. These segments are logistics and wholesale. See Note 5, Segment Information, in the Notes to Condensed Consolidated Financial Statements for further discussion.
Consolidated
Three Months Ended June 30, 2017, Compared to the Three Months Ended June 30, 2016
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands, except per unit data)
Revenues:
 
 
 
 
 
Fee based:
 
 
 
 
 
Affiliate
$
67,783

 
$
53,965

 
$
13,818

Third-party
703

 
677

 
26

Product sales based:
 
 
 
 
 
Affiliate
139,770

 
126,525

 
13,245

Third-party
419,253

 
397,435

 
21,818

Total revenues
627,509

 
578,602

 
48,907

Operating costs and expenses:
 

 
 

 
 

Cost of products sold:
 
 
 
 
 
Affiliate
137,150

 
123,870

 
13,280

Third-party
403,180

 
380,386

 
22,794

Operating and maintenance expenses
47,269

 
42,991

 
4,278

Selling, general and administrative expenses
8,023

 
6,007

 
2,016

Gain on disposal of assets, net
(2,936
)
 
(802
)
 
(2,134
)
Depreciation and amortization
9,784

 
9,553

 
231

Total operating costs and expenses
602,470

 
562,005

 
40,465

Operating income
25,039

 
16,597

 
8,442

Other income (expense):
 
 
 
 
 
Interest and debt expense
(6,576
)
 
(6,414
)
 
(162
)
Other, net
15

 
14

 
1

Net income before income taxes
18,478

 
10,197

 
8,281

Provision for income taxes
250

 
(217
)
 
467

Net income
18,728

 
9,980

 
8,748

Less net loss attributable to General Partner

 
(7,894
)
 
7,894

Net income attributable to limited partners
$
18,728

 
$
17,874

 
$
854

 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
Common - basic
$
0.24

 
$
0.33

 
$
(0.09
)
Common - diluted
0.24

 
0.33

 
(0.09
)
Subordinated - basic and diluted

 
0.36

 
(0.36
)
 
 
 
 
 
 
Weighted-average limited partner units outstanding:
 
 
 
 
 
Common - basic
60,962

 
26,409

 
34,553

Common - diluted
60,971

 
26,427

 
34,544

Subordinated - basic and diluted

 
22,811

 
(22,811
)

28



 
Three Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands)
Cash Flow Data
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
28,311

 
$
28,951

 
$
(640
)
Investing activities
(8,788
)
 
(6,874
)
 
(1,914
)
Financing activities
(32,290
)
 
(33,168
)
 
878

Capital expenditures
$
8,847

 
$
7,732

 
$
1,115

Other Data
 
 
 
 
 
EBITDA (1)
$
34,838

 
$
31,830

 
$
3,008

Distributable cash flow (1)
26,353

 
25,090

 
1,263

(1)
EBITDA and Distributable Cash Flow are non-GAAP performance and liquidity measures, respectively, that we believe are useful in evaluating performance as a general indication of, among other things, our operating performance and the ability of our assets to generate sufficient cash to make distributions to our unitholders. We present an explanation and reconciliation to the nearest comparable GAAP measures in the section titled EBITDA and Distributable Cash Flow herein.

Gross Margin. Gross margin is a non-GAAP performance measure that we calculate as total revenues, net of excise taxes, less cost of products sold, exclusive of depreciation and amortization. Gross margin is a non-GAAP performance measure that we believe is important to investors in evaluating our performance as a general indication of the amount above costs of products that we are able to sell our products.
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands)
Net sales
$
627,509

 
$
578,602

 
$
48,907

Cost of products sold (exclusive of depreciation and amortization)
540,330

 
504,256

 
36,074

Gross margin
$
87,179

 
$
74,346

 
$
12,833

Gross margin increased by $12.8 million primarily due to increased logistics fee based revenues of $11.4 million generated by our St. Paul Park Logistics Assets, which were acquired on September 15, 2016, and a $0.5 million increase in asphalt trucking fee margin. In addition, wholesale fuel margins increased $3.9 million. The average wholesale fuel price per gallon sold in the three months ended June 30, 2017 was $1.70, compared to $1.60 for the three months ended June 30, 2016. Partially offsetting the margin increase was reduced lubricant margins of $1.0 million, lower finished product transport margin of $0.8 million and lower crude oil trucking margin of $0.1 million.
Operating and Maintenance Expenses. Operating and maintenance expenses increased period over period due to an increase in our logistics and wholesale segment of $3.4 million and $0.9 million, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased primarily due to an increase in our other category of $2.5 million related to the acceleration of certain phantom unit awards resulting from the Andeavor Acquisition on June 1, 2017, higher public company expense and higher charges allocated from Western, partially offset by a decrease in our wholesale segment of $0.7 million.
Gain on disposal of assets, net. The gain on disposal of assets, net during the three months ended June 30, 2017, was primarily due to the sale of assets related to our lubricant operations in Arizona and Nevada. The gain on disposal of assets, net during the three months ended June 30, 2016, was primarily due to the sale of assets related to our lubricant operations in California.
Depreciation and Amortization. Depreciation and amortization increased due to the ongoing expansion of our Delaware Basin and Four Corners logistics systems.

29



Interest and Debt Expense. The increase in interest expense from prior periods was attributable to higher borrowings under the Revolving Credit Facility during the current period due to borrowings incurred in connection with the St. Paul Park Logistics Transaction.
Six Months Ended June 30, 2017, Compared to the Six Months Ended June 30, 2016
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands, except per unit data)
Revenues:
 
 
 
 
 
Fee based:
 
 
 
 
 
Affiliate
$
133,260

 
$
105,893

 
$
27,367

Third-party
1,322

 
1,367

 
(45
)
Product sales based:
 
 
 
 
 
Affiliate
264,837

 
224,054

 
40,783

Third-party
832,782

 
715,327

 
117,455

Total revenues
1,232,201

 
1,046,641

 
185,560

Operating costs and expenses:
 

 
 

 
 

Cost of products sold:
 
 
 
 
 
Affiliate
259,849

 
219,019

 
40,830

Third-party
797,780

 
680,827

 
116,953

Operating and maintenance expenses
92,116

 
87,649

 
4,467

Selling, general and administrative expenses
14,766

 
11,371

 
3,395

Gain on disposal of assets, net
(3,227
)
 
(901
)
 
(2,326
)
Depreciation and amortization
19,516

 
18,891

 
625

Total operating costs and expenses
1,180,800

 
1,016,856

 
163,944

Operating income
51,401

 
29,785

 
21,616

Other income (expense):
 
 
 
 
 
Interest and debt expense
(13,184
)
 
(13,466
)
 
282

Other, net
37

 
(104
)
 
141

Net income before income taxes
38,254

 
16,215

 
22,039

Benefit (provision) for income taxes
360

 
(478
)
 
838

Net income
38,614

 
15,737

 
22,877

Less net loss attributable to General Partner

 
(16,144
)
 
16,144

Net income attributable to limited partners
$
38,614

 
$
31,881

 
$
6,733

 
 
 
 
 
 
Net income per limited partner unit:
 
 
 
 
 
Common - basic
$
0.52

 
$
0.61

 
$
(0.09
)
Common - diluted
0.52

 
0.61

 
(0.09
)
Subordinated - basic and diluted
0.51

 
0.64

 
(0.13
)
 
 
 
 
 
 
Weighted-average limited partner units outstanding:
 
 
 
 
 
Common - basic
53,364

 
25,429

 
27,935

Common - diluted
53,372

 
25,441

 
27,931

Subordinated - basic and diluted
7,562

 
22,811

 
(15,249
)

30



 
Six Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands)
Cash Flow Data
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
71,657

 
$
47,964

 
$
23,693

Investing activities
(13,895
)
 
(15,111
)
 
1,216

Financing activities
(61,883
)
 
(59,896
)
 
(1,987
)
Capital expenditures
$
14,317

 
$
16,088

 
$
(1,771
)
Other Data
 
 
 
 
 
EBITDA (1)
$
70,954

 
$
60,294

 
$
10,660

Distributable cash flow (1)
54,428

 
47,618

 
6,810

(1)
EBITDA and Distributable Cash Flow are non-GAAP performance and liquidity measures, respectively, that we believe are useful in evaluating performance as a general indication of, among other things, our operating performance and the ability of our assets to generate sufficient cash to make distributions to our unitholders. We present an explanation and reconciliation to the nearest comparable GAAP measures in the section titled EBITDA and Distributable Cash Flow herein.

Gross Margin. Gross margin is a non-GAAP performance measure that we calculate as total revenues, net of excise taxes, less cost of products sold, exclusive of depreciation and amortization. Gross margin is a non-GAAP performance measure that we believe is important to investors in evaluating our performance as a general indication of the amount above costs of products that we are able to sell our products.
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands)
Net sales
$
1,232,201

 
$
1,046,641

 
$
185,560

Cost of products sold (exclusive of depreciation and amortization)
1,057,629

 
899,846

 
157,783

Gross margin
$
174,572

 
$
146,795

 
$
27,777

Gross margin increased by $27.8 million primarily due to increased fee based revenue of $23.1 million generated by our St. Paul Park Logistics Assets which were acquired on September 15, 2016. Also contributing to the increase was higher wholesale fuel margins of $4.0 million. The average wholesale fuel price per gallon sold in the first six months of 2017, was $1.71 compared to $1.41 for the first six months of 2016. Additionally, we experienced increases in finish product transport margin of $3.9 million, crude oil trucking margin of $2.1 million and a $0.4 million increase in asphalt trucking gross margin. Partially offsetting these increases was a $1.4 million decrease in lubricant margins.
Operating and Maintenance Expenses. Operating and maintenance expenses increased period over period due to an increase in our logistics and wholesale segments of $2.4 million and $2.0 million, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased primarily due to an increase in our other category of $3.5 million due to the acceleration of certain phantom unit awards resulting from the Andeavor Acquisition on June 1, 2017, higher public company expense and higher charges allocated from Western.
Gain on disposal of assets, net. The gain on disposal of assets, net during the six months ended June 30, 2017 was primarily due to the sale of assets related to our lubricant operations in Arizona and Nevada. The gain on disposal of assets, net during the six months ended June 30, 2016 was primarily due to the sale of assets related to our lubricant operations in California.
Depreciation and Amortization. Depreciation and amortization increased due to the ongoing expansion of our Delaware Basin and Four Corners logistics systems.
Interest and Debt Expense. The decrease in interest expense from prior periods was attributable to lower borrowings under the Revolving Credit Facility during the current period. On October 30, 2015, we borrowed $145.0 million under the Revolving Credit Facility to partially fund the purchase of the TexNew Mex Pipeline system and we repaid these direct

31



borrowings during the second quarter of 2016. On September 15, 2016, we borrowed $20.3 million under the Revolving Credit Facility, to partially fund the St. Paul Park Logistics Transaction.
EBITDA and Distributable Cash Flow
We define EBITDA as earnings before interest and debt expense, provision for income taxes and depreciation and amortization. We define Distributable Cash Flow as EBITDA plus the change in deferred revenues, less interest accruals, income taxes paid, maintenance capital expenditures and distributions declared on our TexNew Mex units. The GAAP performance measure most directly comparable to EBITDA is net income. The GAAP liquidity measure most directly comparable to EBITDA and distributable cash flow is net cash provided by operating activities. These non-GAAP financial measures should not be considered alternatives to GAAP net income or net cash provided by operating activities.
EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;
EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and
EBITDA, as we calculate it, may differ from the EBITDA calculations of our affiliates or other companies in our industry, thereby limiting its usefulness as a comparative measure.
EBITDA and Distributable Cash Flow are used as supplemental financial measures by management and by external users of our financial statements, such as investors and commercial banks, to assess:
our operating performance and liquidity as compared to those of other companies in the midstream energy industry, without regard to financial methods, historical cost basis or capital structure;
the ability of our assets to generate sufficient cash to make distributions to our unitholders;
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.
Distributable Cash Flow is a standard used by the investment community with respect to publicly traded partnerships because the value of a partnership unit is, in part, measured by its yield. Yield is based on the amount of cash distributions a partnership can pay to a unitholder. Although distributable cash flow is a liquidity measure, it is also presented in this reconciliation compared to net income as supplemental information.
We believe that the presentation of these non-GAAP measures provides useful information to investors in assessing our financial condition and results of operations. These non-GAAP measures should not be considered as alternatives to net income, net cash provided by operating activities or any other measure of financial performance presented in accordance with GAAP. EBITDA excludes some, but not all, items that affect net income attributable to limited partners. These non-GAAP measures may vary from those of other companies. As a result, EBITDA and Distributable Cash Flow as presented herein may not be comparable to similarly titled measures of other companies.
The calculation of EBITDA and Distributable Cash Flow includes the results of operations for the St. Paul Park Logistics Assets subsequent to the St. Paul Park Logistics Transaction. The results of operations and operating cash flows for the St. Paul Park Logistics Assets are excluded from the EBITDA and Distributable Cash Flow calculations for the comparable periods in the prior year because a retrospective adjustment of these performance measures is not a representative measure of performance results or liquidity. The EBITDA and Distributable Cash Flow calculations for the comparable periods in the prior year have not been retrospectively adjusted to include the combined financial results of the St. Paul Park Logistics Assets prior to September 15, 2016.

32



The following tables reconcile net income attributable to limited partners and net cash provided by operating activities to EBITDA and Distributable Cash Flow for the three and six months ended June 30, 2017 and 2016, respectively.
Three Months Ended June 30, 2017, Compared to the Three Months Ended June 30, 2016
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands)
Net income attributable to limited partners
$
18,728

 
$
17,874

 
$
854

Interest and debt expense
6,576

 
6,414

 
162

Provision (benefit) for income taxes
(250
)
 
217

 
(467
)
Depreciation and amortization
9,784

 
7,325

 
2,459

EBITDA
34,838

 
31,830

 
3,008

 
 
 
 
 
 
Change in deferred revenues
102

 
1,446

 
(1,344
)
Interest accruals
(6,149
)
 
(6,072
)
 
(77
)
Income taxes paid

 
(64
)
 
64

Maintenance capital expenditures
(2,438
)
 
(2,050
)
 
(388
)
Distributable cash flow
$
26,353

 
$
25,090

 
$
1,263

 
 
 
 
 
 
Minimum quarterly distribution
$
17,541

 
$
14,840

 
$
2,701



33



 
Three Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands)
Net cash provided by operating activities
$
28,311

 
$
28,951

 
$
(640
)
Changes in operating assets and liabilities
(147
)
 
(8,964
)
 
8,817

Interest and debt expense
6,576

 
6,414

 
162

Unit-based compensation expense
(3,097
)
 
(788
)
 
(2,309
)
Amortization of deferred financing costs
(497
)
 
(343
)
 
(154
)
Deferred income taxes
1,010

 

 
1,010

Gain on disposal of assets, net
2,936

 
802

 
2,134

Provision (benefit) for income taxes
(250
)
 
217

 
(467
)
Reserve for doubtful accounts
(4
)
 
(125
)
 
121

EBITDA attributable to General Partner (1)

 
5,666

 
(5,666
)
EBITDA
34,838

 
31,830

 
3,008

 
 
 
 
 
 
Change in deferred revenues
102

 
1,446

 
(1,344
)
Interest accruals
(6,149
)
 
(6,072
)
 
(77
)
Income taxes paid

 
(64
)
 
64

Maintenance capital expenditures
(2,438
)
 
(2,050
)
 
(388
)
Distributable cash flow
$
26,353

 
$
25,090

 
$
1,263

 
 
 
 
 
 
Minimum quarterly distribution
$
17,541

 
$
14,840

 
$
2,701

(1)
The calculation of EBITDA attributable to General Partner is as follows:
 
Three Months Ended
 
June 30,
 
2016
 
(In thousands)
Net loss attributable to General Partner
$
(7,894
)
Depreciation and amortization
2,228

EBITDA attributable to General Partner
$
(5,666
)


34



Six Months Ended June 30, 2017, Compared to the Six Months Ended June 30, 2016
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands)
Net income attributable to limited partners
$
38,614

 
$
31,881

 
$
6,733

Interest and debt expense
13,184

 
13,466

 
(282
)
Provision (benefit) for income taxes
(360
)
 
478

 
(838
)
Depreciation and amortization
19,516

 
14,469

 
5,047

EBITDA
70,954

 
60,294

 
10,660

 
 
 
 
 
 
Change in deferred revenues
466

 
3,678

 
(3,212
)
Interest accruals
(12,281
)
 
(12,781
)
 
500

Income taxes paid
(89
)
 
(94
)
 
5

Maintenance capital expenditures
(4,622
)
 
(3,479
)
 
(1,143
)
Distributable cash flow
$
54,428

 
$
47,618

 
$
6,810

 
 
 
 
 
 
Minimum quarterly distribution
$
35,062

 
$
28,438

 
$
6,624



35



 
Six Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands)
Net cash provided by operating activities
$
71,657

 
$
47,964

 
$
23,693

Changes in operating assets and liabilities
(12,566
)
 
(12,114
)
 
(452
)
Interest and debt expense
13,184

 
13,466

 
(282
)
Unit-based compensation expense
(3,732
)
 
(1,312
)
 
(2,420
)
Amortization of deferred financing costs
(989
)
 
(685
)
 
(304
)
Deferred income taxes
522

 

 
522

Gain on disposal of assets, net
3,227

 
901

 
2,326

Provision (benefit) for income taxes
(360
)
 
478

 
(838
)
Reserve for doubtful accounts
11

 
(126
)
 
137

EBITDA attributable to General Partner (1)

 
11,722

 
(11,722
)
EBITDA
70,954

 
60,294

 
10,660

 
 
 
 
 
 
Change in deferred revenues
466

 
3,678

 
(3,212
)
Interest accruals
(12,281
)
 
(12,781
)
 
500

Income taxes paid
(89
)
 
(94
)
 
5

Maintenance capital expenditures
(4,622
)
 
(3,479
)
 
(1,143
)
Distributable cash flow
$
54,428

 
$
47,618

 
$
6,810

 
 
 
 
 
 
Minimum quarterly distribution
$
35,062

 
$
28,438

 
$
6,624

(1)
The calculation of EBITDA attributable to General Partner is as follows:
 
Six Months Ended
 
June 30,
 
2016
 
(In thousands)
Net loss attributable to General Partner
$
(16,144
)
Depreciation and amortization
4,422

EBITDA attributable to General Partner
$
(11,722
)


36



Logistics Segment
Three Months Ended June 30, 2017, Compared to the Three Months Ended June 30, 2016
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands, except key operating statistics)
Statement of Operations Data:
 
 
 
 
 
Fee based revenues:
 
 
 
 
 
Affiliate
$
53,567

 
$
43,053

 
$
10,514

Third-party
703

 
677

 
26

Total revenues
54,270

 
43,730

 
10,540

Operating costs and expenses:
 

 
 

 
 
Operating and maintenance expenses
27,102

 
23,734

 
3,368

General and administrative expenses
829

 
590

 
239

Gain on disposal of assets, net
(53
)
 
(5
)
 
(48
)
Depreciation and amortization
8,781

 
8,347

 
434

Total operating costs and expenses
36,659

 
32,666

 
3,993

Operating income
$
17,611

 
$
11,064

 
$
6,547

Key Operating Statistics:
 
 
 
 
 
Pipeline and gathering (bpd):
 
 
 
 
 
Mainline movements (1):
 
 
 
 
 
Permian/Delaware Basin system
62,268

 
55,953

 
6,315

Four Corners system
50,780

 
58,047

 
(7,267
)
TexNew Mex system
5,831

 
10,375

 
(4,544
)
Gathering (truck offloading):
 
 
 
 
 
Permian/Delaware Basin system
13,203

 
17,823

 
(4,620
)
Four Corners system
7,094

 
11,133

 
(4,039
)
Pipeline gathering and injection system:
 
 
 
 
 
Permian/Delaware Basin system
13,607

 
11,302

 
2,305

Four Corners system
26,832

 
27,225

 
(393
)
TexNew Mex system
5,988

 
343

 
5,645

Tank storage capacity (bbls) (2)
959,087

 
845,514

 
113,573

Terminalling, transportation and storage:
 
 
 
 
 
Shipments into and out of storage (bpd) (includes asphalt)
589,653

 
393,037

 
196,616

Terminal storage capacity (bbls) (2)
11,376,599

 
7,385,543

 
3,991,056

(1)
Some barrels of crude oil in route to Western's Gallup refinery and Permian/Delaware Basin are transported on more than one of our mainlines. Mainline movements for the Four Corners and Delaware Basin systems include each barrel transported on each mainline.
(2)
Storage shell capacities represent weighted-average capacities for the periods indicated.
Fee Based Revenues. We generate our logistics revenues from third-party contracts and commercial agreements with Western. Our St. Paul Park Logistics Assets, acquired September 15, 2016, generated $11.4 million in additional fee based revenue during the second quarter of 2017. Prior to our acquisition of the St. Paul Park Logistics Assets, they did not generate revenue.
On July 1, 2016, we decreased certain pipeline, terminal and other service fee rates with such decreases averaging 3.0% for terminal, storage and gathering activities and 2.0% for crude oil pipeline shipments based on negative changes in the Producer Price Index stipulated in our commercial agreements with Western. Due to the decreased rates and several contributing factors throughout our operating regions, our fee based revenues decreased by $0.9 million period over period.

37



Our Permian Basin assets increased overall volumes by 6,315 barrels per day, or "bpd", compared to 2016, resulting in increased fees of $0.8 million. In addition, recognition of deferred revenue and additive revenue of $1.2 million and $0.3 million, respectively, increased period over period. Offsetting these increases were decreased Four Corners system volumes by 7,267 bpd. The lower volumes resulted in a $0.2 million decrease in Four Corners fees period over period. Our TexNew Mex Pipeline System volumes were down by 4,544 bpd compared to 2016, resulting in decreased fees of $1.1 million. In addition, terminalling fees of $1.5 million decreased period over period.
Operating and Maintenance Expenses. Operating and maintenance expenses increased primarily due to maintenance expense ($2.9 million), employee expenses ($0.7 million), property taxes ($0.4 million) and chemical expense ($0.2 million) specifically related to chemical additives used in the pipeline transportation process, partially offset by decreased outside support services ($1.0 million).
General and Administrative Expenses. General and administrative expenses increased primarily due to increased employee expenses ($0.1 million) and charges allocated from Western ($0.1 million).
Depreciation and Amortization. Depreciation and amortization increased due to the ongoing expansion of our Delaware Basin and Four Corners logistics systems.

38



Six Months Ended June 30, 2017, Compared to the Six Months Ended June 30, 2016
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands, except key operating statistics)
Statement of Operations Data:
 
 
 
 
 
Fee based revenues:
 
 
 
 
 
Affiliate
$
103,204

 
$
83,969

 
$
19,235

Third-party
1,322

 
1,367

 
(45
)
Total revenues
104,526

 
85,336

 
19,190

Operating costs and expenses:
 

 
 

 
 
Operating and maintenance expenses
52,930

 
50,491

 
2,439

General and administrative expenses
1,636

 
1,371

 
265

Gain on disposal of assets, net
(43
)
 
(5
)
 
(38
)
Depreciation and amortization
17,362

 
16,502

 
860

Total operating costs and expenses
71,885

 
68,359

 
3,526

Operating income
$
32,641

 
$
16,977

 
$
15,664

Key Operating Statistics:
 
 
 
 
 
Pipeline and gathering (bpd):
 
 
 
 
 
Mainline movements (1):
 
 
 
 
 
Permian/Delaware Basin system
57,728

 
52,719

 
5,009

Four Corners system
49,139

 
55,257

 
(6,118
)
TexNew Mex system
5,121

 
11,460

 
(6,339
)
Gathering (truck offloading):
 
 
 
 
 
Permian/Delaware Basin system
13,900

 
19,178

 
(5,278
)
Four Corners system
6,857

 
11,947

 
(5,090
)
Pipeline gathering and injection system:
 
 
 
 
 
Permian/Delaware Basin system
12,794

 
9,594

 
3,200

Four Corners system
25,458

 
25,831

 
(373
)
TexNew Mex system
5,664

 
171

 
5,493

Tank storage capacity (bbls) (2)
959,087

 
836,858

 
122,229

Terminalling, transportation and storage:
 
 
 
 
 
Shipments into and out of storage (bpd) (includes asphalt)
587,078

 
390,647

 
196,431

Terminal storage capacity (bbls) (2)
11,376,666

 
7,385,543

 
3,991,123

(1)
Some barrels of crude oil in route to Western's Gallup refinery and Permian/Delaware Basin are transported on more than one of our mainlines. Mainline movements for the Four Corners and Delaware Basin systems include each barrel transported on each mainline.
(2)
Storage shell capacities represent weighted-average capacities for the periods indicated.
Fee Based Revenues. We generate our logistics revenues from third-party contracts and commercial agreements with Western. Our St. Paul Park Logistics Assets that we acquired on September 15, 2016, generated $23.1 million in additional fee based revenue during the first six months of 2017. Prior to our acquisition of the St. Paul Park Logistics Assets, they did not generate revenue.
On July 1, 2016, we decreased certain pipeline, terminal and other service fee rates with such decreases averaging 3.0% for terminal, storage and gathering activities and 2.0% for crude oil pipeline shipments based on negative changes in the Producer Price Index stipulated in our commercial agreements with Western. Due to the decreased rates and several contributing factors throughout our operating regions, our fee based revenues decreased by $1.7 million period over period.

39



Our Permian Basin assets increased overall volumes by 5,009 bpd compared to 2016, resulting in increased fees of $1.6 million. Our Four Corners system volumes were down by 6,118 bpd, but current period volumes included movements on newly constructed, higher capacity pipelines that receive higher regulatory tariffs than did comparable pipeline deliveries during the first six months of 2016. These redirected volumes resulted in a $0.1 million increase in Four Corners fees period over period. In addition, recognition of deferred revenue and additive revenue of $1.8 million and $0.4 million, respectively, increased period over period. Offsetting these increases were decreased TexNew Mex Pipeline system volumes of 6,339 bpd, resulting in a decrease of $3.6 million, and decreased terminalling fees of $3.4 million period over period.
Operating and Maintenance Expenses. Operating and maintenance expenses increased primarily due to increased maintenance expense ($3.8 million), employee expenses ($1.3 million) and property taxes ($0.7 million), partially offset by decreased outside support services ($3.2 million).
General and Administrative Expenses. General and administrative expenses increased primarily due to increased employee expenses ($0.2 million) and administrative support services ($0.1 million).
Depreciation and Amortization. Depreciation and amortization increased due to the ongoing expansion of our Delaware Basin and Four Corners logistics systems.

40



Wholesale Segment
Three Months Ended June 30, 2017, Compared to the Three Months Ended June 30, 2016
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands, except key operating stats)
Statement of Operations Data:
 
 
 
 
 
Fee based revenues (1):
 
 
 
 
 
Affiliate
$
14,216

 
$
10,912

 
$
3,304

Product sales based revenues (1):
 
 
 
 
 
Affiliate
139,770

 
126,525

 
13,245

Third-party
419,253

 
397,435

 
21,818

Total revenues
573,239

 
534,872

 
38,367

Operating costs and expenses:
 

 
 

 
 

Cost of products sold:
 
 
 
 
 
Affiliate
137,150

 
123,870

 
13,280

Third-party
403,180

 
380,386

 
22,794

Operating and maintenance expenses
20,167

 
19,257

 
910

General and administrative expenses
1,442

 
2,153

 
(711
)
Gain on disposal of assets, net
(2,883
)
 
(797
)
 
(2,086
)
Depreciation and amortization
1,003

 
1,206

 
(203
)
Total operating costs and expenses
560,059

 
526,075

 
33,984

Operating income
$
13,180

 
$
8,797

 
$
4,383

Key Operating Statistics:
 
 
 
 
 
Fuel gallons sold (in thousands)
318,046

 
311,486

 
6,560

Fuel gallons sold to retail (included in fuel gallons sold above) (in thousands)
85,046

 
83,721

 
1,325

Fuel margin per gallon (2)
$
0.037

 
$
0.025

 
$
0.012

Lubricant gallons sold (in thousands)
1,019

 
1,846

 
(827
)
Lubricant margin per gallon (3)
$
0.93

 
$
0.89

 
$
0.04

Asphalt trucking volume (bpd)
6,953

 
4,876

 
2,077

Crude oil trucking volume (bpd)
51,352

 
42,092

 
9,260

Average crude oil revenue per barrel
$
2.20

 
$
2.17

 
$
0.03

(1)
All wholesale fee based revenues are generated through fees charged to Western's refining segment for truck transportation and delivery of crude oil and asphalt. Affiliate and third-party product sales based revenues result from sales of refined products to Western and third-party customers at a delivered price that includes charges for product transportation.
(2)
Fuel margin per gallon is a measurement calculated by dividing the difference between fuel sales, net of transportation charges, and cost of fuel sales for our wholesale business by the number of gallons sold. Fuel margin per gallon is a measure frequently used in the petroleum products wholesale industry to measure operating results related to fuel sales.
(3)
Lubricant margin per gallon is a measurement calculated by dividing the difference between lubricant sales, net of transportation charges, and lubricant cost of products sold by the number of gallons sold. Lubricant margin is a measure frequently used in the petroleum products wholesale industry to measure operating results related to lubricant sales.

41



Gross Margin. Gross margin is a non-GAAP performance measure that we calculate as total revenues, net of excise taxes, less cost of products sold, exclusive of depreciation and amortization. Gross margin is a non-GAAP performance measure that we believe is important to investors in evaluating our performance as a general indication of the amount above costs of products that we are able to sell our products.
 
Three Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands)
Net sales
$
573,239

 
$
534,872

 
$
38,367

Cost of products sold (exclusive of depreciation and amortization)
540,330

 
504,256

 
36,074

Gross margin
$
32,909

 
$
30,616

 
$
2,293

We primarily use fuel margin per gallon and fuel gallons sold to evaluate the operating results of the wholesale segment. We believe this metric is more useful to investors than utilizing the absolute price per gallon and cost of product sold since fuel prices can be volatile and our fuel margin per gallon is not generally correlated with changes in absolute prices per gallon. Wholesale gross margin increased $2.3 million quarter over quarter. Fuel margins increased $3.9 million primarily due to a per gallon increase in fuel margins of approximately $0.012, increased margin of $0.5 million period over period from new asphalt hauling activity by truck, partially offset by decreased margin from lubricant sales of $1.0 million, margin decrease of $0.8 million related to finished product transport activity and margin decrease of $0.1 million from crude oil gathering activity by truck. Fuel sales volumes had an increase of 6.6 million gallons period over period.
Operating and Maintenance Expenses. The increase in operating and maintenance expenses was the result of higher employee expenses ($0.9 million) primarily due to employee severance costs associated with the disposal of our lubricant operations, environmental expense ($0.3 million) and insurance expense ($0.2 million), partially offset by decreased lease expenses ($0.4 million).
General and Administrative Expenses. General and administrative expenses decreased primarily due to a decrease in employee expenses of $0.6 million.
Gain on disposal of assets, net. The gain on disposal of assets, net during the three months ended June 30, 2017 was primarily due to the sale of assets related to our lubricant operations in Arizona and Nevada. The gain on disposal of assets, net during the three months ended June 30, 2016 was primarily due to the sale of assets related to our lubricant sales activities in California.


42



Six Months Ended June 30, 2017, Compared to the Six Months Ended June 30, 2016
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands, except key operating stats)
Statement of Operations Data:
 
 
 
 
 
Fee based revenues (1):
 
 
 
 
 
Affiliate
$
30,056

 
$
21,924

 
$
8,132

Product sales based revenues (1):
 
 
 
 
 
Affiliate
264,837

 
224,054

 
40,783

Third-party
832,782

 
715,327

 
117,455

Total revenues
1,127,675

 
961,305

 
166,370

Operating costs and expenses:
 

 
 

 
 

Cost of products sold:
 
 
 
 
 
Affiliate
259,849

 
219,019

 
40,830

Third-party
797,780

 
680,827

 
116,953

Operating and maintenance expenses
39,186

 
37,158

 
2,028

Selling, general and administrative expenses
3,736

 
4,058

 
(322
)
Gain on disposal of assets, net
(3,184
)
 
(896
)
 
(2,288
)
Depreciation and amortization
2,154

 
2,389

 
(235
)
Total operating costs and expenses
1,099,521

 
942,555

 
156,966

Operating income
$
28,154

 
$
18,750

 
$
9,404

Key Operating Statistics:
 
 
 
 
 
Fuel gallons sold (in thousands)
620,096

 
626,429

 
(6,333
)
Fuel gallons sold to retail (included in fuel gallons sold above) (in thousands)
164,159

 
163,562

 
597

Fuel margin per gallon (2)
$
0.040

 
$
0.027

 
$
0.013

Lubricant gallons sold (in thousands)
2,340

 
4,047

 
(1,707
)
Lubricant margin per gallon (3)
$
1.02

 
$
0.78

 
$
0.24

Asphalt trucking volume (bpd)
6,084

 
3,875

 
2,209

Crude oil trucking volume (bpd)
50,130

 
38,801

 
11,329

Average crude oil revenue per barrel
$
2.23

 
$
2.20

 
$
0.03

(1)
All wholesale fee based revenues are generated through fees charged to Western's refining segment for truck transportation and delivery of crude oil and asphalt. Affiliate and third-party product sales based revenues result from sales of refined products to Western and third-party customers at a delivered price that includes charges for product transportation.
(2)
Fuel margin per gallon is a measurement calculated by dividing the difference between fuel sales, net of transportation charges, and cost of fuel sales for our wholesale business by the number of gallons sold. Fuel margin per gallon is a measure frequently used in the petroleum products wholesale industry to measure operating results related to fuel sales.
(3)
Lubricant margin per gallon is a measurement calculated by dividing the difference between lubricant sales, net of transportation charges, and lubricant cost of products sold by the number of gallons sold. Lubricant margin is a measure frequently used in the petroleum products wholesale industry to measure operating results related to lubricant sales.

43



Gross Margin. Gross margin is a non-GAAP performance measure that we calculate as total revenues, net of excise taxes, less cost of products sold, exclusive of depreciation and amortization. Gross margin is a non-GAAP performance measure that we believe is important to investors in evaluating our performance as a general indication of the amount above costs of products that we are able to sell our products.
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands)
Net sales
$
1,127,675

 
$
961,305

 
$
166,370

Cost of products sold (exclusive of depreciation and amortization)
1,057,629

 
899,846

 
157,783

Gross margin
$
70,046

 
$
61,459

 
$
8,587

We primarily use fuel margin per gallon and fuel gallons sold to evaluate the operating results of the wholesale segment. We believe this metric is more useful to investors than utilizing the absolute price per gallon and cost of product sold since fuel prices can be volatile and our fuel margin per gallon is not generally correlated with changes in absolute price per gallon. Wholesale gross margin increased $8.6 million for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. This increase was in part due to increased fuel margins of $4.0 million primarily due to a per gallon increase in fuel margins of approximately $0.013, increased gross margin of $3.9 million related to finished product transport activity, increased gross margin of $2.1 million associated with crude oil gathering activity by truck and increased gross margin of $0.4 million from asphalt hauling activity by truck. These increases were partially offset by a $1.4 million decrease in margin from lubricant sales. Fuel sales volume decreased by 6.3 million gallons.
Operating and Maintenance Expenses. The increase in operating and maintenance expenses was the result of higher employee expense ($1.7 million) primarily due to employee severance costs associated with the disposal of our lubricant operations, fuel expense for our truck fleet ($0.8 million), environmental expense ($0.3 million) and insurance expense ($0.3 million), partially offset by decreased lease expense ($0.9 million).
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased primarily due to lower employee expenses ($0.3 million).
Gain on disposal of assets, net. The gain on disposal of assets, net during the six months ended June 30, 2017 was primarily due to the sale of assets related to our lubricant operations in Arizona and Nevada. The gain on disposal of assets, net during the six months ended June 30, 2016 was primarily due to the sale of assets related to our lubricant sales activities in California.


44



Outlook
We generate our operating revenues from our fee-based arrangements with Western, through sales of wholesale fuels to Western and third parties and through fees charged on crude oil and refined product transportation. Our operating results depend significantly on the volumes of crude oil and refined petroleum products that we transport through our pipelines and process through our terminals and transportation operations. The reliability of Western's refineries and the supply of and demand for crude oil and refined petroleum products in the regions that we serve each bear significant influence on our results of operations.
Crude oil production levels in the Delaware Basin grew in the first half of 2017 and this growth is expected to continue throughout 2017. In the Four Corners region, crude production was relatively flat in the first and second quarter of 2017. We expect production to remain flat in the short term; however, we expect production in the region to grow toward the end of 2017 and beyond. These factors, both independently and on a combined basis could have an impact on our logistics segment results.
Our wholesale fuel margins are dependent on the contractual prices that we charge to Western and on margins that we realize from third-party customers. To date in the third quarter of 2017, our wholesale fuel margins are improved relative to the average of $0.037 per gallon that we realized for the six months ended June 30, 2017. Our crude and asphalt trucking operations have experienced growth during the six months ended June 30, 2017, and continue to improve thus far in the third quarter of 2017.
Liquidity and Capital Resources
At June 30, 2017, we had cash and cash equivalents of $10.5 million. Our sources for liquidity include cash generated from operations, borrowings under our Revolving Credit Facility, asset sales and the issuance of equity or debt securities.
On June 30, 2017, we sold our lubricant operations located in Arizona and Nevada for $14.7 million resulting in a gain on disposal of assets of $2.8 million.
On March 2, 2017, the requirements for the conversion of all WNRL subordinated units into common units were satisfied under the partnership agreement. As a result, the 22,811,000 subordinated units converted into common units on a one-for-one basis and, thereafter, participated on terms equal with all other common units in distributions of available cash. See Note 11, Equity, in the Notes to Condensed Consolidated Financial Statements for further discussion.
On September 15, 2016, we purchased the St. Paul Park Logistics Assets for $195.0 million and 628,224 common units. We funded the cash portion of the consideration through a combination of $20.3 million in direct borrowings under our Revolving Credit Facility and $174.7 million of cash on hand primarily generated from a September 2016 equity offering of 8,625,000 common units for $185.3 million.
On September 7, 2016, we entered into an underwriting agreement relating to the issuance and sale by the Partnership of 7,500,000 common units representing limited partner interests in the Partnership. The closing of the offering occurred on September 13, 2016. We also granted the underwriter an option to purchase additional common units on the same terms, which was exercised in full and closed on September 30, 2016, for 1,125,000 additional common units. We generated $185.3 million from this equity offering.
On May 16, 2016, we entered into an underwriting agreement relating to the issuance and sale by the Partnership of 3,750,000 common units representing limited partner interests in the Partnership. The closing of the offering occurred on May 20, 2016. We also granted the underwriters an option to purchase up to 562,500 additional common units on the same terms, which was exercised in full and closed on June 1, 2016. We generated $92.5 million from this equity offering.
At June 30, 2017, the Revolving Credit Facility had availability of $479.0 million, net of $20.3 million in direct borrowings and $0.7 million in outstanding letters of credit. Our Revolving Credit Facility and the indenture governing our WNRL 2023 Senior Notes both contain covenants that limit or restrict our ability to make cash distributions. Under our Revolving Credit Facility, we are permitted to make cash distributions to our equity holders, including our general partner, but only up to the amount of available cash under our partnership agreement and so long as no default exists or will be caused by such distributions. Under the Revolving Credit Facility, we are also required to maintain certain financial ratios, each tested on a quarterly basis for the immediately preceding four quarter period. The indenture governing the WNRL 2023 Senior Notes also prohibits us from making cash distributions to our equity holders, unless no default has occurred or will be caused by such distributions and such distributions are less than the cap amount prescribed in the indenture. We were in compliance with our debt covenants as of and for the six months ended June 30, 2017. See Note 10, Debt, in the Notes to Condensed Consolidated Financial Statements for further discussion on our Revolving Credit Facility.
We have an effective universal shelf Registration Statement on Form S-3 that provides for the registration and sale of up to $1 billion of our or certain of our subsidiaries' equity or debt securities. We may over time, and subject to market conditions,

45



in one or more offerings, offer and sell any combination of the securities described in the prospectus. During the second and third quarter of 2016, we completed equity offerings pursuant to the shelf registration statement and resulted in reduced availability. The current availability under our shelf Registration Statement on Form S-3 is $713.8 million.
Distributions
Our minimum quarterly distribution of $0.2875 per unit per quarter, or $1.15 per unit on an annualized basis, aggregates to $17.5 million per quarter and $70.1 million per year based on the current number of common units outstanding. Actual amounts distributed may be different than this amount. Any distributions are subject to compliance with the restrictions of our Revolving Credit Facility.
Our Second Amended and Restated Partnership Agreement sets forth the calculation to be used to determine the amount and priority of cash distributions that the common and subordinated unitholders, our General Partner as the holder of incentive distribution rights and Western as the holder of the TexNew Mex Units will receive. In accordance with our partnership agreement, our subordinated units converted to common units on March 2, 2017 once we met specified distribution targets and successfully completed other tests set forth in our partnership agreement. Our distributions are declared subsequent to quarter end. During the six months ended June 30, 2017 and 2016, we declared and paid distributions that were in excess of the target distribution amounts set forth in our partnership agreement, resulting in distributions to our General Partner as the holder of incentive distribution rights. We made cash distributions to our General Partner of $3.1 million, $5.2 million, $0.9 million and $1.7 million for the three and six months ended June 30, 2017 and 2016, respectively. Refer to Note 11, Equity, in the Notes to Condensed Consolidated Financial Statements for further information regarding incentive distribution rights.
The table below summarizes our 2017 quarterly distribution declarations, payments and scheduled payments:
Declaration Date
 
Record Date
 
Payment Date
 
Distribution per Unit
January 31, 2017
 
February 13, 2017
 
March 1, 2017
 
$
0.4375

April 28, 2017
 
May 9, 2017
 
May 23, 2017
 
0.4525

July 25, 2017
 
August 4, 2017
 
August 18, 2017
 
0.4675

Total
 
$
1.3575

Cash Flows
The following table sets forth our cash flows for the periods indicated:
 
Six Months Ended
 
June 30,
 
2017
 
2016
 
Change
 
(In thousands)
Net cash provided by operating activities
$
71,657

 
$
47,964

 
$
23,693

Net cash used in investing activities
(13,895
)
 
(15,111
)
 
1,216

Net cash used in financing activities
(61,883
)
 
(59,896
)
 
(1,987
)
Net change in cash and cash equivalents
$
(4,121
)
 
$
(27,043
)
 
$
22,922

The increase in net cash from operating activities period over period was primarily the result of an increase in net income, depreciation and amortization, unit-based compensation expense and changes in our working capital as disclosed in our Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016. The change in third-party accounts receivable was due to a decrease in wholesale third-party receivables. The change in accounts payable and accrued liabilities was primarily due to an increase in the prior period associated with accrued payroll expenses related to Western employee services.
Cash flows provided by operating activities for the six months ended June 30, 2017 were primarily used to fund cash distributions to affiliates and public holders of our common units of $33.7 million and $26.5 million, respectively, and fund capital expenditures of $14.3 million. We received proceeds of $14.8 million from the sale of our lubricant assets located in Arizona and Nevada.
For the same period in 2016, cash flows provided by operating activities combined with $92.5 million from the issuance of common units were primarily used to repay the borrowings under our Revolving Credit Facility of $125.0 million, fund capital expenditures of $16.1 million and fund cash distributions to affiliates and public holders of our common units of $26.9 million and $12.6 million, respectively.

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Capital Expenditures
Our capital requirements have consisted of and are expected to continue to consist of maintenance-related capital expenditures and discretionary capital expenditures. As of June 30, 2017, we had cash and cash equivalents of $10.5 million, the majority of which is intended for use in planned growth projects. Maintenance capital expenditures include expenditures required to maintain equipment reliability, tankage and pipeline integrity and safety and to address environmental and other regulatory requirements. Discretionary capital expenditures include expenditures to acquire assets and expand existing facilities that increase throughput capacity of our pipelines and in our terminals or increase storage capacity at our storage facilities. For 2017, we expect to spend $15.6 million for maintenance capital projects and up to $27.0 million in discretionary growth projects. We rely primarily upon external financing sources, including borrowings under our Revolving Credit Facility and the issuance of debt and equity securities, to fund any significant future discretionary capital expenditures.
Contractual Obligations
We include a complete summary of our future contractual obligations and commercial commitments as of December 31, 2016, in our 2016 Form 10-K under Part I, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Contractual Obligations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Regulatory Matters
Our pipeline systems are subject to regulation by various federal, state, and local agencies. Our interstate common carrier crude oil pipeline is subject to regulation by the Federal Energy Regulatory Commission (“FERC”), under the Interstate Commerce Act (the “ICA”) and the Energy Policy Act of 1992 and the rules and regulations promulgated under those laws.
The FERC regulations require, among other things, that rates for interstate pipelines that transport crude oil and refined petroleum products and certain other liquids (collectively referred to as “petroleum pipelines”), be just and reasonable and must not be unduly discriminatory or confer any undue preference upon any shipper. The ICA also requires interstate common carrier petroleum pipelines to file with the FERC and publicly post tariffs stating their interstate transportation rates and terms and conditions of service and apply them uniformly to all shippers. Under the ICA, the FERC or interested persons may challenge existing or changed rates or services. If the FERC determines that a protested rate is unjust and unreasonable, the FERC may order refunds of amounts charged in excess of the just and reasonable rate. The FERC may also order a pipeline to change its rates, and may require a common carrier to pay shippers reparations for damages sustained for a period up to two years prior to the filing of a complaint.
We operate certain segments of our pipeline system pursuant to tariffs filed with the FERC. The FERC or a state commission could investigate our rates on its own initiative or at the urging of a third party. If our rate levels are investigated by the FERC or a state commission, the inquiry could result in a comparison of our rates to those charged by others or to an investigation of our costs. For several segments of our pipeline system, the FERC has granted us a temporary waiver of the filing and reporting requirements. These segments are still subject to the FERC’s jurisdiction under the ICA and we are still subject to the other requirements of the ICA. If the facts upon which the waiver was granted change materially (for example, if an unaffiliated third party seeks access to our pipelines), we are required to inform the FERC, which may result in revocation of the waiver.
On December 15, 2016, FERC issued a Notice of Inquiry requesting energy industry input on how FERC should address income tax allowances in cost-based rates proposed by pipeline companies organized as part of a master limited partnership. FERC’s current policy permits an income tax allowance in cost-based rates proposed by such pipeline companies to the extent the pipeline companies can show that their owner has an actual or potential income tax liability to be paid on income generated by the companies’ FERC regulated assets. FERC issued the Notice of Inquiry in response to the remand from the U.S. Court of Appeals for the D.C. Circuit in United Airlines, Inc., et al. v. FERC., in which the court determined that FERC had acted arbitrarily and capriciously when it failed to demonstrate that permitting an interstate petroleum products pipeline organized as a limited partnership to include an income tax allowance in the cost of service underlying its rates in addition to the discounted cash flow return on equity would not result in the pipeline partnership owners double-recovering their income taxes. Many other pipelines have revised the language as shown here, but the change is not required. We cannot predict whether FERC will successfully justify its conclusion that there is no double recovery of taxes in these circumstances or whether FERC will modify its current policy on either income tax allowances or return on equity calculations for pipeline companies organized as part of a master limited partnership. However, any modification that reduces or eliminates an income tax allowance for pipeline companies organized as a part of a master limited partnership or decreases the return on equity for such pipelines could result in an adverse impact on our revenues associated with the transportation services we provide pursuant to cost-based rates.

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We are also subject to regulation by the U.S. Department of Transportation (“DOT”) through safety standards and regulations promulgated by the Pipeline and Hazardous Materials Safety Administration (“PHMSA”), the Texas Railroad Commission, the New Mexico Public Regulation Commission, as well as various federal and state environmental agencies. These regulations include, but are not limited to, regulations regarding pipeline design, construction, operation, maintenance, integrity, testing, spill prevention and spill response plans. Many of these regulations are becoming increasingly stringent and the cost of compliance can be expected to increase over time.
Environmental and Other Matters
Environmental Regulation. Our operations are subject to extensive and periodically changing federal, state and local laws, regulations and ordinances relating to the protection of the environment. Among other things, these laws and regulations govern the emission or discharge of pollutants into or onto the land, air and water, the handling and disposal of solid and hazardous wastes, the remediation of contamination and protection of endangered and threatened species. Compliance with existing and anticipated environmental laws and regulations increases our overall cost of business, including our capital costs to develop, maintain, operate and upgrade equipment and facilities. However, these laws and regulations are subject to changes, or to changes in the interpretation of such laws and regulations, by regulatory authorities and continued and future compliance with such laws and regulations may require us to incur significant expenditures. Additionally, violation of environmental laws, regulations and permits can result in the imposition of significant administrative, civil and criminal penalties, injunctions limiting our operations, investigatory or remedial liabilities or construction bans or delays in the development of additional facilities or equipment. Additionally, a release of hydrocarbons or hazardous substances into the environment could, to the extent the event is not insured, subject us to substantial expenses, including costs to comply with applicable laws and regulations and to resolve claims by third parties for personal injury or property damage, or by the U.S. federal government or state governments for natural resources damages. These impacts could directly and indirectly affect our business and may have an adverse impact on our financial position, results of operations and liquidity. We cannot currently determine the amounts of such future impacts.
Environmental Liabilities. Western has been party to various litigation and contingent loss matters, including environmental matters, arising in the ordinary course of business. We cannot accurately predict the outcome of these matters. Our historical costs have not been material. We are not currently aware of any environmental or other asserted or unasserted claims against us or that involve our assets that would be expected to have a material effect on our financial condition, results of operations or cash flows. Western has agreed to indemnify us for certain environmental cleanup expenses.
Seasonality
The crude oil, refined product and asphalt throughput in our pipelines and terminals and crude oil and asphalt trucking volume are directly affected by the level of supply and demand for crude oil, refined products and asphalt in the markets served directly or indirectly by our assets. However, many effects of seasonality on our revenues will be substantially mitigated through our fee based commercial agreements with Western that include minimum monthly volume commitments.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
Refer to Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016, for quantitative and qualitative disclosures about market risk. There have been no material changes in our exposures to market risk since December 31, 2016.
Item 4.
Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of June 30, 2017. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2017.
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2017, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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Part II. Other Information
Item 1. Legal Proceedings
In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including environmental claims and employee related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceedings or proceedings to which we are a party will have a material adverse effect on our business, financial condition, results of operations or cash flows.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risks described below and disclosed in the section entitled "Risk Factors" in our 2016 Form 10-K under Part I, Item 1A. Risk Factors. These risks are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
There can be no assurance that the proposed acquisition of the Partnership by Andeavor Logistics will be agreed upon, approved and ultimately consummated, and the terms of any such transaction may differ materially from those originally proposed by Andeavor Logistics.
On July 20, 2017, Andeavor Logistics delivered a non-binding preliminary proposal to the Conflicts Committee (the “WNRL Conflicts Committee”) of the WNRL Board to acquire all of our outstanding common units in an all-stock transaction with an exchange ratio of 0.4906 Andeavor Logistics Common Units for each WNRL common unit. The proposed transaction will be structured as a merger of WNRL with a wholly owned subsidiary of Andeavor Logistics. In addition, Andeavor Logistics proposes to acquire WRGP through a merger of WRGP with another wholly owned subsidiary of Andeavor Logistics.
There can be no assurance that any discussions that may occur between Andeavor Logistics and WNRL will contain transaction terms consistent with those described above or result in the entry into a definitive agreement concerning a transaction or, if such a definitive agreement is reached, will result in the consummation of a transaction provided for in such definitive agreement. Discussions concerning a possible transaction may be terminated at any time and without prior notice. Entry into a definitive agreement concerning a potential transaction and the consummation of any such transaction is subject to a number of contingencies, which are beyond the control of Andeavor Logistics and WNRL, including the satisfactory completion of due diligence, the approval of the WNRL Board and the Andeavor Logistics Board, the approval of the conflicts committees established by the WNRL Board and the Andeavor Logistics Board, respectively, and the satisfaction of any conditions to the consummation of a transaction set forth in any such definitive agreement.
We also cannot predict the timing, final structure and other terms of any potential transaction, and the terms of any such transaction may differ materially from those originally proposed by Andeavor Logistics. Any decrease in the market prices of the Andeavor Logistics Common Units would result in a corresponding proportional decrease in the value of the Andeavor Logistics Common Units our unitholders would receive in the event the proposed transaction were consummated on the terms proposed by Andeavor Logistics. In addition, any changes in the market prices of Andeavor Logistics’ common units or our common units could affect whether the Andeavor Logistics Board, the conflicts committee of the Andeavor Logistics Board, the WNRL Board and the WNRL Conflicts Committee ultimately approve the proposed transaction, or if such approval is granted, the terms on which the proposed transaction is approved.
If the potential transaction with Andeavor Logistics does not occur, then our strategic options may be limited and, as a result, our business prospects may be negatively affected. If a transaction is not agreed upon, approved and consummated for any reason, we may be subject to a number of other risks, including the following:
the current market price of our common units may reflect a market assumption that a transaction will occur and a failure to agree upon, approve and consummate a transaction could result in negative publicity or a negative impression of us in the investment community, and cause a decline in the market price of our common units and adversely impact our relationships with employees, vendors, creditors and other business partners;
our unitholders may not realize the potential benefits from a transaction with Andeavor Logistics; and
we would continue to face the risks that we currently face as a publicly traded partnership.


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There may be substantial disruption to our business and distraction of our management and employees as a result of the proposed transaction with Andeavor Logistics, and the uncertainty associated with the proposed transaction may otherwise adversely impact our operations and relationships with key stakeholders.
There may be substantial disruption to our business and distraction of our management and employees from day-to-day operations because matters related to the proposed transaction with Andeavor Logistics may require substantial commitments of time and resources, which could otherwise have been devoted to other opportunities that could have been beneficial to us.
In addition, the uncertainty surrounding whether or when a transaction with Andeavor Logistics will occur and other aspects of such a transaction, may adversely affect our ability to enter into new customer agreements or extend or expand existing customer relationships if potential and existing customers choose to wait to learn whether the transaction will proceed before committing to new, extended or expanded customer relationships with us. Similarly, suppliers, vendors and other businesses or organizations that we may seek to contract with or expand existing relationships with us may choose to wait to enter into new agreements or arrangements or change existing agreements or arrangements with us. If such uncertainty continues for a protracted period, our ability to secure new, extended or expanded customer relationships may be adversely affected, or we may be compelled to pay higher fees or incur new or higher expenses to operate and maintain our business. We cannot predict whether or when any adverse effects on our business will result from these uncertainties, but such effects, if any, could materially and adversely affect our revenues and results of operations in future periods.
Furthermore, the uncertainty surrounding a potential transaction with Andeavor Logistics may adversely affect our ability to attract and retain qualified personnel. We operate in an industry that currently experiences a high level of competition among different companies for qualified and experienced personnel. The uncertainty relating to the possibility of a merger transaction may increase the risk that we could experience higher than normal rates of attrition or that we experience increased difficulty in attracting qualified personnel or incur higher expenses to do so. High levels of attrition among the management and employee personnel necessary to operate our business or difficulties or increased expense incurred to replace any personnel who leave, could materially adversely affect our business or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.

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ITEM 6. EXHIBITS.
Exhibit Index***
——————
* Filed herewith
** Furnished herewith
*** Reports filed under the Securities Exchange Act of 1934, as amended (Form 10-K, Form 10-Q and Form 8-K), are filed under File No. 001-36114.

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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.
WESTERN REFINING LOGISTICS, LP
BY: WESTERN REFINING LOGISTICS GP, LLC
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Steven M. Sterin
 
Executive Vice President and Chief Financial Officer
 
August 9, 2017
Steven M. Sterin
 
(Principal Financial Officer and Duly Authorized Signatory)
 
 


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