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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950134-01-002669.txt : 20010328
<SEC-HEADER>0000950134-01-002669.hdr.sgml : 20010328
ACCESSION NUMBER: 0000950134-01-002669
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010327
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TESORO PETROLEUM CORP /NEW/
CENTRAL INDEX KEY: 0000050104
STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911]
IRS NUMBER: 950862768
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-03473
FILM NUMBER: 1580780
BUSINESS ADDRESS:
STREET 1: 300 CONCORD PLAZA DRIVE
CITY: SAN ANTONIO
STATE: TX
ZIP: 78216-6999
BUSINESS PHONE: 2108288484
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d82749e10-k405.txt
<DESCRIPTION>FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000
<TEXT>
<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM . . . . TO . . . .
COMMISSION FILE NUMBER 1-3473
TESORO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-0862768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
300 CONCORD PLAZA DRIVE, SAN ANTONIO, TEXAS 78216-6999
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
210-828-8484
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Stock, $0.16 2/3 par value New York Stock Exchange
Pacific Stock Exchange
Premium Income Equity Securities New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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 [X] No [ ]
---------------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
---------------------
At February 28, 2001, the aggregate market value of the voting stock held
by nonaffiliates of the registrant was approximately $375,960,326 based upon the
closing price of its Common Stock on the New York Stock Exchange Composite tape.
At February 28, 2001, there were 30,905,044 shares of the registrant's Common
Stock outstanding.
---------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement pertaining to the 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof. The
Company intends to file such Proxy Statement no later than 120 days after the
end of the fiscal year covered by this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TESORO PETROLEUM CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 3
Refining and Marketing...................................... 3
Marine Services............................................. 9
Competition and Other....................................... 9
Government Regulation and Legislation....................... 10
Employees................................................... 12
Executive Officers of the Registrant........................ 13
Risk Factors and Investment Considerations.................. 15
Item 2. Properties.................................................. 17
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 18
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Strategy.................................................... 22
Profit Improvement Programs................................. 22
Business Environment........................................ 24
Results of Operations....................................... 25
Capital Resources and Liquidity............................. 32
Forward-Looking Statements.................................. 37
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 37
Item 8. Financial Statements and Supplementary Data................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 66
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 66
Item 11. Executive Compensation...................................... 66
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 66
Item 13. Certain Relationships and Related Transactions.............. 66
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 66
SIGNATURES............................................................. 73
</TABLE>
THIS ANNUAL REPORT ON FORM 10-K (INCLUDING DOCUMENTS INCORPORATED BY
REFERENCE HEREIN) CONTAINS STATEMENTS WITH RESPECT TO THE COMPANY'S EXPECTATIONS
OR BELIEFS AS TO FUTURE EVENTS. THESE TYPES OF STATEMENTS ARE "FORWARD-LOOKING"
AND SUBJECT TO UNCERTAINTIES. SEE "FORWARD-LOOKING STATEMENTS" ON PAGE 37.
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
Tesoro Petroleum Corporation and its subsidiaries ("Tesoro" or the
"Company") is an independent refiner and marketer of petroleum products and
provider of marine logistics services. Tesoro owns and operates three petroleum
refineries with a combined capacity of 275,000 barrels per day and sells refined
products to a wide variety of customers in the western United States and other
countries on the Pacific Rim. Tesoro markets products to wholesale and retail
customers, as well as commercial end-users. The Company also operates a network
of terminals along the Texas and Louisiana Gulf Coast that provides fuel and
logistical support services to the marine and offshore exploration and
production industries. The Company conducts its business through two operating
segments: (i) Refining and Marketing and (ii) Marine Services. For financial and
statistical information relating to the Company's operations, see Selected
Financial Data in Item 6, Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 7, and Note C of Notes to
Consolidated Financial Statements in Item 8.
Tesoro was incorporated in Delaware in 1968. Its principal executive
offices are located at 300 Concord Plaza Drive, San Antonio, Texas 78216-6999,
its telephone number is (210) 828-8484, and its website address is
www.tesoropetroleum.com.
REFINING AND MARKETING
OVERVIEW
The Company owns and operates petroleum refineries in Alaska, Hawaii and
Washington and sells refined products to a wide variety of customers in the
western United States, primarily in Alaska, Hawaii and the Pacific Northwest,
and other countries on the Pacific Rim. During 2000, products from the
refineries accounted for approximately 80% of these sales volumes, with the
remaining 20% purchased from other refiners and suppliers.
REFINERIES AND TERMINALS
The Company's three refineries have a combined rated crude oil throughput
capacity of 275,000 barrels per day ("bpd"), including 72,000 bpd at the Alaska
refinery, 95,000 bpd at the Hawaii refinery and 108,000 bpd at the Washington
refinery. Actual throughput of crude oil and other feedstocks are summarized
below (thousand bpd):
<TABLE>
<CAPTION>
THROUGHPUT
--------------------
REFINERY 2000 1999 1998
-------- ---- ---- ----
<S> <C> <C> <C>
Alaska...................................................... 49 49 58
Hawaii...................................................... 84 87 48
Washington.................................................. 117 98 43
--- --- ---
Total Throughput....................................... 250 234 149
=== === ===
</TABLE>
Throughput at the Alaska refinery has been below capacity levels,
reflecting supply and marketing economics. At the Washington refinery,
throughput was higher than rated crude oil capacity in 2000 due to operational
improvements together with processing other feedstocks in addition to crude oil.
Scheduled refinery maintenance turnarounds temporarily reduced throughput in
Hawaii in 2000 and Washington and Alaska in 1999. Volumes for 1998 include
throughput at the Hawaii refinery (acquired in May 1998) and the Washington
refinery (acquired in August 1998) since their dates of acquisition, averaged
over the full year.
3
<PAGE> 4
The Company's refineries primarily manufacture gasoline and gasoline
blendstocks, jet fuel, diesel fuel and residual fuel oil. Other products
manufactured include liquefied petroleum gas and liquid asphalt. Refined
products manufactured, in volume and as a percentage of total refinery
throughput, are summarized below:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
VOLUME % VOLUME % VOLUME %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Refined Products Manufactured (thousand bpd):
Gasoline and gasoline blendstocks.......... 95 38 93 40 51 34
Jet fuel................................... 58 23 58 25 41 27
Diesel fuel................................ 39 16 33 14 19 13
Heavy oils, residual products and other.... 65 26 60 25 43 29
--- --- --- --- --- ---
Total Refined Products Manufactured..... 257 103 244 104 154 103
=== === === === === ===
</TABLE>
The Alaska refinery is located near Kenai, Alaska, approximately 70 miles
southwest of Anchorage, where it has access to Alaskan and imported crude oil
supplies. The Alaska refinery is capable of producing liquefied petroleum gas,
gasoline and gasoline blendstocks, jet fuel, diesel fuel, heating oil, liquid
asphalt, heavy oils and residual products. The Alaska refinery began operations
in 1969 and has been expanded progressively, including the 1997 hydrocracker
unit expansion which increased the unit's capacity to produce more jet fuel. A
scheduled maintenance turnaround of all major process units at the Alaska
refinery was completed in May 1999, and the next turnaround is scheduled for the
second quarter of 2001.
The Hawaii refinery, located at Kapolei in an industrial park 22 miles west
of Honolulu, was acquired by the Company in May 1998. This acquisition added
volumes of liquified petroleum gas, gasoline and gasoline blendstocks, jet fuel,
diesel fuel and fuel oil to the Company's existing slate of refined products.
The Hawaii refinery began operations in 1972 and has been expanded progressively
in capacity and complexity. Major product upgrade units include the distillate
hydrocracker, vacuum distillation and catalytic reformer units. The Company
completed a planned maintenance turnaround in September 2000, and the next
turnaround is scheduled for 2003.
The Washington refinery, located in Anacortes on Puget Sound, about 60
miles north of Seattle, was acquired in August 1998. The Washington refinery
includes fluid catalytic cracking ("FCC"), alkylation, hydrotreating, vacuum
distillation and catalytic reformer units. The Washington refinery is the most
complex of the Company's refineries. The FCC and other product upgrade units
enable the Washington refinery to produce about 75% to 85% of its output as
gasoline, diesel and jet fuel, depending on the mix of crude oil and other
feedstock throughput. The acquisition of the Washington refinery shifted the
Company's total manufactured product mix by increasing gasoline yield and
decreasing lower-value heavy oil and residual products. The FCC unit can also
upgrade heavy vacuum gas oils from the Alaska and Hawaii refineries and other
suppliers. In December 1999, the Washington refinery completed the installation
of a distillate treater which increased production of low-sulfur diesel and jet
fuels. A scheduled maintenance turnaround of the crude distillation and
catalytic reformer units was completed in October 1999, and the next turnaround
is scheduled for the FCC and alkylation units in late 2001.
In 2000, the Company commenced a heavy oil conversion project, which
includes modernization of the FCC unit and installation of improved deasphalting
technology at the Washington refinery. This project will enable the Company to
increase the proportion of lower-cost heavy crude oil throughput, while
increasing the proportion of higher-value gasoline yield and decreasing
lower-value heavy product yield. The installation of the deasphalting technology
is expected to be completed in the third quarter of 2001 and the FCC
modernization is expected to be completed in conjunction with the FCC turnaround
in late 2001. The heavy oil conversion project has an estimated total cost of
approximately $100 million (including capitalized interest), of which $23
million was expended in 2000.
The Company operates refined product terminals at Kenai and Anchorage,
Alaska, at Port Angeles and Vancouver, Washington, at Stockton and Port Hueneme,
California, and in Hawaii on the islands of Maui, Hawaii and Kauai. In addition,
the Company distributes products through third-party terminals and truck racks
in its market areas. The Company-operated terminals are supplied primarily by
the Company's
4
<PAGE> 5
refineries. Fuel distributed through third-party facilities is also supplied by
the Company's refineries and through purchases and exchange arrangements with
other refining and marketing companies.
REFINERY FEEDSTOCK SUPPLY
Crude oil feedstocks for the Company's refineries are supplied from several
sources, including Alaska, Canada, Australia, Southeast Asia, the Middle East
and Russia. Throughput for the Company's refining system averaged 249,500 bpd in
2000, which consisted of 49% crude oil from foreign sources (including 16% from
Canada), 34% crude oil from Alaska's North Slope ("ANS"), 12% crude oil from
Alaska's Cook Inlet and 5% from other feedstocks. In 2000, approximately 42% of
throughput was heavy crude oil, compared with 35% in 1999. Purchases for the
refineries are made through term agreements and in the spot market. Alaska Cook
Inlet, Canadian and ANS crude oils are purchased from several suppliers under
term agreements with renewal provisions. Prices under the term agreements
fluctuate with market prices.
The Alaska refinery runs primarily Alaska Cook Inlet and, to a lesser
extent, ANS and other crude oils. Crude oil is delivered by tanker to the Alaska
refinery through the Kenai Pipe Line Company ("KPL") marine terminal, which is a
Company-owned common carrier and marine dock facility, and to KPL by pipeline
connected directly with some of the Cook Inlet producing fields.
The Hawaii refinery's crude oil supply is sourced primarily from Alaska,
Australia and Southeast Asia. Crude oil for the Hawaii refinery is received
through a Company-owned single-point mooring terminal and pipeline system which
also can be used for receiving and loading refined products.
The Washington refinery's crude oil is sourced primarily from Alaska,
Canada and Southeast Asia. Crude oil from Canada is received at the Washington
refinery through a third-party pipeline system. Other feedstock is delivered by
tanker at the Washington refinery's marine terminal at Anacortes. Intermediate
feedstocks, primarily heavy vacuum gas oil, are supplied from the Company's
other refineries and by spot market purchases from third-party refineries.
The Company continuously evaluates the economics of processing various
crude oils and other feedstocks, and makes adjustments in the volumes and mix of
feedstocks processed at each refinery. To optimize refinery operations, the
Company processed 38 types of crude oil during 2000, which were at least twice
the number of crude types run by these refineries in 1998. Occasionally, a
better economic opportunity displaces a previous crude oil purchase commitment
and results in the resale of crude oil. In 2000, crude oil resales also included
amounts related to agreements which provide for the Company to purchase ANS
crude oil from one of its suppliers and to sell an equal quantity of West Texas
Intermediate crude oil to that supplier.
MARKETING
The Company's sales of refined products in the Refining and Marketing
segment consisted of the following:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
VOLUME % VOLUME % VOLUME %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Product Sales (thousand bpd):
Gasoline and gasoline blendstocks.................... 135 42 123 41 59 35
Jet fuel............................................. 76 23 76 25 46 27
Diesel fuel.......................................... 54 17 47 15 24 15
Heavy oils, residual products and other.............. 58 18 57 19 39 23
--- --- --- --- --- ---
Total Product Sales............................... 323 100 303 100 168 100
=== === === === === ===
</TABLE>
Sources of the Company's product sales include products manufactured at its
refineries, products drawn from inventory balances and products purchased from
third parties.
Gasoline and Gasoline Components. The Company sells gasoline and gasoline
components in both the wholesale bulk and retail markets in the western United
States, primarily Alaska, Hawaii and the Pacific
5
<PAGE> 6
Northwest. During 2000, approximately 90% of these gasoline and gasoline
component sales were to wholesale customers and bulk end-users and 10% were
through the Company's retail network. The demand for gasoline is seasonal in
Alaska and the Pacific Northwest, with lowest demand during the winter months.
In wholesale marketing, the Company sells gasoline to two major oil
companies on the U.S. West Coast under term sales agreements, which approximated
37,500 bpd in 2000, or approximately 36% of the Company's West Coast gasoline
sales. The Company also supplies one of these major oil companies in Hawaii and
Alaska. Other sales of gasoline to wholesale customers and bulk end-users are
made under various supply agreements. Gasoline is also delivered to refiners and
marketers in exchange for product received at other locations in the western
United States. In addition, the Company sells, at wholesale, to unbranded
jobbers and dealers. Product is distributed through Company-owned and
third-party terminals and truck racks. Although the Company's marketing strategy
is to maximize in-state sales in Alaska and Hawaii, gasoline and gasoline
components produced in excess of market demand may be shipped to the U.S. West
Coast or exported to other markets, principally in the Asia/Pacific area.
The Company sells CARB (California Air Resources Board) quality blendstocks
in the wholesale bulk market, generally at higher values than conventional
gasoline. Light naphtha, which is produced by the Hawaii refinery, is sold to
Hawaii's gas utility company as feedstock for their manufacture of synthetic
natural gas distributed through the Honolulu gas utility pipeline system.
During 2000, the Company continued initiatives to expand its retail
marketing. The Company sells gasoline to retail customers through an arrangement
with Wal-Mart Stores, Inc. ("Wal-Mart"), through Company-owned and operated
sites, and agreements with third-party, branded jobber/dealers. Volumes sold
under these branded retail marketing programs averaged 13,000 bpd in 2000.
Capital spending for the Company's retail programs totaled $31 million in 2000,
including costs for sites under the agreement with Wal-Mart, costs of
Company-owned and operated facilities, and expansion of Tesoro's branded
jobber/dealer network. The Company has retail marketing offices in San Antonio,
Texas, in Auburn, Washington, in Honolulu, Hawaii, and in Anchorage, Alaska. In
addition, the Company has recently established sales offices in Denver, Colorado
and Phoenix, Arizona.
In 2000, the Company entered into an agreement with Wal-Mart, whereby
Wal-Mart offers sites at its existing and future stores at which the Company can
build and operate retail gasoline stations. The Company's relationship with
Wal-Mart encompasses 17 states. Under the agreement, each site is subject to a
lease with a ten-year primary term and an option, exercisable at the Company's
discretion, to extend a site's lease for two additional terms of five years
each. The "Mirastar" brand was developed by the Company, exclusively for the
Wal-Mart sites. As of February 28, 2001, the Company had 28 Mirastar stations in
operation with a goal of averaging approximately 200,000 gallons per station
after one year of operation. Monthly sales are currently averaging approximately
150,000 gallons per constructed Mirastar station. These stations are located in
Oregon, California, Washington, Idaho, Utah, Nevada, Arizona, New Mexico,
Colorado, Wyoming, South Dakota and Kansas. The Company expects to have 80 to 90
Mirastar stations in operation by the end of 2001 and expects to construct an
additional 80 to 90 stations in each of 2002 and 2003. The estimated average
cost to construct a standard Mirastar station with four fuel dispensers is
approximately $525,000, which includes a small kiosk that sells limited
merchandise.
The Company also sells gasoline to end-users through 63 Company-owned and
operated "Tesoro" and "Tesoro Alaska" branded stations, primarily in Alaska and
Hawaii. Several of these stations include convenience stores with the "2-Go
Tesoro" brand. The Company also sells gasoline to end-users through 118 "Tesoro"
and "Tesoro Alaska" branded jobber/dealer stations in Alaska and Hawaii and 75
branded jobber/dealer stations in other western states, including Washington,
Oregon, Idaho, Nevada and northern California. The typical arrangement with a
branded jobber/dealer generally involves a five-year supply agreement and
requires capital spending by the Company, such as signs and improvements,
ranging from $50,000 to $250,000. Average volumes per branded jobber/dealer site
are targeted at 150,000 gallons per month.
6
<PAGE> 7
The following table summarizes the branded retail stations owned and
operated by the Company and jobber/dealer-operated stations as of December 31,
2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Branded Retail Stations:
Tesoro --
Company-owned and operated*............................ 60 59 31
Jobber/dealer-operated................................. 69 51 2
Tesoro Alaska --
Company-owned and operated*............................ 3 3 30
Jobber/dealer-operated................................. 124 131 169
Mirastar --
Company-owned and operated*............................ 20 -- --
--- --- ---
Total Branded Retail Stations........................ 276 244 232
=== === ===
</TABLE>
- ---------------
* Company-owned stations include 29 in Alaska, 33 in Hawaii and 21 in other
western states.
Jet Fuel. The Company is a major supplier of commercial jet fuel to
passenger and cargo airlines in Alaska and Hawaii and on the U.S. West Coast.
Several marketers, including the Company, import jet fuel into Alaska, Hawaii
and the West Coast. In December 1999, the Washington refinery installed a
distillate treater which enabled the refinery to increase production of
low-sulfur diesel and jet fuels. The Company primarily markets jet fuel at
airports in Anchorage, Honolulu and other Hawaiian island locations, Seattle/
Tacoma, Portland, San Francisco, Los Angeles, San Diego, Las Vegas, Reno and
Phoenix.
Diesel Fuel. The Company's diesel fuel production is sold primarily on a
wholesale basis for marine, transportation and industrial purposes, as well as
for home heating in Alaska. Lesser amounts are sold to end-users through marine
terminals and retail gas stations and for power generation in Hawaii. Generally,
the production of diesel fuel by refiners in Alaska, Hawaii and the Pacific
Northwest is in balance with demand. There are occasions when diesel fuel is
imported into or exported from Alaska and Hawaii because of the variability of
demand. See "Government Regulation and Legislation -- Environmental Controls"
for a discussion of the effect of governmental regulations on the production of
low-sulfur diesel fuel.
Heavy Oils and Residual Products. All three of the Company's refineries
have vacuum units that use atmospheric crude tower bottoms as a feedstock and
further process these volumes into light vacuum gas oil ("LVGO"), medium vacuum
gas oil ("MVGO"), heavy vacuum gas oil ("HVGO") and vacuum tower bottoms
("VTBs"). LVGO and MVGO are further processed in the Alaska and Hawaii
hydrocrackers, where they are converted into jet fuel, gasoline blendstocks and
diesel fuel. HVGO is used primarily as an FCC feedstock at the Washington
refinery where HVGO is upgraded to gasoline and diesel fuel. The VTBs are used
to produce liquid asphalt, fuel oil and marine bunker fuel. The Company sells
heavy fuel oils to other refineries, electric power producers, and marine and
industrial end-users. The Company sells its liquid asphalt for paving materials
in Alaska, Hawaii and Washington. In Alaska and Washington, demand for liquid
asphalt is seasonal because mild weather conditions are needed for highway
construction.
The Company has marine fuel marketing operations and leased facilities at
Port Angeles and Seattle, Washington, and Portland, Oregon. Marine fuels sold
from these locations are supplied principally by the Company's Washington and
Alaska refineries.
Sales of Purchased Products. In the normal course of business, the Company
purchases refined products for resale to customers. The products, primarily
gasoline, jet fuel, diesel fuel and industrial and marine fuel blendstocks,
manufactured by others, are purchased primarily in the spot market. Sales of
these products represented approximately 20% of total volumes sold by the
Company in 2000 and 1999. The Company's gasoline and diesel fuel purchase and
resale activity is conducted primarily on the U.S. West Coast. The jet
7
<PAGE> 8
fuel activity primarily consists of imports into Alaska and Hawaii. The
Company's gross margin from these activities was $14 million in 2000, as
compared to $38 million in 1999.
TRANSPORTATION
The Company charters two double-hull Lightship Class tankers to transport
crude oil and refined products. The charter for the Cape Lookout Shoals has a
three-year primary term that began in May 2000 and two one-year renewal options.
In March 2001, the Company entered into a charter for a double-hull sister ship
to the Cape Lookout Shoals for a two-year initial term with an option to renew
for an additional year. The Company also charters other tankers and ocean-going
barges on a short-term basis to transport crude oil and petroleum products. For
further information on marine charters, see Management's Discussion and Analysis
of Financial Condition and Results of Operations in Item 7 and Note M of Notes
to Consolidated Financial Statements in Item 8.
The Company owns and operates a common-carrier petroleum products pipeline,
which runs from the Alaska refinery to its terminal facilities in Anchorage and
to the Anchorage airport. This ten-inch diameter pipeline has a capacity to
transport approximately 40,000 bpd of products and allows the Company to
transport light products to the terminal facilities throughout the year,
regardless of weather conditions. The Company also owns and operates a
common-carrier pipeline and marine terminal (KPL), adjacent to the Alaska
refinery, for unloading crude oil feedstocks and loading product inventory on
tankers and barges.
Crude oil is transported to Hawaii by tankers and discharged through the
Company's single-point mooring terminal ("SPM"), about 1.5 miles offshore from
the Hawaii refinery. Three underwater pipelines connect the SPM to the Hawaii
refinery to allow crude oil and products to be transferred to the Hawaii
refinery and to load products from the Hawaii refinery to ships and barges. The
Company distributes refined products to customers on the island of Oahu through
a pipeline system with connections to the military at several locations, to
commercial customers via third-party terminals at Honolulu International Airport
and Honolulu Harbor, and by barge to Company-owned and third-party terminal
facilities on the islands of Maui, Kauai and Hawaii. Company-owned product
pipelines connect the Hawaii refinery to Barbers Point Harbor, 2.5 miles away,
which is able to accommodate barges and product tankers up to 800 feet in length
and reduces traffic at the SPM.
The Washington refinery receives crude oil from Canada through the 24-inch,
third-party Transmountain Pipeline which originates in Edmonton, Canada. Other
crudes are received through the Washington refinery's marine terminal. The
pipeline and the marine terminal are each capable of providing 100% of the
Washington refinery's feedstock needs. During 2000, the Washington refinery
shipped approximately 76,000 bpd (37,500 bpd of which was allocated to the
Company and the balance of which was allocated to customers) of high-value
products (gasoline, jet fuel and diesel) via the third-party Olympic pipeline
system, which serves the Seattle area with 16-inch and 20-inch lines and
continues to Portland, Oregon with a 14-inch line. In June 1999, the section of
the Olympic pipeline system north of the Washington refinery was shut down,
preventing refiners north of the Washington refinery from shipping their
products through the Olympic pipeline. As a result, the Company was able to ship
a higher volume of high-value products through the Olympic pipeline than
historical averages. Beginning in February 2001, the Company's allocation for
shipments through the Olympic pipeline system was reduced to approximately
16,800 bpd, due to the restart of the section of the Olympic pipeline system
north of the Washington refinery. The reduced allocation will require the
Company to transport a higher proportion of high-value products by barge, which
should not materially increase transportation costs. Gasoline is also delivered
through a neighboring refinery's truck rack, and some diesel fuel is distributed
through a truck rack at the Company's refinery. Products are also shipped by
barge and ship. The Washington refinery can deliver significant volumes of
products through its marine terminal to ships and barges. All of the fuel oil
production is shipped by water. Propane and asphalt are shipped by both truck
and rail.
For further information on transportation, see "Government Regulation and
Legislation -- Environmental Controls."
8
<PAGE> 9
MARINE SERVICES
OVERVIEW
Marine Services markets and distributes a broad range of petroleum
products, chemicals and supplies and provides logistical support services to the
marine and offshore exploration and production industries operating in the Gulf
of Mexico. These operations are conducted through a network of 19 terminals
located on the Texas Gulf Coast in Freeport, Galveston, Harbor Island, Houston,
Port O'Connor and Sabine Pass, and along the Louisiana Gulf Coast in Amelia,
Berwick, Cameron, Intracoastal City, Port Fourchon and Venice. Marine Services
also owns tugboats, barges and trucks used in its operations.
FUELS AND LUBRICANTS
Marine Services markets and distributes fuels and lubricants to offshore
drilling rigs, offshore production platforms, and various ships and equipment
engaged in seismic surveys. Marine Services also provides petroleum products to
tugboats and barges using the Intracoastal Canal System and the Gulf of Mexico
fishing industry, as well as ships entering various ports in Texas and
Louisiana. Marine Services obtains its supply of fuel from local area refiners.
Total gallons of fuel, primarily diesel fuel, sold by this segment amounted to
170 million, 148 million and 181 million in 2000, 1999 and 1998, respectively.
The Company is a distributor of major brands of marine lubricants and
greases, offering a full spectrum of brands. Total annual sales of lubricants
amounted to approximately two million gallons in each of the years 2000, 1999
and 1998.
LOGISTICAL SERVICES
Through many of its Gulf Coast terminals, Marine Services provides
full-service shore-based support for offshore drilling rigs and production
platforms. These services include cranes, forklifts and loading docks for supply
boats serving the offshore exploration and production industry. In addition,
Marine Services provides warehousing, office space, living quarters, helicopter
landing pads, and long-term parking for offshore workers. Marine Services
terminals also serve as "one-stop shops" for a full range of offshore
exploration and production services. Products and services, such as drilling
muds, environmental services, and equipment repair and fabrication, are provided
through a variety of arrangements with "tenant partners." Revenues from services
were approximately $13 million in 2000 and $12 million in each of the years 1999
and 1998.
COMPETITION AND OTHER
The petroleum industry is highly competitive in all phases, including the
refining of crude oil, the marketing of refined petroleum products, and the
marine services business. The industry also competes with other industries that
supply the energy and fuel requirements of industrial, commercial and individual
consumers. The Company competes with a substantial number of major integrated
oil companies and other companies having greater financial and other resources
than the Company. These competitors have a greater ability to bear the economic
risks inherent in all phases of the industry. The recent consolidation
experienced in the refining and marketing industry has reduced the number of
competitors; however, it has not reduced overall competition. In addition,
unlike the Company, many of its competitors produce large volumes of crude oil
which can then be used in connection with their refining operations. Other
larger competitors, although they do not produce crude oil, may have a
competitive advantage as larger purchasers when negotiating with crude oil
producers.
The refining and marketing businesses are highly competitive, with prices
of feedstocks and products being the principal factors in competition. In the
refining industry, the Alaska refinery competes primarily with other refineries
in Alaska and on the U.S. West Coast. The Company's refining competition in
Alaska includes two refineries near Fairbanks and one refinery near Valdez. The
Company estimates that such other refineries have a combined capacity to process
approximately 270,000 bpd of crude oil. After processing the crude oil and
removing the higher-value products, these refiners are permitted, because of
their direct connection to the Trans Alaska Pipeline System ("TAPS"), to return
the remainder of the processed crude back into the
9
<PAGE> 10
pipeline system as "return oil" in consideration for a fee, thereby eliminating
their need to transport and market lower-value products that are not in demand
in Alaska. The Alaska refinery is not directly connected to the TAPS, and the
Company, therefore, cannot return its lower-value products to the TAPS. The
Hawaii refinery competes primarily with one other refinery in Hawaii, which is
also located at Kapolei and which has a rated capacity of 54,000 bpd of crude
oil. Historically, the other refinery produces lower volumes of jet fuel than
the Hawaii refinery. The Washington refinery competes with several refineries on
the U.S. West Coast, including refineries which have higher refining capacity
than the Washington refinery and which are owned by companies substantially
larger than the Company.
The Company is a major producer and distributor of gasoline in Alaska and
Hawaii through a network of Company-operated retail stations and branded and
unbranded dealers and jobbers. The Company supplies a major oil company through
a product exchange agreement, whereby gasoline in Alaska is provided in exchange
for gasoline delivered to the Company on the U.S. West Coast. In 2000,
approximately 36% of the Company's West Coast gasoline sales were to two major
oil companies through term sales agreements at market prices. The Company also
supplies one of these major oil companies in Alaska and Hawaii through a
gasoline sales agreement.
Competitive factors affecting the retail marketing of gasoline in the
western United States include such factors as product price and quality,
together with station appearance, location and brand-name identification. The
Company competes with other petroleum companies, distributors and other
developers for new locations. The Company competes against independent marketing
companies and integrated oil companies when engaging in these marketing
operations.
The Company's jet fuel sales in Alaska are concentrated in Anchorage, where
it is one of the principal suppliers to the Anchorage International Airport, a
major hub for air cargo traffic between manufacturing regions in the Far East
and markets in the United States and Europe. In Hawaii, jet fuel sales are
concentrated in Honolulu, where the Company is the principal supplier to the
Honolulu International Airport. The Company also serves four airports on other
islands in Hawaii. In Washington, jet fuel sales are concentrated at the
Seattle/Tacoma International Airport. The Company also supplies jet fuel
customers in Portland, Oregon, in Los Angeles, San Francisco and San Diego,
California, in Las Vegas and Reno, Nevada, and in Phoenix, Arizona. Other
refiners and marketers compete for sales at all of these airports.
The Company's Refining and Marketing segment sells its diesel fuel
primarily on a wholesale basis, competing with other refiners and marketers in
all of its market areas. Refined products from foreign sources also compete for
distillate markets in the Company's market areas.
Demand for services and products offered by Marine Services is
significantly affected by the level of oil and gas exploration, development and
production in the Gulf of Mexico. Various factors, including general economic
conditions, demand for and prices of oil and natural gas, availability of
equipment and materials, and government regulations and energy policies cause
exploration and development activity to fluctuate and directly impact the
revenues of Marine Services. Management believes that the principal competitive
factors affecting the Marine Services operations are location of facilities,
availability of logistical support services, experience of personnel and
dependability of service. The market for Marine Services' products and services,
particularly diesel fuel, is highly competitive and price sensitive.
GOVERNMENT REGULATION AND LEGISLATION
ENVIRONMENTAL CONTROLS
Federal, state, area and local laws, regulations and ordinances relating to
the protection of the environment affect all operations of the Company to some
degree. While the Company believes that its facilities generally are in
substantial compliance with current regulatory standards, over the next several
years the Company's facilities will comply with the new requirements being
adopted and promulgated by the U.S. Environmental Protection Agency ("EPA") and
the states in which the Company operates. An example of a federal environmental
law that will require operational additions and modifications is the Clean Air
Act, which was amended in 1990. As part of these requirements, the Company's
refineries will comply with the second
10
<PAGE> 11
phase of Maximum Achievable Control Technologies designated for petroleum
refineries ("Refinery MACT II"). These provisions, which were signed on January
18, 2001, will require additional air emission control technologies for certain
processing units, predominantly at the Company's Washington refinery.
The Company will be affected by changes in fuel manufacturing standards,
such as those related to diesel fuel sulfur concentrations. On December 21,
2000, the EPA announced additional standards for allowable sulfur concentrations
in highway diesel fuels. The "ultra low sulfur diesel" standards will, in
general, become effective on June 1, 2006. In these new regulations, the EPA
allowed the State of Alaska until April 1, 2002 to submit an alternate
compliance plan for meeting these ultra low sulfur diesel fuel regulations. The
Company is unable to predict the outcome of the State of Alaska's alternate
compliance plan, and how this plan will incorporate exemptions previously
granted to the State of Alaska by the EPA for implementing low sulfur diesel
specifications. While these matters are unresolved, the Company estimates that
demand for ultra low sulfur diesel in Alaska will not be significant and should
not have a material impact on its operations. With regards to the other Company
refineries, the Hawaii refinery can currently produce diesel fuels that comply
with the new ultra low sulfur standards. For the Washington refinery, the
Company is currently evaluating how the ultra low sulfur diesel fuel standards
will affect production and/or necessitate equipment changes or modifications.
Specifics as to achieving these sulfur concentrations in highway diesel fuels
produced at the Washington refinery, including capital costs, are being
determined.
The Company will also be affected by recent changes in allowable sulfur
concentrations in gasoline fuels manufactured at its refineries. On December 21,
1999, the EPA promulgated new regulations that limit the amount of sulfur in
gasoline. These limits will be phased in between 2004 and 2008, with the
Company's refineries required to produce the low sulfur ("Tier II") gasoline, in
aggregate, by January 1, 2004. While the Company's Hawaii and Alaska refineries
currently manufacture Tier II compliant gasoline, the Company expects to make
modifications on certain equipment at the Washington refinery in order to
produce a Company-wide aggregate gasoline pool with sulfur concentrations at or
below Tier II requirements. Management believes that the Company's Alaska
refinery is the only refinery in Alaska currently capable of producing Tier II
gasoline.
OIL SPILL PREVENTION AND RESPONSE
The Federal Oil Pollution Act of 1990 ("OPA 90") and related state
regulations include requirements that most oil refining, transport and storage
companies maintain and update various oil spill prevention and oil spill
contingency plans. The Company has submitted these plans and received federal
and state approvals necessary to comply with OPA 90 and related regulations. The
Company's oil spill prevention plans and procedures are frequently reviewed and
modified to prevent oil releases and to minimize potential impacts should a
release occur.
The Company currently charters, on a long-term and short-term basis,
tankers and barges for shipment of crude oil from foreign and domestic sources
to its Alaska, Hawaii and Washington refineries. OPA 90 requires, as a condition
of operation, that the Company demonstrate the capability to respond to the
"worst case discharge" to the maximum extent practicable. As an example, the
State of Alaska requires the Company to provide spill-response capability to
contain or control and cleanup an amount equal to 50,000 barrels for a tanker
carrying fewer than 500,000 barrels of crude oil or 300,000 barrels for a tanker
carrying more than 500,000 barrels. To meet such requirements, the Company has
entered into contracts with various parties to provide spill response services.
The Company has entered into spill-response agreements with (i) Cook Inlet Spill
Prevention and Response, Incorporated and Alyeska Pipeline Service Company for
spill-response services in Alaska; (ii) Clean Islands Council for response
services throughout the State of Hawaii; and (iii) Clean Sound Incorporated for
response actions associated with the Puget Sound, Washington operations. In
addition, for larger spill contingency capabilities, the Company has entered
into contracts with Marine Spill Response Corporation in Hawaii and in the Gulf
Coast region. The Company believes these contracts, and those with other
regional spill-response organizations that are in place on a location by
location basis, provide the additional services necessary to meet spill-response
requirements established by state and federal law.
11
<PAGE> 12
Regulations promulgated by the Alaska Department of Environmental
Conservation ("ADEC") require the installation of liners in secondary
containment systems for petroleum storage tanks. In 1996, the ADEC approved the
Company's alternative compliance schedule which allows the Company until the
year 2002 to line secondary containment systems for all of the Company's
existing petroleum storage tank facilities in Alaska. The total remaining
estimated cost of these improvements is approximately $3 million.
ENVIRONMENTAL EXPENDITURES
As described above, the Company is currently evaluating certain newly
promulgated revisions to the Clean Air Act regulations, which will require a
reduction in the sulfur content in gasoline by January 1, 2004. To meet the
revised gasoline standard previously discussed in "Environmental Controls," the
Company expects, based upon most recent cost estimates, to make capital
improvements of approximately $40 million to $50 million at its Washington
refinery. Additionally, the Company expects to spend approximately $15 million
in capital improvements over the next four years, primarily for the Washington
refinery, to comply with the second phase of Refinery MACT II referred to in
"Environmental Controls." Management expects that the Refinery MACT II
regulations will require new emission controls at certain processing units at
each of the Company's refineries.
Also, as described above, on December 21, 2000, the EPA announced new
standards that will require a reduction in sulfur content in diesel fuel
manufactured for on-road consumption. In general, the new diesel fuel standards
will become effective on June 1, 2006. As discussed above, although the Company
is evaluating the new diesel fuel standards with respect to its Alaska
operations, the Company estimates that the demand for ultra low sulfur diesel in
Alaska will not be significant and should not have a material impact on its
operations. The Hawaii refinery is currently capable of producing diesel fuels
that comply with the new standards. For the Washington refinery, the Company is
currently evaluating the impact of the new diesel fuel standards on production,
equipment requirements and related costs.
To comply with environmental laws and regulations, the Company anticipates
it will make other capital improvements of approximately $8 million in 2001 and
$16 million in 2002, primarily for upgrading storage tanks and secondary
containment systems as well as preliminary construction activities associated
with Tier II gasoline production equipment. During 2000, the Company spent
approximately $10 million on environmental capital projects, primarily for
improvements to crude oil and product tanks and tank farm secondary containment.
Conditions that require additional expenditures may exist for various
Company sites, including, but not limited to, the Company's refineries, tank
farms, retail gasoline stations (operating and closed locations) and petroleum
product terminals, and for compliance with the Clean Air Act and other state and
federal regulations. The amount of such future expenditures cannot currently be
determined by the Company. For further information on environmental matters and
contingencies, see Legal Proceedings in Item 3 and Note M of Notes to
Consolidated Financial Statements in Item 8.
EMPLOYEES
At December 31, 2000, the Company employed approximately 2,100 persons.
Approximately 200 employees at the Washington refinery are covered by a
collective bargaining agreement. The Company considers its relations with its
employees to be satisfactory.
12
<PAGE> 13
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the Company's executive officers, their ages and
their positions with the Company at February 28, 2001.
<TABLE>
<CAPTION>
NAME AGE POSITION POSITION HELD SINCE
---- --- -------- -------------------
<S> <C> <C> <C>
Bruce A. Smith....................... 57 Chairman of the Board of Directors, June 1996
President and Chief Executive
Officer
William T. Van Kleef................. 49 Executive Vice President and Chief July 1998
Operating Officer
James C. Reed, Jr.................... 56 Executive Vice President, General September 1995
Counsel and Secretary
Thomas E. Reardon.................... 54 Executive Vice President, Corporate November 1999
Resources
W. Eugene Burden..................... 52 President, Tesoro Alaska Company February 2001
Faye W. Kurren....................... 50 President, Tesoro Hawaii Corporation May 1998
Donald A. Nyberg..................... 49 President, Tesoro Marine Services, November 1996
Inc.
Joseph E. Sparano.................... 53 President, Tesoro West Coast Company March 2000
Stephen L. Wormington................ 56 Executive Vice President and Chief May 1998
Operating Officer, Tesoro Refining,
Marketing & Supply Company
Don M. Heep.......................... 51 Senior Vice President, Controller June 2000
Gregory A. Wright.................... 51 Senior Vice President, Financial November 1999
Resources
Sharon L. Layman..................... 47 Vice President and Treasurer November 1999
Richard M. Parry..................... 47 Vice President, Retail, Tesoro West June 1999
Coast Company
</TABLE>
There are no family relationships among the officers listed, and there are
no arrangements or understandings pursuant to which any of them were elected as
officers. Officers are elected annually by the Board of Directors at its first
meeting following the Annual Meeting of Stockholders, each to hold office until
the corresponding meeting of the Board in the next year or until a successor
shall have been elected or shall have qualified.
The Company's executive officers have been employed by the Company or its
subsidiaries in an executive capacity for at least the past five years, except
for those named below who have had the business experience indicated during that
period. Positions, unless otherwise specified, are with the Company.
<TABLE>
<S> <C>
W. Eugene Burden............................. President of Tesoro Alaska Company, a
subsidiary of the Company, since February
2001. Senior Vice President, Governmental
Relations of Tesoro Petroleum Companies,
Inc., a subsidiary of the Company, from
September 1999 to February 2001. President of
Burden & Associates, Inc. from February 1996
to September 1999. Commissioner,
Environmental Conservation for the State of
Alaska from December 1994 to February 1996.
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C>
Faye W. Kurren............................... President of Tesoro Hawaii Corporation, a
subsidiary of the Company, since May 1998.
Vice President, Operations Planning, Supply
and International Marketing of BHP Hawaii
Inc. from March 1996 to May 1998. Vice
President, General Counsel of BHP Hawaii Inc.
from February 1995 to March 1996.
Donald A. Nyberg............................. President of Tesoro Marine Services, Inc., a
subsidiary of the Company, since November
1996. Vice President, Strategic Planning, of
MAPCO Inc. from January 1996 to November
1996. President and Chief Executive Officer
of Marya Resources from August 1994 to
January 1996.
Joseph E. Sparano............................ President of Tesoro West Coast Company, a
subsidiary of the Company, since March 2000.
President of Sparano Consulting from August
1995 to March 2000. Chairman and Chief
Executive Officer of Pacific Refining Company
from September 1990 to August 1995.
Don M. Heep.................................. Senior Vice President, Controller since June
2000. Vice President, Controller from May
1998 to June 2000. Senior Vice President,
Administration for Tesoro Alaska Petroleum
Company, a subsidiary of the Company, from
November 1996 to May 1998. Senior Vice
President and Chief Financial Officer of
Valero Energy Corporation from 1994 to 1996.
Sharon L. Layman............................. Vice President and Treasurer since November
1999. Assistant Treasurer from February 1990
to November 1999.
Richard M. Parry............................. Vice President, Retail of Tesoro West Coast
Company, a subsidiary of the Company, since
June 1999. Vice President, Marketing & Sales
of Tesoro Hawaii Corporation, a subsidiary of
the Company, from May 1998 to June 1999. Vice
President, Marketing & Sales of BHP Hawaii
Inc. from December 1997 to May 1998. Vice
President, Trading and Marketing, of BHP
Hawaii Inc. from December 1994 to December
1997.
</TABLE>
14
<PAGE> 15
RISK FACTORS AND INVESTMENT CONSIDERATIONS
VOLATILITY OF PRICES; EFFECT ON EARNINGS AND CASH FLOWS
The Company's refining and marketing earnings and cash flows from
operations are dependent upon the margin above fixed and variable expenses
(including the cost of refinery feedstocks) at which the Company is able to sell
refined products. In recent years, the prices of crude oil and refined products
have fluctuated substantially. These prices depend on numerous factors beyond
the Company's control, including the demand for crude oil, gasoline and other
refined products, which in turn depend on, among other factors, changes in the
economy, the level of foreign and domestic production of crude oil and refined
products, worldwide political conditions, the availability of imports of crude
oil and refined products, the marketing of alternative and competing fuels and
the extent of government regulations. The prices received by the Company for its
refined products are also affected by local factors such as local market
conditions and the level of operations of other refineries in the Company's
markets.
The prices at which the Company can sell its refined products are
influenced by the commodity price of crude oil. Generally, an increase or
decrease in the price of crude oil results in a corresponding increase or
decrease in the price of gasoline and other refined products; however, the
timing of the relative movement of the prices, as well as the overall change in
product prices, can reduce profit margins and could have a significant impact on
the Company's refining and marketing operations and the earnings and cash flows
of the Company as a whole. In addition, the Company maintains inventories of
crude oil, intermediate products and refined products, the values of which are
subject to rapid fluctuation in market prices. In addition, crude oil supply
contracts are generally term contracts with market-responsive pricing
provisions. The Company purchases its refinery feedstocks prior to selling the
refined products manufactured. Price level changes during the period between
purchasing feedstocks and selling the manufactured refined products from such
feedstocks could have a significant effect on the Company's financial results.
The Company also purchases refined products manufactured by others for sale to
its customers. Price level changes during the periods between purchasing and
selling such products could have a material effect on financial results.
The costs and availability of fuel and utility services used by the
Company's refineries and other operations have impacted and will continue to
impact production and delivery of products, as well as increasing operating
costs over historical levels. Prices have been and will continue to be affected
by supply and demand for fuel and utility services in both local and regional
markets.
See Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
herein for information related to commodity price and interest rate risks.
REFINERY FEEDSTOCK SUPPLY
The Company believes an adequate supply of feedstocks, primarily crude oil,
will be available to its three refineries to sustain the Company's refining
operations for the foreseeable future at substantially the levels currently
being experienced. However, there can be no assurance that this situation will
continue. If additional crude oil becomes necessary at one or more of its
refineries, the Company intends to implement available alternatives that are
most advantageous under then prevailing conditions. Implementation of some
alternatives could require the consent or cooperation of third parties and other
considerations beyond the control of the Company. If the Company is unable to
obtain such supplemental crude oil volumes, or is only able to obtain such
volumes at uneconomic prices, the Company's results from operations could be
adversely affected.
TRANSPORTATION
The Company's Washington refinery receives all of its Canadian crude oil
through pipelines operated by third parties. During 2000, it also delivered
approximately 76,000 bpd of high-value refined products through third-party
pipelines. The Alaska and Hawaii refineries receive most of their crude oil and
transport a substantial portion of refined products through ships and barges. In
addition to environmental risks, discussed below, the Company could experience
an interruption of supply or an increased cost to deliver refined products to
market in the event of any upset in the ability of the pipelines or vessels to
transport crude or refined
15
<PAGE> 16
product, whether because of accident, governmental regulation or third-party
action. Should such an upset in the ability of a pipeline or vessels to
transport crude oil or product persist for an extended time, it could have a
significant adverse effect on the Company.
ENVIRONMENTAL
The Company's operations are inherently subject to accidental spills,
discharges or other releases of petroleum or hazardous substances which may give
rise to liability to governmental entities or private parties under Federal,
state or local environmental laws, as well as under common law. Although the
Company has invested substantial resources to prevent future accidental
discharges and to remediate contamination resulting from prior discharges, there
can be no assurance that accidental discharges will not occur in the future,
that future action will not be taken in connection with past discharges, that
governmental agencies will not assess penalties against the Company in
connection with any past or future contamination, or that third parties will not
assert claims against the Company for damages allegedly arising out of any past
or future contamination. See Item 3, Legal Proceedings, contained herein.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's operations are subject to hazards and risks inherent in
refining operations and in transporting and storing crude oil and refined
products, such as fires, natural disasters, explosions, pipeline ruptures and
spills, mechanical failure of equipment at Company or third-party facilities,
any of which can result in environmental pollution, personal injury claims and
other damage to properties of the Company and others. As protection against
operating hazards, the Company maintains insurance coverage against some, but
not all, potential losses. The Company's coverages include, but are not limited
to, physical damage on certain assets, employer's liability, comprehensive
general liability, automobile, workers' compensation and business interruption
insurance. The Company believes that its insurance is adequate and customary for
companies of a similar size engaged in operations similar to those of the
Company, but losses could occur for uninsurable or uninsured risks or in amounts
in excess of existing insurance coverage. The occurrence of an event that is not
fully covered by insurance could have an adverse impact on the Company's
financial condition and results of operations.
CONCENTRATION OF OPERATIONS
The Company's refining operations are conducted at its three refineries in
Alaska, Hawaii and Washington. The refineries are three of the Company's
principal operating assets. As a result, the operations of the Company and its
ability to service debt and other obligations are subject to significant
interruption if one or more of the refineries were to experience a major
accident, be damaged by severe weather or other natural disaster, or otherwise
be forced to shut down. Although the Company maintains business interruption
insurance against some types of risks in amounts which the Company believes to
be economically prudent, if the refineries were to experience an unplanned
interruption in operations, the Company's business could be materially adversely
affected. See "Refining and Marketing" discussed above.
OTHER
For information on competitive factors affecting the Company's business,
see "Competition and Other" discussed above. A discussion of environmental
factors and controls are included in "Government Regulation and Legislation"
discussed above.
16
<PAGE> 17
ITEM 2. PROPERTIES
See information appearing under Item 1, Business, herein and Notes C, D,
and M of Notes to Consolidated Financial Statements in Item 8.
ITEM 3. LEGAL PROCEEDINGS
Environmental. The Company is currently involved with the U.S.
Environmental Protection Agency ("EPA") regarding a waste disposal site near
Abbeville, Louisiana, at which the Company has been named a potentially
responsible party under the Federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund"). Although the Superfund
law may impose joint and several liability upon each party at the site, the
extent of the Company's allocated financial contributions for cleanup is
expected to be de minimis based upon the number of companies, volumes of waste
involved and total estimated costs to close the site. The Company believes,
based on these considerations and discussions with the EPA, that its liability
at the Abbeville site will not exceed $25,000.
As previously reported, on March 3, 2000, the Alaska Department of
Environmental Conservation ("ADEC") issued a Notice of Violation ("NOV") to
Tesoro Alaska Company ("Tesoro Alaska"), a subsidiary of the Company, related to
alleged non-compliance at one of its two Anchorage terminals. The allegations
concern the operation of the vapor collection and recovery system at the
facility. On November 15, 2000, Tesoro Alaska entered into a Settlement
Agreement and Order ("Agreement") with the ADEC. The Agreement required Tesoro
Alaska to pay a cash penalty of $123,000 and incur other additional
environmental expenditures of up to $270,000. The Company believes that the
Agreement resolves this matter in its entirety.
On January 19, 2001, Tesoro Alaska received an NOV from the ADEC which
alleges that Tesoro Alaska failed to perform proper tank inspections and repairs
and to comply with its oil spill contingency plan for one of its Anchorage
terminals. The alleged violations were discovered while Tesoro Alaska was
renewing the oil spill contingency plan for the facility. The facility was
acquired by Tesoro Alaska in August 1999. On January 26, 2001, Tesoro Alaska
signed a letter of intent with the ADEC and received a short-term extension of
the oil spill contingency plan which expires on May 26, 2001. In the letter of
intent Tesoro Alaska agreed to provide the ADEC with certain technical and
engineering information supporting a proposed tank inspection schedule and an
interim plan for preventing oil spills at the facility. Tesoro Alaska also
agreed to enter into a Compliance Order By Consent with the ADEC prior to the
ADEC's final approval of the facility oil spill contingency plan. The Company
believes that the resolution of this matter will not have a material adverse
effect on the Company.
Other. As previously reported, on May 31, 2000, the Company and certain of
its officers were named defendants in a lawsuit filed in the United States
District Court, Western District of Texas, San Antonio Division, brought by
Group One Limited which seeks to certify as a class, all persons or entities who
purchased the Company's securities during the period from January 3, 2000
through May 3, 2000. Three other identical lawsuits have also been filed in the
same court. The lawsuits, which have been consolidated, allege that the
defendants issued false and misleading information regarding the Company's
financial condition and operations, which artificially inflated the market price
of the Company's securities during the period from January 3, 2000 through May
3, 2000. The plaintiffs seek unspecified damages. The Company believes the
claims are without merit and intends to vigorously defend against such claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed under the symbol "TSO" on the New York
Stock Exchange and the Pacific Stock Exchange. The per share market price ranges
for the Company's Common Stock on the New York Stock Exchange during 2000 and
1999 are summarized below:
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
QUARTERS ENDED HIGH LOW HIGH LOW
-------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31............................................... $13 $ 9 $12 5/8 $ 7 7/16
June 30................................................ $12 1/2 $ 9 3/16 $15 15/16 $10 1/16
September 30........................................... $10 13/16 $ 8 15/16 $18 13/16 $14 7/8
December 31............................................ $11 7/8 $ 9 5/16 $16 3/8 $ 9 3/4
</TABLE>
At February 28, 2001, there were approximately 2,800 holders of record of
the Company's 30,905,044 outstanding shares of Common Stock. The Company has not
paid dividends on its Common Stock since 1986.
For information regarding a stock repurchase program and restrictions on
future dividend payments, see Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 and Note F of Notes to
Consolidated Financial Statements in Item 8. The Board of Directors has no
present plans to pay dividends on Common Stock. However, from time to time, the
Board of Directors reevaluates the feasibility of declaring future dividends on
Common Stock.
As discussed in Note F of Notes to Consolidated Financial Statements in
Item 8, the 10,350,000 Premium Income Equity Securities ("PIES") outstanding
will automatically convert into shares of Common Stock on July 1, 2001, at a
conversion rate based upon a formula dependent upon the average closing price
per share of Common Stock for the 20 trading days prior to July 1, 2001. The
maximum conversion rate on July 1, 2001 would require each PIES to convert into
one share of Common Stock. Before July 1, 2001, each PIES is convertible, at the
option of the holder thereof, into 0.8455 shares of Common Stock, subject to
adjustment in certain events.
The 2001 Annual Meeting of Stockholders will be held at 10:00 A.M. Mountain
time on Wednesday, May 23, 2001, at the Hyatt Regency Denver, 1750 Welton
Street, Denver, Colorado. Holders of Common Stock of record at the close of
business on March 29, 2001, are entitled to notice of and to vote at the annual
meeting.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial and operating data of Tesoro as of the end of and for each of the six
years in the period ended December 31, 2000. The following table should be read
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 and the Company's Consolidated Financial
Statements, including the Notes thereto, in Item 8. Financial results of
acquired operations have been included in the amounts below since their
respective acquisition dates (see Note D of Notes to Consolidated Financial
Statements in Item 8). Certain amounts previously reported have been
reclassified to reflect the transfer of the West Coast marine fuel operations
from the Marine Services segment to the Refining and Marketing segment.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
2000 1999 1998 1997 1996 1995
-------- -------- -------- ------- ------- -------
(DOLLARS IN MILLIONS EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Refining and Marketing:
Refined products......................... $4,536.0 $2,808.6 $1,198.2 $ 643.7 $ 620.8 $ 664.5
Other, primarily crude oil resales and
merchandise............................ 381.6 80.5 69.8 77.2 124.6 106.5
Marine Services............................ 186.8 111.2 118.6 132.2 122.5 74.5
-------- -------- -------- ------- ------- -------
Total Revenues......................... $5,104.4 $3,000.3 $1,386.6 $ 853.1 $ 867.9 $ 845.5
======== ======== ======== ======= ======= =======
SUMMARY OF OPERATIONS
Segment Operating Profit (Loss)(a):
Refining and Marketing................... $ 189.1 $ 125.1 $ 69.7 $ 20.5 $ 6.0 $ 0.7
Marine Services.......................... 10.4 5.9 8.6 6.3 6.1 (4.4)
-------- -------- -------- ------- ------- -------
Total Segment Operating Profit
(Loss).............................. 199.5 131.0 78.3 26.8 12.1 (3.7)
General and Administrative Expenses........ (40.3) (34.1) (19.7) (13.6) (12.7) (16.4)
Interest and Financing Costs............... (32.7) (37.6) (25.2) (8.1) (13.8) (16.3)
Other Expenses, Net(a)..................... (3.0) (8.1) (21.3) (1.7) (5.9) (4.3)
-------- -------- -------- ------- ------- -------
Earnings (Loss) From Continuing Operations
Before Income Taxes and Extraordinary
Loss..................................... 123.5 51.2 12.1 3.4 (20.3) (40.7)
Income Tax Provision (Benefit)............. 50.2 19.0 4.5 1.0 (5.9) (0.9)
-------- -------- -------- ------- ------- -------
Earnings (Loss) From Continuing Operations,
Net of Income Taxes...................... 73.3 32.2 7.6 2.4 (14.4) (39.8)
Earnings (Loss) from Discontinued
Operations, Net of Income Taxes(b)....... -- 42.8 (22.6) 28.3 91.2 97.3
Extraordinary Loss, Net of Income
Taxes(c)................................. -- -- (4.4) -- (2.3) (2.9)
-------- -------- -------- ------- ------- -------
Net Earnings (Loss)........................ 73.3 75.0 (19.4) 30.7 74.5 54.6
Preferred Dividend Requirements............ 12.0 12.0 6.0 -- -- --
-------- -------- -------- ------- ------- -------
Net Earnings (Loss) Applicable to Common
Stock.................................... $ 61.3 $ 63.0 $ (25.4) $ 30.7 $ 74.5 $ 54.6
======== ======== ======== ======= ======= =======
EARNINGS (LOSS) PER SHARE
Continuing Operations:
Basic.................................... $ 1.96 $ 0.62 $ 0.05 $ 0.09 $ (0.55) $ (1.62)
Diluted.................................. $ 1.75 $ 0.62 $ 0.05 $ 0.09 $ (0.55) $ (1.62)
Net Earnings:
Basic.................................... $ 1.96 $ 1.94 $ (0.86) $ 1.16 $ 2.87 $ 2.22
Diluted.................................. $ 1.75 $ 1.92 $ (0.86) $ 1.14 $ 2.81 $ 2.18
Weighted Average Common Shares -- Basic
(millions)............................... 31.2 32.4 29.4 26.4 26.0 24.6
Weighted Average Common Shares and
Potentially Dilutive Common Shares --
Diluted (millions)(d).................... 41.8 32.8 29.9 26.9 26.5 25.1
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
2000 1999 1998 1997 1996 1995
-------- -------- -------- ------- ------- -------
(DOLLARS IN MILLIONS EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN)
Operating Activities....................... $ 90.4 $ 112.7 $ 121.8 $ 91.0 $ 177.7 $ 35.0
Investing Activities....................... (88.0) 166.3 (718.6) (151.5) (94.2) 2.4
Financing Activities....................... (130.1) (149.2) 606.6 41.5 (75.9) (37.8)
-------- -------- -------- ------- ------- -------
Increase (Decrease) in Cash and Cash
Equivalents............................ $ (127.7) $ 129.8 $ 9.8 $ (19.0) $ 7.6 $ (0.4)
======== ======== ======== ======= ======= =======
CAPITAL EXPENDITURES(e)
Refining and Marketing..................... $ 87.5 $ 72.4 $ 38.0 $ 43.9 $ 11.1 $ 9.3
Marine Services............................ 3.2 1.5 4.2 9.4 6.9 0.4
Corporate.................................. 3.3 10.8 7.8 1.3 0.4 0.8
-------- -------- -------- ------- ------- -------
Total from Continuing Operations......... 94.0 84.7 50.0 54.6 18.4 10.5
Discontinued Operations.................... -- 56.5 135.1 92.9 66.6 53.4
-------- -------- -------- ------- ------- -------
Total Capital Expenditures............... $ 94.0 $ 141.2 $ 185.1 $ 147.5 $ 85.0 $ 63.9
======== ======== ======== ======= ======= =======
BALANCE SHEET DATA
Current Assets............................. $ 630.2 $ 611.6 $ 370.2 $ 153.2 $ 196.1 $ 161.7
Property, Plant and Equipment, Net......... $ 781.4 $ 731.6 $ 691.4 $ 236.0 $ 197.0 $ 182.1
Net Assets of Discontinued Operations...... $ -- $ -- $ 212.7 $ 191.6 $ 138.5 $ 143.4
Total Assets............................... $1,543.6 $1,486.5 $1,406.4 $ 610.4 $ 558.8 $ 508.1
Current Liabilities........................ $ 382.4 $ 321.6 $ 187.8 $ 91.7 $ 114.7 $ 94.5
Total Debt and Other Obligations(f)........ $ 310.6 $ 417.6 $ 543.9 $ 132.3 $ 89.3 $ 164.5
Stockholders' Equity(f)(g)................. $ 669.9 $ 623.1 $ 559.2 $ 333.0 $ 304.1 $ 216.5
Current Ratio.............................. 1.6:1 1.9:1 2.0:1 1.7:1 1.7:1 1.7:1
Working Capital............................ $ 247.8 $ 290.0 $ 182.4 $ 61.5 $ 81.4 $ 67.2
Total Debt to Capitalization(f)............ 32% 40% 49% 28% 23% 43%
Common Stock Outstanding (million
shares)(f)(g)............................ 30.9 32.4 32.3 26.3 26.4 24.8
Book Value Per Common Share................ $ 16.39 $ 14.14 $ 12.19 $ 12.66 $ 11.51 $ 8.74
OTHER FINANCIAL DATA(h)
EBITDA:
Continuing Operations.................... $ 201.7 $ 131.7 $ 65.9 $ 26.6 $ 8.1 $ (11.4)
Discontinued Operations.................. -- 110.3 87.0 77.2 166.7 139.2
-------- -------- -------- ------- ------- -------
Total EBITDA........................... $ 201.7 $ 242.0 $ 152.9 $ 103.8 $ 174.8 $ 127.8
======== ======== ======== ======= ======= =======
ROCE....................................... 9.5% 6.4% 6.1% 2.7% (0.4)% (10.1)%
Free Cash Flow............................. $ 69.1 $ (18.4) $ 7.2 $ (34.9) $ (22.5) $ (39.0)
OPERATING DATA
Refinery Throughput
(thousands of barrels per day)(i):
Alaska................................... 48.5 48.7 57.6 50.2 47.5 50.6
Hawaii................................... 84.4 86.9 48.3 -- -- --
Washington............................... 116.6 98.1 42.6 -- -- --
-------- -------- -------- ------- ------- -------
Total Refinery Throughput.............. 249.5 233.7 148.5 50.2 47.5 50.6
======== ======== ======== ======= ======= =======
Refined Products Manufactured
(thousands of barrels per day)(i):
Gasoline and gasoline blendstocks........ 95.0 92.9 50.9 12.8 12.8 14.3
Jet fuel................................. 57.6 58.3 40.6 15.4 14.1 14.3
Diesel fuel.............................. 39.2 32.7 18.8 6.2 6.1 6.4
Heavy oils, residual products and
other.................................. 64.8 59.9 43.2 17.1 16.1 17.0
-------- -------- -------- ------- ------- -------
Total Refined Products Manufactured.... 256.6 243.8 153.5 51.5 49.1 52.0
======== ======== ======== ======= ======= =======
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
2000 1999 1998 1997 1996 1995
-------- -------- -------- ------- ------- -------
(DOLLARS IN MILLIONS EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Refining and Marketing -- Product Sales
(thousands of barrels per day)(i)(j):
Gasoline and gasoline blendstocks........ 135.0 123.7 58.4 17.4 17.4 24.5
Middle distillates, including jet and
diesel fuels........................... 129.9 122.6 70.1 30.6 29.7 38.0
Heavy oils, residual products and
other.................................. 57.6 56.5 39.3 17.9 15.1 14.8
-------- -------- -------- ------- ------- -------
Total Product Sales.................... 322.5 302.8 167.8 65.9 62.2 77.3
======== ======== ======== ======= ======= =======
Marine Services -- Fuel Sales
(millions of gallons).................... 170.0 148.3 180.8 156.4 142.7 112.5
Marine Services -- Service Revenues........ $ 13.3 $ 11.7 $ 11.6 $ 11.3 $ 8.7 $ 0.6
</TABLE>
- ---------------
(a) Segment operating profit equals operating revenues, gains and losses on
asset sales and other income, less applicable segment costs of sales,
operating expenses, depreciation and other items. Income taxes, interest
expense, corporate general and administrative and other expenses are not
included in determining segment operating profit. In 1998, a charge of $19
million for special incentive compensation, of which $7 million related to
operating segments, was classified as corporate other expense and not
charged to segment operating profit (see Note L of Notes to Consolidated
Financial Statements in Item 8).
(b) In December 1999, the Company sold its exploration and production operations
and recorded an aftertax gain of $39.1 million, or $1.19 per diluted share
from the sale of these operations (see Note E of Notes to Consolidated
Financial Statements in Item 8). In 1998, these operations incurred pretax
write-downs of oil and gas properties of $68.3 million ($43.2 million
aftertax or $1.47 per diluted share) and recognized pretax income from
receipt of contingency funds of $21.3 million ($13.4 million aftertax or
$0.45 per diluted share). The discontinued operations included $60 million
in pretax income ($42 million aftertax or $1.58 per diluted share) from
termination of a natural gas contract in 1996 and a $33.5 million pretax
gain ($33.5 million aftertax or $1.33 per diluted share) from the sale of
certain interests in a natural gas field in 1995.
(c) Extraordinary losses on debt extinguishments, net of income tax benefits,
were $4.4 million ($0.15 per basic and diluted share), $2.3 million ($0.09
per basic and diluted share) and $2.9 million ($0.12 per basic share and
$0.11 per diluted share) in 1998, 1996 and 1995, respectively.
(d) The assumed conversion of Preferred Stock to 10.35 million shares of Common
Stock for 1999 and 1998 produced anti-dilutive results and therefore was not
included in the diluted calculations.
(e) Capital expenditures exclude amounts to fund acquisitions in the Refining
and Marketing segment in 1998 and the Marine Services segment in 1996.
(f) In conjunction with acquisitions in 1998, the Company refinanced its
existing indebtedness and issued senior subordinated notes and additional
equity securities, including Common Stock and 7.25% Mandatorily Convertible
Preferred Stock which is included in stockholders' equity (see Note F of
Notes to Consolidated Financial Statements in Item 8).
(g) The Company has not paid dividends on its Common Stock since 1986.
(h) EBITDA, ROCE (return on capital employed) and Free Cash Flow are measures
used by the Company for internal analysis and in presentations to analysts,
investors and lenders. The calculations of these measures are not based on
accounting principles generally accepted in the United States ("U.S. GAAP")
and should not be considered as alternatives to net earnings or cash flows
from operating activities (which are determined in accordance with U.S.
GAAP), as indicators of operating performance or as measures of liquidity.
EBITDA represents earnings before extraordinary items, interest and
financing costs, income taxes and depreciation and amortization (including
oil and gas property write-downs in 1998). ROCE is computed by dividing
aftertax earnings before interest and special charges by average capital
employed. Average capital employed includes current assets and net fixed
assets, less cash, accounts payable and accrued liabilities. Special charges
included special incentive compensation of $12.0 million aftertax in 1998
and employee termination, restructuring and other costs of $4.6 million
aftertax and $5.0 million aftertax in 1996 and 1995, respectively. Free Cash
Flow is defined as EBITDA from continuing operations before special charges,
less capital expenditures, payments of interest, income taxes and Preferred
Stock dividends, and the difference between turnaround expenditures and
related amortization. These measures may not be comparable to similarly
titled measures used by other entities.
(i) Volumes for 1998 include amounts from the Hawaii operations (acquired in
May 1998) and the Washington refinery (acquired in August 1998) since their
dates of acquisition, averaged over the full year.
(j) Sources of total product sales include products manufactured at the
refineries, products from inventory balances and products purchased from
third parties for resale.
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THOSE STATEMENTS IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS THAT ARE NOT
HISTORICAL IN NATURE SHOULD BE DEEMED FORWARD-LOOKING STATEMENTS THAT ARE
INHERENTLY UNCERTAIN. SEE "FORWARD-LOOKING STATEMENTS" ON PAGE 37 AND "RISK
FACTORS AND INVESTMENT CONSIDERATIONS" ON PAGE 15 FOR DISCUSSION OF THE FACTORS
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN
SUCH STATEMENTS.
THE COMPANY HAS ENDEAVORED TO PROVIDE A MORE THOROUGH DISCUSSION OF
MANAGEMENT'S EXPECTATIONS AND GOALS FOR THE COMPANY IN THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS, AND THE COMPANY ANTICIPATES THAT IT WILL CONTINUE TO DO
THE SAME IN MANAGEMENT'S DISCUSSION AND ANALYSIS IN THE FUTURE. HOWEVER,
EXPECTATIONS AND GOALS MAY CHANGE DURING INTERIM PERIODS OF TIME. THE COMPANY
DOES NOT INTEND TO, AND A READER HEREOF SHOULD NOT EXPECT THAT THE COMPANY WILL,
UPDATE THE INFORMATION CONTAINED HEREIN DURING ANY SUCH INTERIM PERIOD.
STRATEGY
Management's corporate goal is to create shareholder value through improved
financial performance and acquisitions. Its strategic objectives are to (i)
maximize the Company's earnings, cash flows and return on capital employed by
reducing costs, increasing efficiencies and optimizing existing assets and (ii)
increase the Company's competitiveness by expansion in overall size and market
presence through a combination of internal growth initiatives and selective
acquisitions which are both accretive to earnings and provide significant
operational synergies. The Company is also focused on improving profitability in
the Refining and Marketing segment by enhancing processing capabilities,
strengthening its marketing activities and improving supply and transportation
functions. The Marine Services segment pursues opportunities for expansion, as
well as optimizing existing operations through development of customer services
and cost management. As part of this strategy, the Company continues to assess
its existing asset base in order to maximize returns and financial flexibility
through market diversification and related acquisitions.
At the end of 1999, management set a goal to triple its 1999 earnings per
share of $0.62 to $1.86 by 2002. A number of factors, including the Company's
efforts to control costs and market products into higher-value channels of
trade, enabled the Company to nearly achieve this three-year goal in the first
year, reporting a diluted earnings per share of $1.75 in 2000. Management has
now raised its earnings-per-share goal for 2002 to a minimum of $3.00, based on
the objective to acquire strategic assets that will be accretive to earnings and
the expected benefits from profit improvement programs. In addition, management
expects to achieve, over time, a 12% aftertax return on capital employed. During
2000, the Company earned a 9.5% aftertax return on capital employed, as compared
to 6.4% in 1999.
To improve profitability from the Company's existing asset base, management
has implemented profit improvement programs focused on manufacturing
enhancements, marketing improvements and growth, and cost reductions. The
Company also continues to upgrade and develop its integrated, enterprise-wide
information system. Management believes that, based on the current business
environment, these profit improvement programs, which are further discussed
below, will improve profitability and reduce volatility of earnings.
PROFIT IMPROVEMENT PROGRAMS
MANUFACTURING
The Company's manufacturing strategy includes improving refinery
reliability and safety, improving refining processes, and controlling
manufacturing costs. Part of this strategy was achieved in 2000 when a new $13
million distillate treater, which was placed in service at the Washington
refinery in December 1999, performed ahead of expectations and contributed an
estimated $12 million in operating profit in 2000. The Company also commenced a
heavy oil conversion project at its Washington refinery in 2000, which will
enable the Company to process a larger proportion of lower-cost heavy crude
oils, to manufacture a larger proportion of higher-value gasoline, and to reduce
production of lower-value heavy products. The Company expects to
22
<PAGE> 23
spend approximately $100 million (including capitalized interest) for this
project, of which $23 million was spent in 2000. The heavy oil conversion
project is expected to be completed in late 2001. Based on forecasts determined
using historical price differentials between light and heavy crude oils and
between light and heavy refined products at the time the heavy oil conversion
project was approved in July 2000, management believed that the project would
increase annual operating profit by $30 million to $40 million in 2002. However,
based upon price differentials between light and heavy crude oils and between
light and heavy refined products for the twelve months ended February 28, 2001,
management estimates that the heavy oil conversion project would have increased
annual operating profit by $50 million, if it had been in operation during that
period. The actual profit to be contributed by the heavy oil conversion project
is subject to several factors, including, among other things, refinery
throughput; market values of light and heavy refined products; availability of
economic heavy feedstocks; price differentials between light and heavy crude
oils; and operating costs, including fuel and utility costs.
Other manufacturing initiatives focus on controlling fuel and utility
costs, consolidating purchasing, increasing asphalt production capabilities,
upgrading process control systems, increasing jet fuel production and
implementing various other cost-savings projects. Due to the recent high
volatility in fuel and utility prices, management is reevaluating its goal of
reducing total direct manufacturing costs by $0.10 per barrel in 2001. However,
management is developing alternatives for controlling ongoing fuel and utility
costs, which include projects to self-generate power for the Washington
refinery.
The manufacturing goals for 2001, which include the impact of the
completion of the heavy oil conversion project during late 2001 and other
manufacturing initiatives mentioned above, are expected to achieve $4 million to
$6 million in profit improvement in 2001.
MARKETING
In marketing, the Company's objectives include moving products into
higher-value market channels and developing markets for ratable offtake to
reduce seasonal volatility. The Company's strategies to accomplish these
objectives include: increasing product rack sales and reducing lower-value bulk
sales of refined products, maximizing in-state sales in Alaska and Hawaii,
developing high-volume, low-cost operations for branded retail gasoline sales
(both Company and jobber/dealer-operated), marketing jet fuel in additional West
Coast markets, increasing the production and sales of asphalt, directly
marketing to marine and industrial fuel customers, and increasing term sales of
bunker fuels to tankers and cruise ships.
As part of its retail marketing initiatives, the Company has an agreement
with Wal-Mart Stores, Inc. ("Wal-Mart") to build and operate retail fueling
facilities on sites at selected existing and future Wal-Mart store locations in
the western United States. In 2000, the Company introduced the "Mirastar" brand
which is used exclusively in its program with Wal-Mart. As of February 28, 2001,
the Company had 28 Mirastar stations in operation, 7 Mirastar stations under
construction and 48 sites in various stages of development or evaluation.
Management expects to have 80 to 90 Mirastar stations operating by the end of
2001 and expects to construct an additional 80 to 90 stations in each of 2002
and 2003. Management has targeted a 15% return on investment for this program,
assuming average monthly volumes of 200,000 gallons per station by the end of
the first year of operation and an average construction cost for a standard
Mirastar station with four fuel dispensers of approximately $525,000. The
average investment in Mirastar sites may increase in the future as stations with
five to eight dispensers are constructed.
In addition, the Company is adding branded stations operated by
jobber/dealers to its retail network. At the end of 2000, the Company had 75
branded jobber/dealer locations in the western U.S., excluding Alaska and
Hawaii, a net addition of 21 for the year. The typical arrangement for a
jobber/dealer-operated site includes a five-year supply arrangement and is
targeted to cost the Company between $50,000 and $250,000 per site. Average
volumes per jobber/dealer site are targeted at 150,000 gallons per month.
The Company's retail capital spending program (for Mirastar sites,
Company-owned and operated sites and expansion of its branded jobber/dealer
program) totaled $31 million for the year 2000 and is planned to total $59
million in 2001. At the end of 2000, the Company supplied 276 branded sites,
including 83 Company-owned and operated sites. Management has targeted an
increase to a range of 368 to 378 sites by
23
<PAGE> 24
year-end 2001, primarily through the growth in the Mirastar and branded
jobber/dealer programs. Volumes sold under the Company's branded retail
marketing programs averaged 13,000 bpd in 2000, as compared to approximately
12,000 bpd in 1999, with a management goal of 28,000 bpd in 2001.
Other product marketing programs are focused on increasing margins by
moving certain volumes into higher-value channels of trade. The Company has
entered into two unbranded retail agreements in the Pacific Northwest. Including
these sales, the Company has increased its total rack sales of unbranded
gasoline from about 15,000 bpd in 1999 to 22,000 bpd during 2000. Management's
goal for 2001 is to increase unbranded rack gasoline sales to 33,000 bpd. Diesel
rack sales have increased from about 21,000 bpd in 1999 to 24,000 bpd during
2000, and management's goal for 2001 is to increase to 27,000 bpd. Management
expects an average future margin uplift in value for unbranded gasoline and
diesel of 75 basis points ($0.0075 per gallon) as compared to bulk sales values.
The Company has experienced from time to time margin uplifts of greater than 100
basis points ($0.01 per gallon) in the price of unbranded gasoline.
Management's goals for the Company's gasoline and commercial fuels
marketing programs described above, which assume lower rack margins and
increased competition on jet fuel sales, are expected to add $4 million to $7
million to operating profit in 2001 as compared to 2000.
OTHER
In 2000, the Company identified an opportunity to alter its gasoline
blending process to market higher-value CARB quality blendstocks, rather than
including these materials in the refinery's finished gasoline pool. The
flexibility to sell these products added an estimated $10 million to operating
profit in 2000, as compared to the values received from sales of conventional
gasoline. Assuming market conditions for CARB gasoline blendstocks remain
strong, management's goal is to add $5 million to $6 million to operating profit
in 2001, when compared with 2000.
The Company's profit improvement programs also include reductions in
domestic shipping costs. The Company released two high-cost U.S. flag vessels
upon expiration of their charters in 2000. The Company replaced these vessels by
chartering two U.S. flag double-hull vessels. The first vessel was received in
July 2000 and the second replacement vessel, chartered in March 2001, is
expected in mid-2001. When compared to the rates on the replaced vessels,
management believes that the new charters will result in aggregate savings on an
annual basis of $9 million, or approximately $5 million in 2001 compared to 2000
due to the mid-year timing of the replacements. Management also believes that
the charters will help ensure availability of economic cargo transportation, as
compared to spot charters.
BUSINESS ENVIRONMENT
The Company operates in an environment where its results and cash flows are
sensitive to volatile changes in energy prices. Fluctuations in the costs of
crude oil and other refinery feedstocks and the price of refined products can
result in changes in margins from the Refining and Marketing operations, as
prices received for refined products may not keep pace with changes in feedstock
costs. As part of its marketing program, the Company also purchases refined
products for sale to customers. Changes in price levels of crude oil and refined
products can result in changes in margins on such activities. Energy prices,
together with volume levels, also determine the carrying value of crude oil and
refined product inventory. The Company uses the last-in, first-out ("LIFO")
method of accounting for inventories of crude oil and refined products in its
Refining and Marketing segment. This method results in inventory carrying
amounts that are less likely to represent current values and costs of sales that
more closely represent current costs.
The Company maintains inventories of crude oil, intermediate products and
refined products, the values of which are subject to fluctuations in market
prices. At December 31, 2000 and 1999, the Company's inventories of refinery
feedstocks and refined products totaled 11.9 million barrels and 8.6 million
barrels, respectively. The average cost of the 3.3 million barrel increase in
inventories was $29.82 per barrel. Any sales that result in a reduction in
inventories during 2001 would have a per barrel cost of sales equal to the sum
of $29.82 plus the cost of transportation to market. This amount could exceed
the year-to-date average costs of sales in 2001. The Company continues to
monitor its inventory positions. The average cost of the Company's
24
<PAGE> 25
Refining and Marketing inventories of refinery feedstocks and refined products
as of December 31, 2000 was $20.79 per barrel. If market price levels decline
from current levels to a level below the average cost of these inventories, the
Company may be required to write down the carrying value of its inventory.
Changes in crude oil and natural gas prices also influence the level of
drilling activity in the Gulf of Mexico. The Company's Marine Services segment,
whose customers include offshore drilling contractors and related industries,
can be impacted by significant fluctuations in crude oil and natural gas prices.
The Marine Services segment uses the first-in, first-out ("FIFO") method of
accounting for inventories of fuels. Changes in fuel prices can significantly
affect inventory valuations and costs of sales.
For further information on commodity price and interest rate risks, see
Quantitative and Qualitative Disclosures About Market Risk in Item 7A herein.
RESULTS OF OPERATIONS
SUMMARY
Tesoro's net earnings for 2000 were $73.3 million ($1.96 per basic share or
$1.75 per diluted share). On a comparable basis, the Company's earnings from
continuing operations were $32.2 million ($0.62 per basic and diluted share) in
1999 and $7.6 million ($0.05 per basic and diluted share) in 1998. The earnings
improvement during 2000 reflected a record level of operating profit from the
Refining and Marketing segment resulting from higher refined product margins and
increased throughput levels, partly offset by higher operating expenses. The
Marine Services segment's operating profit also reached a record level,
reflecting a recovery in sales volumes from depressed 1999 levels, as well as
effective cost management.
The improvement in 1999 earnings from continuing operations, as compared to
1998, was also due to higher operating profit from the Company's Refining and
Marketing segment. Increased throughput and sales volumes from operations
acquired in mid-1998, refinery efficiency and reliability, and profits from
purchasing and selling products manufactured by others contributed to the
Refining and Marketing results. Partially offsetting these improvements were
increased general and administrative expenses and interest and financing costs
during 1999 as compared to 1998.
The Company's 1999 net earnings of $75.0 million ($1.94 per basic share or
$1.92 per diluted share) and net loss of $19.4 million ($0.86 per basic and
diluted share) in 1998 included results from the Company's former exploration
and production operations. These discontinued operations contributed $42.8
million to net earnings ($1.32 per basic share or $1.30 per diluted share) in
1999, including an aftertax gain of $39.1 million from the sale of these
operations. In 1998, discontinued operations incurred a net loss of $22.6
million ($0.76 per basic and diluted share), which included $43.2 million in
aftertax write-downs of oil and gas properties and $13.4 million in aftertax
income from receipt of contingency funds related to these operations. In
addition, the Company incurred an aftertax extraordinary loss of $4.4 million in
1998 for early extinguishment of debt.
A discussion and analysis of the factors contributing to results of
operations are presented below. The accompanying Consolidated Financial
Statements and related Notes, together with the following information, are
intended to provide shareholders and other investors with a reasonable basis for
assessing the Company's operations, but should not serve as the only criteria
for predicting the future performance of the Company. Certain amounts previously
reported have been reclassified to reflect the transfer of the Company's West
Coast marine fuel operations from the Marine Services segment to the Refining
and Marketing segment.
25
<PAGE> 26
REFINING AND MARKETING
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(DOLLARS IN MILLIONS
EXCEPT PER BARREL AMOUNTS)
<S> <C> <C> <C>
REVENUES
Refined products.......................................... $4,536.0 $2,808.6 $1,198.2
Other revenues, primarily crude oil resales and
merchandise............................................ 381.6 80.5 69.8
-------- -------- --------
Total Revenues....................................... $4,917.6 $2,889.1 $1,268.0
======== ======== ========
SEGMENT OPERATING PROFIT
Gross margins:
Refinery(a)............................................ $ 625.2 $ 500.6 $ 308.3
Purchased product and crude oil resales................ 14.4 38.5 3.8
Merchandise and other.................................. 27.2 23.2 17.8
-------- -------- --------
Total gross margins.................................. 666.8 562.3 329.9
Operating expenses and other(b)........................... 437.3 399.3 235.1
Depreciation and amortization(c).......................... 40.4 37.9 25.1
-------- -------- --------
Segment Operating Profit............................. $ 189.1 $ 125.1 $ 69.7
======== ======== ========
CAPITAL EXPENDITURES........................................ $ 87.5 $ 72.4 $ 38.0
======== ======== ========
TOTAL REFINERY SYSTEM THROUGHPUT (thousand bpd)(d).......... 249.5 233.7 148.5
% HEAVY CRUDE OIL OF TOTAL REFINERY SYSTEM THROUGHPUT....... 42.5% 34.9% 42.8%
TOTAL REFINERY SYSTEM PRODUCT SPREAD ($/barrel)(e).......... $ 6.99 $ 5.79 $ 5.67
PRODUCT SALES (thousand bpd)(d)(f)
Gasoline and gasoline blendstocks......................... 135.0 123.7 58.4
Jet fuel.................................................. 76.3 75.5 45.9
Diesel fuel............................................... 53.6 47.1 24.2
Heavy oils, residual products and other................... 57.6 56.5 39.3
-------- -------- --------
Total Product Sales.................................. 322.5 302.8 167.8
======== ======== ========
PRODUCT SALES PRICES ($/barrel)
Gasoline and gasoline blendstocks......................... $ 41.95 $ 29.62 $ 24.22
Middle distillates (jet fuel and diesel fuel)............. $ 39.97 $ 25.18 $ 19.79
Heavy oils, residual products and other................... $ 26.88 $ 16.80 $ 12.12
PRODUCT SALES MARGIN ($/barrel)(e)
Average sales price....................................... $ 38.43 $ 25.41 $ 19.56
Average costs of sales.................................... 33.03 20.59 14.49
-------- -------- --------
Gross Margin......................................... $ 5.40 $ 4.82 $ 5.07
======== ======== ========
</TABLE>
- ---------------
(a) Approximates refinery system throughput times the refinery system product
spread, adjusted for changes in refined product inventory. Refined product
inventory increased, primarily in the fourth quarter, to approximately 7
million barrels at December 31, 2000 from 6 million barrels at December 31,
1999.
(b) Includes manufacturing costs per throughput barrel of $2.85, $2.98 and $2.73
for 2000, 1999 and 1998, respectively. Manufacturing costs included non-cash
amortization of maintenance turnaround costs of $20.1 million, $14.2 million
and $11.3 million in 2000, 1999 and 1998, respectively.
(c) Includes manufacturing depreciation per throughput barrel of approximately
$0.26, $0.32 and $0.27 for 2000, 1999 and 1998, respectively.
(d) Volumes for 1998 include amounts from the Hawaii operations (acquired in May
1998) and the Washington refinery (acquired in August 1998) since their
dates of acquisition, averaged over the full year.
26
<PAGE> 27
(e) Beginning in the fourth quarter of 1999, the Company identified
industry-posted price information to calculate an indicator margin. This
indicator margin is an analytical tool which may provide an indication of
the direction and magnitude of changes in market conditions that may be
representative of market changes which impact Tesoro's refinery system. It
reflects a component of, but is not a predictor of, Tesoro's actual refinery
spread. Other factors including, but not limited to, throughput volumes and
mix, yield percentages and inventory changes, determine actual refinery
spread. The indicator margin utilizes industry-posted prices, such as
Pacific Northwest gasoline and diesel fuel prices; Los Angeles jet fuel
prices; Seattle industrial fuel oil prices; Alaska North Slope crude oil
prices; and West Texas intermediate crude oil prices. The indicator margin
is posted weekly on the Company's website at
www.tesoropetroleum.com/investor/indicator_margin.html.
(f) Sources of total product sales included products manufactured at the
refineries, products drawn from inventory balances and products purchased
from third parties. Gross margins on total product sales included margins on
sales of manufactured and purchased products and the effects of inventory
changes.
2000 Compared to 1999. Segment operating profit for the Refining and
Marketing segment increased 51% during 2000 to $189.1 million. This improvement
was driven by a combination of stronger refined product margins and record-high
refinery throughput. Industry product supply concerns and tight product
inventories contributed to strong West Coast margins. The Company was able to
capitalize on these conditions by operating its refineries at historically high
rates. The record level of refinery throughput reflected high levels of
operational reliability without compromising the Company's safety program. The
improvement in refinery margins was partially offset by higher operating
expenses and lower margins from purchased product resales as discussed below.
Revenues from sales of refined products in the Refining and Marketing
segment increased 62% in 2000, primarily due to higher product prices and
increases in sales volumes. The Company's average product sales prices increased
51% to $38.43 per barrel in 2000 from $25.41 per barrel in 1999. Total product
sales increased to an average of 322,500 bpd during 2000 from 302,800 bpd in
1999. Other revenues increased during 2000 primarily due to crude oil resales of
$332.4 million in 2000 compared to $16.6 million in 1999. This increase in crude
oil resales resulted from a term agreement with one of the Company's crude oil
suppliers. The increase in cost of sales reflected higher costs of refinery
feedstocks and purchased products due to higher prices as well as higher
volumes.
The Company's refinery gross margins improved to $625.2 million in 2000
from $500.6 million in 1999, reflecting a 21% increase in refinery system
product spread to $6.99 per barrel and a 7% increase in refinery throughput to
249,500 bpd. The improvement in refinery margins was partly due to the higher
throughput levels combined with strong market conditions. In addition, during
2000, the Company's refinery margins benefitted from the Company's initiatives
and focus on profit improvement programs. In manufacturing, a flexible feedstock
supply enabled the Company to process a higher percentage of lower-cost heavy
crude oil, which represented 42.5% of refinery throughput in 2000 compared with
34.9% in 1999. This percentage increase in heavy crude oil partly offset the
impact of higher prices for refinery feedstocks, while minimally affecting the
Company's yield of light, higher-value products, which declined less than 2%.
The investment in the distillate treater, which was placed in service at the
Washington refinery in December 1999, was a contributing factor in maintaining
those yields. The Company estimates that this investment added approximately $12
million of incremental segment operating profit in 2000. In marketing, the
Company altered its gasoline blending process to market higher-value CARB
quality blendstocks, rather than including these materials in the finished
gasoline pool. The flexibility to sell these products added an estimated $10
million to segment operating profit in 2000, as compared to the values received
from sales of conventional gasoline.
Margins on purchased product and crude oil resales declined by $24.1
million during 2000. Market conditions in 2000 offered fewer opportunities for
product resales compared to market conditions in 1999, which were affected by
product supply disruptions. The $4.0 million increase in merchandise and other
margins reflected increased sales volumes and the continued expansion of retail
sites in 2000.
Operating expenses and other, excluding depreciation, increased by 10% to
$437.3 million in 2000 from $399.3 million in 1999. This increase was primarily
attributable to the impact of higher refinery throughput
27
<PAGE> 28
and increased costs for refinery utilities and fuel. In addition, expenses
increased for state and local taxes because of higher product values, employee
costs related to expansion of the retail marketing team and maintenance
turnaround costs. Savings associated with the Company's cost reduction program
partly offset these higher expenses.
Electricity rates at the Washington refinery increased from an average of
$35 per megawatt hour in 1999 to an average of $104 per megawatt hour in 2000
(including an average of $205 per megawatt hour in the fourth quarter of 2000),
resulting in an aggregate increase in electricity costs from $6 million in 1999
to $18 million in 2000. Management expects that utility costs will continue at
high levels and is developing alternatives for controlling ongoing utility
costs, which include projects to self-generate power for the Washington
refinery.
Operating expenses included non-cash amortization of refinery turnaround
costs of $20.1 million and $14.2 million in 2000 and 1999, respectively. The
increase in 2000 was due, in part, to the accelerated turnaround of certain
refinery units. The Hawaii crude unit turnaround was moved from 2001 and
combined with the September 2000 hydrocracker turnaround to avoid a temporary
reduction in throughput in 2001. The turnaround at the Washington refinery,
originally planned for 2002, was changed to coincide with the expected
completion of the heavy oil conversion project in late 2001.
1999 Compared to 1998. Segment operating profit for the Company's Refining
and Marketing operations was $125.1 million in 1999, an increase of $55.4
million from segment operating profit of $69.7 million in 1998. Contributing to
the increase was a full year of results from the Washington refinery and related
marketing operations in 1999, compared to five months in 1998. Similarly, the
Hawaii refinery and operations contributed to operating profit for the full year
in 1999; however, the 1999 results were lower than in the seven months included
in 1998 due to rising crude oil costs and lower product margins.
Segment operating profit increased significantly during the 1999 second
quarter and first half of the 1999 third quarter due primarily to stronger than
normal market conditions on the West Coast. Refining margins during this period
were strong in the western U.S. due to seasonal demand, product supply
disruptions caused by operating problems at other refineries, and a rupture of
the major refined products pipeline which serves the Pacific Northwest region.
However, in the fourth quarter of 1999, margins were adversely impacted as
industry refining capacity on the West Coast came back on-line, refined product
imports into the West Coast continued, and crude costs escalated rapidly. The
Company's refinery system product spread, which averaged approximately $8.07 per
barrel in the month of July 1999 and $7.16 per barrel in the month of August
1999, dropped precipitously during the 1999 fourth quarter to approximately
$4.30 per barrel in the month of December 1999. In addition, during the 1999
fourth quarter, lower refinery throughputs, caused primarily by the scheduled
turnaround of the Washington refinery's crude distillation and catalytic
reformer units for 25 days in October, reduced overall system throughput to an
average of 208,100 bpd.
Revenues from sales of refined products in the Refining and Marketing
segment increased in 1999, primarily due to the higher sales volumes from the
Hawaii and Washington refineries, acquired in mid-1998, higher product prices
and increased sales volumes of purchased product. The increase in other revenues
during 1999 included higher retail merchandise sales, primarily from the Hawaii
acquisition, and $4.5 million in revenues from the sub-charter of vessels to
third parties, partially offset by lower crude oil resales. The increase in
costs of sales reflected higher volumes associated with the 1998 acquisitions,
increased prices for feedstocks and products, and higher purchased product
volumes. During 1999, the Company reduced inventory levels by approximately 2.5
million barrels from the prior year-end level, resulting in a liquidation of
LIFO inventory quantities carried at lower costs prevailing in previous years.
This LIFO liquidation resulted in a decrease in costs of sales of $8.4 million
in 1999.
During 1999, the Refining and Marketing segment benefitted from the
Company's focus on manufacturing efficiency and reliability, as well as
distribution costs and marketing flexibility. The Company maintained a flexible
supply of crude oils and other feedstocks and operated the refineries at
economic rates, which all contributed to the improvement in operating profit.
Overall refinery gross margin increased to $500.6 million in 1999 due to the
higher throughput volumes and an increase in average refinery system product
spread to $5.79 per barrel in 1999 compared to $5.67 per barrel in 1998.
28
<PAGE> 29
Margins from purchased product and crude oil resales increased to $38.5
million in 1999 from $3.8 million in 1998, due primarily to opportunities on the
U.S. West Coast. Operating expenses and depreciation and amortization increased
in 1999 primarily due to the acquisitions of the Hawaii and Washington
refineries in 1998.
MARINE SERVICES
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Fuels..................................................... $156.9 $ 86.5 $ 91.1
Lubricants and other...................................... 15.0 13.0 15.9
Services.................................................. 13.3 11.7 11.6
Other income.............................................. 1.6 - -
------ ------ ------
Total Revenues......................................... 186.8 111.2 118.6
Costs of Sales.............................................. 143.6 74.8 79.0
------ ------ ------
Gross Profit.............................................. 43.2 36.4 39.6
Operating Expenses and Other................................ 30.1 27.9 28.6
Depreciation and Amortization............................... 2.7 2.6 2.4
------ ------ ------
Segment Operating Profit.................................. $ 10.4 $ 5.9 $ 8.6
====== ====== ======
Sales Volumes (millions of gallons):
Fuels, primarily diesel................................... 170.0 148.3 180.8
Lubricants................................................ 2.1 2.0 2.3
Capital Expenditures........................................ $ 3.2 $ 1.5 $ 4.2
</TABLE>
2000 Compared to 1999. Segment operating profit for Marine Services
improved 76% to a record $10.4 million in 2000 from $5.9 million in 1999,
primarily due to higher fuel sales volumes and service revenues. The Marine
Services business, which is largely dependent upon the volume of oil and gas
drilling, workover, construction and seismic activity in the U.S. Gulf of
Mexico, was positively impacted in 2000 by the recovery in drilling activity
during the latter half of 1999. The higher fuel sales volumes and service
revenues reflected increased customer exploration and development activities in
the U.S. Gulf of Mexico, compared with 1999. The average number of drilling rigs
served by Tesoro's terminals increased from 22 rigs in 1999 to 29 rigs in 2000.
Operating revenues increased 67% to $185.2 million in 2000 from $111.2 million
in 1999, reflecting higher fuel volumes and prices, and service revenues. The
increase in cost of sales also reflected the higher fuel sales volumes and
prices. In 2000, the Company realized other income of $1.2 million from
settlement of a service contract and $0.4 million from the sale of excess real
estate. Operating expenses in 2000, as compared to 1999, increased due mainly to
the higher sales activities.
1999 Compared with 1998. Segment operating profit decreased $2.7 million to
$5.9 million during 1999. The lower operating profit for 1999 was primarily due
to the 18% decrease in fuel sales volumes to 148.3 million gallons in 1999. The
segment's operations were negatively impacted by the low level of drilling
activity in the U.S. Gulf of Mexico during the first half of 1999. However, the
business climate improved during the latter half of 1999 with the number of
drilling rigs served by Tesoro's terminals increasing to a high of 35 as
compared to eight in March 1999. The recovery by the Company in the last half of
1999 was due in part to the increased drilling activity and better cost
management.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $40.3 million in 2000, compared
with $34.1 million in 1999 and $19.7 million in 1998. The $6.2 million increase
in 2000 was primarily due to higher employee costs associated with business
development and growth. The $14.4 million increase in 1999 was primarily due to
29
<PAGE> 30
costs related to the implementation of an integrated enterprise-wide information
system and higher employee costs.
INTEREST AND FINANCING COSTS
Interest and financing costs were $32.7 million in 2000, compared with
$37.6 million in 1999 and $25.2 million in 1998. The $4.9 million decrease in
2000 primarily reflected lower borrowings. Proceeds from the sales of the
Company's exploration and production operations were used to repay debt in
December 1999 and in March 2000 (see Note F of Notes to Consolidated Financial
Statements in Item 8). The benefits from these debt repayments were partly
offset by higher interest rates on variable-rate debt and additional borrowings
to finance an increase in working capital. The increases in inventories and
receivables, which arose from higher crude oil and product inventory volumes,
petroleum prices and sales activities, were financed by borrowings and trade
payables. Interest and financing costs increased in 1999, as compared to 1998,
primarily due to a full year's interest on the 9% Senior Subordinated Notes
which were issued to finance the Hawaii and Washington refinery acquisitions in
1998.
Corporate interest expense allocated to discontinued operations was based
on net assets and amounted to $10.6 million and $7.8 million in 1999 and 1998,
respectively (see Note E of Notes to Consolidated Financial Statements in Item
8). Interest and financing costs reported in the Company's Statements of
Consolidated Operations are after the allocation to discontinued operations.
INTEREST INCOME
Interest income totaled $2.8 million in 2000, compared with $1.2 million in
1999 and $2.0 million in 1998. The $1.6 million increase in 2000 primarily
reflected the temporary investment of a portion of the proceeds from the
December 1999 sales of exploration and production operations. A substantial
portion of those proceeds was used to repay debt in March 2000, as discussed
above.
OTHER EXPENSES
Other expenses totaled $5.8 million in 2000, compared with $9.3 million in
1999 and $23.3 million in 1998. The $3.5 million decrease in 2000 primarily
reflected a $3 million provision for settlement of claims by the State of Hawaii
in 1999. The $14 million decrease in 1999 was primarily due to the $19 million
charge recorded in 1998 for special incentive compensation resulting from the
Company's Common Stock market price achieving a specific performance target (see
Note L of Notes to Consolidated Financial Statements in Item 8).
INCOME TAX PROVISION
Income taxes on continuing operations increased to $50.2 million in 2000,
from $19.0 million in 1999 and $4.5 million in 1998, primarily due to the higher
pretax earnings from continuing operations. The Company's combined federal and
state effective income tax rate increased to 40% in 2000 from 37% in both 1999
and 1998. The effective state tax rate increased from 1% in 1998 to 3% in 1999
and 2000 due to a larger apportionment of taxable income to states with higher
income tax rates. The 1999 tax rate benefited from amendments to prior year
returns. See Note G of Notes to Consolidated Financial Statements in Item 8 for
further information on income taxes and Note E for income taxes related to
discontinued operations.
DISCONTINUED OPERATIONS
Earnings from discontinued operations in 1999 of $42.8 million (net of
income tax expense of $29.6 million), or $1.30 per diluted share, included $3.7
million of aftertax operating results and a $39.1 million aftertax gain on the
sale of these operations. In 1998, discontinued operations had a net loss of
$22.6 million, or $0.76 per diluted share, which included aftertax write-downs
of oil and gas properties of $43.2 million and aftertax income of $13.4 million
for the receipt of contingency funds from an operator. See Note E of Notes to
Consolidated Financial Statements in Item 8 for further information related to
discontinued operations.
30
<PAGE> 31
OUTLOOK AND OTHER FACTORS
Management believes that industry margins for 2001 will be better than the
five-year historical average, but lower than 2000 levels, due to, among other
things: (i) increased demand for distillate products together with an
anticipated reduction in jet fuel imports to the West Coast caused by improved
economic conditions in the Far East and higher foreign shipping rates and (ii)
increased gasoline demand in the Pacific Northwest due to continued economic
strength in that region which could be offset by an increased supply of
conventional gasoline from California to Pacific Northwest markets due to more
stringent fuel specifications in California. Management expects that industry
maintenance and turnaround activity will continue to keep industry inventory
levels low, and with good demand, that the Company's margin environment should
be better than the five-year historical average. However, many other factors
contribute to the strength of industry margins, including, among others, cost
and availability of crude oil, the general demand for refined products, changes
in product specifications, changes in refining capacity in the Company's
operational regions and other conditions. In addition, industry margins may be
impacted by high-volume retail expansions and strong competition in the industry
due to mergers and acquisitions.
Assuming that industry margins continue to remain stronger than historical
averages and product demand remains healthy, management expects the Company's
refinery throughput to be at the higher end of the 240,000 bpd to 250,000 bpd
range for the first quarter of 2001 and to average between 250,000 bpd to
260,000 bpd for the year 2001. Based on the Company's business plan, prior to
completion of the heavy oil conversion project, feedstocks for the system-wide
refineries are expected to consist of approximately 49% heavy crude oils, 46%
light crude oils and 5% other feedstocks with a system-wide yield, expressed as
percentages of throughput barrels, of 35% gasoline, 25% jet fuel, 17% diesel
fuel and 26% residual fuel oil and other products. After completion of the heavy
oil conversion project expected in late 2001, the business plan projects that
feedstocks for the system-wide refineries should consist of approximately 58%
heavy crude oils, 40% light crude oils and 2% other feedstocks with a
system-wide yield, expressed as percentages of throughput barrels, of 37%
gasoline, 25% jet fuel, 16% diesel fuel and 24% residual fuel oil and other
products. The Company's actual throughput and refinery yields for the year 2001
may differ from the projections discussed above due to market conditions, the
availability and costs of crude oil, the demand for refined products and other
factors.
Management estimates that its Refining and Marketing operating expenses
will be in the range of $115 million to $120 million per quarter in 2001,
depending on the level of throughput, while general and administrative expenses
will average approximately $10 million per quarter and other expense will
average approximately $1.25 million per quarter. Expenses in 2001 will continue
to reflect high electricity and fuel costs at the Washington refinery and higher
employee costs associated with expanded retail operations. Total depreciation is
expected to be about $45 million on an annual basis for 2001. Management expects
that interest and financing costs will average approximately $7.5 million per
quarter, when considering the Company's capital budget of $195 million, offset
by interest capitalized on certain major projects. The effective combined rates
for Federal and state income taxes are expected to approximate 40% in 2001.
For the first quarter of 2001, management expects the Company's earnings to
be in the range of $0.35 to $0.50 per diluted share, based primarily on
quarter-to-date results. Refining margins and total refinery throughput for the
first two months of 2001 increased compared to the same period in 2000. The
Company's margins have benefited from processing a greater percent of favorably
priced heavy crude oils. In addition, strong product prices, particularly
gasoline prices, which increased over the quarter, and seasonally strong diesel
prices supported margins. Through the end of February 2001, the Company
processed approximately 60% heavy crude, compared to approximately 45% in the
first quarter of 2000.
For the year 2001, management projects that the Company's earnings per
share will be in the range of $1.60 to $2.00 per share, based on year 2000
results, planned operations, expected market fundamentals and estimated
operating costs. The Company has developed programs to improve its profitability
and reduce volatility of earnings, as discussed above in "Profit Improvement
Programs." However, future profitability of
31
<PAGE> 32
the Company will continue to be influenced by market conditions and other
factors that are beyond the control of the Company.
See "Forward-Looking Statements" on page 37, "Risk Factors and Investment
Considerations" on page 15 and "Business Environment" on page 24 for further
information related to these factors.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
The Company's primary sources of liquidity are its cash flows from
operations and borrowing availability under a revolving line of credit. Capital
requirements are expected to include capital expenditures, working capital, debt
service and preferred dividend requirements. Based upon current needs,
management believes that available capital resources will be adequate to meet
the Company's future capital requirements.
The Company operates in an environment where its liquidity and capital
resources are impacted by changes in the supply of and demand for crude oil and
refined petroleum products, market uncertainty and a variety of additional risks
that are beyond the control of the Company. These risks include, among others,
the level of consumer product demand, weather conditions, fluctuations in
seasonal demand, governmental regulations, the price and availability of
alternative fuels and overall market and economic conditions. The Company's
future capital expenditures, as well as borrowings under its credit arrangements
and other sources of capital, will be affected by these conditions.
CAPITALIZATION
The Company's capital structure at December 31, 2000 was comprised of the
following (in millions):
<TABLE>
<S> <C>
Debt and other obligations outstanding, including current
maturities:
9% Senior Subordinated Notes, due 2008.................... $297
Other senior debt and obligations......................... 14
----
Total debt and other obligations.................. 311
Mandatorily Convertible Preferred Stock..................... 165
Common stockholders' equity................................. 505
----
Total Capitalization.............................. $981
====
</TABLE>
During 2000, the Company spent $94 million on capital projects, repaid $106
million of debt and financed working capital requirements, primarily using
internally-generated cash flows and existing cash balances from the prior year
sale of its exploration and production operations. As a result, the Company's
total debt-to-capitalization ratio was lowered to 32% at December 31, 2000, from
40% at year-end 1999.
The Credit Facility, Senior Subordinated Notes and Preferred Stock impose
various restrictions and covenants on the Company that could potentially limit
the Company's ability to respond to market conditions, to provide for
anticipated capital investments, to raise additional debt or equity capital, or
to take advantage of business opportunities. For further information on the
Company's capital structure, see Note F of Notes to Consolidated Financial
Statements in Item 8.
CREDIT ARRANGEMENTS
In 2000, the Company and a group of banks entered into a new $250 million
unsecured revolving credit facility, consisting of a $150 million, 3-year
Revolving Credit Agreement and a $100 million, 364-Day Revolving Credit
Agreement (collectively referred to as the "Credit Facility"). Each Revolving
Credit Agreement, which provides for cash borrowings and issuance of letters of
credit, can be extended for up to two one-year periods, subject to bank
approval. The Credit Facility replaced the Company's previous credit facility,
which provided for $175 million in total commitments and was secured by
substantially all of the assets of the Company and its subsidiaries.
32
<PAGE> 33
The Credit Facility requires the Company to maintain specified levels of
consolidated leverage and fixed charge coverages and includes a limitation on
the Company's debt to capital ratio. It also contains other covenants and
restrictions customary in credit arrangements of this kind. The terms of the
Credit Facility allow for payment of cash dividends on the Company's Common
Stock and repurchases of shares of its Common Stock, not to exceed an aggregate
of $15 million in any year. The Credit Facility also allows the Company to
repurchase up to 1,372,600 additional shares of its Common Stock under a share
repurchase program and to pay required dividends on the Company's 7.25%
Mandatorily Convertible Preferred Stock, so long as no default or event of
default is in existence.
At December 31, 2000, the Company had no revolving borrowings outstanding
and $3.8 million in letters of credit outstanding, resulting in unused credit
availability of $246.2 million. Based on current needs, the $250 million
capacity under the Credit Facility, together with internally-generated cash
flows and existing cash, is expected to be sufficient to fund capital
expenditures, working capital requirements and other corporate purposes.
DEBT SERVICE AND PREFERRED DIVIDENDS
At December 31, 2000, the Company's debt consisted primarily of 9% Senior
Subordinated Notes due 2008, Series B ("Senior Subordinated Notes"). The Senior
Subordinated Notes, which were issued in 1998 at an aggregate principal amount
of $300 million, have a ten-year maturity without sinking fund requirements and
are subject to optional redemption by the Company after five years at declining
premiums. The indenture for the Senior Subordinated Notes contains covenants and
restrictions which are customary for notes of this nature. These covenants and
restrictions are less restrictive than those under the Credit Facility.
The Company has 10,350,000 Premium Income Equity Securities ("PIES")
outstanding, which represent fractional interests in the Company's 7.25%
Mandatorily Convertible Preferred Stock ("Preferred Stock"). Holders of PIES are
entitled to receive a cash dividend until the PIES are converted to Common
Stock. The scheduled dividends on the PIES total $3 million per quarter, with
the last scheduled quarterly payment due on July 1, 2001. The PIES will
automatically convert into shares of Common Stock on July 1, 2001, at a rate
based upon a formula dependent upon the market price of Common Stock at the time
of conversion. The maximum conversion rate on July 1, 2001 would require each
PIES to convert into one share of Common Stock. Before July 1, 2001, each PIES
is convertible, at the option of the holder thereof, into 0.8455 shares of
Common Stock, subject to adjustment in certain events.
For further information concerning debt maturities and conversion of PIES,
see Note F of Notes to Consolidated Financial Statements in Item 8.
COMMON STOCK SHARE REPURCHASE PROGRAM
In February 2000, the Company's Board of Directors authorized the
repurchase of up to 3 million shares of Tesoro Common Stock, which represented
approximately 9% of the shares then outstanding. Under the program, the Company
may make repurchases from time to time in the open market and through privately-
negotiated transactions. Purchases depend on price, market conditions and other
factors and have been made primarily from internally-generated cash flows. The
stock may be used to meet employee benefit plan requirements and other corporate
purposes. During 2000, the Company repurchased 1,627,400 shares of Common Stock
for approximately $15.5 million, or an average cost per share of $9.54.
CAPITAL SPENDING
During 2000, the Company's capital expenditures totaled $94 million, which
were funded from existing cash and cash flows from operations. Capital
expenditures during this period included initial costs related to certain
manufacturing improvements and marketing programs. In manufacturing, the Company
is constructing a heavy oil conversion project at its Washington refinery.
Management believes that this project, which has an estimated total cost of
approximately $100 million (including capitalized interest), will be completed
in late 2001. Capital expenditures for this project were approximately $23
million in 2000. As related to its marketing program, the Company has an
agreement with Wal-Mart to build and operate retail fueling
33
<PAGE> 34
facilities on sites at selected existing and future Wal-Mart store locations in
the western United States. The Company introduced the "Mirastar" brand which is
used exclusively in its program with Wal-Mart. As of February 28, 2001, the
Company had 28 Mirastar stations in operation, 7 Mirastar stations under
construction and 48 sites in various stages of development or evaluation.
Capital spending for the Mirastar and other retail marketing programs totaled
$31 million during 2000, including costs for Mirastar sites, Company-owned and
operated facilities and expansion of Tesoro's branded jobber/dealer network.
Other capital spending during 2000 included $34 million for other Refining and
Marketing projects, $3 million in the Marine Services segment and $3 million for
upgrades to the Company's information systems.
For 2001, the Company's total capital program is $195 million, primarily
for manufacturing improvements and retail marketing expansion. Refinery projects
are planned to total $121 million, including completion of the heavy oil
conversion project and other economic projects, $28 million for sustaining
capital, and $12 million for environmental, health, safety and other projects.
The Company plans to spend approximately $59 million to further expand its
retail marketing, which includes construction of new Mirastar stations under the
agreement with Wal-Mart, construction of Company-owned and operated stations,
and expansion of Tesoro's branded jobber/dealer network. The Company plans to
build approximately 60 to 70 Mirastar stations in 2001. The Company's Marine
Services capital expenditures are planned to be $5 million, and other capital is
budgeted at $10 million, primarily for information systems to support the
expanded retail program and other upgrades. Management plans to fund its capital
program in 2001 with internally-generated cash flows from operations and
borrowings under the Credit Facility.
MAJOR MAINTENANCE COSTS
During the third quarter of 2000, the Company completed a turnaround for
certain processing units at its Hawaii refinery at a total cost of approximately
$11 million. The costs of this turnaround are being amortized over a 36-month
period until the next turnaround which is projected to occur in 2003.
Amortization of turnaround costs, other major maintenance projects and catalysts
totaled $24 million in 2000.
For 2001, the Company has scheduled a turnaround for the Alaska refinery in
the second quarter at an estimated cost of $11 million and turnarounds of
certain processing units at the Washington refinery in the fourth quarter at an
estimated cost of $20 million. Amortization of turnaround costs, other major
maintenance projects and catalysts are projected to total $21 million in 2001.
CASH FLOW SUMMARY
Components of the Company's cash flows are set forth below (in millions):
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Cash Flows From (Used In):
Operating Activities.................................. $ 90.4 $ 112.7 $ 121.8
Investing Activities.................................. (88.0) 166.3 (718.6)
Financing Activities.................................. (130.1) (149.2) 606.6
------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents........ $(127.7) $ 129.8 $ 9.8
======= ======= =======
</TABLE>
Net cash from operating activities during 2000 totaled $90 million,
compared to $85 million from continuing operations in 1999. This improvement was
primarily due to higher earnings before depreciation and amortization and other
non-cash charges, partially offset by increased working capital requirements.
Increases in receivables and inventories reflected higher prices for refinery
feedstocks and products, as well as an increase in inventory volumes, compared
with year-end 1999. Net cash used in investing activities of $88 million in 2000
included capital expenditures of $94 million, partly offset by proceeds from
sales of assets. Net cash used in financing activities of $130 million in 2000
included repayments of debt totaling $106 million, repurchase of treasury stock
of $15 million and payments of dividends on Preferred Stock of $9 million. The
Company had no outstanding borrowings under revolving credit lines at December
31, 2000 or 1999. Gross borrowings and repayments under revolving credit lines
amounted to $866 million during 2000.
Working capital totaled $248 million at December 31, 2000 compared to $290
million at year-end 1999. Included in working capital at year-end 2000 were cash
and cash equivalents of $14 million, compared with
34
<PAGE> 35
$142 million at year-end 1999, which reflected the temporary investment of a
portion of the proceeds from the sale of discontinued operations.
During 1999, net cash from operating activities totaled $113 million, $85
million from continuing operations and $28 million from discontinued operations.
Continuing operations provided cash flows from earnings before depreciation and
amortization and other non-cash charges partially offset by increased working
capital requirements. During 1999, working capital requirements increased due to
higher receivables arising in part from higher commodity prices, partially
offset by correlating changes in payables and a reduction in inventory levels.
Net cash from investing activities of $166 million in 1999 was provided by net
proceeds of $309 million from the sale of assets, primarily the exploration and
production operations, partially offset by capital expenditures of $85 million
for continuing operations and $56 million for discontinued operations. Net cash
used in financing activities of $149 million in 1999 primarily represented
repayments of debt of $184 million and payments of dividends on Preferred Stock
of $15 million. These uses of cash in financing activities were partially offset
by the issuance of $50 million of debt in January 1999. Gross repayments under a
revolving credit line amounted to $550 million, while gross borrowings amounted
to $489 million.
During 1998, net cash from operating activities totaled $122 million, $51
million from continuing operations and $71 million from discontinued operations.
Continuing operations provided cash flows from earnings before depreciation and
amortization and other non-cash charges and from changes in working capital and
other net assets. Cash flows from discontinued operations were due to positive
earnings before depreciation, depletion and amortization and write-downs of oil
and gas properties together with the receipt of $21 million pretax from an
operator, representing contingency funds from an operator that were no longer
needed. Net cash used in investing activities of $719 million in 1998 included
$536 million for acquisitions and $185 million for capital expenditures ($50
million for continuing operations and $135 million for discontinued operations).
Net cash from financing activities of $607 million in 1998 primarily included
net proceeds of $533 million from the issuance of equity and debt securities and
$150 million from term loans, partially offset by net repayments of other debt.
Gross borrowings under revolving credit lines and an interim credit facility
amounted to $944 million, while repayments totaled $916 million. Payments of
dividends on Preferred Stock totaled $3 million in 1998. At December 31, 1998,
the Company's working capital totaled $182 million, including cash and cash
equivalents of $12 million.
ENVIRONMENTAL AND OTHER
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which change frequently, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites or install additional controls
or other modifications or changes in use for certain emission sources. The
Company is currently involved in remedial responses and has incurred cleanup
expenditures associated with environmental matters at a number of sites,
including certain of its own properties. At December 31, 2000, the Company's
accruals for environmental expenses totaled $13.2 million. Based on currently
available information, including the participation of other parties or former
owners in remediation actions, the Company believes these accruals are adequate.
The Company is currently evaluating certain newly promulgated revisions to
the Clean Air Act regulations, which will require a reduction in the sulfur
content in gasoline by January 1, 2004. To meet the revised gasoline standard,
the Company expects, based upon most recent cost estimates, to make capital
improvements of approximately $40 million to $50 million at its Washington
refinery. Additionally, the Company expects to spend approximately $15 million
in capital improvements over the next four years to comply with the second phase
of Maximum Achievable Control Technologies for petroleum refineries ("Refinery
MACT II") which was signed into law on January 18, 2001. Management expects that
the Refinery MACT II regulations will require new emission controls at certain
processing units at each of the Company's refineries.
On December 21, 2000, the U.S. Environmental Protection Agency announced
new standards that will require a reduction in sulfur content in diesel fuel
manufactured for on-road consumption. In general, the new diesel fuel standards
will become effective on June 1, 2006. Although the Company is evaluating the
new
35
<PAGE> 36
diesel fuel standards with respect to its Alaska operations, the Company
estimates that the demand for ultra low sulfur diesel in Alaska will not be
significant and should not have a material impact on its operations. The Hawaii
refinery is currently capable of producing diesel fuels that comply with the new
standards. For the Washington refinery, the Company is currently evaluating the
impact of the new diesel fuel standards on production, equipment requirements
and related costs.
To comply with environmental laws and regulations, the Company anticipates
it will make other capital improvements of approximately $8 million in 2001 and
$16 million in 2002. During 2000, the Company spent approximately $10 million on
environmental capital projects, primarily for improvements to crude oil and
product tanks and tank farm secondary containment. These amounts for 2000 and
2001 are included in "Capital Spending" discussed above.
Conditions that require additional expenditures may exist for various
Company sites, including, but not limited to, the Company's refineries, tank
farms, retail gasoline stations (operating and closed locations) and petroleum
product terminals, and for compliance with the Clean Air Act and other state and
federal requirements. The amount of such future expenditures cannot currently be
determined by the Company.
For further information on environmental matters and other contingencies,
see Note M of Notes to Consolidated Financial Statements in Item 8 and Legal
Proceedings in Item 3.
NEW ACCOUNTING STANDARDS AND DISCLOSURES
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138, which is effective for the
Company on January 1, 2001. SFAS 133, as amended and interpreted, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS 133 requires all derivatives be recorded on the balance sheet at fair
value. The accounting for changes in fair value of a derivative depends on the
intended use of the derivative and the designation if in a hedging relationship.
The Company has evaluated the effects of implementing SFAS No. 133 and
believes that substantially all of its agreements are normal purchases and sales
and that repricing provisions in other agreements are not embedded derivatives.
Non-hedging derivatives are marked to market and the changes in fair value are
recognized in earnings. As of December 31, 2000, the Company did not have any
derivatives that were designated and accounted for as hedges. The Company
adopted these accounting standards effective January 1, 2001, which did not have
a significant impact on the Company's financial condition, results of operations
or cash flows.
Staff Accounting Bulletin No. 101 ("SAB 101") on revenue recognition was
issued by the staff of the SEC in December 1999. Management believes that the
Company's revenue recognition practices conform with SAB 101.
For further information related to new accounting standards and
disclosures, see Note A of Notes to Consolidated Financials Statements in Item
8.
36
<PAGE> 37
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain statements that are
"forward-looking" statements within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, as codified in Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements include,
among other things, projections of revenues, earnings, earnings per share,
capital expenditures or other financial items; discussions of estimated future
revenue enhancements and cost savings; and the Company's business strategy,
goals and expectations concerning the Company's market position, future
operations, margins, profitability, liquidity and capital resources. Although
the Company believes that the assumptions upon which the forward-looking
statements contained in this Form 10-K are based are reasonable, any of the
assumptions could prove to be inaccurate and, as a result, the forward-looking
statements based on those assumptions also could be incorrect. All phases of the
operations of the Company involve risks and uncertainties, many of which are
outside the control of the Company and any one of which, or a combination of
which, could materially affect the results of the Company's operations and
whether the forward-looking statements ultimately prove to be correct. Actual
results and trends in the future may differ materially depending on a variety of
factors including, but not limited to, changes in general economic conditions;
the timing and extent of changes in commodity prices and underlying demand;
availability and costs of crude oil, other refinery feedstocks and refined
products; changes in the Company's inventory levels; changes in the cost or
availability of third-party vessels, pipelines and other means of transporting
feedstocks and products; changes in fuel and utility costs for the Company's
facilities; disruptions due to equipment interruption or failure at Company or
third-party facilities; execution of planned capital projects; results of
management's evaluation of the Company's cost structure; the ability of the
Company to make acquisitions and successfully integrate them; adverse changes in
the credit ratings assigned to the Company's trade credit and debt instruments;
state and federal environmental, economic, safety and other policies and
regulations, any changes therein, and any legal or regulatory delays or other
factors beyond the Company's control; adverse rulings, judgments, or settlements
in litigation or other legal or tax matters, including unexpected environmental
remediation costs in excess of any reserves; actions of customers and
competitors; weather conditions affecting the Company's operations or the areas
in which the Company's products are marketed; earthquakes or other natural
disasters affecting operations; political developments in foreign countries; and
the conditions of the capital markets and equity markets during the periods
covered by the forward-looking statements. Many of the factors are described in
greater detail in the Company's other filings with the SEC. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
foregoing. The Company undertakes no obligation to update any information
contained herein or to publicly release the results of any revisions to any such
forward-looking statements that may be made to reflect events or circumstances
that occur, or which the Company becomes aware of, after the date hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has a risk management committee responsible for overseeing
energy risk management activities. The primary sources of market risk to the
Company include changes in commodity prices and interest rates.
COMMODITY PRICE RISKS
The Company's Refining and Marketing earnings and cash flows from
operations are dependent upon the margin above fixed and variable expenses
(including the costs of crude oil and other feedstocks) at which the Company is
able to sell refined products. In recent years, the prices of crude oil and
refined products have fluctuated substantially. These prices depend on numerous
factors, including the demand for crude oil, gasoline and other refined
products, which in turn depend on, among other factors, changes in the economy,
the level of foreign and domestic production of crude oil and refined products,
worldwide political conditions, the availability of imports of crude oil and
refined products, the marketing of alternative and competing fuels and the
extent of government regulations. The prices received by the Company for its
refined products are also affected by local factors such as local market
conditions and the level of operations of other refineries in the Company's
markets.
37
<PAGE> 38
The prices at which the Company can sell its refined products are
influenced by the commodity price of crude oil. Generally, an increase or
decrease in the prices of crude oil results in a corresponding increase or
decrease in the prices of gasoline and other refined products; however, the
timing of the relative movement of the prices can impact profit margins which
could significantly affect the Company's earnings and cash flows of the Company
as a whole. In addition, crude oil supply contracts generally are short-term in
nature with market-responsive pricing provisions. The Company purchases its
refinery feedstocks prior to selling the refined products manufactured. Price
level changes during the period between purchasing feedstocks and selling the
manufactured refined products from such feedstocks could have a significant
effect on the Company's financial results. The Company also purchases refined
products manufactured by others for resale to customers. Price level changes
during the periods between purchasing and selling such products could have a
significant effect on financial results.
The Company maintains inventories of crude oil, intermediate products and
refined products, the values of which are subject to fluctuations in market
prices. At December 31, 2000 and 1999, the Company's inventories of refinery
feedstocks and refined products totaled 11.9 million barrels and 8.6 million
barrels, respectively. The average cost of the 3.3 million barrel increase in
inventories was $29.82 per barrel. Any sales that result in a reduction in
inventories during 2001 would have a per barrel cost of sales equal to the sum
of $29.82 plus the cost of transportation to market. This amount could exceed
the year-to-date average costs of sales in 2001. The Company continues to
monitor its inventory positions. The average cost of the Company's Refining and
Marketing inventories of refinery feedstocks and refined products as of December
31, 2000 was $20.79 per barrel. If market price levels decline from current
levels to a level below the average cost of these inventories, the Company may
be required to write down the carrying value of its inventory.
The Company periodically enters into derivative type arrangements on a
limited basis, as part of its programs to acquire refinery feedstocks at
reasonable costs and to manage margins on certain refined product sales. The
Company also engages in limited non-hedging activities which are marked to
market with changes in the fair value of the derivative recognized in earnings.
Management believes that any potential adverse impact from these activities
would not result in a material adverse effect on the Company's financial
results, financial position or cash flows. At December 31, 2000, Refining and
Marketing held exchange traded crude oil futures contracts to purchase 148,000
barrels in February 2001 at a weighted average price of $26.24 per barrel. The
contracts are accounted for at market prices and have a total fair value of $3.9
million at year-end 2000.
INTEREST RATE RISK
The Company had no outstanding floating-rate debt at December 31, 2000. The
fair market value of the Company's fixed-rate debt at December 31, 2000 was
approximately $9 million less than its book value of $311 million, based on
recent transactions and bid quotes for the Company's 9% Senior Subordinated
Notes, due in 2008. The Company will have future exposure to short-term interest
rate fluctuations based on borrowings under the revolving lines of credit in the
Credit Facility (see Note F of Notes to Consolidated Financial Statements in
Item 8).
38
<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Tesoro Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Tesoro
Petroleum Corporation and subsidiaries (the "Company") as of December 31, 2000
and 1999, and the related statements of consolidated operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Tesoro Petroleum Corporation
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Antonio, Texas
February 12, 2001
(March 23, 2001 as to the third paragraph of Note M)
39
<PAGE> 40
TESORO PETROLEUM CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Refining and Marketing.................................... $4,917.6 $2,889.1 $1,268.0
Marine Services........................................... 186.8 111.2 118.6
-------- -------- --------
Total Revenues....................................... 5,104.4 3,000.3 1,386.6
-------- -------- --------
COSTS OF SALES AND OPERATING EXPENSES
Refining and Marketing.................................... 4,688.1 2,726.1 1,172.9
Marine Services........................................... 173.7 102.7 107.9
Depreciation and amortization............................. 43.1 40.5 27.5
-------- -------- --------
Total Costs of Sales and Operating Expenses.......... 4,904.9 2,869.3 1,308.3
-------- -------- --------
SEGMENT OPERATING PROFIT.................................... 199.5 131.0 78.3
General and administrative expenses......................... (40.3) (34.1) (19.7)
Interest and financing costs, net of capitalized interest... (32.7) (37.6) (25.2)
Interest income............................................. 2.8 1.2 2.0
Other expenses.............................................. (5.8) (9.3) (23.3)
-------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM........................................ 123.5 51.2 12.1
Income tax provision........................................ 50.2 19.0 4.5
-------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS, NET.................... 73.3 32.2 7.6
Earnings (loss) from discontinued operations, net of income
taxes..................................................... -- 42.8 (22.6)
-------- -------- --------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM................... 73.3 75.0 (15.0)
Extraordinary loss on extinguishment of debt (net of income
tax benefit of $2.6)...................................... -- -- (4.4)
-------- -------- --------
NET EARNINGS (LOSS)......................................... 73.3 75.0 (19.4)
Preferred dividend requirements............................. 12.0 12.0 6.0
-------- -------- --------
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK.............. $ 61.3 $ 63.0 $ (25.4)
======== ======== ========
EARNINGS PER SHARE FROM CONTINUING OPERATIONS
Basic..................................................... $ 1.96 $ 0.62 $ 0.05
======== ======== ========
Diluted................................................... $ 1.75 $ 0.62 $ 0.05
======== ======== ========
NET EARNINGS (LOSS) PER SHARE
Basic..................................................... $ 1.96 $ 1.94 $ (0.86)
======== ======== ========
Diluted................................................... $ 1.75 $ 1.92 $ (0.86)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES -- BASIC..................... 31.2 32.4 29.4
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES AND POTENTIALLY DILUTIVE
COMMON SHARES -- DILUTED.................................. 41.8 32.8 29.9
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE> 41
TESORO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 14.1 $ 141.8
Receivables, less allowance for doubtful accounts......... 334.5 280.7
Inventories............................................... 274.3 182.2
Prepayments and other..................................... 7.3 6.9
-------- --------
Total Current Assets................................. 630.2 611.6
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Refining and Marketing.................................... 991.1 906.6
Marine Services........................................... 50.3 47.7
Corporate................................................. 25.1 21.8
-------- --------
1,066.5 976.1
Less accumulated depreciation and amortization............ 285.1 244.5
-------- --------
Net Property, Plant and Equipment...................... 781.4 731.6
-------- --------
OTHER ASSETS................................................ 132.0 143.3
-------- --------
Total Assets...................................... $1,543.6 $1,486.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 281.6 $ 214.2
Accrued liabilities....................................... 97.0 80.0
Current maturities of debt and other obligations.......... 3.8 27.4
-------- --------
Total Current Liabilities............................ 382.4 321.6
-------- --------
DEFERRED INCOME TAXES....................................... 107.2 85.8
-------- --------
OTHER LIABILITIES........................................... 77.3 65.8
-------- --------
DEBT AND OTHER OBLIGATIONS.................................. 306.8 390.2
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value; authorized 5,000,000
shares: 7.25% Mandatorily Convertible Preferred Stock,
103,500 shares issued and outstanding.................. 165.0 165.0
Common stock, par value $0.16 2/3; authorized 100,000,000
shares; 32,739,592 shares issued (32,704,856 in
1999).................................................. 5.4 5.4
Additional paid-in capital................................ 280.0 279.0
Retained earnings......................................... 239.9 178.6
Treasury stock, 1,920,281 common shares (292,881 in 1999),
at cost................................................ (20.4) (4.9)
-------- --------
Total Stockholders' Equity........................... 669.9 623.1
-------- --------
Total Liabilities and Stockholders' Equity........ $1,543.6 $1,486.5
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE> 42
TESORO PETROLEUM CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
--------------- --------------- ADDITIONAL RETAINED ---------------
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL EARNINGS SHARES AMOUNT
------ ------ ------ ------ --------------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT JANUARY 1, 1998................. -- $ -- 26.5 $4.4 $190.9 $141.0 (0.2) $ (3.3)
Net loss......................... -- -- -- -- -- (19.4) -- --
Preferred dividend
requirements.................. -- -- -- -- -- (6.0) -- --
Issuance of Common Stock......... -- -- 5.7 0.9 85.8 -- -- --
Issuance of Preferred Stock...... 0.1 165.0 -- -- (5.7) -- -- --
Other, primarily related to
shares issued under special
incentive strategy............ -- -- 0.4 0.1 7.6 -- (0.1) (2.1)
--- ------ ---- ---- ------ ------ ---- ------
AT DECEMBER 31, 1998............... 0.1 165.0 32.6 5.4 278.6 115.6 (0.3) (5.4)
Net earnings..................... -- -- -- -- -- 75.0 -- --
Preferred dividend
requirements.................. -- -- -- -- -- (12.0) -- --
Other, primarily related to stock
options....................... -- -- 0.1 -- 0.4 -- -- 0.5
--- ------ ---- ---- ------ ------ ---- ------
AT DECEMBER 31, 1999............... 0.1 165.0 32.7 5.4 279.0 178.6 (0.3) (4.9)
Net earnings..................... -- -- -- -- -- 73.3 -- --
Preferred dividend
requirements.................. -- -- -- -- -- (12.0) -- --
Shares repurchased and stock
options....................... -- -- 0.1 -- 1.0 -- (1.6) (15.5)
--- ------ ---- ---- ------ ------ ---- ------
AT DECEMBER 31, 2000............... 0.1 $165.0 32.8 $5.4 $280.0 $239.9 (1.9) $(20.4)
=== ====== ==== ==== ====== ====== ==== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE> 43
TESORO PETROLEUM CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Continuing operations:
Earnings from continuing operations before
extraordinary item................................... $ 73.3 $ 32.2 $ 7.6
Adjustments to reconcile earnings from continuing
operations before extraordinary item to net cash from
operating activities:
Depreciation and amortization........................ 45.5 42.9 28.6
Amortization of refinery turnarounds and other
non-cash charges.................................. 22.0 8.2 10.7
Deferred income taxes................................ 21.4 12.7 9.2
Changes in operating assets and liabilities:
Receivables....................................... (58.0) (132.9) (33.1)
Inventories....................................... (92.1) 25.5 1.0
Other assets...................................... (14.0) 1.0 (5.4)
Accounts payable and accrued liabilities.......... 82.1 89.5 34.8
Other liabilities and obligations................. 10.2 5.6 (2.4)
------- ------- -------
Total from continuing operations.................. 90.4 84.7 51.0
Discontinued operations................................... -- 28.0 70.8
------- ------- -------
Net cash from operating activities................ 90.4 112.7 121.8
------- ------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures:
Continuing operations.................................. (94.0) (84.7) (50.0)
Discontinued operations................................ -- (56.5) (135.1)
Proceeds from asset sales, including $307 from
discontinued operations in 1999........................ 2.4 309.4 3.2
Acquisitions.............................................. -- -- (536.5)
Other..................................................... 3.6 (1.9) (0.2)
------- ------- -------
Net cash from (used in) investing activities...... (88.0) 166.3 (718.6)
------- ------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Refinancing and repayments of debt and obligations........ (105.9) (123.4) (93.3)
Repayments under revolving credit and interim facilities,
net of borrowings...................................... -- (61.2) 27.6
Borrowings under term loans and other..................... -- 50.0 150.0
Payment of dividends on Preferred Stock................... (9.0) (15.0) (3.0)
Proceeds from equity offerings, net....................... -- -- 246.0
Proceeds from debt offerings, net......................... -- -- 286.7
Repurchases of Common Stock............................... (15.5) -- --
Financing costs and other................................. 0.3 0.4 (7.4)
------- ------- -------
Net cash from (used in) financing activities...... (130.1) (149.2) 606.6
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (127.7) 129.8 9.8
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 141.8 12.0 2.2
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 14.1 $ 141.8 $ 12.0
======= ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid, net of capitalized interest................ $ 17.9 $ 58.0 $ 12.0
======= ======= =======
Income taxes paid......................................... $ 22.6 $ 34.4 $ 16.4
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE> 44
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description and Nature of Business
Tesoro Petroleum Corporation ("Tesoro" or the "Company") was incorporated
in Delaware in 1968 and is an independent refiner and marketer of petroleum
products and provider of marine logistics services. Tesoro owns and operates
three petroleum refineries with a combined capacity of 275,000 barrels per day
and sells refined products to a wide variety of customers in the western United
States and other countries on the Pacific Rim. Tesoro markets products to
wholesale and retail customers, as well as commercial end-users. The Company
also operates a network of terminals along the Texas and Louisiana Gulf Coast
that provides fuel and logistical support services to the marine and offshore
exploration and production industries. The Company conducts its business through
two operating segments: (i) Refining and Marketing and (ii) Marine Services.
Tesoro's operations can be influenced by domestic and international,
political, legislative and regulatory environments. In addition, significant
changes in the prices or availability of crude oil and refined products can have
a significant impact on results of operations.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of
Tesoro and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates and Presentation
Preparation of the Company's Consolidated Financial Statements in
conformity with accounting principles generally accepted in the United States of
America ("U.S. GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the year. Actual results
could differ from those estimates.
Unless otherwise stated, the Notes to Consolidated Financial Statements
exclude discontinued operations (see Note E). Certain reclassifications have
been made to information previously reported to conform to current presentation,
including the transfer of the Company's West Coast marine fuel operations from
the Marine Services segment to the Refining and Marketing segment.
Cash and Cash Equivalents
The Company considers all highly-liquid instruments, such as temporary cash
investments, with a maturity of three months or less at the time of purchase to
be cash equivalents. Cash equivalents are stated at cost, which approximates
market value. The Company's policy is to invest cash in conservative,
highly-rated instruments and to invest in various financial institutions to
limit the amount of credit exposure in any one institution. The Company monitors
the credit standing of these financial institutions.
Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, receivables, accounts payable and certain accrued liabilities,
approximate fair value because of the short maturity of these instruments. The
carrying amounts of the Company's fixed-rate debt and other obligations may vary
from the Company's estimates of the fair value of such items. At December 31,
2000, the fair market value of the Company's fixed-rate debt was estimated by
management to be approximately $9 million less than its book value of $311
million.
44
<PAGE> 45
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. The last-in,
first-out ("LIFO") method is used to determine the cost of Refining and
Marketing inventories of crude oil and refined products. The cost of fuel at
Marine Services terminals is determined on the first-in, first-out ("FIFO")
method. The carrying value of petroleum inventories is sensitive to volatile
market prices. Merchandise and materials and supplies are valued at average
cost, not in excess of market value.
Property, Plant and Equipment
Additions to property, plant and equipment and major improvements and
modifications are capitalized at cost. Depreciation of property, plant and
equipment is generally computed on the straight-line method based upon the
estimated useful life of each asset. The weighted average lives range from 25 to
28 years for refineries, 6 to 16 years for terminals, 10 to 16 years for retail
stations, 9 to 30 years for transportation assets, and 3 to 13 years for
corporate and other assets.
The Company capitalizes interest on major projects during extended
construction time periods. Such interest is allocated to property, plant and
equipment and amortized over the estimated useful lives of the related assets.
Interest capitalized totaled $0.7 million, $0.6 million and $0.1 million in
2000, 1999 and 1998, respectively.
Environmental Expenditures
Environmental expenditures that extend the life or increase the capacity of
facilities, or expenditures that mitigate or prevent environmental contamination
that is yet to occur, are capitalized. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. Liabilities are recorded when
environmental assessments and/or remedial efforts are probable. Cost estimates
are based on the expected timing and extent of remedial actions required by
applicable governing agencies, experience gained from similar sites on which
environmental assessments or remediation have been completed, and the amount of
the Company's anticipated liability considering the proportional liability and
financial abilities of other responsible parties. Generally, the timing of these
accruals coincides with the completion of a feasibility study or the Company's
commitment to a formal plan of action. Estimated liabilities are not discounted
to present value.
Other Assets
The cost over the fair value of net assets acquired, or goodwill, is
amortized by the straight-line method over 28 years for Refining and Marketing
assets and 20 years for Marine Services assets. At December 31, 2000 and 1999,
goodwill amounted to $63.2 million (net of accumulated amortization of
approximately $7.7 million) and $67.5 million (net of accumulated amortization
of approximately $4.9 million), respectively. Goodwill amortization is included
in depreciation and amortization in the Statements of Consolidated Operations.
Refinery processing units are shut down periodically for major scheduled
maintenance, or turnarounds. Certain catalysts are used in refinery process
units for periods exceeding one year. Also, ships, tugs and barges are drydocked
for periodic maintenance. Turnaround, catalyst and drydocking costs are deferred
and amortized on a straight-line basis over the expected periods of benefit
generally ranging from 23 to 48 months. Amortization of such deferred costs is
included in costs of sales and operating expenses in the Statements of
Consolidated Operations. At December 31, 2000 and 1999, the unamortized deferred
costs, which are included in other assets in the Consolidated Balance Sheets,
amounted to $32.2 million and $40.5 million, respectively.
45
<PAGE> 46
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Debt issue costs are deferred and amortized using the effective interest
method over the estimated terms of each instrument.
Impairment of Long-Lived Assets
Property, plant and equipment and other long-lived assets, such as
goodwill, are reviewed for impairment whenever events or changes in business
circumstances indicate the carrying values of the assets may not be recoverable.
Impairment losses would be recorded when the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of those
assets.
Revenue Recognition
The Company recognizes revenues from product sales and services upon
delivery to customers. The Company's revenue recognition practices conform with
those described in Staff Accounting Bulletin No. 101 issued by the staff of the
Securities and Exchange Commission.
Income Taxes
Deferred tax assets and liabilities are recognized for future income tax
consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases. Measurement of
deferred tax assets and liabilities is based on enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes
the enactment date.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's Common Stock at the date of
grant over the amount an employee must pay to acquire the stock, except for
stock options granted under a special incentive compensation strategy (see Note
L).
New Accounting Standards and Disclosures
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138, which is effective for the
Company on January 1, 2001. SFAS No. 133, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires all derivatives to be recorded on the
balance sheet at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the designation if
in a hedging relationship.
The Company periodically enters into derivatives arrangements, on a limited
basis, as part of its programs to acquire refinery feedstocks at reasonable
costs and to manage margins on certain refined product sales. The Company also
engages in limited non-hedging derivatives, which are marked to market with
changes in the fair value of the derivatives recognized in earnings in the
Statements of Consolidated Operations and the carrying amounts included in other
current assets or accrued liabilities in the Consolidated Balance Sheets.
The Company has evaluated the effects of implementing SFAS No. 133 and
believes that substantially all of its agreements are normal purchases and sales
and that repricing provisions in other agreements are not embedded derivatives.
Non-hedging derivatives are marked to market and the changes in fair value are
46
<PAGE> 47
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized in earnings. As of December 31, 2000, the Company did not have any
derivative instruments that were designated and accounted for as hedges. The
Company adopted these accounting standards effective January 1, 2001, which did
not have a significant impact on the Company's financial condition, results of
operations or cash flows.
NOTE B -- EARNINGS PER SHARE
Basic earnings per share are determined by dividing net earnings applicable
to Common Stock by the weighted average number of common shares outstanding
during the period. The calculation of diluted earnings per share takes into
account the effects of potentially dilutive shares outstanding during the
period, principally the maximum shares which would have been issued assuming
conversion of Preferred Stock at the beginning of the period and stock options.
The assumed conversion of Preferred Stock to 10.35 million shares of Common
Stock produced anti-dilutive results in 1999 and 1998, and, in accordance with
SFAS No. 128, "Earnings per Share," was not included in the dilutive
calculation. Earnings (loss) per share calculations are presented below (in
millions except per share amounts):
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- ------
<S> <C> <C> <C>
BASIC:
Numerator:
Continuing operations before extraordinary item........ $73.3 $32.2 $ 7.6
Discontinued operations, aftertax...................... -- 42.8 (22.6)
Extraordinary loss on extinguishment of debt,
aftertax............................................. -- -- (4.4)
----- ----- ------
Net earnings (loss).................................... 73.3 75.0 (19.4)
Less dividends on preferred stock...................... 12.0 12.0 6.0
----- ----- ------
Net earnings (loss) applicable to common shares........ $61.3 $63.0 $(25.4)
===== ===== ======
Denominator:
Weighted average common shares outstanding............. 31.2 32.4 29.4
===== ===== ======
Basic Earnings (Loss) Per Share:
Continuing operations before extraordinary item........ $1.96 $0.62 $ 0.05
Discontinued operations, aftertax...................... -- 1.32 (0.76)
Extraordinary loss, aftertax........................... -- -- (0.15)
----- ----- ------
Net earnings (loss).................................... $1.96 $1.94 $(0.86)
===== ===== ======
DILUTED:
Numerator:
Net earnings (loss) applicable to common shares........ $61.3 $63.0 $(25.4)
Plus income impact of assumed conversion of Preferred
Stock (dilutive in 2000)............................. 12.0 -- --
----- ----- ------
Total.................................................. $73.3 $63.0 $(25.4)
===== ===== ======
Denominator:
Weighted average common shares outstanding............. 31.2 32.4 29.4
Add potentially dilutive securities:
Incremental dilutive shares from assumed exercise of
stock options and other........................... 0.3 0.4 0.5
Incremental dilutive shares from assumed conversion
of Preferred Stock (dilutive in 2000)............. 10.3 -- --
----- ----- ------
Total diluted shares................................... 41.8 32.8 29.9
===== ===== ======
Diluted Earnings (Loss) Per Share:
Continuing operations before extraordinary item........ $1.75 $0.62 $ 0.05
Discontinued operations, aftertax...................... -- 1.30 (0.76)
Extraordinary loss, aftertax........................... -- -- (0.15)
----- ----- ------
Net earnings (loss).................................... $1.75 $1.92 $(0.86)
===== ===== ======
</TABLE>
47
<PAGE> 48
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- OPERATING SEGMENTS
The Company's revenues are derived from two operating segments: (i)
Refining and Marketing and (ii) Marine Services. Management has identified these
segments for managing operations and investing activities.
Refining and Marketing operates three petroleum refineries located in
Alaska, Hawaii and Washington which manufacture gasoline and gasoline
blendstocks, jet fuel, diesel fuel, heavy oils and other refined products. These
products, together with products purchased from third parties, are sold at
wholesale through terminal facilities and other locations in Alaska, Hawaii, the
Pacific Northwest and on the U.S. West Coast. In addition, gasoline, other
petroleum products and convenience store items are sold through Company-
operated retail stations in the western U.S., primarily in Alaska and Hawaii.
Refining and Marketing also markets petroleum products through branded and
unbranded retail jobber/dealers primarily located in Alaska, Hawaii and the
Pacific Northwest, and occasionally exports products to other markets in the
Asia/Pacific area. The Company at times resells previously purchased crude oil,
sales of which amounted to $332.4 million, $16.6 million and $29.9 million in
2000, 1999 and 1998, respectively.
Marine Services markets and distributes petroleum products, water, drilling
mud and other supplies and services primarily to the marine and offshore
exploration and production industries operating in the Gulf of Mexico. This
segment operates through terminals along the Texas and Louisiana Gulf Coast.
The operating segments follow the same accounting policies used for the
Company's Consolidated Financial Statements and described in the summary of
significant policies in Note A. Management evaluates the performance of its
segments and allocates resources based on segment operating profit and EBITDA,
as described below.
Segment operating profit includes those revenues and expenses that are
directly attributable to management of the respective segment. Income taxes,
interest and financing costs, interest income and corporate general and
administrative expenses are not included in determining segment operating
profit. Corporate and unallocated costs in 1998 included $19.1 million for
special incentive compensation, of which $7.1 million related to the operating
segments (see Note L).
EBITDA represents earnings before extraordinary items, interest and
financing costs, income taxes, and depreciation and amortization. While not
purporting to reflect any U.S. GAAP measurement of the Company's operations or
cash flows, EBITDA is used by management for additional analysis. Operating
segment EBITDA is equal to segment operating profit before depreciation and
amortization related to each segment.
Identifiable assets are those assets utilized by the segment. Corporate
assets are principally cash and other assets that are not directly associated
with the operations of a business segment.
48
<PAGE> 49
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain amounts previously reported were reclassified to reflect the
transfer of the Company's West Coast marine fuel operations from Marine Services
to Refining and Marketing. For the years presented, intersegment revenues were
not significant. Segment information for each of the three years in the period
ended December 31, 2000 is as follows (in millions):
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Refining and Marketing:
Refined products.................................. $4,536.0 $2,808.6 $1,198.2
Other, primarily crude oil resales and
merchandise..................................... 381.6 80.5 69.8
Marine Services...................................... 186.8 111.2 118.6
-------- -------- --------
Total Revenues.................................. $5,104.4 $3,000.3 $1,386.6
======== ======== ========
SEGMENT OPERATING PROFIT
Refining and Marketing............................... $ 189.1 $ 125.1 $ 69.7
Marine Services...................................... 10.4 5.9 8.6
-------- -------- --------
Total Segment Operating Profit.................. 199.5 131.0 78.3
Corporate and Unallocated Costs...................... (76.0) (79.8) (66.2)
-------- -------- --------
Earnings from Continuing Operations Before Income
Taxes and Extraordinary Item...................... $ 123.5 $ 51.2 $ 12.1
======== ======== ========
EBITDA
Continuing Operations:
Refining and Marketing............................ $ 229.5 $ 163.0 $ 94.8
Marine Services................................... 13.1 8.5 11.0
-------- -------- --------
Total Segment EBITDA............................ 242.6 171.5 105.8
Corporate and Unallocated............................ (40.9) (39.8) (39.9)
-------- -------- --------
Total Continuing EBITDA......................... 201.7 131.7 65.9
Depreciation and Amortization from Continuing
Operations........................................ (45.5) (42.9) (28.6)
Interest and Financing Costs......................... (32.7) (37.6) (25.2)
-------- -------- --------
Earnings from Continuing Operations Before Income
Taxes and Extraordinary Item...................... $ 123.5 $ 51.2 $ 12.1
======== ======== ========
DEPRECIATION AND AMORTIZATION
Continuing Operations:
Refining and Marketing............................ $ 40.4 $ 37.9 $ 25.1
Marine Services................................... 2.7 2.6 2.4
Corporate......................................... 2.4 2.4 1.1
-------- -------- --------
Total Continuing Operations..................... 45.5 42.9 28.6
Discontinued Operations.............................. -- 27.3 106.8
-------- -------- --------
Total Depreciation and Amortization............. $ 45.5 $ 70.2 $ 135.4
======== ======== ========
</TABLE>
49
<PAGE> 50
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Continuing Operations:
Refining and Marketing(a)......................... $ 87.5 $ 72.4 $ 38.0
Marine Services................................... 3.2 1.5 4.2
Corporate......................................... 3.3 10.8 7.8
-------- -------- --------
Total Continuing Operations..................... 94.0 84.7 50.0
Discontinued Operations.............................. -- 56.5 135.1
-------- -------- --------
Total Capital Expenditures...................... $ 94.0 $ 141.2 $ 185.1
======== ======== ========
IDENTIFIABLE ASSETS
Refining and Marketing............................... $1,394.7 $1,223.6 $1,077.7
Marine Services...................................... 76.8 66.5 59.2
Corporate............................................ 72.1 196.4 56.8
Net Assets of Discontinued Operations................ -- -- 212.7
-------- -------- --------
Total Assets.................................... $1,543.6 $1,486.5 $1,406.4
======== ======== ========
</TABLE>
- ---------------
(a) Excluding acquisitions of $536.5 million in 1998.
NOTE D -- ACQUISITIONS AND EXPANSIONS
Refining and Marketing Expansions
In January 2000, the Company entered into an agreement with Wal-Mart
Stores, Inc. ("Wal-Mart") to build and operate retail fueling facilities on
sites at selected existing and future Wal-Mart store locations in the western
United States. The Company introduced the new "Mirastar" brand which is used
exclusively in its program with Wal-Mart. Capital spending for the Mirastar
sites and other retail projects, including costs of Company-owned and operated
facilities and expansion of Tesoro's branded jobber/dealer network, totaled
approximately $31 million during 2000.
During 2000, the Company commenced a heavy oil conversion project at its
Washington refinery which will enable the Company to process a larger proportion
of lower-cost heavy crude oils, to manufacture a larger proportion of
higher-value gasoline, and to reduce production of lower-value heavy products.
The project, which is estimated to cost approximately $100 million (including
capitalized interest), is expected to be completed in late 2001. The Company's
capital spending totaled approximately $23 million during 2000 for this project.
In December 1999, the Company completed the installation of a distillate
treater at its Washington refinery which enables the refinery to increase its
production of low-sulfur diesel fuel and jet fuel. The distillate treater
installation, together with licensing fees and supporting infrastructure, cost
approximately $13 million.
In August 1999, the Company purchased a refined products terminal in
Anchorage, Alaska for approximately $8 million in cash. This terminal, which is
near the Company's other terminal in Anchorage, provides the Company with
additional storage and purchasing flexibility.
Acquisitions of Hawaii and Washington Refineries
In May 1998, the Company acquired (the "Hawaii Acquisition") all of the
outstanding capital stock of two affiliates of The Broken Hill Proprietary
Company Limited ("BHP"). The Hawaii Acquisition included a 95,000-barrel per day
refinery and 32 retail gasoline stations in Hawaii. Tesoro paid $252 million in
cash for the Hawaii Acquisition, including $77 million for working capital. In
addition, Tesoro issued an unsecured,
50
<PAGE> 51
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
non-interest bearing, promissory note ("BHP Note") which was repaid in 1999 and
2000 for a total of $28 million.
In August 1998, the Company acquired (the "Washington Acquisition" and
together with the Hawaii Acquisition, the "Acquisitions") all of the outstanding
stock of an affiliate of Shell Oil Company ("Shell"). The Washington Acquisition
included a 108,000-barrel per day refinery in Anacortes, Washington and related
assets. The total cash purchase price for the Washington Acquisition was $280
million, including $43 million for working capital.
The Acquisitions were accounted for as purchases whereby the purchase
prices were allocated to the assets acquired and liabilities assumed based upon
their respective fair market values at the dates of acquisition. Under purchase
accounting, financial results of the Acquisitions have been included in Tesoro's
Consolidated Financial Statements since the dates of acquisition. Tesoro's
consolidated results for the year ended December 31, 1998, on an unaudited pro
forma basis would have been as follows (in millions except per share amounts):
<TABLE>
<S> <C>
Revenues.................................................... $2,167.1
Earnings from continuing operations, net.................... $ 10.6
Loss before extraordinary item.............................. $ (12.0)
Net loss.................................................... $ (16.4)
Basic and diluted per share amounts:
Earnings from continuing operations....................... $ 0.36
Extraordinary loss on debt extinguishment................. $ (0.14)
Net loss.................................................. $ (0.88)
</TABLE>
See Note M for environmental matters related to the Acquisitions.
NOTE E -- DISCONTINUED OPERATIONS
In December 1999, the Company completed the sales of its domestic and
Bolivian exploration and production operations. The net cash proceeds of
approximately $307 million were used primarily to reduce debt in 1999 and early
2000. The Company's consolidated financial statements for periods prior to the
sales have been restated to report the net assets, results of operations and
cash flows of the exploration and production business as discontinued
operations. Earnings (loss) from discontinued operations for the years ended
December 31, 1999 and 1998 were as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
----- ------
<S> <C> <C>
Operating Results from Discontinued Operations:
Revenues.................................................. $65.4 $104.0
Costs and expenses........................................ 44.6 123.8
Allocated interest expense................................ 10.6 7.8
----- ------
Results of operations, pretax.......................... 10.2 (27.6)
Income tax expense (benefit).............................. 6.5 (5.0)
----- ------
Results of operations, aftertax........................ 3.7 (22.6)
----- ------
Gain from Sales of Discontinued Operations:
Gain, pretax.............................................. 62.2 --
Income tax expense........................................ 23.1 --
----- ------
Gain, aftertax......................................... 39.1 --
----- ------
Total Discontinued Operations..................... $42.8 $(22.6)
===== ======
</TABLE>
In 1998, revenues from discontinued operations included receipt of $21.3
million from an operator, representing funds related to a contingency matter.
Costs and expenses in 1998 included write-downs of oil
51
<PAGE> 52
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and gas properties of $68.3 million. Interest expense on corporate debt was
allocated to discontinued operations based on net assets. Income tax expense
(benefit) on discontinued operations included foreign income tax expense of $2.7
million and $5.2 million for 1999 and 1998, respectively.
NOTE F -- CAPITALIZATION
Debt and other obligations at December 31, 2000 and 1999 consisted of the
following (in millions):
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
9% Senior Subordinated Notes (net of unamortized discount of
$2.7 in 2000 and $2.9 in 1999)............................ $297.3 $297.1
Term loan and note repaid in 2000........................... -- 104.9
Liability to the Department of Energy, interest at 6%....... 5.3 6.6
Other, primarily capital leases............................. 8.0 9.0
------ ------
Total debt and other obligations....................... 310.6 417.6
Less current maturities..................................... 3.8 27.4
------ ------
Debt and other obligations, less current maturities.... $306.8 $390.2
====== ======
</TABLE>
At December 31, 2000, aggregate maturities of outstanding debt and other
obligations for each of the five years following December 31, 2000 were as
follows: 2001 -- $3.8 million; 2002 -- $3.6 million; 2003 -- $1.1 million;
2004 -- $1.4 million; and 2005 -- $1.2 million. These amounts include maturities
of the liability to the Department of Energy in equal annual installments in
2001 and 2002.
Credit Facility
In 2000, the Company and a group of banks entered into a new $250 million
unsecured revolving credit facility, consisting of a $150 million, 3-Year
Revolving Credit Agreement and a $100 million, 364-Day Revolving Credit
Agreement (collectively referred to as the "Credit Facility"). Each Revolving
Credit Agreement, which provides for cash borrowings and issuance of letters of
credit, can be extended for up to two one-year periods, subject to bank
approval. Borrowings under the Credit Facility bear interest, at the Company's
election, at either the Eurodollar Rate (6.56% at December 31, 2000) plus a
margin ranging from 1.0% to 2.0% or a Base Rate (9.50% at December 31, 2000).
The Company is also charged various fees and expenses in connection with the
Credit Facility, including commitment fees and various letter of credit fees. At
December 31, 2000, the Company had no revolving borrowings outstanding and $3.8
million in letters of credit outstanding, resulting in unused credit
availability of $246.2 million.
The Credit Facility requires the Company to maintain specified levels of
consolidated leverage and fixed charge coverages and includes a limitation on
the Company's debt to capital ratio. It also contains other covenants and
restrictions customary in credit arrangements of this kind. The terms of the
Credit Facility allow for payment of cash dividends on the Company's Common
Stock and repurchases of shares of its Common Stock, not to exceed an aggregate
of $15 million in any year. The Credit Facility also allows the Company to
repurchase up to 1,372,600 additional shares of its Common Stock under a share
repurchase program (described below) and to pay required dividends on the
Company's 7.25% Mandatorily Convertible Preferred Stock, so long as no default
or event of default is in existence.
The Credit Facility replaced the Company's previous credit facility, which
provided for $175 million in total commitments and was secured by substantially
all of the assets of the Company and its subsidiaries.
52
<PAGE> 53
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Subordinated Notes
In 1998, the Company issued $300 million aggregate principal amount of 9%
Senior Subordinated Notes due 2008, Series B ("Senior Subordinated Notes"). The
Senior Subordinated Notes have a ten-year maturity without sinking fund
requirements and are subject to optional redemption by the Company after five
years at declining premiums. The indenture ("Indenture") for the Senior
Subordinated Notes contains covenants and restrictions which are customary for
notes of this nature. The restrictions under the Indenture are less restrictive
than those in the Credit Facility. To the extent the Company's fixed charge
coverage ratio, as defined in the Indenture, allows for the incurrence of
additional indebtedness, the Company is allowed to pay cash dividends on Common
Stock and repurchase shares of Common Stock. The effective interest rate on the
Senior Subordinated Notes is 9.16%, after giving effect to the discount at the
date of issue.
Capital Leases
Capital leases are primarily for tugs and barges used in transportation of
petroleum products in Hawaii. At December 31, 2000 and 1999, the cost of capital
leases included in fixed assets was $10.0 million gross (accumulated
amortization of $3.1 million) and $10.4 million gross (accumulated amortization
of $2.0 million), respectively. Capital lease obligations included in debt
totaled $7.7 million and $8.7 million at December 31, 2000 and 1999,
respectively.
Preferred Stock and Common Stock
In May 1998, the Company filed a universal shelf registration statement
("Shelf Registration") for $600 million of debt or equity securities for
acquisitions or general corporate purposes. The Company offered Premium Income
Equity Securities ("PIES") and Common Stock from the Shelf Registration to
provide partial funding for the Acquisitions discussed in Note D. In July 1998,
the Company issued 10,350,000 PIES, representing fractional interests in the
Company's 7.25% Mandatorily Convertible Preferred Stock ("Preferred Stock"), for
gross proceeds of $165 million, and 5,750,000 shares of Common Stock, for gross
proceeds of $91.6 million. Holders of PIES are entitled to receive a cash
dividend until the PIES are converted to Common Stock. The scheduled dividends
on the PIES total $3 million per quarter, with the last scheduled quarterly
payment due on July 1, 2001.
The PIES will automatically convert into shares of Common Stock on July 1,
2001, at a conversion rate based upon a formula dependent upon the average
closing price per share ("Conversion Price") of Common Stock for the 20 trading
days prior to July 1, 2001. If the Conversion Price is less than or equal to
$15.9375, each PIES outstanding converts into one share of Common Stock. If the
Conversion Price is greater than or equal to $18.85, each PIES outstanding
converts into 0.8455 shares of Common Stock. If the Conversion Price is less
than $18.85 and more than $15.9375, each PIES outstanding converts into a
fraction ($15.9375 divided by the Conversion Price) of a share of Common Stock.
Before July 1, 2001, each PIES is convertible, at the option of the holder
thereof, into 0.8455 shares of Common Stock, subject to adjustment in certain
events, such as Common Stock splits and stock dividends.
In February 2000, the Company's Board of Directors authorized the
repurchase of up to 3 million shares of Tesoro Common Stock, which represented
approximately 9% of the shares then outstanding. Under the program, the Company
may make repurchases from time to time in the open market and through
privately-negotiated transactions. Purchases depend on price, market conditions
and other factors and have been made primarily from internally-generated cash
flow. The stock may be used to meet employee benefit plan requirements and other
corporate purposes. During the year ended December 31, 2000, the Company
repurchased 1.6 million shares of Common Stock for $15.5 million, or an average
cost per share of $9.54. For information concerning restrictions on the
repurchase of Common Stock, see "Credit Facility" and "Senior Subordinated
Notes" described above.
53
<PAGE> 54
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For information relating to stock-based compensation and Common Stock
reserved for exercise of options and conversion of Preferred Stock, see Note L.
NOTE G -- INCOME TAXES
The income tax provision (benefit) on continuing operations for the years
ended December 31, 2000, 1999 and 1998 included the following (in millions):
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Current:
Federal................................................... $24.2 $ 5.9 $(5.6)
State..................................................... 4.6 0.4 --
Deferred:
Federal................................................... 19.4 10.5 10.0
State..................................................... 2.0 2.2 0.1
----- ----- -----
Income Tax Provision................................... $50.2 $19.0 $ 4.5
===== ===== =====
</TABLE>
Deferred income taxes and benefits are provided for differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases. Temporary differences and the resulting deferred tax
liabilities and assets at December 31, 2000 and 1999 are summarized as follows
(in millions):
<TABLE>
<CAPTION>
2000 1999
------ -----
<S> <C> <C>
Deferred Federal Tax Liabilities:
Accelerated depreciation and property-related items....... $114.7 $95.2
Deferred turnaround costs................................. 9.4 12.9
LIFO inventory............................................ 6.6 --
------ -----
Total Deferred Federal Tax Liabilities................. 130.7 108.1
------ -----
Deferred Federal Tax Assets:
Accrued pension and postretirement benefits............... 23.7 20.0
Accrued environmental costs............................... 4.6 4.8
Liability to the Department of Energy..................... 1.9 2.3
Alternative minimum tax credits (carryforward available
indefinitely).......................................... 6.2 --
LIFO inventory............................................ -- 7.6
Other..................................................... 5.7 4.2
------ -----
Total Deferred Federal Tax Assets...................... 42.1 38.9
------ -----
Net Deferred Federal Tax Liability.......................... 88.6 69.2
State Income Taxes.......................................... 18.6 16.6
------ -----
Net Deferred Tax Liability............................. $107.2 $85.8
====== =====
</TABLE>
54
<PAGE> 55
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth earnings from continuing operations (in
millions) and a reconciliation of the normal statutory federal income tax rate
with the Company's effective tax rate (percent):
<TABLE>
<CAPTION>
2000 1999 1998
------ ----- -----
<S> <C> <C> <C>
Earnings from Continuing Operations Before Income Taxes and
Extraordinary Item........................................ $123.5 $51.2 $12.1
====== ===== =====
Statutory U.S. Corporate Tax Rate........................... 35% 35% 35%
Effect of:
State income taxes, net of tax benefit.................... 3 3 1
Non-deductible items...................................... 1 1 --
Other..................................................... 1 (2) 1
------ ----- -----
Effective Income Tax Rate................................... 40% 37% 37%
====== ===== =====
</TABLE>
NOTE H -- RECEIVABLES
Concentrations of credit risk with respect to accounts receivable are
influenced by the large number of customers comprising the Company's customer
base and their dispersion across various industry groups and geographic areas of
operations. The Company has not experienced unusual credit and collection
results related to recent conditions on the U.S. West Coast caused by the high
cost of power supplies. The Company performs ongoing credit evaluations of its
customers' financial condition and in certain circumstances requires letters of
credit or other collateral arrangements. The Company's allowance for doubtful
accounts is reflected as a reduction of receivables in the Consolidated Balance
Sheets and amounted to $2.1 million and $1.7 million at December 31, 2000 and
1999, respectively.
NOTE I -- INVENTORIES
Components of inventories at December 31, 2000 and 1999 were as follows (in
millions):
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Crude oil and refined products, at LIFO..................... $248.0 $147.8
Fuel products, at FIFO...................................... 4.5 9.9
Merchandise and other....................................... 5.6 6.0
Materials and supplies...................................... 16.2 18.5
------ ------
Total inventories...................................... $274.3 $182.2
====== ======
</TABLE>
At December 31, 2000, inventories valued using LIFO were lower than
replacement cost by approximately $120.0 million. During 1999, certain inventory
quantities were reduced, resulting in a liquidation of applicable LIFO inventory
quantities carried at lower costs prevailing in previous years. This LIFO
liquidation resulted in a decrease in cost of sales of $8.4 million and an
increase in earnings from continuing operations of approximately $5.3 million
aftertax, or $0.16 per share, during 1999.
55
<PAGE> 56
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- ACCRUED LIABILITIES
The Company's current accrued liabilities and noncurrent other liabilities
as shown in the Consolidated Balance Sheets at December 31, 2000 and 1999
included the following (in millions):
<TABLE>
<CAPTION>
2000 1999
----- -----
<S> <C> <C>
Accrued Liabilities -- Current:
Accrued taxes other than income taxes, primarily excise
taxes.................................................. $28.1 $26.5
Accrued employee costs.................................... 27.1 23.5
Other..................................................... 41.8 30.0
----- -----
Total Accrued Liabilities -- Current................... $97.0 $80.0
===== =====
Other Liabilities -- Noncurrent:
Accrued pension and other postretirement benefits......... $67.6 $57.2
Other..................................................... 9.7 8.6
----- -----
Total Other Liabilities -- Noncurrent.................. $77.3 $65.8
===== =====
</TABLE>
NOTE K -- BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company sponsors defined benefit pension plans, including an employee
retirement plan, executive security plans and a non-employee director retirement
plan.
For all eligible employees, the Company provides a qualified
noncontributory retirement plan ("Retirement Plan"). Plan benefits are based on
years of service and compensation. The Company's funding policy is to make
contributions at a minimum in accordance with the requirements of applicable
laws and regulations, but no more than the amount deductible for income tax
purposes. Retirement plan assets are primarily comprised of common stock and
bond funds.
The Company's executive security plans ("ESP Plans") provide executive
officers and other key personnel with supplemental death or retirement plans.
Such benefits are provided by two nonqualified, noncontributory plans and are
based on years of service and compensation. The Company makes contributions to
one plan, the "Funded ESP Plan", based upon estimated requirements. Assets of
the Funded ESP plan consist of a group annuity contract.
The Company had previously established an unfunded non-employee director
retirement plan ("Director Retirement Plan") which provided eligible directors
retirement payments upon meeting certain age or other requirements. In 1997, the
Director Retirement Plan was frozen with accrued benefits of current directors
transferred to the Company's Board of Directors Phantom Stock Plan ("Phantom
Stock Plan") (see Note L). After the amendment and transfer, only those retired
directors or beneficiaries who had begun to receive benefits remained
participants in the Director Retirement Plan.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," requires the Company to disclose the aggregate
projected benefit obligations, accumulated benefit obligations and fair value of
plan assets for pension plans with accumulated benefit obligations in excess of
plan assets. At December 31, 2000, the projected benefit obligations,
accumulated benefit obligations and fair value of plan assets aggregated $92.9
million, $71.5 million and $62.3 million, respectively, for three of the plans.
The assets of the Funded ESP Plan exceeded its accumulated benefit obligation at
year-end 2000. At December 31, 1999, the projected benefit obligations and
accumulated benefit obligations aggregated $2.4 million and $1.5 million,
respectively, for the unfunded ESP Plan and the Director Retirement Plan. The
assets of the Retirement Plan and Funded ESP plan exceeded their accumulated
benefit obligations at December 31, 1999.
56
<PAGE> 57
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company provides health care and life insurance benefits to retirees
who were participating in the Company's group insurance program at retirement.
Health care is provided to qualified dependents of participating retirees. These
benefits are provided through unfunded, defined benefit plans or through
contracts with area health-providers on a premium basis. The health care plans
are contributory, with retiree contributions adjusted periodically, and contain
other cost-sharing features such as deductibles and coinsurance. The life
insurance plan is noncontributory. The Company funds its share of the cost of
postretirement health care and life insurance benefits on a pay-as-you go basis.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care and life insurance plans. A
one-percentage-point change in assumed health care cost trend rates could have
the following effects (in millions):
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost
components............................................. $0.7 $(0.6)
Effect on postretirement benefit obligations............. $7.7 $(6.2)
</TABLE>
Financial information related to the Company's pension plans and other
postretirement benefits is presented below (in millions except percentages):
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- ---------------
2000 1999 2000 1999
------- ------- ------ ------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year.......... $ 94.4 $ 94.6 $ 38.1 $ 41.6
Service cost..................................... 6.1 6.6 1.6 1.9
Interest cost.................................... 7.5 6.2 3.2 2.8
Actuarial (gain) loss............................ 6.4 (6.5) 11.2 (7.7)
Benefits paid.................................... (6.2) (5.6) (1.8) (1.2)
Curtailments, special termination benefits and
other......................................... (0.1) (0.9) -- 0.7
------ ------ ------ ------
Benefit obligation at end of year............. 108.1 94.4 52.3 38.1
------ ------ ------ ------
Change in plan assets:
Fair value of plan assets at beginning of year... 79.2 69.1 -- --
Actual return on plan assets..................... (0.4) 9.9 -- --
Employer contributions........................... 1.7 5.7 -- --
Benefits paid.................................... (6.1) (5.5) -- --
------ ------ ------ ------
Fair value of plan assets at end of year...... 74.4 79.2 -- --
------ ------ ------ ------
Funded status...................................... (33.7) (15.2) (52.3) (38.1)
Unrecognized prior service cost.................... 0.5 0.5 0.7 0.7
Unrecognized net transition asset.................. 0.1 0.2 -- --
Unrecognized net actuarial (gain) loss............. 20.5 10.5 4.6 (6.8)
------ ------ ------ ------
Accrued benefit cost.......................... $(12.6) $ (4.0) $(47.0) $(44.2)
====== ====== ====== ======
Amounts recognized in Consolidated Balance Sheets:
Accrued liabilities.............................. $(20.6) $(13.0) $(47.0) $(44.2)
Prepaid benefit cost............................. 8.0 9.0 -- --
------ ------ ------ ------
Net amount recognized......................... $(12.6) $ (4.0) $(47.0) $(44.2)
====== ====== ====== ======
</TABLE>
57
<PAGE> 58
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------- -----------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Assumed weighted average % as of December
31:
Discount rate.......................... 7.58 8.25 6.75 7.50 8.25 6.75
Rate of compensation increase.......... 5.40 5.62 4.33 5.75 5.75 4.25
Expected return on plan assets......... 8.07 8.10 8.03 -- -- --
</TABLE>
The weighted average annual assumed rate of increase in the per capita cost
of covered health care benefits was assumed to be 7.5% for retirees younger than
65 for 2000, decreasing gradually to 5% by the year 2010, and an initial 9.5%
for retirees 65 and older, decreasing gradually to 5.5% by the year 2010 and
remaining level thereafter.
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------- ------------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost:
Service cost....................... $ 6.1 $ 6.6 $ 4.2 $ 1.6 $1.9 $1.2
Interest cost...................... 7.5 6.2 4.9 3.2 2.8 2.2
Expected return on plan assets..... (5.9) (5.0) (4.2) -- -- --
Amortization of unrecognized
transition asset................ -- (0.6) (1.1) -- -- --
Recognized net actuarial loss...... 2.2 1.5 1.0 (0.2) -- --
Curtailments, settlements and
special termination benefits.... 0.5 (0.4) 0.5 -- -- --
----- ----- ----- ----- ---- ----
Net periodic benefit cost..... $10.4 $ 8.3 $ 5.3 $ 4.6 $4.7 $3.4
===== ===== ===== ===== ==== ====
</TABLE>
Thrift Plan
The Company sponsors an employee thrift plan ("Thrift Plan") which provides
for contributions, subject to certain limitations, by eligible employees into
designated investment funds with a matching contribution by the Company.
Employees may elect tax deferred treatment in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. Effective September 1, 1998, the
Thrift Plan was amended to change the Company's 100% matching contribution, from
a maximum of 4% to 6% of the employee's eligible contribution, with at least 50%
of the Company's matching contribution invested in Common Stock of the Company.
The Company's contributions amounted to $5.4 million, $6.8 million and $3.2
million during 2000, 1999 and 1998, respectively.
Effective January 1, 2001, the Company began sponsoring a new savings plan,
in lieu of the Thrift Plan, for eligible retail employees who have completed one
year of service and have worked at least 1,000 hours within that time. Eligible
employees will receive a mandatory employer contribution equal to 3% of eligible
earnings. If employees elect to make pretax contributions, the Company will also
contribute an employer match contribution equal to $0.50 for each $1.00 of
employee contributions, up to 6% of eligible earnings. At least 50% of the
mandatory and matching employer contributions must be invested in Common Stock
of the Company.
58
<PAGE> 59
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- STOCK-BASED COMPENSATION
Incentive Stock Plans
The Company has three employee incentive stock plans, the Key Employee
Stock Option Plan, as amended ("1999 Plan"), the Amended and Restated Executive
Long-Term Incentive Plan ("1993 Plan") and Amended Incentive Stock Plan of 1982
("1982 Plan"). In addition, the Company has the 1995 Non-Employee Director Stock
Option Plan ("1995 Plan").
Under the 1993 Plan, shares of Common Stock may be granted in a variety of
forms, including restricted stock, incentive stock options, nonqualified stock
options, stock appreciation rights and performance share and performance unit
awards. At the Company's 2000 Annual Meeting of Stockholders held in May 2000,
an amendment was approved by the shareholders which increased the number of
shares available for grant under the 1993 Plan from 4,250,000 to 5,250,000.
Stock options may be granted at exercise prices not less than the fair market
value on the date the options are granted. The options granted generally become
exercisable after one year in 20%, 25% or 33% increments per year and expire ten
years from the date of grant. The 1993 Plan will expire, unless earlier
terminated, as to the issuance of awards in the year 2003. At December 31, 2000,
the Company had 497,040 shares available for future grants under the 1993 Plan.
In November 1999, the Company's Board of Directors approved the 1999 Plan
which provides for the granting of stock options to eligible persons employed by
the Company who are not executive officers of the Company. Under the 1999 Plan,
the total number of stock options which may be granted is 800,000 shares. Stock
options may be granted at not less than the fair market value on the date the
options are granted and generally become exercisable after one year in 25%
increments. The options expire after ten years from the date of grant. The Board
of Directors may amend, terminate or suspend the 1999 Plan at any time. At
December 31, 2000, the Company had 83,000 shares available for future grants
under the 1999 Plan.
The 1982 Plan expired in 1994 as to issuance of stock appreciation rights,
stock options and stock awards; however, grants made before the expiration date,
that have not been fully exercised, remain outstanding pursuant to their terms.
The 1995 Plan provides for the grant of up to an aggregate of 150,000
nonqualified stock options to eligible non-employee directors of the Company.
These automatic, non-discretionary stock options are granted at an exercise
price equal to the fair market value per share of the Company's Common Stock as
of the date of grant. The term of each option is ten years, and an option first
becomes exercisable six months after the date of grant. The 1995 Plan will
terminate as to issuance of stock options in February 2005. At December 31,
2000, the Company had 88,000 options outstanding and 39,000 shares available for
future grants under the 1995 Plan.
59
<PAGE> 60
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity for all plans is set forth below (shares
in thousands):
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Outstanding January 1, 1998.............................. 2,207.9 $12.26
Granted................................................ 801.2 15.94
Exercised.............................................. (34.1) 10.42
Forfeited and expired.................................. (23.4) 12.16
-------
Outstanding December 31, 1998............................ 2,951.6 13.28
Granted................................................ 940.0 12.85
Exercised.............................................. (42.5) 10.86
Forfeited and expired.................................. (95.7) 14.63
-------
Outstanding December 31, 1999............................ 3,753.4 13.17
Granted................................................ 1,492.0 10.01
Exercised.............................................. (28.7) 7.42
Forfeited and expired.................................. (193.5) 14.03
-------
Outstanding December 31, 2000............................ 5,023.2 12.23
=======
</TABLE>
At December 31, 2000, 1999 and 1998, exercisable stock options totaled 2.4
million, 2.0 million and 1.4 million, respectively.
The following table summarizes information about stock options outstanding
under all plans at December 31, 2000 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.92 to $ 7.59 166.6 2.2 years $ 4.46 166.6 $ 4.46
$ 7.60 to $11.27 1,989.3 8.5 years 9.68 509.1 8.69
$11.28 to $14.95 1,768.2 7.3 years 13.30 1,095.7 13.55
$14.96 to $18.63 1,099.1 7.5 years 16.30 670.9 16.41
------- -------
$ 3.92 to $18.63 5,023.2 7.6 years 12.23 2,442.3 12.70
======= =======
</TABLE>
Phantom Stock Plan
Under the Phantom Stock Plan, a yearly credit of $7,250 is made in units to
an account ("Account") of each non-employee director, based upon the closing
market price of the Company's Common Stock on the date of credit. In addition, a
director may elect to have the value of his cash retainer fee deposited
quarterly into the Account in units. Certain non-employee directors also
received a credit in their Account in 1997 arising from the transfer of their
lump-sum accrued benefit under the frozen Director Retirement Plan. The value of
each Account balance, which is a function of the amount, if any, by which the
market value of the Company's Common Stock changes, is payable in cash at
termination (if vested with three years of service) or at retirement, death or
disability. The Company's results of operations included expense of $201,000 and
$44,000 in 2000 and 1999, respectively, and a credit to expense of $110,000 in
1998 related to the Phantom Stock Plan.
60
<PAGE> 61
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Phantom Stock Agreement
The chief executive officer of the Company holds 175,000 phantom stock
options, which were granted in 1997 at 100% of the fair value of the Company's
Common Stock on the grant date, or $16.9844 per share. These phantom stock
options vest in 15% increments in each of the first three years and the
remaining 55% increment vests in the fourth year. At December 31, 2000, 78,750
of these phantom stock options were exercisable. Upon exercise, the chief
executive officer would be entitled to receive in cash the difference between
the fair market value of the Common Stock on the date of the phantom stock
option grant and the fair market value of Common Stock on the date of exercise.
At the discretion of the Compensation Committee of the Board of Directors, these
phantom stock options may be converted to traditional stock options under the
1993 Plan.
Incentive Compensation
In October 1998, the Company's Board of Directors unanimously approved the
1998 Performance Incentive Compensation Plan ("Performance Plan"), which is
intended to advance the best interests of the Company and its stockholders by
directly targeting Company performance to align with the ninetieth percentile
historical stock-price growth rate for the Company's peer group. In addition,
the Performance Plan will provide the Company's employees with additional
compensation, contingent upon achievement of the targeted objectives, thereby
encouraging them to continue in the employ of the Company. Under the Performance
Plan, targeted objectives are comprised of the fair market value of the
Company's Common Stock equaling or exceeding an average of $35 per share ("First
Performance Target") and $45 per share ("Second Performance Target") on any 20
consecutive trading days during a period commencing on October 1, 1998 and
ending on the earlier of September 30, 2002, or the date on which the Second
Performance Target is achieved ("Performance Period"). The Performance Plan has
several tiers of awards, with the award generally determined by job level. Most
eligible employees have contingent cash bonus opportunities of 25% of their
annual "basic compensation" (as defined in the Performance Plan) and three
executive officers have contingent awards totaling 655,000 shares of phantom
stock which will be payable solely in cash. Upon achievement of the First
Performance Target, one-fourth of the contingent award will be earned, with
payout deferred until the end of the Performance Period. The remaining 75% will
be earned only upon achievement of the Second Performance Target, with payout
occurring 30 days thereafter. Employees will need to have at least one year of
regular, full-time service at the time the Performance Period ends in order to
be eligible for a payment. No costs will be recorded until the First Performance
Target is reached. The Company estimates that it will incur costs of
approximately 2% of the total aggregate increase in shareholder value if the
First Performance Target is reached and will incur an additional 4% charge if
the Second Performance Target is reached.
In 1998, under a previous special incentive compensation strategy, the
Company incurred a pretax charge of approximately $19.1 million, of which $7.1
million related to operating segments, when the market price of the Company's
Common Stock achieved a specific performance target. Of this charge,
approximately $10 million related to noncash vesting of restricted stock awards
and stock options and $9 million related to cash bonuses.
Pro Forma Information
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation. Had compensation cost been
determined based on the fair value at the grant dates for awards in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's pro
forma results in 2000, 1999 and 1998 would have been net earnings of $68.9
million ($1.82 per basic share, $1.65 per diluted share), net earnings of $71.4
million ($1.83 per basic share, $1.81 per diluted share) and a net loss of $22.3
million ($0.96 per basic and diluted share), respectively. The fair value of
each option grant was
61
<PAGE> 62
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: expected volatility of 57%, 48% and
49%; risk free interest rates of 5.8%, 6.1% and 4.7%; expected lives of seven
years; and no dividend yields for 2000, 1999 and 1998, respectively. The
estimated average fair value per share of options granted during 2000, 1999 and
1998 were $6.21, $7.48 and $7.85, respectively. The fair value of phantom stock
awards in 1998 was $0.82 per share.
Shares Reserved
Shares of unissued Common Stock reserved for the employee incentive stock
plans and non-employee director plan totaled 5,651,212 at December 31, 2000. In
addition, at December 31, 2000, 8,750,925 shares of unissued Common Stock were
reserved for the conversion of Preferred Stock, which may increase to a maximum
of 10,350,000 on July 1, 2001 (see Note F).
NOTE M -- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has various noncancellable operating leases related to
buildings, equipment, property, retail facilities, and a ship charter. These
leases have remaining primary terms generally up to ten years, with terms of
certain rights-of-way extending up to 30 years, and generally contain multiple
renewal options. During January 2000, the Company entered into an agreement with
Wal-Mart to build and operate retail fueling facilities on sites at selected
existing and future Wal-Mart store locations in the western United States. Under
the agreement with Wal-Mart, each site will be subject to a lease with a
ten-year primary term and an option, exercisable at the Company's discretion, to
extend a site's lease for two additional terms of five years each. The Company's
ship charter for the Cape Lookout Shoals, which is used to transport crude oil
and refined products, has a three-year primary term at an annual cost of
approximately $10 million beginning in May 2000 and two one-year options. Future
minimum annual lease payments as of December 31, 2000, for operating leases
having initial or remaining noncancellable lease terms in excess of one year,
including the Wal-Mart leases and ship charter, were as follows (in millions):
<TABLE>
<S> <C>
2001........................................................ $ 26.6
2002........................................................ 25.3
2003........................................................ 18.0
2004........................................................ 14.1
2005........................................................ 13.5
Remainder................................................... 137.2
</TABLE>
Total rental expense for short-term and long-term leases, excluding marine
charters, amounted to approximately $26 million, $27 million and $20 million for
2000, 1999 and 1998, respectively. Total marine charter expense was $34 million
in 2000, $37 million in 1999 and $34 million in 1998. In addition, the Company
leases tugs and barges for its Hawaii operations under capital leases (see Note
F) whereby the Company pays operating costs, such as personnel, repairs,
maintenance and drydocking costs, which amounted to approximately $8 million in
2000. The Company also enters into various short-term charters for vessels to
transport refined products from the Company's refineries and terminals and to
deliver products to customers.
On March 23, 2001, the Company entered into a charter for a sister ship to
the Cape Lookout Shoals. This charter has a two-year primary term at an annual
cost of approximately $12 million, beginning in mid-2001, with an option to
renew for an additional year.
Other Commitments
In the normal course of business, the Company has long-term commitments to
purchase supplies of electricity, water and oxygen for consumption by certain of
its refineries. The minimum annual payments
62
<PAGE> 63
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under these contracts are estimated to total $1.2 million in 2001, $2.9 million
in 2002 and $3.4 million in each of the years 2003, 2004 and 2005. The remaining
minimum commitment totals approximately $26 million over nine years.
Under an agreement with the State of Alaska ("State"), the Company is
obligated to pay the State a throughput charge of $0.33 per barrel in 2001 with
respect to barrels of feedstock processed at the Alaska refinery which exceed
50,000 barrels per day on a monthly basis, subject to available credits. No
throughput payments were required in 2000, 1999 or 1998.
Environmental and Other
The Company is a party to various litigation and contingent loss
situations, including environmental and income tax matters, arising in the
ordinary course of business. The Company has made accruals in accordance with
SFAS No. 5, "Accounting for Contingencies," in order to provide for these
matters. The ultimate effects of these matters cannot be predicted with
certainty, and related accruals are based on management's best estimates,
subject to future developments. Although the resolution of certain of these
matters could have a material adverse impact on interim or annual results of
operations, the Company believes that the outcome of these matters will not
result in a material adverse effect on its liquidity or consolidated financial
position.
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which change frequently, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites or install additional controls
or other modifications or changes in use for certain emission sources.
The Company is currently involved with the U.S. Environmental Protection
Agency ("EPA") regarding a waste disposal site near Abbeville, Louisiana. The
Company has been named a potentially responsible party under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"
or "Superfund") at this location. Although the Superfund law may impose joint
and several liability upon each party at the site, the extent of the Company's
allocated financial contributions for cleanup is expected to be de minimis based
upon the number of companies, volumes of waste involved and total estimated
costs to close the site. The Company believes, based on these considerations and
discussions with the EPA, that its liability at the Abbeville site will not
exceed $25,000.
In connection with the Hawaii Acquisition discussed in Note D, affiliates
of BHP and the Company executed a separate environmental agreement, whereby the
BHP affiliates indemnified the Company for environmental costs arising out of
conditions which existed at or prior to closing. This indemnification, which is
in effect until 2008, is subject to a maximum limit of $9.5 million ($7.3
million remaining as of December 31, 2000). Under the environmental agreement,
the first $5.0 million of these liabilities will be the responsibility of the
BHP affiliates and the next $6.0 million will be shared on the basis of 75% by
the BHP affiliates and 25% by the Company. Certain environmental claims arising
out of prior operations will not be subject to the $9.5 million limit or the
ten-year time limit. The indemnity obligation of the BHP affiliates are
guaranteed by BHP.
Under the agreement related to the Washington Acquisition discussed in Note
D, an affiliate of Shell generally agreed to indemnify the Company for
environmental liabilities at the Washington refinery arising out of conditions
which existed at or prior to the closing date and identified by the Company
prior to August 1, 2001. The Company is responsible for environmental costs up
to the first $0.5 million each year, after which the Shell affiliate will be
responsible for annual environmental costs up to $1.0 million. Annual costs
greater than $1.0 million will be shared equally between the Company and the
Shell affiliate, subject to an aggregate maximum of $5.0 million and a ten-year
term. The indemnity obligation of Shell's affiliate is guaranteed by Shell.
63
<PAGE> 64
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is also involved in remedial responses and has incurred cleanup
expenditures associated with environmental matters at a number of sites,
including certain of its owned properties. At December 31, 2000, the Company's
accruals for environmental expenses totaled $13.2 million. Based on currently
available information, including the participation of other parties or former
owners in remediation actions, the Company believes these accruals are adequate.
The Company is currently evaluating certain newly promulgated revisions to
the Clean Air Act regulations, which will require a reduction in the sulfur
content in gasoline by January 1, 2004. To meet the revised gasoline standard,
the Company expects, based upon most recent cost estimates, to make capital
improvements of approximately $40 million to $50 million at its Washington
refinery. Additionally, the Company expects to spend approximately $15 million
in capital improvements over the next four years to comply with the second phase
of Maximum Achievable Control Technologies for petroleum refineries ("Refinery
MACT II") which was signed into law on January 18, 2001. Management expects that
the Refinery MACT II regulations will require new emission controls at certain
processing units at each of the Company's refineries.
On December 21, 2000, the EPA announced new standards that will require a
reduction in sulfur content in diesel fuel manufactured for on-road consumption.
In general, the new diesel fuel standards will become effective on June 1, 2006.
Although the Company is evaluating the new diesel fuel standards with respect to
its Alaska operations, the Company estimates that the demand for ultra low
sulfur diesel in Alaska will not be significant and should not have a material
impact on its operations. The Hawaii refinery is currently capable of producing
diesel fuels that comply with the new standards. For the Washington refinery,
the Company is currently evaluating the impact of the new diesel fuel standards
on production, equipment requirements and related costs.
To comply with environmental laws and regulations, the Company anticipates
that it will make other capital improvements of approximately $8 million in 2001
and $16 million in 2002. During 2000, the Company spent approximately $10
million on environmental capital projects, primarily for improvements to crude
oil and product tanks and tank farm secondary containment.
Conditions that require additional expenditures may exist for various
Company sites, including, but not limited to, the Company's refineries, tank
farms, retail gasoline stations (operating and closed locations) and petroleum
product terminals, and for compliance with the Clean Air Act and other state and
federal requirements. The amount of such future expenditures cannot currently be
determined by the Company.
See Note L for information related to special incentive compensation.
64
<PAGE> 65
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS
----------------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- --------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
2000
Revenues..................................... $1,055.3 $1,218.2 $1,394.6 $1,436.3 $5,104.4
Segment Operating Profit..................... $ 34.0 $ 42.5 $ 64.1 $ 58.9 $ 199.5
Net Earnings................................. $ 9.3 $ 14.6 $ 25.0 $ 24.4 $ 73.3
Net Earnings Per Share:
Basic..................................... $ 0.20 $ 0.37 $ 0.71 $ 0.69 $ 1.96
Diluted................................... $ 0.20 $ 0.35 $ 0.60 $ 0.59 $ 1.75
1999
Revenues..................................... $ 493.4 $ 738.8 $ 893.5 $ 874.6 $3,000.3
Segment Operating Profit (Loss).............. $ 17.9 $ 68.8 $ 59.8 $ (15.5) $ 131.0
Earnings (Loss) From Continuing Operations,
Net....................................... $ 0.2 $ 32.6 $ 23.0 $ (23.6) $ 32.2
Earnings (Loss) From Discontinued Operations,
Net....................................... $ 0.1 $ (0.1) $ 2.3 $ 40.5 $ 42.8
Net Earnings................................. $ 0.3 $ 32.5 $ 25.3 $ 16.9 $ 75.0
Earnings (Loss) Per Share from Continuing
Operations:
Basic..................................... $ (0.09) $ 0.92 $ 0.62 $ (0.82) $ 0.62
Diluted................................... $ (0.09) $ 0.76 $ 0.53 $ (0.82) $ 0.62
Net Earnings (Loss) Per Share:
Basic..................................... $ (0.08) $ 0.91 $ 0.69 $ 0.43 $ 1.94
Diluted................................... $ (0.08) $ 0.76 $ 0.58 $ 0.43 $ 1.92
</TABLE>
During the fourth quarter of 1999, a liquidation of LIFO inventory
quantities resulted in a decrease in cost of sales of $8.4 million and an
increase in net earnings from continuing operations of approximately $5.3
million, or $0.16 per share (Note I). Also in the fourth quarter of 1999, the
Company recorded an aftertax gain of $39.1 million in discontinued operations
for the sale of its exploration and production business (Note E). In the 1999
third quarter, the Company accrued a liability of $3.0 million pretax related to
a litigation settlement with the State of Hawaii, which was subsequently paid in
2000.
65
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this Item will be contained in the Company's
2001 Proxy Statement, incorporated herein by reference. See also Executive
Officers of the Registrant under Business in Item 1 hereof.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the Company's
2001 Proxy Statement, incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item will be contained in the Company's
2001 Proxy Statement, incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item will be contained in the Company's
2001 Proxy Statement, incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Tesoro Petroleum
Corporation and its subsidiaries are included in Part II, Item 8 of this Form
10-K:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 39
Statements of Consolidated Operations -- Years Ended
December 31, 2000, 1999 and 1998.......................... 40
Consolidated Balance Sheets -- December 31, 2000 and 1999... 41
Statements of Consolidated Stockholders' Equity -- Years
Ended December 31, 2000, 1999 and 1998.................... 42
Statements of Consolidated Cash Flows -- Years Ended
December 31, 2000, 1999 and 1998.......................... 43
Notes to Consolidated Financial Statements.................. 44
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are submitted because of the absence of
the conditions under which they are required or because the required information
is included in the Consolidated Financial Statements or notes thereto.
66
<PAGE> 67
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 -- Stock Sale Agreement, dated March 18, 1998, among the
Company, BHP Hawaii Inc. and BHP Petroleum Pacific
Islands Inc. (incorporated by reference herein to Exhibit
2.1 to Registration Statement No. 333-51789).
2.2 -- Stock Sale Agreement, dated May 1, 1998, among Shell
Refining Holding Company, Shell Anacortes Refining
Company and the Company (incorporated by reference herein
to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1998, File No. 1-3473).
2.3 -- Stock Purchase Agreement, dated as of October 8, 1999,
but effective as of July 1, 1999 among the Company,
Tesoro Gas Resources Company, Inc., EEX Operating LLC and
EEX Corporation (incorporated by reference herein to
Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on January 3, 2000, File No. 1-3473).
2.4 -- First Amendment to Stock Purchase Agreement dated
December 16, 1999, but effective as of October 8, 1999,
among the Company, Tesoro Gas Resources Company, Inc.,
EEX Operating LLC and EEX Corporation (incorporated by
reference herein to Exhibit 2.2 to the Company's Current
Report on Form 8-K filed on January 3, 2000, File No.
1-3473).
2.5 -- Purchase Agreement dated as of December 17, 1999 among
the Company, Tesoro Gas Resources Company, Inc. and EEX
Operating LLC (Membership Interests in Tesoro Grande LLC)
(incorporated by reference herein to Exhibit 2.3 to the
Company's Current Report on Form 8-K filed on January 3,
2000, File No. 1-3473).
2.6 -- Purchase Agreement dated as of December 17, 1999 among
the Company, Tesoro Gas Resources Company, Inc. and EEX
Operating LLC (Membership Interests in Tesoro Reserves
Company LLC) (incorporated by reference herein to Exhibit
2.4 to the Company's Current Report on Form 8-K filed on
January 3, 2000, File No. 1-3473).
2.7 -- Purchase Agreement dated as of December 17, 1999 among
the Company, Tesoro Gas Resources Company, Inc. and EEX
Operating LLC (Membership Interests in Tesoro Southeast
LLC) (incorporated by reference herein to Exhibit 2.5 to
the Company's Current Report on Form 8-K filed on January
3, 2000, File No. 1-3473).
2.8 -- Stock Purchase Agreement, dated as of November 19, 1999,
by and between the Company and BG International Limited
(incorporated by reference herein to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on January 13,
2000, File No. 1-3473).
3.1 -- Restated Certificate of Incorporation of the Company
(incorporated by reference herein to Exhibit 3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, File No. 1-3473).
3.2 -- By-Laws of the Company, as amended through June 6, 1996
(incorporated by reference herein to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, File No. 1-3473).
3.3 -- Amendment to Restated Certificate of Incorporation of the
Company adding a new Article IX limiting Directors'
Liability (incorporated by reference herein to Exhibit
3(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, File No. 1-3473).
</TABLE>
67
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.4 -- Certificate of Designation Establishing a Series of $2.20
Cumulative Convertible Preferred Stock, dated as of
January 26, 1983 (incorporated by reference herein to
Exhibit 3(c) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, File No.
1-3473).
3.5 -- Certificate of Designation Establishing a Series A
Participating Preferred Stock, dated as of December 16,
1985 (incorporated by reference herein to Exhibit 3(d) to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, File No. 1-3473).
3.6 -- Certificate of Amendment, dated as of February 9, 1994,
to Restated Certificate of Incorporation of the Company
amending Article IV, Article V, Article VII and Article
VIII (incorporated by reference herein to Exhibit 3(e) to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, File No. 1-3473).
3.7 -- Certificate of Amendment, dated as of August 3, 1998, to
Certificate of Incorporation of the Company, amending
Article IV, increasing the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000 (incorporated
by reference herein to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the period ended
September 30, 1998, File No. 1-3473).
3.8 -- Certificate of Designation of 7.25% Mandatorily
Convertible Preferred Stock (incorporated by reference
herein to Exhibit 4.1 to the Company's Current Report on
Form 8-K filed on July 1, 1998, File No. 1-3473).
4.1 -- Form of Coastwide Energy Services Inc. 8% Convertible
Subordinated Debenture (incorporated by reference herein
to Exhibit 4.3 to Post-Effective Amendment No. 1 to
Registration No. 333-00229).
4.2 -- Debenture Assumption and Conversion Agreement dated as of
February 20, 1996, between the Company, Coastwide Energy
Services, Inc. and CNRG Acquisition Corp. (incorporated
by reference herein to Exhibit 4.4 to Post-Effective
Amendment No. 1 to Registration No. 333-00229).
4.3 -- Form of Cancellation/Substitution Agreement by and
between the Company, Coastwide Energy Services, Inc. and
Optionee (incorporated by reference herein to Exhibit 4.6
to Post-Effective Amendment No. 1 to Registration No.
333-00229).
4.4 -- Indenture, dated as of July 2, 1998, between Tesoro
Petroleum Corporation and U.S. Bank Trust National
Association, as Trustee (incorporated by reference herein
to Exhibit 4.4 to Registration Statement No. 333-59871).
4.5 -- Form of 9% Senior Subordinated Notes due 2008 and 9%
Senior Subordinated Notes due 2008, Series B (filed as
part of Exhibit 4.4 hereof) (incorporated by reference
herein to Exhibit 4.5 to Registration Statement No.
333-59871).
4.6 -- Deposit Agreement among the Company, The Bank of New York
and the holders from time to time of depository receipts
executed and delivered thereunder (incorporated by
reference to Exhibit 4.2 to the Company's Current Report
on Form 8-K filed on July 1, 1998, File No. 1-3473).
4.7 -- Form of depository receipt evidencing ownership of
Premium Income Equity Securities (filed as a part of
Exhibit 4.10 hereof) incorporated by reference herein to
Exhibit 4.9 to Registration Statement No. 333-59871).
</TABLE>
68
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.1 -- $150,000,000 Revolving Credit Agreement, dated as of
October 4, 2000, among the Company, the Lender parties
thereto, Banc One Capital Markets, Inc., an Arranger,
Bank One, NA, as Administrative Agent, The Bank of Nova
Scotia, as Syndication Agent, and ABN AMRO Bank, N.V., as
Documentation Agent (incorporated by reference herein to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000,
File No. 1-3473).
10.2 -- $100,000,000 364-Day Revolving Credit Agreement, dated as
of October 4, 2000, among the Company, the Lender parties
thereto, Banc One Capital Markets, Inc., as Arranger,
Bank One, NA, as Administrative Agent, the Bank of Nova
Scotia, as Syndication Agent, and ABN AMRO Bank, N.V., as
Documentation Agent (incorporated by reference herein to
Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000,
File No. 1-3473).
10.3 -- Registration Rights Agreement, dated as of July 2, 1998,
among Tesoro Petroleum Corporation, Lehman Brothers Inc.,
Bear, Stearns & Co. Inc. and Salomon Smith Barney
(incorporated by reference herein to Exhibit 10.1 to
Registration Statement No. 333-59871).
+10.4 -- The Company's Amended Executive Security Plan, as amended
through November 13, 1989, and Funded Executive Security
Plan, as amended through February 28, 1990, for executive
officers and key personnel (incorporated by reference
herein to Exhibit 10(f) to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1990,
File No. 1-3473).
+10.5 -- Sixth Amendment to the Company's Amended Executive
Security Plan and Seventh Amendment to the Company's
Funded Executive Security Plan, both dated effective
March 6, 1991 (incorporated by reference herein to
Exhibit 10(g) to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1991, File No.
1-3473).
+10.6 -- Seventh Amendment to the Company's Amended Executive
Security Plan and Eighth Amendment to the Company's
Funded Executive Security Plan, both dated effective
December 8, 1994 (incorporated by reference herein to
Exhibit 10(f) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, File No.
1-3473).
+10.7 -- Eighth Amendment to the Company's Amended Executive
Security Plan and Ninth Amendment to the Company's Funded
Executive Security Plan, both dated effective June 6,
1996 (incorporated by reference herein to Exhibit 10.5 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, File No. 1-3473).
+10.8 -- Ninth Amendment to the Company's Amended Executive
Security Plan and Tenth Amendment to the Company's Funded
Executive Security Plan, both dated effective October 1,
1998 (incorporated by reference herein to Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, File No. 1-3473).
+10.9 -- Amended and Restated Employment Agreement between the
Company and Bruce A. Smith dated November 1, 1997
(incorporated by reference therein to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, File No. 1-3473).
</TABLE>
69
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
+10.10 -- First Amendment dated October 28, 1998 to Amended and
Restated Employment Agreement between the Company and
Bruce A. Smith dated November 1, 1997 (incorporated by
reference herein to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998, File No. 1-3473).
+10.11 -- Amendment and Restated Employment Agreement between the
Company and William T. Van Kleef dated as of October 28,
1998 (incorporated by reference herein to Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, File No. 1-3473).
+10.12 -- Amended and Restated Employment Agreement between the
Company and James C. Reed, Jr. dated as of October 28,
1998 (incorporated by reference herein to Exhibit 10.10
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, File No. 1-3473).
+10.13 -- Management Stability Agreement between the Company and
Thomas E. Reardon dated December 14, 1994 (incorporated
by reference herein to Exhibit 10(w) to Registration
Statement No. 333-00229).
+10.14 -- Management Stability Agreement between the Company and
Faye W. Kurren dated March 15, 2000 (incorporated by
reference herein to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000, File No. 1-3473).
+10.15 -- Management Stability Agreement between the Company and
Donald A. Nyberg dated December 12, 1996 (incorporated by
reference herein to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997, File No. 1-3473).
+10.16 -- Management Stability Agreement between the Company and
Richard M. Parry dated March 15, 2000 (incorporated by
reference herein to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000, File No. 1-3473).
+10.17 -- Management Stability Agreement between the Company and
Joseph E. Sparano dated March 15, 2000 (incorporated by
reference herein to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000, File No. 1-3473).
+10.18 -- Management Stability Agreement between the Company and
Steve Wormington dated September 27, 1995 (incorporated
by reference herein to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-3473).
+10.19 -- Management Stability Agreement between the Company and
Don M. Heep dated December 12, 1996 (incorporated by
reference herein to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998, File No. 1-3473).
+10.20 -- Management Stability Agreement between the Company and
Gregory A. Wright dated February 23, 1995 (incorporated
by reference herein to Exhibit 10(p) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-3473).
+10.21 -- Management Stability Agreement between the Company and
Sharon L. Layman dated December 14, 1994 (incorporated by
reference herein to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1999, File No. 1-3473).
</TABLE>
70
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
+10.22 -- The Company's Amended Incentive Stock Plan of 1982, as
amended through February 24, 1988 (incorporated by
reference herein to Exhibit 10(t) to the Company's Annual
Report on Form 10-K for the fiscal year ended September
30, 1988, File No. 1-3473).
+10.23 -- Resolution approved by the Company's stockholders on
April 30, 1992 extending the term of the Company's
Amended Incentive Stock Plan of 1982 to February 24, 1994
(incorporated by reference herein to Exhibit 10(o) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, File No. 1-3473).
+10.24 -- Copy of the Company's Amended and Restated Executive
Long-Term Incentive Plan, as amended through May 25, 2000
(incorporated by reference herein to Exhibit 99.1 to the
Company's Registration Statement No. 333-39070 filed on
Form S-8).
+10.25 -- Copy of the Company's 1998 Performance Incentive
Compensation Plan (incorporated by reference herein to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1998, File No.
1-3473).
+10.26 -- Copy of the Company's Non-Employee Director Retirement
Plan dated December 8, 1994 (incorporated by reference
herein to Exhibit 10(t) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994,
File No. 1-3473).
+10.27 -- Copy of the Company's Board of Directors Deferred
Compensation Plan dated February 23, 1995 (incorporated
by reference herein to Exhibit 10(u) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-3473).
+10.28 -- Copy of the Company's Board of Directors Deferred
Compensation Trust dated February 23, 1995 (incorporated
by reference herein to Exhibit 10(v) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-3473).
+10.29 -- Copy of the Company's Board of Directors Deferred Phantom
Stock Plan (incorporated by reference herein to Exhibit
10 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997, File No. 1-3473).
+10.30 -- Phantom Stock Option Agreement between the Company and
Bruce A. Smith dated effective October 29, 1997
(incorporated by reference herein to Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, File No. 1-3473).
10.31 -- Copy of Settlement Agreement dated effective January 19,
1993, between Tesoro Petroleum Corporation, Tesoro Alaska
Petroleum Company and the State of Alaska (incorporated
by reference herein to Exhibit 10(q) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, File No. 1-3473).
10.32 -- Form of Indemnification Agreement between the Company and
its officers and directors (incorporated by reference
herein to Exhibit B to the Company's Proxy Statement for
the Annual Meeting of Stockholders held on February 25,
1987, File No. 1-3473).
</TABLE>
71
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
*21 -- Subsidiaries of the Company
*23 -- Consent of Deloitte & Touche LLP
</TABLE>
- ---------------
* Filed herewith.
+ Identifies management contracts or compensatory plans or arrangements required
to be filed as an exhibit hereto pursuant to Item 14(c) of Form 10-K.
Copies of exhibits filed as part of this Form 10-K may be obtained by
stockholders of record at a charge of $0.15 per page, minimum $5.00 each
request. Direct inquiries to the Corporate Secretary, Tesoro Petroleum
Corporation, 300 Concord Plaza Drive, San Antonio, Texas, 78216-6999.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2000.
72
<PAGE> 73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TESORO PETROLEUM CORPORATION
By: /s/ BRUCE A. SMITH
----------------------------------
Bruce A. Smith
Chairman of the Board of
Directors,
President and Chief Executive
Officer
Date: March 27, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BRUCE A. SMITH Chairman of the Board of Directors March 27, 2001
- ----------------------------------------------------- and Director, President and
(Bruce A. Smith) Chief Executive Officer
(Principal Executive Officer)
/s/ DON M. HEEP Senior Vice President, Controller March 27, 2001
- ----------------------------------------------------- (Principal Accounting Officer)
(Don M. Heep)
/s/ GREGORY A. WRIGHT Senior Vice President, Financial March 27, 2001
- ----------------------------------------------------- Resources (Principal Financial
(Gregory A. Wright) Officer)
/s/ STEVEN H. GRAPSTEIN Vice Chairman of the Board of March 27, 2001
- ----------------------------------------------------- Directors and Director
(Steven H. Grapstein)
/s/ WILLIAM J. JOHNSON Director March 27, 2001
- -----------------------------------------------------
(William J. Johnson)
/s/ RAYMOND K. MASON, SR. Director March 27, 2001
- -----------------------------------------------------
(Raymond K. Mason, Sr.)
/s/ DONALD H. SCHMUDE Director March 27, 2001
- -----------------------------------------------------
(Donald H. Schmude)
/s/ PATRICK J. WARD Director March 27, 2001
- -----------------------------------------------------
(Patrick J. Ward)
/s/ MURRAY L. WEIDENBAUM Director March 27, 2001
- -----------------------------------------------------
(Murray L. Weidenbaum)
</TABLE>
73
<PAGE> 74
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
21 -- Subsidiaries of the Company
23 -- Consent of Deloitte & Touche LLP
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>2
<FILENAME>d82749ex21.txt
<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT
<TEXT>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Tesoro Petroleum Corporation is publicly-held and has no parent. The
subsidiaries listed below are wholly-owned. Small or inactive subsidiaries are
omitted from the list below. Such omitted subsidiaries, considered in the
aggregate as a single subsidiary, would not constitute a "significant
subsidiary" at the end of the year ended December 31, 2000.
<TABLE>
<CAPTION>
INCORPORATED
OR ORGANIZED
NAME OF SUBSIDIARY (a) UNDER LAWS OF
---------------------- -------------
<S> <C>
Tesoro Alaska Company...........................................................Delaware
Tesoro Hawaii Corporation.......................................................Hawaii
Tesoro Marine Services Holding Company..........................................Delaware
Tesoro Marine Services, Inc..............................................Delaware
Tesoro Petroleum Companies, Inc.................................................Delaware
Tesoro Refining, Marketing & Supply Company.....................................Delaware
Tesoro West Coast Company.......................................................Delaware
</TABLE>
- ----------
(a) Where the name of a subsidiary is indented, it is wholly-owned by its
immediate parent listed at the margin above it.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>3
<FILENAME>d82749ex23.txt
<DESCRIPTION>CONSENT OF DELOITTE & TOUCHE LLP
<TEXT>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-25379 and No. 333-39070 of Tesoro Petroleum Corporation on Form S-8 and in
Registration Statement No. 333-51789 of Tesoro Petroleum Corporation on Form S-3
of our report dated February 12, 2001 (March 23, 2001 as to the third paragraph
of Note M), appearing in this Annual Report on Form 10-K of Tesoro Petroleum
Corporation for the year ended December 31, 2000.
/s/ DELOITTE & TOUCHE LLP
San Antonio, Texas
March 26, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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