e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
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o |
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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 CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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95-0862768 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
19100 Ridgewood Pkwy, San Antonio, Texas 78259-1828
(Address of principal executive offices) (Zip Code)
210-626-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange
Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There were 140,204,799 shares of the registrants Common Stock outstanding at November 3, 2009.
TESORO CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS |
TESORO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions except per share amounts)
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September 30, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
534 |
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$ |
20 |
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Receivables, less allowance for doubtful accounts |
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1,082 |
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738 |
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Inventories |
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690 |
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787 |
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Prepayments and other |
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89 |
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101 |
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Total Current Assets |
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2,395 |
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1,646 |
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PROPERTY, PLANT AND EQUIPMENT |
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Refining |
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5,687 |
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5,468 |
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Retail |
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650 |
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599 |
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Corporate and other |
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212 |
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198 |
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6,549 |
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6,265 |
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Less accumulated depreciation and amortization |
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(1,396 |
) |
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(1,184 |
) |
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Net Property, Plant and Equipment |
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5,153 |
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5,081 |
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OTHER NONCURRENT ASSETS |
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Goodwill |
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89 |
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89 |
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Acquired intangibles, net |
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255 |
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269 |
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Other, net |
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352 |
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348 |
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Total Other Noncurrent Assets |
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696 |
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706 |
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Total Assets |
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$ |
8,244 |
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$ |
7,433 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
1,432 |
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$ |
1,027 |
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Accrued liabilities |
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517 |
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412 |
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Current maturities of debt |
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3 |
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2 |
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Total Current Liabilities |
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1,952 |
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1,441 |
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DEFERRED INCOME TAXES |
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443 |
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416 |
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OTHER LIABILITIES |
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775 |
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749 |
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DEBT |
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1,836 |
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1,609 |
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COMMITMENTS AND CONTINGENCIES (Note F) |
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STOCKHOLDERS EQUITY |
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Common stock, par value $0.162/3; authorized 200,000,000 shares;
146,988,339 shares issued (145,755,260 in 2008) |
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24 |
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24 |
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Additional paid-in capital |
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935 |
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916 |
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Retained earnings |
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2,614 |
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2,616 |
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Treasury stock, 7,149,542 common shares (7,380,182 in 2008), at cost |
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(144 |
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(147 |
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Accumulated other comprehensive loss |
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(191 |
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(191 |
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Total Stockholders Equity |
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3,238 |
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3,218 |
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Total Liabilities and Stockholders Equity |
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$ |
8,244 |
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$ |
7,433 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TESORO CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(Dollars in millions except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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REVENUES (a) |
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$ |
4,742 |
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$ |
8,682 |
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$ |
12,203 |
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$ |
24,175 |
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COSTS AND EXPENSES: |
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Costs of sales and operating expenses (a) |
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4,492 |
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8,049 |
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11,536 |
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23,351 |
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Selling, general and administrative expenses |
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55 |
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68 |
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162 |
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178 |
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Depreciation and amortization |
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102 |
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99 |
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315 |
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288 |
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Loss on asset disposals and impairments |
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4 |
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14 |
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25 |
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37 |
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OPERATING INCOME |
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89 |
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452 |
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165 |
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321 |
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Interest and financing costs |
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(35 |
) |
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(30 |
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(94 |
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(83 |
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Interest income |
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2 |
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3 |
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5 |
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Foreign currency exchange loss |
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(3 |
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(13 |
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(8 |
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Other income |
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1 |
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50 |
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EARNINGS BEFORE INCOME TAXES |
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51 |
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425 |
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61 |
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285 |
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Income tax provision |
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18 |
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166 |
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22 |
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104 |
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NET EARNINGS |
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$ |
33 |
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$ |
259 |
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$ |
39 |
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$ |
181 |
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NET EARNINGS PER SHARE: |
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Basic |
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$ |
0.24 |
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$ |
1.89 |
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$ |
0.28 |
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$ |
1.33 |
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Diluted |
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$ |
0.24 |
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$ |
1.86 |
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$ |
0.28 |
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$ |
1.30 |
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WEIGHTED AVERAGE COMMON SHARES: |
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Basic |
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138.2 |
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137.1 |
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138.0 |
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136.6 |
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Diluted |
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139.7 |
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139.4 |
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139.6 |
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139.3 |
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DIVIDENDS PER SHARE |
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$ |
0.10 |
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$ |
0.10 |
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$ |
0.30 |
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$ |
0.30 |
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SUPPLEMENTAL INFORMATION: |
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(a) Includes excise taxes collected by our retail segment |
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$ |
72 |
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$ |
67 |
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$ |
213 |
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$ |
213 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
TESORO CORPORATION
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Dollars in millions except per share amounts)
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Nine Months Ended |
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September 30, |
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2009 |
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2008 |
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CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES |
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Net earnings |
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$ |
39 |
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$ |
181 |
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Adjustments to reconcile net earnings to net cash from (used in)
operating activities: |
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Depreciation and amortization |
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315 |
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288 |
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Amortization of debt issuance costs and discounts |
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10 |
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8 |
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Loss on asset disposals and impairments |
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25 |
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37 |
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Stock-based compensation |
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33 |
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8 |
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Deferred income taxes |
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68 |
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88 |
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Provisions for bad debt |
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7 |
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3 |
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Excess tax benefits from stock-based compensation arrangements |
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(1 |
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(2 |
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Other changes in non-current assets and liabilities |
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(71 |
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(53 |
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Changes in current assets and current liabilities: |
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Receivables |
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(351 |
) |
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(559 |
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Inventories |
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96 |
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348 |
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Prepayments and other |
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(2 |
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(28 |
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Accounts payable and accrued liabilities |
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501 |
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463 |
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Net cash from operating activities |
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669 |
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782 |
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CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES |
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Capital expenditures |
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(326 |
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(500 |
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Proceeds from asset sales |
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1 |
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39 |
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Net cash used in investing activities |
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(325 |
) |
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(461 |
) |
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CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES |
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Proceeds from debt offerings, net of discount of $12 million and
issuance costs of $6 million |
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282 |
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Borrowings under revolving credit agreement |
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418 |
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5,527 |
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Repayments on revolving credit agreement |
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(484 |
) |
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(5,647 |
) |
Repayments of debt |
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(2 |
) |
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(2 |
) |
Dividend payments |
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(41 |
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(41 |
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Proceeds from stock options exercised |
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1 |
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5 |
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Repurchase of common stock |
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(2 |
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(3 |
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Excess tax benefits from stock-based compensation arrangements |
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1 |
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2 |
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Financing costs and other |
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(3 |
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(1 |
) |
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Net cash from (used in) financing activities |
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170 |
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(160 |
) |
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INCREASE IN CASH AND CASH EQUIVALENTS |
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514 |
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161 |
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
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20 |
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23 |
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
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$ |
534 |
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$ |
184 |
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SUPPLEMENTAL CASH FLOW DISCLOSURES |
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Interest paid in excess of amount capitalized |
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$ |
36 |
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$ |
37 |
|
Income taxes paid, net of refunds |
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$ |
32 |
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$ |
7 |
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES |
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Capital expenditures included in accounts payable and accrued liabilities |
|
$ |
35 |
|
|
$ |
42 |
|
The
accompanying notes are an integral part of these condensed consolidated financial
statements.
5
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A BASIS OF PRESENTATION
The interim condensed consolidated financial statements and notes thereto of Tesoro Corporation
(Tesoro) and its subsidiaries have been prepared by management without audit according to the
rules and regulations of the SEC. The accompanying condensed consolidated financial statements
reflect all adjustments that, in the opinion of management, are necessary for a fair presentation
of results for the periods presented. Such adjustments are of a normal recurring nature, unless
otherwise disclosed. The consolidated balance sheet at December 31, 2008 has been condensed from
the audited consolidated financial statements at that date. Certain information and notes normally
included in financial statements prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to
the SECs rules and regulations. However, management believes that the disclosures presented
herein are adequate to make the information not misleading. The accompanying condensed
consolidated financial statements and notes should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2008.
We prepare our condensed consolidated financial statements in conformity with U.S. GAAP, which
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 periods presented. We
review our estimates on an ongoing basis, based on currently available information. Changes in
facts and circumstances may result in revised estimates and actual results could differ from those
estimates. The results of operations for any interim period are not necessarily indicative of
results for the full year. We have reclassified certain previously reported amounts related to
gains and losses on our derivative instruments to conform to the current presentation (see Note I).
We have evaluated subsequent events through the filing of this Form 10-Q on November 9, 2009. Any
material subsequent events that occurred during this time have been properly recognized or
disclosed in our financial statements.
NOTE B EARNINGS PER SHARE
We compute basic earnings per share by dividing net earnings by the weighted average number of
common shares outstanding during the period. Diluted earnings per share include the effects of
potentially dilutive shares, principally consisting of common stock options and unvested restricted
stock outstanding during the period. Common stock options for which the exercise prices were
greater than the average market price of our common stock are excluded from potentially dilutive
shares. These options totaled 5.4 million shares and 4.8 million shares for the three and nine
months ended September 30, 2009, respectively, and 3.4 million shares and 3.3 million shares for
the three and nine months ended September 30, 2008, respectively. Share and per share calculations
are presented below (in millions except per share amounts):
|
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|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
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September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Basic: |
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|
|
|
|
|
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|
|
|
|
|
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Net earnings |
|
$ |
33 |
|
|
$ |
259 |
|
|
$ |
39 |
|
|
$ |
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
138.2 |
|
|
|
137.1 |
|
|
|
138.0 |
|
|
|
136.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
$ |
0.24 |
|
|
$ |
1.89 |
|
|
$ |
0.28 |
|
|
$ |
1.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
33 |
|
|
$ |
259 |
|
|
$ |
39 |
|
|
$ |
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
138.2 |
|
|
|
137.1 |
|
|
|
138.0 |
|
|
|
136.6 |
|
Dilutive effect of stock options and unvested
restricted
stock |
|
|
1.5 |
|
|
|
2.3 |
|
|
|
1.6 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted shares |
|
|
139.7 |
|
|
|
139.4 |
|
|
|
139.6 |
|
|
|
139.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
$ |
0.24 |
|
|
$ |
1.86 |
|
|
$ |
0.28 |
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE C INVENTORIES
Components of inventories were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Crude oil and refined products |
|
$ |
582 |
|
|
$ |
680 |
|
Oxygenates and by-products |
|
|
18 |
|
|
|
22 |
|
Merchandise |
|
|
13 |
|
|
|
13 |
|
Materials and supplies |
|
|
77 |
|
|
|
72 |
|
|
|
|
|
|
|
|
Total Inventories |
|
$ |
690 |
|
|
$ |
787 |
|
|
|
|
|
|
|
|
Crude oil and refined products inventories valued at LIFO cost were less than replacement cost by
approximately $1.1 billion and $405 million at September 30, 2009 and December 31, 2008,
respectively. At both September 30, 2009 and 2008, reductions in inventory quantities resulted in
liquidations of applicable LIFO inventory quantities carried at lower costs in the prior year. The
LIFO liquidation resulted in a decrease of costs of sales of $12 million during the three and nine
months ended September 30, 2009 and $68 million and $146 million during the three months and nine
months ended September 30, 2008, respectively.
NOTE D DEBT
In June 2009, we issued $300 million aggregate principal amount of 9.75% senior notes due June 2019
for general corporate purposes. The notes were issued at a price of 96.172% at an effective
interest rate of 10.375%. The notes have a ten-year maturity with no sinking fund requirements and
are subject to optional redemption by Tesoro beginning June 1, 2014 at premiums of 4.875% through
May 31, 2015, 3.25% from June 1, 2015 through May 31, 2016; 1.625% from June 1, 2016 through May
31, 2017; and at par thereafter. We have the right to redeem up to 35% of the aggregate principal
amount at a redemption price of 109.75% with proceeds from certain equity issuances through June 1,
2012. The indenture for the notes contains covenants and restrictions that are customary for notes
of this nature. Substantially all of these covenants will terminate before the notes mature if one
of two specified ratings agencies, Moodys or Standard and Poors, assigns the notes an investment
grade rating and no events of default exist under the indenture. The terminated covenants will not
be restored even if the credit rating assigned to the notes subsequently falls below investment
grade. The notes are unsecured and are guaranteed by substantially all of our domestic
subsidiaries.
Credit Agreement Revolving Credit Facility
In May 2009, we amended our credit agreement, which among other things, modified the following:
|
|
|
the covenant permitting additional unsecured indebtedness, as defined, increased from
$75 million to $600 million; |
|
|
|
|
letters of credit allowed under separate letter of credit agreements increased from $500
million to $600 million; |
|
|
|
|
the applicable margin, as defined; and |
|
|
|
|
the annual rate of commitment fees to 0.375% from 0.25% for the unused portion of the
revolving credit facility. |
At September 30, 2009, our credit agreement provided for borrowings (including letters of credit)
up to the lesser of the amount of a periodically adjusted borrowing base of approximately $1.64
billion (based upon an Alaska North Slope crude oil price of $70 per barrel), consisting of
Tesoros eligible cash and cash equivalents, receivables and petroleum inventories, net of the
standard reserve as defined, or the agreements total capacity of $1.81 billion. The capacity can
be further increased up to $1.95 billion. We had no borrowings and $474 million in letters of
credit outstanding under the credit agreement as of September 30, 2009, resulting in total unused
credit availability of approximately $1.2 billion
7
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
or 71% of the eligible borrowing base. Borrowings under the revolving credit facility bear
interest at either a base rate (3.25% at September 30, 2009), or a Eurodollar rate (0.25% at
September 30, 2009) plus an applicable margin. The applicable margin at September 30, 2009 was
1.50% in the case of the Eurodollar rate, but varies based upon our credit facility availability
and credit ratings. Letters of credit outstanding under the revolving credit facility incur fees
at an annual rate tied to the applicable margin described above (1.50% at September 30, 2009). We
also incur commitment fees for the unused portion of the revolving credit facility at an annual
rate of 0.375% as of September 30, 2009. Our credit agreement expires in May 2012.
The credit agreement contains covenants and conditions that, among other things, limit our ability
to pay cash dividends, incur indebtedness, create liens and make investments. Tesoro is also
required to maintain a minimum fixed charge coverage ratio and specified levels of tangible net
worth. We satisfied all of the financial covenants under the credit agreement for the three and
nine months ended September 30, 2009. The credit agreement is guaranteed by substantially all of
Tesoros active subsidiaries. The credit agreement allows up to $100 million of restricted
payments during any four quarter period subject to credit availability exceeding 20% of the
borrowing base.
Letter of Credit Agreements
The credit agreement allows us to obtain letters of credit up to $600 million under separate letter
of credit agreements for the purchase of foreign petroleum inventories. At September 30, 2009, our
letters of credit capacity under three agreements totaled $500 million, of which $331 million was
outstanding. Letters of credit outstanding under these agreements incur fees and are secured by
the petroleum inventories supported by the issued letters of credit. The agreements may be
terminated by either party, at any time.
Capitalized Interest
We capitalize interest as part of the cost of major projects during extended construction periods.
Capitalized interest, which is a reduction to interest and financing costs in the condensed
statements of consolidated operations, totaled $7 million and $4 million for the three months ended
September 30, 2009 and 2008, respectively, and $17 million and $22 million for the nine months
ended September 30, 2009 and 2008, respectively.
NOTE E PENSION AND OTHER POSTRETIREMENT BENEFITS
Tesoro sponsors the following four defined benefit pension plans: a funded employee retirement
plan, an unfunded executive security plan, an unfunded non-employee director retirement plan and an
unfunded restoration retirement plan. Although our funded employee retirement plan fully meets all
funding requirements under applicable laws and regulations, during the nine months ended September
30, 2009, we voluntarily contributed $35 million to improve the funded status of the plan. The
components of pension benefit expense included in the condensed statements of consolidated
operations for the three and nine months ended September 30, 2009 and 2008 were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
10 |
|
|
$ |
6 |
|
|
$ |
27 |
|
|
$ |
24 |
|
Interest cost |
|
|
7 |
|
|
|
5 |
|
|
|
20 |
|
|
|
17 |
|
Expected return on plan assets |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(15 |
) |
|
|
(19 |
) |
Amortization of prior service cost |
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
Recognized net actuarial loss |
|
|
4 |
|
|
|
1 |
|
|
|
11 |
|
|
|
4 |
|
Curtailment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Expense |
|
$ |
17 |
|
|
$ |
8 |
|
|
$ |
46 |
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The components of other postretirement benefit expense, primarily for health insurance, included in
the condensed statements of consolidated operations for the three and nine months ended September
30, 2009 and 2008 were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
3 |
|
|
$ |
4 |
|
|
$ |
12 |
|
|
$ |
12 |
|
Interest cost |
|
|
4 |
|
|
|
6 |
|
|
|
15 |
|
|
|
15 |
|
Recognized net actuarial (gain) loss |
|
|
(1 |
) |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Amortization of prior service cost |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic Benefit Expense |
|
$ |
6 |
|
|
$ |
12 |
|
|
$ |
28 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE F COMMITMENTS AND CONTINGENCIES
Environmental and Tax Matters
We are a party to various litigation and contingent loss situations, including environmental and
income tax matters, arising in the ordinary course of business. We cannot predict the ultimate
outcomes of these matters with certainty, and we have made related accruals based on our best
estimates. We believe that the outcome of these matters will not materially impact our liquidity
and consolidated financial position, although the resolution of certain of these matters could have
a material impact on interim or annual results of operations.
Tesoro 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 us to remove or mitigate the environmental effects of the disposal or release of petroleum
or chemical substances at various sites, install additional controls, or make other modifications
to certain emission sources.
Future expenditures may be required to comply with the Clean Air Act and other federal, state and
local requirements for our various sites, including our refineries, tank farms, pipelines,
operating and closed retail stations and operating and closed refined products terminals. For
example, the U.S. Congress is considering legislation seeking to establish a national cap-and-trade
program beginning in 2012 to address greenhouse gas emissions and climate change. The U.S.
Environmental Protection Agency is also proposing to regulate greenhouse gases emissions under the
Clean Air Act. The impact of these legislative and regulatory developments, including any
cap-and-trade program, could result in increased compliance costs, additional operating
restrictions on our business, and an increase in the cost of the products we manufacture, which
could have an adverse impact on our financial position, results of operations, and liquidity.
We cannot currently determine the amounts of such future impacts.
Tesoro is subject to audits by federal, state and local taxing authorities in the normal course of
business. It is possible that tax audits could result in claims against Tesoro in excess of
recorded liabilities. We believe that when these matters are resolved they will not materially
affect our consolidated financial position or results of operations. We believe it is reasonably
possible that unrecognized tax benefits could decrease by as much as $22 million in the next twelve
months through settlements or other conclusions, primarily regarding state tax issues.
Tesoro is also subject to extensive federal, state and local tax laws and regulations. New tax
laws and regulations and changes in existing tax laws and regulations are continuously being
enacted or proposed that could result in increased expenditures for tax liabilities in the future.
9
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Environmental Liabilities
We are currently, and expect to continue, incurring expenses for environmental cleanup at a number
of current and previously owned properties. Our accruals for environmental expenditures included
in Accrued liabilities and Other liabilities in the condensed consolidated balance sheets
totaled $114 million and $123 million at September 30, 2009 and December 31, 2008, respectively.
Our environmental accruals include retained liabilities for previously owned or operated, refining,
pipeline, terminal and retail station properties. We believe these accruals are adequate and they
include the expected participation of other parties or former owners in remediation actions. These
environmental liabilities require judgment to assess. It is reasonably possible that our estimates
will change and that additional remediation costs will be incurred as more information becomes
available.
We received $58.5 million in a settlement with a prior owner of our Golden Eagle refinery in 2007
in exchange for assuming responsibility for certain environmental liabilities arising from
operations at the refinery prior to August 2000. Our accruals for these environmental liabilities
totaled $82 million and $87 million at September 30, 2009 and December 31, 2008, respectively. We
cannot presently determine the additional remedial activities that may be required at the Golden
Eagle refinery. Therefore, it is reasonably possible that we will incur additional remediation
costs as more information becomes available. We expect to file insurance claims under
environmental insurance policies that provide coverage up to $140 million for expenditures in
excess of the settlement proceeds. Amounts recorded for environmental liabilities have not been
reduced for possible insurance recoveries.
We are continuing to investigate conditions at certain active wastewater treatment units at our
Golden Eagle refinery. This investigation is driven by an order from the San Francisco Bay
Regional Water Quality Control Board that names us as well as two previous owners of the Golden
Eagle refinery. Costs to investigate these conditions are included in our environmental accruals.
We cannot currently estimate the amount of the ultimate resolution, but we believe the final
resolution of the order will not have a material adverse effect on our financial position or
results of operations.
Other Matters
In the ordinary course of business, we become party to lawsuits, administrative proceedings and
governmental investigations, including environmental, regulatory and other matters. Large and
sometimes unspecified damages or penalties may be sought from us in some matters for which the
likelihood of loss may be reasonably possible but the amount of loss is not currently estimable.
As a result, we have not established reserves for these matters and the matters described below.
On the basis of existing information, we believe that the resolution of these matters, individually
or in the aggregate, will not have a material adverse effect on our financial position or results
of operations.
We received a Notice of Violation (NOV) from the EPA in February 2009 relating to our compliance
with the Clean Air Act and the corresponding regulations concerning the regulation of fuels and
fuel additives. The allegations arise from a compliance review conducted by the EPA in 2006 for
the years 2003 through the time of the review in 2006. We are investigating the allegations
contained in the NOV.
Prior to this year, we received two NOVs from the EPA for the Washington refinery alleging that
prior to our acquisition of the refinery, certain modifications were made to the fluid catalytic
cracking unit in violation of the Clean Air Act. We have investigated the allegations and believe
we have defenses to the allegations and intend to vigorously defend ourselves.
Prior to this year, we received a NOV from the EPA concerning our Utah refinery alleging certain
violations of the Clean Air Act at the refinery beginning in 2004. We are investigating the
allegations contained in the NOV.
10
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G STOCKHOLDERS EQUITY
Cash Dividends
On November 8, 2009, our Board of Directors declared a quarterly cash dividend on common stock of
$0.05 per share, payable on December 15, 2009 to shareholders of record on December 1, 2009. We
have paid previously declared quarterly cash dividends on common stock of $0.10 per share in each
of the first three quarters of 2009.
NOTE H STOCK-BASED COMPENSATION
Stock-based compensation expense included in our condensed statements of consolidated operations
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Stock options |
|
$ |
2 |
|
|
$ |
5 |
|
|
$ |
9 |
|
|
$ |
15 |
|
Restricted stock |
|
|
4 |
|
|
|
3 |
|
|
|
10 |
|
|
|
9 |
|
Stock appreciation rights |
|
|
5 |
|
|
|
(1 |
) |
|
|
9 |
|
|
|
(13 |
) |
Phantom stock |
|
|
3 |
|
|
|
|
|
|
|
5 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock-Based Compensation Expense |
|
$ |
14 |
|
|
$ |
7 |
|
|
$ |
33 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit from tax deductions associated with stock-based compensation totaled $2
million and $3 million for the nine months ended September 30, 2009 and 2008, respectively.
Stock Options
The fair value of each option is estimated on the grant date using the Black-Scholes option-pricing
model. The estimated fair value of these stock options is amortized over the vesting period using
the straight-line method. We granted 583,400 options during the nine months ended September 30,
2009 with a weighted-average exercise price of $14.13 per share. The estimated weighted-average
grant-date fair value per share of options granted was $6.45. These options will become
exercisable after one year in 33% annual increments and expire ten years from the date of grant.
Total unrecognized compensation cost related to non-vested stock options totaled $12 million as of
September 30, 2009. This cost is expected to be recognized over a weighted-average period of 1.1
years. A summary of our stock options as of September 30, 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
Weighted-Average |
|
Remaining |
|
Intrinsic Value |
|
|
Shares |
|
Exercise Price |
|
Contractual Term |
|
(In Millions) |
Options outstanding |
|
|
8,247,038 |
|
|
$ |
21.31 |
|
|
|
5.3 |
|
|
$ |
|
|
Options vested or expected to vest |
|
|
8,208,878 |
|
|
$ |
21.33 |
|
|
|
5.3 |
|
|
$ |
|
|
Options exercisable |
|
|
6,763,986 |
|
|
$ |
19.23 |
|
|
|
4.6 |
|
|
$ |
|
|
11
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Restricted Stock
The fair value of each restricted share on the grant date is equal to the market price of our
common stock on the date of grant. The estimated fair value of our restricted stock is amortized
over the vesting period using the straight-line method. We issued 987,500 shares of restricted
stock during the nine months ended September 30, 2009 with a weighted-average grant-date fair value
of $14.13 per share. These restricted shares vest in annual increments ratably over three years.
Unrecognized compensation cost related to our non-vested restricted stock totaled $20 million as of
September 30, 2009, which is expected to be recognized over a weighted-average period of 1.8 years.
As of September 30, 2009, we had 1,378,716 shares of restricted stock outstanding at a
weighted-average grant-date fair value of $21.66 per share.
Stock Appreciation Rights
A stock appreciation right (SAR) entitles a holder to receive cash in an amount equal to the
excess of the fair market value of one share of common stock on the date of exercise over the grant
price of the SAR. The fair value of each SAR is estimated at the end of each reporting period
using the Black-Scholes option-pricing model. We granted 5,121,100 SARs during the nine months
ended September 30, 2009 to our employees at 100% of the fair value of Tesoros common stock with a
weighted-average grant price of $14.13 per SAR. The SARs granted in 2009 vest ratably over three
years following the date of grant and expire seven years from the grant date. The liability
associated with our SARs in the condensed consolidated balance sheets totaled $11 million and $3
million at September 30, 2009 and December 31, 2008, respectively.
Phantom Stock Options
We granted 1,593,000 phantom stock options during the nine months ended September 30, 2009 to our
executive officers with a term of ten years at 100% of the fair value of Tesoros common stock on
the grant date of $14.13 per share. The fair value of each phantom stock option is estimated at the
end of each reporting period using the Black-Scholes option-pricing model. The phantom stock
options vest ratably over three years following the date of grant and expire ten years from the
date of grant. The liability associated with these executive phantom stock awards in the condensed
consolidated balance sheet totaled $4 million at September 30, 2009.
12
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE I OPERATING SEGMENTS
We are an independent refiner and marketer of petroleum products and derive revenues from two
operating segments, refining and retail. We evaluate our segments performance primarily based on
segment operating income, which includes revenues and expenses directly attributable to the
segment. Intersegment sales from refining to retail are made at prices, which approximate market.
Income taxes, interest and financing costs, interest income, foreign currency exchange gain or
loss, other income, corporate depreciation and corporate general and administrative expenses are
excluded from segment operating income. Identifiable segment assets are those assets used by the
segment. Identifiable corporate assets are principally cash and other assets that are not
associated with a specific operating segment. Segment information is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined products |
|
$ |
4,489 |
|
|
$ |
8,227 |
|
|
$ |
11,310 |
|
|
$ |
22,808 |
|
Crude oil resales and other (a) |
|
|
91 |
|
|
|
289 |
|
|
|
526 |
|
|
|
998 |
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel (b) |
|
|
863 |
|
|
|
1,219 |
|
|
|
2,182 |
|
|
|
3,479 |
|
Merchandise and other |
|
|
63 |
|
|
|
67 |
|
|
|
178 |
|
|
|
189 |
|
Intersegment Sales from Refining to Retail |
|
|
(764 |
) |
|
|
(1,120 |
) |
|
|
(1,993 |
) |
|
|
(3,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
4,742 |
|
|
$ |
8,682 |
|
|
$ |
12,203 |
|
|
$ |
24,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining (c) |
|
$ |
84 |
|
|
$ |
476 |
|
|
$ |
268 |
|
|
$ |
474 |
|
Retail (d) |
|
|
53 |
|
|
|
34 |
|
|
|
42 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Income |
|
|
137 |
|
|
|
510 |
|
|
|
310 |
|
|
|
469 |
|
Corporate and Unallocated Costs |
|
|
(48 |
) |
|
|
(58 |
) |
|
|
(145 |
) |
|
|
(148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
89 |
|
|
|
452 |
|
|
|
165 |
|
|
|
321 |
|
Interest and Financing Costs |
|
|
(35 |
) |
|
|
(30 |
) |
|
|
(94 |
) |
|
|
(83 |
) |
Interest Income |
|
|
|
|
|
|
2 |
|
|
|
3 |
|
|
|
5 |
|
Foreign Currency Exchange Loss |
|
|
(3 |
) |
|
|
|
|
|
|
(13 |
) |
|
|
(8 |
) |
Other Income (e) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
$ |
51 |
|
|
$ |
425 |
|
|
$ |
61 |
|
|
$ |
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining |
|
$ |
86 |
|
|
$ |
83 |
|
|
$ |
263 |
|
|
$ |
239 |
|
Retail |
|
|
10 |
|
|
|
10 |
|
|
|
29 |
|
|
|
32 |
|
Corporate |
|
|
6 |
|
|
|
6 |
|
|
|
23 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation and Amortization |
|
$ |
102 |
|
|
$ |
99 |
|
|
$ |
315 |
|
|
$ |
288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining |
|
$ |
91 |
|
|
$ |
119 |
|
|
$ |
250 |
|
|
$ |
407 |
|
Retail |
|
|
1 |
|
|
|
4 |
|
|
|
10 |
|
|
|
10 |
|
Corporate |
|
|
4 |
|
|
|
7 |
|
|
|
31 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures |
|
$ |
96 |
|
|
$ |
130 |
|
|
$ |
291 |
|
|
$ |
441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Identifiable Assets |
|
|
|
|
|
|
|
|
Refining |
|
$ |
6,779 |
|
|
$ |
6,542 |
|
Retail |
|
|
644 |
|
|
|
649 |
|
Corporate |
|
|
821 |
|
|
|
242 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
8,244 |
|
|
$ |
7,433 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We have reclassified our gains/losses associated with our derivative instruments for all
periods presented from Revenues (included in Crude oil resales and other in the table
above) to Costs of sales and operating expenses. The reclassifications totaled a $6
million loss and a $16 million gain during the three months ended September 30, 2009 and
2008, respectively, and losses of $61 million and $192 million during the nine months ended
September 30, 2009 and 2008, respectively. Crude oil resales and other primarily
represents occasional sales of crude oil that we have purchased to optimize our refinery
supply. |
|
(b) |
|
Federal and state motor fuel taxes on sales by our retail segment are included in both
Revenues and Costs of sales and operating expenses in our condensed statements of
consolidated operations. These taxes totaled $72 million and $67 million for the three months
ended September 30, 2009 and 2008, respectively, and $213 million for both the nine months
ended September 30, 2009 and 2008. |
|
(c) |
|
Refining operating income for the nine months ended September 30, 2009 included a net
termination charge of $12 million related to cancelling the purchase of equipment associated
with a capital project at our Los Angeles refinery. |
|
(d) |
|
Retail operating loss for 2008 includes impairment charges related to a potential sale of 20
retail stations during the 2008 first quarter and the closure of 42 Mirastar stations during
the 2008 third quarter. |
|
(e) |
|
During the nine months ended September 30, 2008, we received net refunds totaling $50 million
from the Trans Alaska Pipeline System (TAPS) for previous years refinery transportation and
distribution costs associated with our protest of intrastate tariffs charged between 1997 and
2003. |
NOTE J FAIR VALUE MEASUREMENTS
We classify financial assets and financial liabilities into the following fair value hierarchy:
level 1 quoted prices in active markets for identical assets and liabilities; level 2
observable inputs other than quoted prices in active markets for identical assets and liabilities;
and level 3 unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. During the first nine months of 2009,
we did not measure any significant nonfinancial assets or nonfinancial liabilities at fair value.
Our only financial assets and financial liabilities that were measured at fair value on a recurring
basis at September 30, 2009 were our derivative instruments. Our derivative instruments consist
primarily of exchange-traded futures and over-the-counter swaps and options. Exchange-traded
futures are valued based on quoted prices from exchanges and are categorized in Level 1 of the fair
value hierarchy. Options are valued using quoted prices from exchanges. Swaps are priced using
third-party broker quotes, industry pricing services, and exchange-traded curves. Our swap and
option instruments are both categorized in Level 2 of the fair value hierarchy since they have
contractual terms that are not identical to exchange-traded futures instruments with a comparable
market price. Our derivative instruments measured at fair value by the three levels described above
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
in Active |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
September 30, |
|
Assets |
|
Inputs |
|
Inputs |
|
|
2009 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
|
|
|
$ |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
(7 |
) |
|
$ |
(2 |
) |
|
$ |
(5 |
) |
|
$ |
|
|
14
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Certain of our derivative contracts, under master netting arrangements, include both asset and
liability positions. We have elected to offset the fair value amounts recognized for multiple
derivative instruments executed with the same counterparty, including any related cash collateral.
The carrying value of our financial instruments, including cash and cash equivalents, receivables,
accounts payable and certain accrued liabilities approximate fair value because of the short
maturities of these instruments. We estimated fair value for our debt primarily using quoted
market prices. The carrying value and fair value of our debt at September 30, 2009 were both
approximately $1.8 billion.
NOTE K DERIVATIVE INSTRUMENTS
The timing, direction and the overall change in refined product prices versus crude oil prices
impacts profit margins and could have a significant impact on our earnings and cash flows. To
manage these commodity price risks, we periodically use derivative instruments primarily associated
with the purchase or sale of crude oil and finished products. We may also use derivative
instruments to manage price risks associated with inventories above or below our target levels.
These derivative instruments typically involve exchange-traded futures, over-the-counter swaps and
options, generally with maturity dates of less than one year.
Futures contracts include a requirement to buy or sell the commodity at a fixed price in the
future. Swap contracts require receipt of payment for the commodity based on the difference between
a fixed or floating price and the market price on the settlement date. Option contracts provide
the right, but not the obligation, to buy or sell the commodity at a specified price in the future.
At September 30, 2009, we had open net short swaps positions of 19,000 barrels and open net short
futures positions of 1.3 million barrels. We have swap derivative instruments that require cash
collateral if our liability position exceeds specified thresholds. At September 30, 2009, we did
not have any cash collateral outstanding.
All of our derivative instruments are matched against physical crude oil or finished product
barrels used in our refining and marketing operations. We do not use derivative instruments for
trading purposes. We elected not to designate our derivative instruments as cash flow or fair value
hedges during the three and nine months ended September 30, 2009 and 2008. Therefore, we
mark-to-market our derivative instruments and recognize the changes in their fair value in Costs
of sales and operating expenses. Accordingly, no change in the value of the related underlying
physical commodity is recorded. The carrying amounts of our derivative instruments are recorded at
fair value in Prepayments and other or Accrued liabilities.
The following table presents the fair value (in millions) and balance sheet classification of our
non-hedging derivative instruments as of September 30, 2009 and December 31, 2008. The fair value
amounts below are presented on a gross basis and do not reflect the netting of asset and liability
positions permitted under the terms of our master netting arrangements. We have elected to offset
the fair value amounts recognized for multiple derivative instruments executed with the same
counterparty. As a result, the asset and liability amounts below will not agree with the amounts
presented in our condensed consolidated balance sheet, nor will they agree to the fair value
information presented in Note J.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
Liabilities |
|
|
Balance |
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
Sheet |
|
September 30, |
|
December 31, |
|
Sheet |
|
September 30, |
|
December 31, |
|
|
Location |
|
2009 |
|
2008 |
|
Location |
|
2009 |
|
2008 |
Commodity contracts |
|
Prepayments and other |
|
$ |
64 |
|
|
$ |
157 |
|
|
Accrued liabilities |
|
$ |
66 |
|
|
$ |
140 |
|
15
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following information presents the gains and losses for our non-hedging derivative
instruments for the three months and nine months ended September 30, 2009 and 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
September 30, |
|
|
Location of Gain (Loss) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Commodity contracts |
|
Costs of sales and operating expenses |
|
$ |
(6 |
) |
|
$ |
16 |
|
|
$ |
(61 |
) |
|
$ |
(192 |
) |
NOTE L NEW ACCOUNTING STANDARDS
FASB Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting
Standards Codification (the Codification or ASC) as the exclusive authoritative source for
nongovernmental U.S. GAAP, except for SEC rules and interpretive releases. The Codification is a
compilation of U.S. GAAP previously issued by several standard setters. Future FASB accounting
standards will update the Codification and will be referred to as Accounting Standards Updates.
The Codification became effective for Tesoro for the period ended September 30, 2009 and its
adoption did not impact our financial position or results of operations.
Disclosures about Derivative Instruments and Hedging Activities
On January 1, 2009, we adopted a standard that changes the annual and interim disclosure
requirements for derivative instruments and hedging activities. An entity with derivative
instruments is required to disclose how and why it uses derivative instruments, how derivative
instruments and related hedged items are accounted for and how those items affect its financial
position, financial performance and cash flows. The adoption of this standard did not impact our
financial position or results of operations. The new disclosures under the standard are included
in Note K.
Fair Value Measurements
On January 1, 2009, we adopted a standard that expanded the framework and disclosures for measuring
fair value to nonfinancial assets and nonfinancial liabilities, including impaired property, plant
and equipment, goodwill and the initial recognition of asset retirement obligations. The adoption
of this standard did not impact our financial position or results of operations.
Business Combinations
On January 1, 2009, we adopted a standard that requires, with limited exceptions, that the assets
acquired and liabilities assumed in a business combination be recorded at the acquisition-date fair
value. This standard changed the accounting treatment for certain acquisition related items,
including:
|
|
|
expensing acquisition related costs as incurred; |
|
|
|
|
valuing noncontrolling interests at fair value at the acquisition date; and |
|
|
|
|
expensing restructuring costs associated with an acquired business. |
The adoption of this standard did not impact our financial position or results of operations.
Subsequent Events
As of June 30, 2009, we adopted a standard, that establishes general standards of accounting for
and disclosures of events that occur after the balance sheet date, but before financial statements
are issued or are available to be issued. The standard requires us to evaluate subsequent events
through the date that the financial statements are issued and to
16
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
disclose the date of evaluation. The adoption of this standard did not impact our financial
position or results of operations.
Interim Disclosures about Fair Value of Financial Instruments
As of June 30, 2009, we adopted a standard that requires fair value disclosures of financial
instruments in interim and annual financial statements. The adoption of this standard did not
impact our financial position or results of operations (see Note J for further information).
Employers Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB issued a standard that requires disclosures of the level within the fair
value hierarchy (i.e. level 1, level 2 and level 3) for each major category of plan assets. The
standard also requires disclosure of investment policies and strategies, the fair value of plan
assets by major category, the nature and amount of any concentrations of risk within categories,
and the valuation techniques and inputs used to develop fair value measurements of plan assets.
This standard is effective for the year ended December 31, 2009 and will not impact our financial
position or results of operations.
Variable Interest Entities
In June 2009, the FASB issued a standard that amends previous guidance on variable interest
entities. The standard modifies the criteria for determining whether an entity is a variable
interest entity and requires ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity and an analysis to determine whether the enterprises
variable interest or interests give it a controlling financial interest in a variable interest
entity. This standard is effective as of January 1, 2010 and will not impact our financial
position or results of operations.
NOTE M CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Separate condensed consolidating financial information of Tesoro Corporation, subsidiary guarantors
and non-guarantors are presented below. Tesoro and certain subsidiary guarantors have fully and
unconditionally guaranteed our 6
1/4%
senior notes due 2012, 6 5/8% senior notes due 2015, 6 1/2% senior
notes due 2017, and 9 3/4% senior notes due 2019. As a result of these guarantee arrangements, we
are required to present the following condensed consolidating financial information. The following
condensed consolidating financial information should be read in conjunction with the accompanying
condensed consolidated financial statements and notes. The following condensed consolidating
financial information is provided as an alternative to providing separate financial statements for
guarantor subsidiaries. Separate financial statements of Tesoros subsidiary guarantors are not
included because the guarantees are full and unconditional and these subsidiary guarantors are 100%
owned and jointly and severally liable for Tesoros outstanding senior notes. The information is
presented using the equity method of accounting for investments in subsidiaries.
17
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet as of September 30, 2009
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Tesoro |
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Corporation |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
533 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
534 |
|
Receivables, less allowance for doubtful accounts |
|
|
63 |
|
|
|
802 |
|
|
|
217 |
|
|
|
|
|
|
|
1,082 |
|
Inventories |
|
|
|
|
|
|
671 |
|
|
|
19 |
|
|
|
|
|
|
|
690 |
|
Prepayments and other |
|
|
53 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
116 |
|
|
|
2,042 |
|
|
|
237 |
|
|
|
|
|
|
|
2,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment |
|
|
|
|
|
|
4,983 |
|
|
|
170 |
|
|
|
|
|
|
|
5,153 |
|
Investment in Subsidiaries |
|
|
4,177 |
|
|
|
(80 |
) |
|
|
(5 |
) |
|
|
(4,092 |
) |
|
|
|
|
Long-Term Receivables from Affiliates |
|
|
1,882 |
|
|
|
|
|
|
|
77 |
|
|
|
(1,959 |
) |
|
|
|
|
Other Noncurrent Assets |
|
|
44 |
|
|
|
651 |
|
|
|
1 |
|
|
|
|
|
|
|
696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
6,219 |
|
|
$ |
7,596 |
|
|
$ |
480 |
|
|
$ |
(6,051 |
) |
|
$ |
8,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
144 |
|
|
$ |
1,461 |
|
|
$ |
344 |
|
|
$ |
|
|
|
$ |
1,949 |
|
Current maturities of debt |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
144 |
|
|
|
1,464 |
|
|
|
344 |
|
|
|
|
|
|
|
1,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Payables to Affiliates |
|
|
|
|
|
|
1,959 |
|
|
|
|
|
|
|
(1,959 |
) |
|
|
|
|
Debt |
|
|
1,812 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
1,836 |
|
Other Noncurrent Liabilities |
|
|
1,025 |
|
|
|
191 |
|
|
|
2 |
|
|
|
|
|
|
|
1,218 |
|
Stockholders Equity |
|
|
3,238 |
|
|
|
3,958 |
|
|
|
134 |
|
|
|
(4,092 |
) |
|
|
3,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
6,219 |
|
|
$ |
7,596 |
|
|
$ |
480 |
|
|
$ |
(6,051 |
) |
|
$ |
8,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Balance Sheet as of December 31, 2008
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Tesoro |
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Corporation |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
20 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20 |
|
Receivables, less allowance for doubtful accounts |
|
|
16 |
|
|
|
567 |
|
|
|
155 |
|
|
|
|
|
|
|
738 |
|
Inventories |
|
|
|
|
|
|
777 |
|
|
|
10 |
|
|
|
|
|
|
|
787 |
|
Prepayments and other |
|
|
23 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
39 |
|
|
|
1,442 |
|
|
|
165 |
|
|
|
|
|
|
|
1,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment |
|
|
|
|
|
|
4,938 |
|
|
|
143 |
|
|
|
|
|
|
|
5,081 |
|
Investment in Subsidiaries |
|
|
4,134 |
|
|
|
(49 |
) |
|
|
(2 |
) |
|
|
(4,083 |
) |
|
|
|
|
Long-Term Receivables from Affiliates |
|
|
1,619 |
|
|
|
|
|
|
|
47 |
|
|
|
(1,666 |
) |
|
|
|
|
Other Noncurrent Assets |
|
|
38 |
|
|
|
667 |
|
|
|
1 |
|
|
|
|
|
|
|
706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
5,830 |
|
|
$ |
6,998 |
|
|
$ |
354 |
|
|
$ |
(5,749 |
) |
|
$ |
7,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
64 |
|
|
$ |
1,160 |
|
|
$ |
215 |
|
|
$ |
|
|
|
$ |
1,439 |
|
Current maturities of debt |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
64 |
|
|
|
1,162 |
|
|
|
215 |
|
|
|
|
|
|
|
1,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Payables to Affiliates |
|
|
|
|
|
|
1,666 |
|
|
|
|
|
|
|
(1,666 |
) |
|
|
|
|
Debt |
|
|
1,584 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
1,609 |
|
Other Noncurrent Liabilities |
|
|
964 |
|
|
|
199 |
|
|
|
2 |
|
|
|
|
|
|
|
1,165 |
|
Stockholders Equity |
|
|
3,218 |
|
|
|
3,946 |
|
|
|
137 |
|
|
|
(4,083 |
) |
|
|
3,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
5,830 |
|
|
$ |
6,998 |
|
|
$ |
354 |
|
|
$ |
(5,749 |
) |
|
$ |
7,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations for the Three Months Ended September 30, 2009
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Tesoro |
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Corporation |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
REVENUES |
|
$ |
|
|
|
$ |
5,921 |
|
|
$ |
533 |
|
|
$ |
(1,712 |
) |
|
$ |
4,742 |
|
Costs and expenses |
|
|
2 |
|
|
|
5,831 |
|
|
|
532 |
|
|
|
(1,712 |
) |
|
|
4,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
(2 |
) |
|
|
90 |
|
|
|
1 |
|
|
|
|
|
|
|
89 |
|
Equity in earnings (loss) of subsidiaries |
|
|
35 |
|
|
|
(1 |
) |
|
|
|
|
|
|
(34 |
) |
|
|
|
|
Other expense |
|
|
|
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES |
|
|
33 |
|
|
|
51 |
|
|
|
1 |
|
|
|
(34 |
) |
|
|
51 |
|
Income tax provision ) (a) |
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS) |
|
$ |
33 |
|
|
$ |
33 |
|
|
$ |
1 |
|
|
$ |
(34 |
) |
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax provision (benefit) reflected in each column does not include any tax
effect of the equity in earnings from subsidiaries. |
20
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations for the Three Months Ended September 30, 2008
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Tesoro |
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Corporation |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
REVENUES |
|
$ |
|
|
|
$ |
10,597 |
|
|
$ |
1,199 |
|
|
$ |
(3,114 |
) |
|
$ |
8,682 |
|
Costs and expenses |
|
|
1 |
|
|
|
10,148 |
|
|
|
1,195 |
|
|
|
(3,114 |
) |
|
|
8,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
(1 |
) |
|
|
449 |
|
|
|
4 |
|
|
|
|
|
|
|
452 |
|
Equity in earnings (loss) of subsidiaries |
|
|
259 |
|
|
|
|
|
|
|
(1 |
) |
|
|
(258 |
) |
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
(28 |
) |
|
|
1 |
|
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES |
|
|
258 |
|
|
|
421 |
|
|
|
4 |
|
|
|
(258 |
) |
|
|
425 |
|
Income tax provision (benefit) (a) |
|
|
(1 |
) |
|
|
165 |
|
|
|
2 |
|
|
|
|
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS) |
|
$ |
259 |
|
|
$ |
256 |
|
|
$ |
2 |
|
|
$ |
(258 |
) |
|
$ |
259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax provision (benefit) reflected in each column does not include any tax
effect of the equity in earnings from subsidiaries. |
21
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations for the Nine Months Ended September 30, 2009
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Tesoro |
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Corporation |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
REVENUES |
|
$ |
|
|
|
$ |
14,663 |
|
|
$ |
1,395 |
|
|
$ |
(3,855 |
) |
|
$ |
12,203 |
|
Costs and expenses |
|
|
5 |
|
|
|
14,494 |
|
|
|
1,394 |
|
|
|
(3,855 |
) |
|
|
12,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
(5 |
) |
|
|
169 |
|
|
|
1 |
|
|
|
|
|
|
|
165 |
|
Equity in earnings (loss) of subsidiaries |
|
|
43 |
|
|
|
(31 |
) |
|
|
(3 |
) |
|
|
(9 |
) |
|
|
|
|
Other expense |
|
|
|
|
|
|
(104 |
) |
|
|
|
|
|
|
|
|
|
|
(104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES |
|
|
38 |
|
|
|
34 |
|
|
|
(2 |
) |
|
|
(9 |
) |
|
|
61 |
|
Income tax provision (benefit) (a) |
|
|
(1 |
) |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS) |
|
$ |
39 |
|
|
$ |
11 |
|
|
$ |
(2 |
) |
|
$ |
(9 |
) |
|
$ |
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax provision (benefit) reflected in each column does not include any tax
effect of the equity in earnings from subsidiaries. |
22
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Operations for the Nine Months Ended September 30, 2008
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Tesoro |
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Corporation |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
REVENUES |
|
$ |
|
|
|
$ |
28,546 |
|
|
$ |
3,391 |
|
|
$ |
(7,762 |
) |
|
$ |
24,175 |
|
Costs and expenses |
|
|
2 |
|
|
|
28,231 |
|
|
|
3,383 |
|
|
|
(7,762 |
) |
|
|
23,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
(2 |
) |
|
|
315 |
|
|
|
8 |
|
|
|
|
|
|
|
321 |
|
Equity in earnings (loss) of subsidiaries |
|
|
182 |
|
|
|
(28 |
) |
|
|
(2 |
) |
|
|
(152 |
) |
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
(29 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES |
|
|
180 |
|
|
|
258 |
|
|
|
(1 |
) |
|
|
(152 |
) |
|
|
285 |
|
Income tax provision (benefit) (a) |
|
|
(1 |
) |
|
|
104 |
|
|
|
1 |
|
|
|
|
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS) |
|
$ |
181 |
|
|
$ |
154 |
|
|
$ |
(2 |
) |
|
$ |
(152 |
) |
|
$ |
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax provision (benefit) reflected in each column does not include any tax
effect of the equity in earnings from subsidiaries. |
23
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2009
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Tesoro |
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Corporation |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
$ |
|
|
|
$ |
607 |
|
|
$ |
62 |
|
|
$ |
|
|
|
$ |
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
(293 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
(326 |
) |
Intercompany notes, net |
|
|
(171 |
) |
|
|
|
|
|
|
|
|
|
|
171 |
|
|
|
|
|
Proceeds from asset sales |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities |
|
|
(171 |
) |
|
|
(292 |
) |
|
|
(33 |
) |
|
|
171 |
|
|
|
(325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt borrowings, net of discount of $12
million and issuance costs of $6 million |
|
|
282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282 |
|
Borrowings under revolver |
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418 |
|
Repayments on revolver |
|
|
(484 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(484 |
) |
Repurchase of common stock |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Dividend payments |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41 |
) |
Repayments of debt |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Financing costs and other |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Proceeds from stock options exercised |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Excess tax benefits from stock-based compensation
arrangements |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Net intercompany borrowings (repayments) |
|
|
|
|
|
|
199 |
|
|
|
(28 |
) |
|
|
(171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
171 |
|
|
|
198 |
|
|
|
(28 |
) |
|
|
(171 |
) |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
513 |
|
|
|
1 |
|
|
|
|
|
|
|
514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
|
|
|
$ |
533 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
TESORO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2008
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
Tesoro |
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Corporation |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities |
|
$ |
(12 |
) |
|
$ |
634 |
|
|
$ |
160 |
|
|
$ |
|
|
|
$ |
782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
(490 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
(500 |
) |
Intercompany notes, net |
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
(172 |
) |
|
|
|
|
Proceeds from asset sales |
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities |
|
|
172 |
|
|
|
(451 |
) |
|
|
(10 |
) |
|
|
(172 |
) |
|
|
(461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolver |
|
|
5,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,527 |
|
Repayments on revolver |
|
|
(5,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,647 |
) |
Repurchase of common stock |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Dividend payments |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41 |
) |
Repayments of debt |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Proceeds from stock options exercised |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Excess tax benefits from stock-based compensation
arrangements |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Financing costs and other |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Net intercompany borrowings (repayments) |
|
|
|
|
|
|
(22 |
) |
|
|
(150 |
) |
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
(160 |
) |
|
|
(22 |
) |
|
|
(150 |
) |
|
|
172 |
|
|
|
(160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
|
|
|
$ |
184 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
Those statements in this section that are not historical in nature should be deemed forward-looking
statements that are inherently uncertain. See Important Information Regarding Forward-Looking
Statements on page 42 for a discussion of the factors that could cause actual results to differ
materially from those projected in these statements. This section should be read in conjunction
with Managements Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2008.
BUSINESS STRATEGY AND OVERVIEW
Industry Overview
Our profitability is substantially determined by the difference between the aggregate value of all
the refined products produced from refining crude oil and the price of crude oil or industry
refining margins. The current economic recession, including its historically high unemployment
rates continued to negatively impact demand for refined products and industry refining margins
during the first nine months of 2009. U.S. demand for diesel and jet fuel was well below the
five-year average primarily due to significantly lower commercial activity. U.S. distillate
inventories climbed to their highest levels since 1983 during the third quarter of 2009. U.S. West
Coast benchmark diesel margins averaged $10 per barrel during the first nine months of 2009 (2009
Period) compared to $25 per barrel during the first nine months of 2008 (2008 Period). U.S.
demand for gasoline averaged near or below the five-year average during the 2009 Period and U.S.
gasoline inventories reached a five-year high during the third quarter. However, on the U.S. West
Coast industry gasoline margins were stronger than U.S. industry averages during the 2009 Period.
Due to the impact of heavy refining industry turnaround (a planned shutdown for maintenance)
activity in the first quarter and unplanned industry maintenance in the third quarter, U.S. West
Coast benchmark gasoline margins averaged $18 per barrel during the 2009 Period compared to $13 per
barrel during the 2008 Period. Narrowing differentials between heavy and light crude oil prices also
continued to negatively impact industry refining margins during the 2009 third quarter. For
example, Oriente crude (a South American heavy crude oil) traded $7 per barrel below
Alaska North Slope crude (a light crude oil) versus $14 per barrel last year. Price differentials for heavy
crude oil were reduced due in part to a lower supply of heavy crude oils from Venezuela, Mexico and
the Middle East and higher demand for heavy crude oil in China and India.
Strategy and Goals
Our strategy in our refining and marketing business is to create stockholder value in a global
market with competitive returns in any economic environment through:
|
|
|
economies of scale; |
|
|
|
|
a competitive cost structure; |
|
|
|
|
effective management information systems that enable success; and |
|
|
|
|
outstanding employees focused on achieving operational excellence. |
Our goals focus on:
|
|
|
operating our facilities in a safe, reliable and environmentally responsible way; |
|
|
|
|
achieving greater operational and administrative efficiencies; and |
|
|
|
|
using excess cash flows from operations to create further shareholder value. |
26
In response to declining refined product demand and refining industry margins, beginning in late
2007 we began implementing initiatives to operate in a lower margin environment. We expect the
remainder of 2009 will be a challenging period as the current economic recession in the U.S. and
abroad continues to negatively impact product demand and U.S. West Coast refining margins in
October 2009 were about half of September levels.
In 2009, our goals are further focused on:
|
|
|
lowering cash break-even costs; |
|
|
|
|
gaining sustainable improvements in our capture of available margins; and |
|
|
|
|
funding our capital program through operating cash flow. |
We plan to continue to improve our capture of available margins and operating profit in 2009 by:
|
|
|
lowering crude oil costs and refinery operating expenses through benefits of our prior
years capital programs; |
|
|
|
|
reducing logistics costs, including shipping costs; |
|
|
|
|
increasing flexibility in our slate of crude oil feedstocks; |
|
|
|
|
matching production to demand; |
|
|
|
|
optimizing profitability by shifting production between gasoline and distillates; and |
|
|
|
|
reducing operating expenses through energy and maintenance efficiency programs. |
Future Capital Projects
We have identified approximately 300 quick-return capital projects. These projects focus on
lowering our feedstock costs, improving clean product yields and reducing operating costs,
including improving energy efficiency at all of our refineries. The cost for the majority of these
projects averages less than $1 million per project. We have
budgeted approximately $50 million in 2010 for these projects.
Global Financial Markets
We continue to remain attentive to current financial market conditions, including limited credit
availability, even as we continue to see global financial markets improve. While our ability to
finance operations has not been impaired, there can be no assurance that there will not be a
further deterioration in financial markets and confidence in major economies that could negatively
impact us.
27
RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2008
A discussion and analysis of the factors contributing to our results of operations is presented
below. The accompanying condensed consolidated financial statements, together with the following
information, are intended to provide investors with a reasonable basis for assessing our historical
operations, but should not serve as the only criteria for predicting our future performance.
Summary
Our net income was $33 million ($0.24 per diluted share) for the three months ended September 30,
2009 (2009 Quarter), compared with net earnings of $259 million ($1.86 per diluted share) for the
three months ended September 30, 2008 (2008 Quarter). The decrease in net earnings during the
2009 Quarter was primarily due to the following:
|
|
|
significantly lower industry distillate margins primarily from reduced demand and
excess inventories; |
|
|
|
|
the narrowing of price differentials between heavy and light crude oils which negatively
impacted gross refining margins in our California region; |
|
|
|
|
the impact of unscheduled maintenance at our Golden Eagle refinery and unscheduled
downtime at our Los Angeles refinery; and |
|
|
|
|
a last-in-first-out (LIFO) liquidation benefit resulting in a reduction to costs of
sales of $68 million during the 2008 Quarter versus a LIFO liquidation benefit of $12
million during the 2009 Quarter. |
The decrease in net earnings during the 2009 Quarter was partially offset by reduced refining
operating expenses of $71 million primarily reflecting decreased natural gas utility costs and
lower refining throughput.
Our net income was $39 million ($0.28 per diluted share) for the nine months ended September 30,
2009 (2009 Period), compared with net earnings of $181 million ($1.30 per diluted share) for the
nine months ended September 30, 2008 (2008 Period). The decrease in net earnings during the 2009
Period was primarily due to the following:
|
|
|
significantly lower industry distillate margins primarily from reduced demand and excess
inventories; |
|
|
|
|
the narrowing of price differentials between heavy and light crude oils which negatively
impacted gross refining margins in our California region; |
|
|
|
|
the impact of scheduled and unscheduled downtime; |
|
|
|
|
a LIFO liquidation benefit resulting in a reduction to costs of sales of $146 million
during the 2008 Period versus a LIFO liquidation benefit of $12 million during the 2009
Period; and |
|
|
|
|
refunds during the 2008 Period totaling $50 million from the Trans Alaska Pipeline
System (TAPS) in connection with rulings from the Regulatory Commission of Alaska
concerning our protest of intrastate pipeline tariffs between 1997 and 2003. |
The following factors positively impacted the 2009 Period compared to the 2008 Period, partially
offsetting the decrease in net earnings:
|
|
|
reduced refining operating expenses of $169 million primarily reflecting decreased
natural gas utility costs and lower refining throughput; |
|
|
|
|
lower losses on our derivative instruments of $131 million; and |
|
|
|
|
improved retail operating income of $47 million primarily due to lower impairment losses
and operating expenses. |
28
Refining Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(Dollars in millions except per barrel amounts) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined products |
|
$ |
4,489 |
|
|
$ |
8,227 |
|
|
$ |
11,310 |
|
|
$ |
22,808 |
|
Crude oil resales and other |
|
|
91 |
|
|
|
289 |
|
|
|
526 |
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
4,580 |
|
|
$ |
8,516 |
|
|
$ |
11,836 |
|
|
$ |
23,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput (thousand barrels per day) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy crude oil (b) |
|
|
162 |
|
|
|
221 |
|
|
|
176 |
|
|
|
194 |
|
Light crude oil |
|
|
361 |
|
|
|
364 |
|
|
|
342 |
|
|
|
380 |
|
Other feedstocks |
|
|
41 |
|
|
|
37 |
|
|
|
37 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Throughput |
|
|
564 |
|
|
|
622 |
|
|
|
555 |
|
|
|
609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Heavy Crude Oil of Total Refining Throughput (b) |
|
|
29 |
% |
|
|
36 |
% |
|
|
32 |
% |
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield (thousand barrels per day) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks |
|
|
289 |
|
|
|
283 |
|
|
|
278 |
|
|
|
282 |
|
Jet fuel |
|
|
79 |
|
|
|
82 |
|
|
|
70 |
|
|
|
80 |
|
Diesel fuel |
|
|
113 |
|
|
|
158 |
|
|
|
115 |
|
|
|
144 |
|
Heavy oils, residual products, internally produced fuel and other |
|
|
115 |
|
|
|
132 |
|
|
|
124 |
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Yield |
|
|
596 |
|
|
|
655 |
|
|
|
587 |
|
|
|
639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin ($/throughput barrel) (c) |
|
$ |
9.59 |
|
|
$ |
16.69 |
|
|
$ |
10.04 |
|
|
$ |
11.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing cost before depreciation and amortization (c) ($/throughput bbl) |
|
$ |
4.79 |
|
|
$ |
5.24 |
|
|
$ |
4.90 |
|
|
$ |
5.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin (d) |
|
$ |
498 |
|
|
$ |
955 |
|
|
$ |
1,521 |
|
|
$ |
1,869 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing costs |
|
|
248 |
|
|
|
300 |
|
|
|
743 |
|
|
|
883 |
|
Other operating expenses |
|
|
69 |
|
|
|
88 |
|
|
|
205 |
|
|
|
234 |
|
Selling, general and administrative |
|
|
7 |
|
|
|
8 |
|
|
|
19 |
|
|
|
29 |
|
Depreciation and amortization (e) |
|
|
86 |
|
|
|
83 |
|
|
|
263 |
|
|
|
239 |
|
Loss on asset disposals and impairments |
|
|
4 |
|
|
|
|
|
|
|
23 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income |
|
$ |
84 |
|
|
$ |
476 |
|
|
$ |
268 |
|
|
$ |
474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales (thousand barrels per day) (f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks |
|
|
309 |
|
|
|
327 |
|
|
|
311 |
|
|
|
330 |
|
Jet fuel |
|
|
92 |
|
|
|
94 |
|
|
|
83 |
|
|
|
95 |
|
Diesel fuel |
|
|
129 |
|
|
|
164 |
|
|
|
123 |
|
|
|
146 |
|
Heavy oils, residual products and other |
|
|
81 |
|
|
|
97 |
|
|
|
85 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refined Product Sales |
|
|
611 |
|
|
|
682 |
|
|
|
602 |
|
|
|
669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales Margin ($/barrel) (f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price |
|
$ |
83.71 |
|
|
$ |
131.21 |
|
|
$ |
70.17 |
|
|
$ |
124.68 |
|
Average costs of sales |
|
|
76.47 |
|
|
|
117.83 |
|
|
|
61.72 |
|
|
|
114.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales Margin |
|
$ |
7.24 |
|
|
$ |
13.38 |
|
|
$ |
8.45 |
|
|
$ |
10.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Refining Data by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(Dollars in millions except per barrel amounts) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
California (Golden Eagle and Los Angeles) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day) (g) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden Eagle |
|
|
133 |
|
|
|
164 |
|
|
|
142 |
|
|
|
154 |
|
Los Angeles |
|
|
102 |
|
|
|
109 |
|
|
|
103 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
235 |
|
|
|
273 |
|
|
|
245 |
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin |
|
$ |
250 |
|
|
$ |
458 |
|
|
$ |
771 |
|
|
$ |
1,016 |
|
Gross refining margin ($/throughput barrel) (c) |
|
$ |
11.54 |
|
|
$ |
18.22 |
|
|
$ |
11.54 |
|
|
$ |
14.22 |
|
Manufacturing cost before depreciation and
amortization (c) ($/throughput bbl) |
|
$ |
7.02 |
|
|
$ |
7.47 |
|
|
$ |
6.72 |
|
|
$ |
7.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pacific Northwest (Alaska and Washington) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day) (g) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington |
|
|
92 |
|
|
|
101 |
|
|
|
85 |
|
|
|
108 |
|
Alaska |
|
|
63 |
|
|
|
61 |
|
|
|
51 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
155 |
|
|
|
162 |
|
|
|
136 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin |
|
$ |
129 |
|
|
$ |
205 |
|
|
$ |
335 |
|
|
$ |
372 |
|
Gross refining margin ($/throughput barrel) (c) |
|
$ |
9.08 |
|
|
$ |
13.76 |
|
|
$ |
9.04 |
|
|
$ |
8.19 |
|
Manufacturing cost before depreciation and
amortization (c) ($/throughput bbl) |
|
$ |
3.04 |
|
|
$ |
3.79 |
|
|
$ |
3.74 |
|
|
$ |
3.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Pacific (Hawaii) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day) |
|
|
66 |
|
|
|
72 |
|
|
|
68 |
|
|
|
70 |
|
Gross refining margin |
|
$ |
7 |
|
|
$ |
80 |
|
|
$ |
78 |
|
|
$ |
30 |
|
Gross refining margin ($/throughput barrel) (c) |
|
$ |
1.05 |
|
|
$ |
12.15 |
|
|
$ |
4.17 |
|
|
$ |
1.55 |
|
Manufacturing cost before depreciation and
amortization (c) ($/throughput bbl) |
|
$ |
3.26 |
|
|
$ |
3.45 |
|
|
$ |
3.07 |
|
|
$ |
3.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Continent (North Dakota and Utah) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Dakota |
|
|
55 |
|
|
|
57 |
|
|
|
54 |
|
|
|
57 |
|
Utah |
|
|
53 |
|
|
|
58 |
|
|
|
52 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
108 |
|
|
|
115 |
|
|
|
106 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin |
|
$ |
115 |
|
|
$ |
213 |
|
|
$ |
337 |
|
|
$ |
448 |
|
Gross refining margin ($/throughput barrel) (c) |
|
$ |
11.50 |
|
|
$ |
20.10 |
|
|
$ |
11.64 |
|
|
$ |
14.61 |
|
Manufacturing cost before depreciation and
amortization (c) ($/throughput bbl) |
|
$ |
3.37 |
|
|
$ |
3.12 |
|
|
$ |
3.39 |
|
|
$ |
3.42 |
|
|
|
|
(a) |
|
Gains and losses associated with our derivative instruments have been reclassified from
Revenues (included in Crude oil resales and other in the table above) to Costs of sales
and operating expenses in our condensed statements of consolidated operations for all periods
presented. The reclassifications totaled a $6 million loss and a $16 million gain during the
three months ended September 30, 2009, and 2008, respectively, and losses of $61 million and
$192 million during the nine months ended September 30, 2009 and 2008, respectively. Refined
products sales include intersegment sales to our retail segment at prices which approximate
market of $764 million and $1.1 billion for the three months ended September 30, 2009 and
2008, respectively, and $2.0 billion and $3.3 billion for the nine months ended September 30,
2009 and 2008, respectively. |
|
(b) |
|
We define heavy crude oil as crude oil with an American Petroleum Institute gravity of 24
degrees or less. |
30
|
|
|
(c) |
|
Management uses gross refining margin per barrel to evaluate performance and compare
profitability to other companies in the industry. Gross refining margin per barrel is
calculated by dividing gross refining margin by total refining throughput and may not be
calculated similarly by other companies. Gross refining margin is calculated as revenues less
costs of feedstocks, purchased refined products, transportation and distribution. Management
uses manufacturing costs per barrel to evaluate the efficiency of refining operations.
Manufacturing costs per barrel is calculated by dividing manufacturing costs by total refining
throughput and may not be comparable to similarly titled measures used by other companies.
Investors and analysts use these financial measures to help analyze and compare companies in
the industry on the basis of operating performance. These financial measures should not be
considered as alternatives to segment operating income, revenues, costs of sales and operating
expenses or any other measure of financial performance presented in accordance with U.S. GAAP. |
|
(d) |
|
Consolidated gross refining margin totals gross refining margin for each of our regions
adjusted for other costs not directly attributable to a specific region. Gross refining
margin includes the effect of intersegment sales to the retail segment at prices which
approximate market. Gross refining margin approximates total refining throughput times gross
refining margin per barrel. |
|
(e) |
|
Includes manufacturing depreciation and amortization per throughput barrel of approximately
$1.57 and $1.39 for the three months ended September 30, 2009 and 2008, respectively, and
$1.63 and $1.35 for the nine months ended September 30, 2009 and 2008, respectively. |
|
(f) |
|
Sources of total refined product sales includes refined products manufactured at our
refineries and refined products purchased from third parties. Total refined product sales
margin includes margins on sales of manufactured and purchased refined products. |
|
(g) |
|
We experienced reduced throughput due to scheduled turnarounds at the Alaska and Golden Eagle
refineries during the 2009 second quarter, scheduled maintenance at the Washington refinery
during the 2009 first quarter, and scheduled turnarounds at the Golden Eagle refinery during
the 2008 first and second quarters and the Washington refinery during the 2008 first quarter. |
Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
Overview. Operating income for our refining segment decreased by $392 million during the 2009
Quarter primarily due to lower gross refining margin and decreased refining throughput associated
with refinery downtime, partially offset by lower operating expenses. Operating income in both
periods benefited from a reduction of petroleum inventories by decreasing LIFO layers acquired at
lower per-barrel costs. These inventory reductions resulted in decreases to costs of sales of $68
million in the 2008 Quarter versus $12 million in the 2009 Quarter.
Our gross refining margin per barrel decreased to $9.59 per barrel in the 2009 Quarter, compared to
$16.69 per barrel in the 2008 Quarter reflecting significantly lower industry diesel fuel and jet
fuel margins, partially offset by higher industry margins for gasoline. U.S. West Coast benchmark
diesel fuel margins declined from an average of $24 per barrel during the 2008 Quarter to $10 per
barrel during the 2009 Quarter, while U.S. West Coast benchmark gasoline margins increased to $17
per barrel in the 2009 Quarter from $12 per barrel in the 2008 Quarter. The decrease in industry
diesel fuel margins reflects lower global demand and significantly higher inventories. Industry
diesel fuel margins a year ago were stronger due to robust global demand and low inventories. U.S.
West Coast industry gasoline margins increased during the 2009 Quarter due to higher demand and the
impact of unplanned industry maintenance. Last year, industry gasoline margins were negatively
impacted due to falling demand caused by the weakening economy.
Gross Refining Margins. On an aggregate basis, our total gross refining margin decreased to $498
million in the 2009 Quarter from $955 million in the 2008 Quarter, reflecting lower total gross
refining margins in all of our regions. Our per-barrel gross refining margin was negatively
impacted by the decline in overall industry margins described above. Our gross refining margin was
also impacted during the 2009 Quarter as compared to the 2008 Quarter by the regional factors
described below.
31
California Region
|
|
|
The reduction of price differentials between heavy and light crude oils during the 2009
Quarter negatively impacted gross refining margins in the region. The California
refineries run a high proportion of heavy crude oils (63% of total refining throughput
during the 2009 Quarter). |
|
|
|
|
In the 2009 Quarter, unscheduled maintenance of the delayed coker and hydrocracker at
the Golden Eagle refinery and unscheduled downtime of the delayed coker at the Los Angeles
refinery negatively impacted gross refining margin. The delayed coker downtime and shifting
from heavy crude oil to lighter crude oil in response to the reduction of heavy crude oil
price differentials decreased the percentage of heavy crude oil throughput to total throughput in the
region by approximately 6% quarter-over-quarter. |
Mid-Continent Region
|
|
|
In the 2008 Quarter, we captured lower crude oil costs through reduced prices on local light
sweet crude oils. These lower prices during the 2008 Quarter were not available during the 2009 Quarter. |
Derivative Instruments. We periodically use derivative instruments to primarily manage exposure
to commodity price risks associated with the purchase or sale of crude oil and finished products.
We may also use derivative instruments to manage price risks associated with inventories above or
below our target levels. Gains or losses associated with our derivative instruments are included
in gross refining margin. Our losses totaled $6 million during the 2009 Quarter versus a gain of
$16 million during the 2008 Quarter.
Refining Throughput. Total refining throughput averaged 564 thousand barrels per day (Mbpd) in
the 2009 Quarter compared to 622 Mbpd during the 2008 Quarter. The decrease primarily reflects
matching production to lower product demand, unscheduled maintenance at the Golden Eagle refinery
and unscheduled downtime at the Los Angles refinery.
Refined Products Sales. Revenues from sales of refined products decreased 45% to $4.5 billion in
the 2009 Quarter as compared to the 2008 Quarter, primarily due to significantly lower average
refined product sales prices and lower refined product sales volumes. Our average product sales
price decreased 36% to $83.71 per barrel in the 2009 Quarter as significantly lower average crude
oil prices during the 2009 Quarter versus the 2008 Quarter led to lower product prices. Total
refined product sales decreased 10% or 71 Mbpd from the 2008 Quarter, primarily reflecting lower
product demand.
Costs of Sales and Expenses. Our average costs of sales decreased 35% to $76.47 per barrel during
the 2009 Quarter reflecting significantly lower average crude oil prices. The decrease in crude
oil prices reflects significantly higher U.S. crude oil inventories combined with low demand.
Manufacturing and other operating expenses decreased to $317 million in the 2009 Quarter, compared
to $388 million in the 2008 Quarter, primarily reflecting lower natural gas utility costs and
refining throughput. We also had higher incentive compensation costs of $23 million in the 2008
Quarter as we did not accrue any incentive compensation during the 2009 Quarter.
32
Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008
Overview. Operating income for our refining segment decreased by $206 million during the 2009
Period primarily due to lower gross refining margin and decreased refining throughput associated
with refinery downtime, partially offset by lower operating expenses. Our operating income in both
periods benefited from a reduction in petroleum inventories by decreasing LIFO layers acquired
at lower per-barrel costs. These inventory reductions resulted in decreases to costs of sales of
$146 million in the 2008 Period versus $12 million in the 2009 Period.
Our gross refining margin per barrel decreased to $10.04 per barrel in the 2009 Period, compared to
$11.21 per barrel in the 2008 Period reflecting significantly lower industry diesel fuel and jet
fuel margins, partially offset by higher industry margins for gasoline and heavy products. The
decrease in industry diesel fuel margins during the 2009 Period reflects lower global demand and
significantly higher inventories. Industry gasoline margins on the U.S. West Coast improved in the
2009 Period as compared to the 2008 Period primarily due to heavy industry downtime during the 2009
first quarter, unscheduled industry downtime during the 2009 Quarter and lower average gasoline
inventories during 2009. We also benefited from lower differentials on heavy products, such as fuel
oil, during the 2009 Period. Fuel oil prices averaged approximately 83% of Alaska North Slope
Crude Oil (ANS) crude oil during the 2008 Period versus approximately 93% of ANS crude oil during
the 2009 Period.
Gross Refining Margins. On an aggregate basis, our total gross refining margin decreased to $1.5
billion in the 2009 Period from $1.9 billion in the 2008 Period, primarily reflecting significantly
lower total gross refining margins in our California and Mid-Continent regions. Our per-barrel
gross refining margin was negatively impacted by the decrease in industry distillate margins
described above. Our gross refining margin was also impacted during the 2009 Period as compared to
the 2008 Period by the regional factors described below.
California Region
|
|
|
The reduction of price differentials between heavy and light crude oils negatively impacted
gross refining margins in the region during the 2009 Period. Our California refineries run
a high proportion of heavy crude oils (66% of total refining throughput during the 2009
Period). |
|
|
|
|
Unscheduled maintenance of the delayed coker and hydrocracker at the Golden Eagle
refinery in the 2009 Quarter and a turnaround of the hydrocracker at the Golden Eagle
refinery in the 2009 Period negatively impacted gross refining margins. |
|
|
|
|
A turnaround of five major units at the Golden Eagle refinery from mid-March through
April 2008 negatively impacted gross refining margins in the prior year. |
Pacific Northwest Region
|
|
|
Gross refining margin was negatively impacted by a refinery-wide turnaround at the
Alaska refinery and other unscheduled downtime during the 2009 Period and a refinery-wide
shutdown for repair of the crude tower at the Washington refinery from mid-January to
mid-February 2009. |
|
|
|
|
A turnaround of our fluid catalytic cracker and alkylation units at our Washington
refinery from late January to mid-February 2008 negatively impacted gross refining margin
during the 2008 Period. |
Mid-Pacific Region
|
|
|
Decreased losses on our derivative instruments of $44 million year-over-year, which is
further discussed below. |
|
|
|
|
Completion of a controls modernization project in the 2008 fourth quarter, which
improved reliability and refining yields and reduced energy costs benefited gross refining
margin during the 2009 Period. |
33
Derivative Instruments. We periodically use derivative instruments to primarily manage exposure
to commodity price risks associated with the purchase or sale of crude oil and finished products.
We may also use derivative instruments to manage price risks associated with inventories above or
below our target levels. Gains or losses associated with our derivative instruments are included
in gross refining margin. Our losses totaled $61 million during the 2009 Period versus $192
million during the 2008 Period. The decrease in our losses reflects the impact of changing our
hedging strategy and a more rapid increase in crude oil prices during the first half of 2008.
During the 2008 second quarter, we closed the majority of our crude oil derivative positions
associated with our long-haul strategy that matched the price of long haul crude oils to crude oil
prices at the day of processing. We continue to monitor our hedging strategy in 2009. This
change in strategy, in conjunction with a less volatile market in 2009 as compared with 2008, is
reflected in the decrease in our derivative losses.
Refining Throughput. Total refining throughput averaged 555 Mbpd in the 2009 Period compared to
609 Mbpd during the 2008 Period. The decrease primarily reflects matching production to lower
product demand, along with a refinery-wide shutdown of the Washington refinery for repairs during
the 2009 first quarter, scheduled downtime at our Alaska refinery during the 2009 second quarter
and unscheduled maintenance at the Golden Eagle refinery during the 2009 Quarter. During the 2009
first quarter, the refinery-wide shutdown reduced average refining throughput at the Washington
refinery by 41 Mbpd quarter-over-quarter. The Golden Eagle refinery experienced scheduled downtime
during the first half of both 2009 and 2008.
Refined Products Sales. Revenues from sales of refined products decreased 50% to $11.3 billion in
the 2009 Period as compared to the 2008 Period, primarily due to significantly lower average
refined product sales prices and lower refined product sales volumes. Our average product sales
price decreased 44% to $70.17 per barrel in the 2009 Period as significantly lower average crude
oil prices during the 2009 Period led to lower product prices. Total refined product sales
decreased by 10% or 67 Mbpd from the 2008 Period, primarily reflecting lower product demand.
Costs of Sales and Expenses. Our average costs of sales decreased 46% to $61.72 per barrel during
the 2009 Period reflecting significantly lower average crude oil prices. The decrease in crude
oil prices reflects significantly higher U.S. crude oil inventories combined with low demand.
Manufacturing and other operating expenses decreased to $948 million in the 2009 Period, compared
to $1.1 billion in the 2008 Period, primarily reflecting lower natural gas utility costs and
refining throughput. Depreciation and amortization increased by $24 million during the 2009
Period reflecting the completion of several capital projects during 2008, including the $600
million delayed coker unit at the Golden Eagle refinery. The increase in loss on asset disposals
and impairments primarily reflects a net termination charge of $12 million related to cancelling
the purchase of equipment associated with a capital project at our Los Angeles refinery in the
2009 second quarter. The equipment purchase was cancelled as we have reevaluated the scope and
timing of the project.
34
Retail Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(Dollars in millions except per gallon amounts) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Fuel |
|
$ |
863 |
|
|
$ |
1,219 |
|
|
$ |
2,182 |
|
|
$ |
3,479 |
|
Merchandise and other |
|
|
63 |
|
|
|
67 |
|
|
|
178 |
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
926 |
|
|
$ |
1,286 |
|
|
$ |
2,360 |
|
|
$ |
3,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Sales (millions of gallons) |
|
|
345 |
|
|
|
334 |
|
|
|
1,004 |
|
|
|
1,026 |
|
Fuel Margin ($/gallon) (a) |
|
$ |
0.28 |
|
|
$ |
0.30 |
|
|
$ |
0.19 |
|
|
$ |
0.18 |
|
Merchandise Margin (in millions) |
|
$ |
14 |
|
|
$ |
16 |
|
|
$ |
39 |
|
|
$ |
44 |
|
Merchandise Margin (percent of sales) |
|
|
25 |
% |
|
|
27 |
% |
|
|
25 |
% |
|
|
26 |
% |
Average Number of Stations (during the period) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated |
|
|
388 |
|
|
|
414 |
|
|
|
388 |
|
|
|
432 |
|
Branded jobber/dealer |
|
|
483 |
|
|
|
495 |
|
|
|
487 |
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Average Retail Stations |
|
|
871 |
|
|
|
909 |
|
|
|
875 |
|
|
|
920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel (b) |
|
$ |
98 |
|
|
$ |
99 |
|
|
$ |
189 |
|
|
$ |
181 |
|
Merchandise and other non-fuel margin |
|
|
21 |
|
|
|
22 |
|
|
|
58 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Margin |
|
|
119 |
|
|
|
121 |
|
|
|
247 |
|
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
51 |
|
|
|
56 |
|
|
|
153 |
|
|
|
170 |
|
Selling, general and administrative |
|
|
5 |
|
|
|
7 |
|
|
|
21 |
|
|
|
19 |
|
Depreciation and amortization |
|
|
10 |
|
|
|
10 |
|
|
|
29 |
|
|
|
32 |
|
Loss on asset disposals and impairments (c) |
|
|
|
|
|
|
14 |
|
|
|
2 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss) |
|
$ |
53 |
|
|
$ |
34 |
|
|
$ |
42 |
|
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Management uses fuel margin per gallon to compare profitability to other companies in the
industry. Fuel margin per gallon is calculated by dividing fuel gross margin by fuel sales
volumes and may not be calculated similarly by other companies. Investors and analysts use
fuel margin per gallon to help analyze and compare companies in the industry on the basis of
operating performance. This financial measure should not be considered an alternative to
segment operating income and revenues or any other measure of financial performance presented
in accordance with U.S. GAAP. |
|
(b) |
|
Includes the effect of intersegment purchases from our refining segment at prices which
approximate market. |
|
(c) |
|
Includes impairment charges related to a potential sale of 20 retail stations during the 2008
first quarter and the closure of 42 Mirastar stations during the 2008 Quarter. |
Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
Operating income for our retail segment increased $19 million in the 2009 Quarter, as compared to
the 2008 Quarter. The 2008 Quarter included an impairment of $13 million for the closure of 42
Mirastar stations. Total gross margins decreased to $119 million during the 2009 Quarter from $121
million in the 2008 Quarter, reflecting slightly lower fuel margin per gallon partially offset by
higher sales volumes due to higher demand associated with lower retail prices as compared to a year
ago.
Revenues on fuel sales decreased to $863 million in the 2009 Quarter, from $1.2 billion in the 2008
Quarter, reflecting significantly lower sales prices. Costs of sales decreased from the 2008
Quarter due to lower prices for purchased fuel.
35
Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008
Operating income for our retail segment was $42 million in the 2009 Period, compared to an
operating loss of $5 million in the 2008 Period. The 2008 Period included an impairment of $25
million related to the potential sale or closure of retail stations. Total gross margins increased
to $247 million during the 2009 Period from $241 million in the 2008 Period, reflecting slightly
higher fuel margin per gallon partially offset by slightly lower sales volumes.
Revenues on fuel sales decreased to $2.2 billion in the 2009 Period, from $3.5 billion in the 2008
Period, reflecting significantly lower sales prices and slightly lower sale volumes. Costs of
sales decreased in the 2008 Period due to lower prices for purchased fuel. Our other expenses,
excluding the loss on impairments, decreased by $18 million to $203 million during the 2009 Period
reflecting a lower average station count.
Consolidated Results of Operations
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $13 million and $16 million during the
2009 Quarter and the 2009 Period, respectively. The decreases primarily reflect lower employee and
contract labor costs partially offset by higher stock-based compensation expenses. The decrease
during the 2009 Period also reflects lower professional fees and purchased services.
Interest and Financing Costs
Interest and financing costs increased by $5 million and $11 million during the 2009 Quarter and
2009 Period, respectively. The increases reflect the issuance of our $300 million senior notes in
June 2009 partially offset by lower outstanding revolver borrowings during 2009. The increase
during the 2009 Period also reflects lower capitalized interest due to lower capital expenditures.
Capitalized interest, which is a reduction to interest and financing costs, totaled $17 million and
$22 million for the 2009 Period and 2008 Period, respectively.
Other Income
Other income totaled $1 million and $50 million in the 2008 Quarter and 2008 Period, respectively,
reflecting refunds received from TAPS in connection with rulings by the Regulatory Commission of
Alaska our protest of intrastate rates. We received a net refund of $45 million from TAPS
concerning rates between 1997 and 2000 during the first quarter of 2008 and net refunds of $5
million associated with the rates between 2001 and 2003 during the 2008 second and third quarters.
We did not earn other income during the 2009 Period.
Income Tax Provision
Our income tax provision totaled $18 million in the 2009 Quarter versus $166 million in the 2008
Quarter. In the 2009 Period, the income tax provision totaled $22 million versus a tax provision
of $104 million in the 2008 Period. The combined federal and state effective income tax rate was
36% during both the 2009 Period and 2008 Period.
36
CAPITAL RESOURCES AND LIQUIDITY
Overview
We operate in an environment where our capital resources and liquidity are impacted by changes in
the price of crude oil and refined products, availability of trade credit, market uncertainty and a
variety of additional factors beyond our control. These risks include, among others, the level of
consumer product demand, weather conditions, fluctuations in seasonal demand, governmental
regulations, geo-political conditions and overall market and global economic conditions. See
Important Information Regarding Forward-Looking Statements on page 42 for further information
related to risks and other factors. Future capital expenditures, as well as borrowings under our
credit agreement and other sources of capital, may be affected by these conditions.
Our primary sources of liquidity have been cash flows from operations and borrowing availability
under revolving lines of credit. We ended the third quarter of 2009 with $534 million of cash and
cash equivalents, no borrowings under our revolver, and approximately $1.2 billion in available
borrowing capacity under our credit agreement after $474 million in outstanding letters of credit.
At September 30, 2009, we also had three separate letter of credit agreements with a total capacity
of $500 million, of which we had $169 million available after $331 million in outstanding letters
of credit. Our total capacity of $1.81 billion under the credit agreement can be increased up to a
total capacity of $1.95 billion. Capacity under our separate letter of credit agreements can be
increased from $500 million to $600 million. In June 2009, we issued $300 million aggregate
principal amount of 9 3/4% senior notes due 2019 for general corporate purposes. We believe
available capital resources will be adequate to meet our capital expenditure, working capital and
debt service requirements.
Our $300 million 93/4% senior notes were issued at a price of 96.172% at an effective interest rate
of 10.375%. The notes have a ten-year maturity with no sinking fund requirements and are subject to
optional redemption by Tesoro beginning June 1, 2014 at premiums of 4.875% through May 31, 2015,
3.25% from June 1, 2015 through May 31, 2016; 1.625% from June 1, 2016 through May 31, 2017; and at
par thereafter. We have the right to redeem up to 35% of the aggregate principal amount at a
redemption price of 109.75% with proceeds from certain equity issuances through June 1, 2012. The
indenture for the notes contains covenants and restrictions that are customary for notes of this
nature. Substantially all of these covenants will terminate before the notes mature if one of two
specified ratings agencies, Moodys or Standard and Poors, assigns the notes an investment grade
rating and no events of default exist under the indenture. The terminated covenants will not be
restored even if the credit rating assigned to the notes subsequently falls below investment grade.
The notes are unsecured and are guaranteed by substantially all of our domestic subsidiaries.
Cash Dividends
On November 8, 2009, our Board of Directors reduced our quarterly cash dividend on common stock
from $0.10 per share to $0.05 per share. The reduction reflects a dividend yield that is more in
line with our historical yield and allows capital to be redeployed in support of our 2010 business plan, if
necessary. The dividend is payable on December 15, 2009 to shareholders of record on December 1,
2009. We have paid previously declared quarterly cash dividends on common stock of $0.10 per share
in each of the first three quarters of 2009.
37
Capitalization
Our capital structure at September 30, 2009 was comprised of the following (in millions):
|
|
|
|
|
Debt, including current maturities: |
|
|
|
|
Credit Agreement Revolving Credit Facility |
|
$ |
|
|
61/4% Senior Notes Due 2012 |
|
|
450 |
|
65/8% Senior Notes Due 2015 |
|
|
450 |
|
61/2% Senior Notes Due 2017 |
|
|
500 |
|
9 3/4% Senior Notes Due 2019, net of unamortized discount of $11 million |
|
|
289 |
|
Junior subordinated notes due 2012, net of unamortized discount of $27 million |
|
|
123 |
|
Capital lease obligations and other |
|
|
27 |
|
|
|
|
|
|
Total debt |
|
|
1,839 |
|
Stockholders equity |
|
|
3,238 |
|
|
|
|
|
|
Total Capitalization |
|
$ |
5,077 |
|
|
|
|
|
|
At September 30, 2009, our debt to capitalization ratio increased to 36% from 33% at year-end
2008, reflecting the issuance of our $300 million senior notes during the 2009 Period.
Our credit agreement and senior notes impose various restrictions and covenants on us that could
potentially limit our ability to respond to market conditions, raise additional debt or equity
capital, pay cash dividends, or repurchase stock. We do not believe that the limitations will
restrict our ability to pay cash dividends or repurchase stock.
Cash Flow Summary
Components of our cash flows are set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Cash Flows From (Used In): |
|
|
|
|
|
|
|
|
Operating Activities |
|
$ |
669 |
|
|
$ |
782 |
|
Investing Activities |
|
|
(325 |
) |
|
|
(461 |
) |
Financing Activities |
|
|
170 |
|
|
|
(160 |
) |
|
|
|
|
|
|
|
Increase in Cash and Cash Equivalents |
|
$ |
514 |
|
|
$ |
161 |
|
|
|
|
|
|
|
|
Net cash from operating activities during the 2009 Period totaled $669 million, compared to $782
million in the 2008 Period. The decrease in net cash from operating activities of $113 million was
primarily due to less cash earnings, partially offset by lower working capital requirements. Net
cash used in investing activities of $325 million reflects capital expenditures. Net cash from
financing activities primarily reflects the net proceeds from our senior notes issuance partially
offset by repayments on our revolver and dividend payments. Working capital (excluding cash)
decreased by $276 million at September 30, 2009 from $185 million at December 31, 2008 as payables
increased, due to higher crude oil prices, by a larger amount than both receivables and
inventories. Inventories decreased by 2 million barrels from December 31, 2008 reflecting our
initiatives to optimize working capital and the impact of matching production to lower product demand.
38
Capital Expenditures
Our 2010 capital budget and 2009 capital budget total $470 million and $460 million, respectively.
Capital spending during the 2009 Period was $291 million. Our capital budgets and capital spending
amounts are comprised of the following project categories at September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
Percent of |
|
|
Percent of 2010 |
|
Percent of 2009 |
|
2009 Quarter |
|
2009 Period |
Project Category |
|
Capital Budget |
|
Capital Budget |
|
Capital Spending |
|
Capital Spending |
Regulatory |
|
|
60 |
% |
|
|
55 |
% |
|
|
60 |
% |
|
|
55 |
% |
Sustaining |
|
|
30 |
% |
|
|
40 |
% |
|
|
30 |
% |
|
|
35 |
% |
Income Improvement |
|
|
10 |
% |
|
|
5 |
% |
|
|
10 |
% |
|
|
10 |
% |
See Business Strategy and Overview and Environmental Capital Expenditures for additional
information.
Refinery Turnaround Spending
We spent $98 million for refinery turnarounds and catalysts during the 2009 Period primarily at our
Golden Eagle, Alaska and Los Angeles refineries. During the remainder of 2009, we expect to spend
an additional $44 million primarily at our Los Angeles refinery. Refining throughput and yields
will be affected by a scheduled turnaround and unscheduled downtime of the delayed coker at our Los Angeles refinery during the fourth quarter.
During 2010, we expect to spend $205 million for refinery turnarounds primarily at our Golden
Eagle, North Dakota, Hawaii and Utah refineries.
Off-Balance Sheet Arrangements
We have not entered into any transactions, agreements or other contractual arrangements that would
result in off-balance sheet liabilities.
Environmental and Other Matters
We are a party to various litigation and contingent loss situations, including environmental and
income tax matters, arising in the ordinary course of business. We cannot predict the ultimate
outcomes of these matters with certainty, and we have made related accruals based on our best
estimates. We believe that the outcome of these matters will not materially impact our liquidity
and consolidated financial position, although the resolution of certain of these matters could have
a material impact on interim or annual results of operations.
Tesoro 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 us to remove or mitigate the environmental effects of the disposal or release of petroleum
or chemical substances at various sites, install additional controls, or make other modifications
to certain emission sources.
Future expenditures may be required to comply with the Clean Air Act and other federal, state and
local requirements for our various sites, including our refineries, tank farms, pipelines,
operating and closed retail stations and operating and closed refined products terminals. For
example, the U.S. Congress is considering legislation seeking to establish a national cap-and-trade
program beginning in 2012 to address greenhouse gas emissions and climate change. The U.S.
Environmental Protection Agency is also proposing to regulate greenhouse gases emissions under the
Clean Air Act. The impact of these legislative and regulatory developments, including any
cap-and-trade program, could result in increased compliance costs, additional operating
restrictions on our business, and an increase in the cost of the products we manufacture, which
could have an adverse impact on our financial position, results of operations, and liquidity.
We cannot currently determine the amounts of such future impacts.
39
Tesoro is subject to audits by federal, state and local taxing authorities in the normal course of
business. It is possible that tax audits could result in claims against Tesoro in excess of
recorded liabilities. We believe that when these matters are resolved they will not materially
affect our consolidated financial position or results of operations. We believe it is reasonably
possible that unrecognized tax benefits could decrease by as much as $22 million in the next twelve
months through settlements or other conclusions, primarily regarding state tax issues.
Tesoro is also subject to extensive federal, state and local tax laws and regulations. New tax
laws and regulations and changes in existing tax laws and regulations are continuously being
enacted or proposed that could result in increased expenditures for tax liabilities in the future.
Environmental Liabilities
We are currently, and expect to continue, incurring expenses for environmental cleanup at a number
of current and previously owned properties. Our accruals for environmental expenditures included
in Accrued liabilities and Other liabilities in the condensed consolidated balance sheets
totaled $114 million and $123 million, at September 30, 2009 and December 31, 2008, respectively.
Our environmental accruals include retained liabilities for previously owned or operated, refining,
pipeline, terminal and retail station properties. We believe these accruals are adequate and they
include the expected participation of other parties or former owners in remediation actions. These
environmental liabilities require judgment to assess. It is reasonably possible that our estimates
will change and that additional remediation costs will be incurred as more information becomes
available.
We received $58.5 million in a settlement with a prior owner of our Golden Eagle refinery in 2007
in exchange for assuming responsibility for certain environmental liabilities arising from
operations at the refinery prior to August 2000. Our accruals for these environmental liabilities
totaled $82 million and $87 million at September 30, 2009 and December 31, 2008, respectively. We
cannot presently determine the additional remedial activities that may be required at the Golden
Eagle refinery. Therefore, it is reasonably possible that we will incur additional remediation
costs as more information becomes available. We expect to file insurance claims under
environmental insurance policies that provide coverage up to $140 million for expenditures in
excess of the settlement proceeds. Amounts recorded for environmental liabilities have not been
reduced for possible insurance recoveries.
We are continuing to investigate conditions at certain active wastewater treatment units at our
Golden Eagle refinery. This investigation is driven by an order from the San Francisco Bay
Regional Water Quality Control Board that names us as well as two previous owners of the Golden
Eagle refinery. Costs to investigate these conditions are included in our environmental accruals.
We cannot currently estimate the amount of the ultimate resolution, but we believe the final
resolution of the order will not have a material adverse effect on our financial position or
results of operations.
Other Matters
In the ordinary course of business, we become party to lawsuits, administrative proceedings and
governmental investigations, including environmental, regulatory and other matters. Large and
sometimes unspecified damages or penalties may be sought from us in some matters for which the
likelihood of loss may be reasonably possible but the amount of loss is not currently estimable.
As a result, we have not established reserves for these matters and the matters described below.
On the basis of existing information, we believe that the resolution of these matters, individually
or in the aggregate, will not have a material adverse effect on our financial position or results
of operations.
We received a Notice of Violation (NOV) in February 2009 from the EPA relating to our compliance
with the Clean Air Act and the corresponding regulations concerning the regulation of fuels and
fuel additives. The allegations arise from a compliance review conducted by the EPA in 2006 for
the years 2003 through the time of the review in 2006. We are investigating the allegations
contained in the NOV.
40
We are a defendant, along with other manufacturing, supply and marketing defendants, in four
pending cases alleging MTBE contamination in groundwater. In January 2009, we were served with the
fourth lawsuit. The defendants are being sued for having manufactured MTBE and having
manufactured, supplied and distributed gasoline containing MTBE. The plaintiffs in the four cases,
all in California, are municipalities and governmental authorities. The plaintiffs allege, in
part, that the defendants are liable for manufacturing or distributing a defective product. The
suits generally seek individual, unquantified compensatory and punitive damages and attorneys
fees. A reserve for three of the four cases was included in accrued liabilities at September 30,
2009. We believe the resolution of the four cases will not have a material adverse affect on our
financial position or results of operations. We believe we have defenses against these claims and
intend to vigorously defend them.
Prior to this year, we received two NOVs from the EPA for the Washington refinery alleging that
prior to our acquisition of the refinery, certain modifications were made to the fluid catalytic
cracking unit in violation of the Clean Air Act. We have investigated the allegations and believe
we have defenses to the allegations and intend to vigorously defend ourselves.
Prior to this year, we received a NOV from the EPA concerning our Utah refinery alleging certain
violations of the Clean Air Act at the refinery beginning in 2004. We are investigating the
allegations contained in the NOV.
Environmental Capital Expenditures
The EPA requirements to reduce non-road diesel sulfur content becomes effective in phases through
2012. At our North Dakota refinery, we expect to spend $8 million in 2009 through 2010 to meet the
standards, including $2 million spent during the first nine months of 2009. We are currently
evaluating alternative projects that will satisfy the future requirements under existing
regulations at our Utah and Hawaii refineries. Our Golden Eagle, Los Angeles, Washington and
Alaska refineries will not require additional capital spending to meet the diesel fuel standards.
The EPA issued regulations in February 2007 that require the reduction of benzene in gasoline. We
plan to spend $280 million in 2009 through 2012 at five of our refineries to comply with the
regulations, including $34 million spent in the first nine months of 2009. Our Golden Eagle and
Los Angeles refineries will not require capital spending to meet the benzene reduction standards.
These cost estimates are subject to further review and analysis.
Regulations issued by Californias South Coast Air Quality Management District require the emission
of nitrogen oxides to be reduced through 2011 at our Los Angeles refinery. Currently, we plan to
meet this requirement by implementing operational changes and a portfolio of smaller capital
projects. Previously, these elements had been part of a larger project to replace our power
cogeneration units and steam boilers, which we are pursuing as a strategic reliability project.
Other projects at our Los Angeles refinery include replacing underground pipelines with
above-ground pipelines as required by an Order from the California Regional Water Quality Control
Board. We expect to spend $60 million in 2009 through 2015 to complete the project, including $6
million spent during the first nine months of 2009.
We are installing facilities at our Golden Eagle and North Dakota refineries to eliminate the use
of atmospheric blowdown towers by rerouting these emergency relief systems. We expect to spend $50
million in 2009 through 2010, including $24 million spent during the first nine months of 2009.
We will spend additional capital at the Golden Eagle refinery for reconfiguring and replacing
above-ground storage tank systems. We expect to spend $81 million primarily in 2009 through 2014
for this project, including $11 million spent during the first nine months of 2009.
We are also evaluating alternative projects for our wharves at the Golden Eagle refinery to meet
engineering and maintenance standards issued by the State of California in February 2006. These
projects could cost between $50 million and $150 million in 2009 through 2016. The timing of these
projects is under evaluation and is subject to change.
41
In connection with our 2001 acquisition of our North Dakota and Utah refineries, Tesoro is required
under a consent decree with the EPA to address issues to reduce air emissions. We expect to spend
$22 million in 2009 through 2010 to install NOx emission controls on boilers and heaters at these
refineries, including $12 million spent during the first nine months of 2009. We plan to
substantially complete the requirements in 2010.
We have completed the installation of enhanced vapor recovery and in-station diagnostic systems at
our California gasoline retail stations as required by the California Air Resources Board. We
spent $9 million during the first nine months of 2009.
In December 2007, the U.S. Congress passed the Energy Independence and Security Act, which, among
other things, modified the industry requirements for the Renewable Fuel Standard (RFS). This
standard requires the total volume of renewable transportation fuels (including ethanol and
biodiesel) sold or introduced in the U.S. to be 11.1 billion gallons in 2009 rising to 36 billion
gallons by 2022. The requirements could reduce demand growth for petroleum products in the future.
In the near term, the RFS presents ethanol production and logistics challenges for both the
ethanol and petroleum refining and marketing industries and may require additional expenditures by
us to accommodate increased ethanol use.
In June 2007, the California Air Resources Board proposed amendments to the requirements for
gasoline in the state of California that decreases the allowable sulfur levels and allows for
additional ethanol to be blended into gasoline. We expect both of our California refineries to be
in compliance with the regulation by the December 31, 2009 deadline.
The cost estimates for the environmental projects described above are subject to further review and
analysis and include estimates for capitalized interest and labor costs.
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (including information incorporated by reference) includes and
references forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements relate to, among other things, expectations regarding
refining margins, revenues, cash flows, capital expenditures, turnaround expenses, and other
financial items. These statements also relate to our business strategy, goals and expectations
concerning our market position, future operations, margins and profitability. We have used the
words anticipate, believe, could, estimate, expect, intend, may, plan, predict,
project, will, would and similar terms and phrases to identify forward-looking statements in
this Quarterly Report on Form 10-Q, which speak only as of the date the statements were made.
Although we believe the assumptions upon which these forward-looking statements are based are
reasonable, any of these assumptions could prove to be inaccurate and the forward-looking
statements based on these assumptions could be incorrect.
The matters discussed in these forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results and trends to differ materially from those made,
projected, or implied in or by the forward-looking statements depending on a variety of
uncertainties or other factors including, but not limited to:
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changes in global economic conditions and the effects of the global economic
downturn on our business and the business of our suppliers, customers, business partners
and lenders; |
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changes in capital requirements or in execution of planned capital projects; |
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the timing and extent of changes in commodity prices and demand for our
refined products; |
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operational hazards inherent in refining operations and in transporting and
storing crude oil and refined products; |
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disruptions due to equipment interruption or failure at our facilities or
third-party facilities; |
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the availability and costs of crude oil, other refinery feedstocks and
refined products; |
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changes in our cash flow from operations; |
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changes in the cost or availability of third-party vessels, pipelines and
other means of transporting crude oil, feedstocks and refined products; |
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actions of customers and competitors;
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42
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direct or indirect effects on our business resulting from actual or
threatened terrorist incidents or acts of war; |
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political developments; |
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changes in our inventory levels and carrying costs; |
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seasonal variations in demand for refined products; |
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changes in fuel and utility costs for our facilities; |
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state and federal environmental, economic, health and safety, energy and
other policies and regulations, any changes therein, and any legal or regulatory
investigations, delays or other factors beyond our control; |
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risks related to labor relations and workplace safety; |
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changes in insurance markets impacting costs and the level and types of
coverage available; |
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adverse rulings, judgments, or settlements in litigation or other legal or
tax matters, including unexpected environmental remediation costs in excess of any
accruals; |
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weather conditions affecting our operations or the areas in which our
refined products are marketed; and |
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earthquakes or other natural disasters affecting operations. |
Many of these factors are described in greater detail in our filings with the SEC. All future
written and oral forward-looking statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the previous statements. We undertake no obligation to
update any information contained herein or to publicly release the results of any revisions to any
forward-looking statements that may be made to reflect events or circumstances that occur, or that
we become aware of, after the date of this Quarterly Report on Form 10-Q.
43
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary source of market risk is the difference between prices received from the sale of
refined products and the prices paid for crude oil and other feedstocks. We have a risk management
committee responsible for, among other things, reviewing a quarterly assessment of risks to the
corporation and presenting a quarterly risk report to executive management for consideration.
Commodity Price Risks
Our earnings and cash flows from operations depend on the margin relative to fixed and variable
expenses (including the costs of crude oil and other feedstocks) at which we are able to sell
refined products. The prices of crude oil and refined products have fluctuated substantially in
recent years. These prices depend on many factors, including the global supply and demand for
crude oil, diesel and other refined products, which in turn depend on, among other factors, changes
in the global economy, the level of foreign and domestic production of crude oil and refined
products, geo-political conditions, the availability of imports of crude oil and refined products,
the relative strength of the U.S. dollar, the marketing of alternative and competing fuels and the
impact of government regulations. The prices we receive for refined products are also affected by
local factors such as local market conditions and the level of operations of other suppliers in our
markets.
Prices for refined products are influenced by the 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. The timing, direction and the overall change in refined
product prices versus crude oil prices will impact profit margins and could have a significant
impact on our earnings and cash flows. Assuming all other factors remained constant, a $1 per
barrel change in average gross refining margins, based on our 2009 Period average throughput of 555
Mbpd, would change annualized pretax operating income by approximately $203 million.
We maintain inventories of crude oil and intermediate and finished refined products, the values of
which are subject to fluctuations in market prices. Our inventories of refinery feedstocks and
refined products totaled 22 million barrels and 24 million barrels at September 30, 2009 and
December 31, 2008, respectively. The average cost of our refinery feedstocks and refined products
at September 30, 2009 was approximately $27 per barrel on a LIFO basis, compared to market prices
of approximately $79 per barrel. If market prices decline to a level below the LIFO average cost of
these inventories, we would be required to write down the value of our inventory to market.
We periodically use non-trading derivative instruments to primarily manage exposure to commodity
price risks associated with the purchase or sale of crude oil and finished products. We may also
use derivative instruments to manage price risks associated with inventories above or below our
target levels. These derivative instruments typically involve exchange-traded futures,
over-the-counter swaps and options, generally with durations of less than one year. During the
2008 second quarter, we closed the majority of our crude oil derivative positions associated with
our long-haul strategy that matched the price of long haul crude oils to crude oil prices at the
day of processing. We continue to monitor our hedging strategy in 2009.
We elected not to designate our derivative instruments as cash flow or fair value hedges during the
first nine months of 2009 and 2008. Therefore, we mark-to-market our derivative instruments and
recognize the changes in their fair value in Costs of sales and operating expenses. Accordingly,
no change in the value of the related underlying physical commodity is recorded. We include the
carrying amounts of our derivatives in Prepayments and other or Accrued liabilities in the
condensed consolidated balance sheet.
44
Net earnings during the 2009 and 2008 third quarters included a derivative instrument loss of $6
million and gain of $16 million, respectively. The gain/loss was comprised of the following (in
millions):
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September 30, |
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2009 |
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2008 |
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Contract |
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Net Gain |
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Contract |
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Net Gain |
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Volumes |
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(Loss) |
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Volumes |
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(Loss) |
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Unrealized gain carried on open derivative
positions from prior year |
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2 |
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$ |
13 |
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3 |
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$ |
19 |
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Realized loss on settled derivative positions |
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69 |
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(19 |
) |
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70 |
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(25 |
) |
Unrealized
gain on open net short derivative positions |
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1 |
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2 |
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22 |
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Net gain (loss) |
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$ |
(6 |
) |
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$ |
16 |
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Our open derivative positions at September 30, 2009 will expire at various times primarily during
2009. We prepared a sensitivity analysis to estimate our exposure to market risk associated with
our derivative instruments. This analysis may differ from actual results. The fair value of each
derivative instrument was based on quoted market prices. Based on our open derivative positions of
1 million barrels at September 30, 2009, a $1 per-barrel change in quoted market prices of our
derivative instruments, assuming all other factors remain constant, could change the fair value of
our derivative instruments and pretax operating income by approximately $1 million.
Foreign Currency Risk
We are exposed to exchange rate fluctuations on our monthly purchases of Canadian crude oil. These
purchases are transacted in Canadian dollars (C$) recently ranging up to C$50 million monthly.
Beginning in August 2009, we entered into forward contracts of Canadian dollars to manage any
monthly exchange rate fluctuations. As of September 30, 2009, we had a forward contract to
purchase $37 million of Canadian dollars scheduled to mature on October 26, 2009.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the
Exchange Act), under the supervision and with the participation of our management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange
Act as of the end of the period. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are effective. During the
quarter ended September 30, 2009, there have been no changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
45
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we become party to lawsuits, administrative proceedings and
governmental investigations, including environmental, regulatory and other matters. Large and
sometimes unspecified damages or penalties may be sought from us in some matters and some matters
may require years for us to resolve. Although we cannot provide assurance, we believe that an
adverse resolution of the matter described below during a future reporting period will not have a
material adverse effect on our financial position or results of operations.
In February 2009, we received a Notice of Violation (NOV) from the EPA relating to our compliance
with the Clean Air Act and the corresponding regulations concerning the regulation of fuels and
fuel additives. The allegations arise from a compliance review conducted by the EPA in 2006 for
the years 2003 through the time of the review in 2006. We are investigating the allegations
contained in the NOV and we cannot estimate the amount of the ultimate resolution of this NOV.
However, at this time we believe the final resolution of this NOV will not have a material adverse
effect on our financial position or results of operations.
ITEM 1A. RISK FACTORS
There have been no significant changes from the risk factors previously disclosed in Item 1A of our
2008 Form 10-K.
ITEM 5. OTHER INFORMATION
On November 8, 2009, we amended and restated the Board of Directors Deferred Compensation Plan (the
Plan) effective May 1, 2009. Changes to the Plan include eliminating certain annual stock-based
grants, a modification to the allocation of the annual retainer fee and a sign-on grant of phantom
stock to new directors. The Plan is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q
and is incorporated herein by reference.
ITEM 6. EXHIBITS
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10.1 |
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Amended and Restated Board of Directors Deferred Compensation Plan. |
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31.1 |
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Certification by Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification by Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification by Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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32.2 |
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Certification by Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TESORO CORPORATION
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Date: November 9, 2009 |
/s/ BRUCE A. SMITH
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Bruce A. Smith |
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Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer) |
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Date: November 9, 2009 |
/s/ GREGORY A. WRIGHT
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Gregory A. Wright |
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Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
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47
EXHIBIT INDEX
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Exhibit |
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Number |
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10.1
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Amended and Restated Board of Directors Deferred Compensation Plan. |
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31.1
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Certification by Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
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|
31.2
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Certification by Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification by Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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32.2
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Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
48