e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2010
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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
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For the transition period
from to
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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
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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19100 Ridgewood Parkway
San Antonio, Texas
(Address of principal
executive offices)
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78259-1828
(Zip Code)
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Registrants telephone number, including area code:
210-626-6000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.16
2/3
par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer 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
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined by
Rule 12b-2
of the
Act). Yes o No þ
At June 30, 2010, the aggregate market value of the voting
common stock held by non-affiliates of the registrant was
approximately $1.6 billion based upon the closing price of
its common stock on the New York Stock Exchange Composite tape.
At February 21, 2011, there were 143,174,369 shares of
the registrants common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement to be filed
pursuant to Regulation 14A pertaining to the 2011 Annual
Meeting of Stockholders are incorporated by reference into
Part III hereof. The Company intends to file such Proxy
Statement no later than 120 days after the end of the
fiscal year covered by this
Form 10-K.
TESORO
CORPORATION
ANNUAL
REPORT ON
FORM 10-K
TABLE OF
CONTENTS
This Annual Report on
Form 10-K
(including documents incorporated by reference herein) contains
statements with respect to our expectations or beliefs as to
future events. These types of statements are
forward-looking and subject to uncertainties. See
Important Information Regarding Forward-Looking
Statements on page 30.
As used in this Annual Report on
Form 10-K,
the terms Tesoro, we, us or
our may refer to Tesoro Corporation, one or more of
its consolidated subsidiaries or all of them taken as a whole.
1
PART I
ITEMS 1.
AND 2. BUSINESS AND PROPERTIES
Statements in this Annual Report on
Form 10-K,
that are not historical in nature should be deemed
forward-looking
statements that are inherently uncertain. See Important
Information Regarding
Forward-Looking
Statements in Managements Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 for
a discussion of forward-looking statements and of factors that
could cause actual outcomes and results to differ materially
from those projected.
Tesoro Corporation (Tesoro) was incorporated in
Delaware in 1968. Based in San Antonio, Texas, we are one
of the largest independent petroleum refiners and marketers in
the United States. Our subsidiaries, operating through two
business segments, primarily manufacture and sell transportation
fuels. Our refining operating segment (refining),
which operates seven refineries in the western United States,
refines crude oil and other feedstocks into transportation
fuels, such as gasoline, gasoline blendstocks, jet fuel and
diesel fuel, as well as other products, including heavy fuel
oils, liquefied petroleum gas, petroleum coke and asphalt. This
operating segment sells refined products in wholesale and bulk
markets to a wide variety of customers within the operations
area. Our retail operating segment (retail) sells
transportation fuels and convenience products in 15 states
through a network of 880 retail stations, primarily under the
Tesoro®,
Shell®,
USA
Gasolinetm
and
Mirastar®
brands. See Notes N and Q to our consolidated financial
statements in Item 8 for additional information on our
operating segments and properties.
Our principal executive offices are located at 19100 Ridgewood
Parkway, San Antonio, Texas
78259-1828
and our telephone number is
(210) 626-6000.
Our common stock trades on the New York Stock Exchange under the
symbol TSO. We file reports with the Securities and
Exchange Commission (SEC), including annual reports
on
Form 10-K,
quarterly reports on
Form 10-Q
and other reports from time to time. The public may read and
copy any materials that we file with the SEC at the SECs
Public Reference Room at 100 F Street, N.E.,
Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Our SEC filings are also available to the public on the
SECs Internet site at
http://www.sec.gov
and our website at
http://www.tsocorp.com
as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. You may
receive a copy of our Annual Report on
Form 10-K,
including the financial statements, free of charge by writing to
Tesoro Corporation, Attention: Investor Relations, 19100
Ridgewood Parkway, San Antonio, Texas
78259-1828.
We also post our corporate governance guidelines, code of
business conduct, code of ethics for senior financial officers
and our Board of Director committee charters on our website. Our
governance documents are available in print by writing to the
address above. We submitted to the New York Stock Exchange on
June 18, 2010 our annual certification concerning corporate
governance pursuant to Section 303A.12 (a) of the New
York Stock Exchange Listed Company Manual.
2
REFINING
Overview
We currently own and operate seven petroleum refineries located
in the western United States and sell transportation fuels to a
wide variety of customers. Our refineries produce a high
proportion of the transportation fuels that we sell, and we
purchase the remainder from other refiners and suppliers. Our
seven refineries have a combined crude oil capacity of 665
thousand barrels per day (Mbpd). Crude oil capacity
and throughput rates of crude oil and other feedstocks by
refinery are as follows:
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Crude Oil
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Capacity
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Throughput (bpd)
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Refinery
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(bpd)(a)
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2010
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2009
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2008
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California
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|
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Golden Eagle
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166,000
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124,000
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140,900
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153,300
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Los Angeles
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97,000
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98,800
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100,500
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105,100
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Pacific Northwest
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Washington(b)
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120,000
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39,300
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84,200
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103,100
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Alaska
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72,000
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53,400
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50,600
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55,600
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Mid-Pacific
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Hawaii
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93,500
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63,900
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68,200
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69,100
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Mid-Continent
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North Dakota
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58,000
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50,800
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54,000
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56,000
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Utah
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58,000
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50,100
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50,600
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52,900
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Total(c)
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664,500
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480,300
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549,000
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595,100
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(a) |
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Crude oil capacity by refinery as reported by the Energy
Information Administration (2010). Throughput can exceed
crude oil capacity due to the processing of other feedstocks in
addition to crude oil. |
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(b) |
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Our Washington refinery was temporarily shut-down from April
2010 to November 2010. |
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(c) |
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See discussion regarding changes in total refining throughput in
Managements Discussion and Analysis of Financial Condition
and Results of Operations in Item 7. |
3
Feedstock Purchases. We purchase crude oil and
other feedstocks from both domestic and foreign sources either
through term agreements with renewal provisions or in the spot
market. We purchase approximately 63% of our crude oil under
term agreements with renewal options, which are primarily
short-term agreements priced at market. We purchase the
remainder of our crude oil and feedstock supplies in the spot
market. We purchase domestic crude oil primarily in California,
Alaska, North Dakota, Colorado, Wyoming and Utah. We purchase
foreign crude oil primarily from South America, Russia, Canada
and the Middle East. Sources of our crude oil purchases are as
follows:
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Crude Oil Source
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2010
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2009
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2008
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Domestic
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65
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%
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|
62
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%
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|
56
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%
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Foreign
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35
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38
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44
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|
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|
|
|
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Total
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100
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%
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|
100
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%
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100
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%
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Our refineries process both heavy and light crude oils. Light
crude oils, when refined, produce a higher proportion of high
value transportation fuels such as gasoline, diesel and jet
fuel, and as a result are generally more expensive than heavy
crude oils. In contrast, heavy crude oils produce more low value
by-products and heavy residual oils. These lower value products
can be upgraded to higher value products through additional
refining processes. Throughput volumes by feedstock type and
region are summarized below (in Mbpd):
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|
2010
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|
2009
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|
|
2008
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|
|
|
Volume
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%
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|
Volume
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%
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|
|
Volume
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%
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California
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|
|
|
|
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|
|
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|
|
|
|
|
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|
|
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|
|
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Heavy crude(a)
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161
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|
|
|
72
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%
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|
160
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|
|
|
66
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%
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|
|
164
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|
|
|
64
|
%
|
Light crude
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|
42
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|
|
|
19
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|
|
|
57
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|
|
|
24
|
|
|
|
73
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|
|
|
28
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|
Other feedstocks
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|
|
20
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|
|
|
9
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|
|
|
24
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|
|
|
10
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|
|
|
21
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|
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|
8
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|
|
|
|
|
|
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|
|
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|
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Total
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|
223
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|
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|
100
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%
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|
241
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|
100
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%
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|
258
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|
100
|
%
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|
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|
Pacific Northwest
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Heavy crude(a)
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|
1
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|
1
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%
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|
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%
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7
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|
4
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%
|
Light crude
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|
87
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|
94
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|
126
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|
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|
93
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|
143
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|
90
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|
Other feedstocks
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5
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|
5
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9
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|
7
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|
9
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|
6
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|
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|
Total
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|
93
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|
100
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%
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|
135
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|
|
100
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%
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|
|
159
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|
|
100
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%
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|
|
|
|
|
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|
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|
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|
|
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|
|
|
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Mid-Pacific
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Heavy crude(a)
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|
19
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|
30
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%
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|
17
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|
|
25
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%
|
|
|
21
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|
|
|
30
|
%
|
Light crude
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|
|
45
|
|
|
|
70
|
|
|
|
51
|
|
|
|
75
|
|
|
|
48
|
|
|
|
70
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
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|
64
|
|
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|
100
|
%
|
|
|
68
|
|
|
|
100
|
%
|
|
|
69
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Mid-Continent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Light crude
|
|
|
96
|
|
|
|
96
|
%
|
|
|
101
|
|
|
|
96
|
%
|
|
|
105
|
|
|
|
96
|
%
|
Other feedstocks
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
|
|
|
100
|
%
|
|
|
105
|
|
|
|
100
|
%
|
|
|
109
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Throughput
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy crude(a)
|
|
|
181
|
|
|
|
38
|
%
|
|
|
177
|
|
|
|
32
|
%
|
|
|
192
|
|
|
|
32
|
%
|
Light crude
|
|
|
270
|
|
|
|
56
|
|
|
|
335
|
|
|
|
61
|
|
|
|
369
|
|
|
|
62
|
|
Other feedstocks
|
|
|
29
|
|
|
|
6
|
|
|
|
37
|
|
|
|
7
|
|
|
|
34
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
480
|
|
|
|
100
|
%
|
|
|
549
|
|
|
|
100
|
%
|
|
|
595
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We define heavy crude oil as crude oil with an American
Petroleum Institute gravity of 24 degrees or less. |
4
Refined Products. The total products produced
in the manufacturing process are referred to as the refining
yield. The refining yield consists primarily of transportation
fuels, including gasoline and gasoline blendstocks, jet fuel and
diesel fuel, but also may include other products including heavy
fuel oils, liquefied petroleum gas, petroleum coke and asphalt.
Our refining yield by region is summarized below (in Mbpd):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Volume
|
|
|
%
|
|
|
Volume
|
|
|
%
|
|
|
Volume
|
|
|
%
|
|
|
California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
124
|
|
|
|
51
|
%
|
|
|
130
|
|
|
|
49
|
%
|
|
|
133
|
|
|
|
48
|
%
|
Jet fuel
|
|
|
19
|
|
|
|
8
|
|
|
|
18
|
|
|
|
7
|
|
|
|
18
|
|
|
|
6
|
|
Diesel fuel
|
|
|
54
|
|
|
|
22
|
|
|
|
52
|
|
|
|
20
|
|
|
|
72
|
|
|
|
26
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
47
|
|
|
|
19
|
|
|
|
63
|
|
|
|
24
|
|
|
|
54
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
244
|
|
|
|
100
|
%
|
|
|
263
|
|
|
|
100
|
%
|
|
|
277
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pacific Northwest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
34
|
|
|
|
35
|
%
|
|
|
60
|
|
|
|
43
|
%
|
|
|
63
|
|
|
|
38
|
%
|
Jet fuel
|
|
|
24
|
|
|
|
25
|
|
|
|
26
|
|
|
|
19
|
|
|
|
32
|
|
|
|
20
|
|
Diesel fuel
|
|
|
11
|
|
|
|
12
|
|
|
|
23
|
|
|
|
16
|
|
|
|
30
|
|
|
|
18
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
27
|
|
|
|
28
|
|
|
|
30
|
|
|
|
22
|
|
|
|
39
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
96
|
|
|
|
100
|
%
|
|
|
139
|
|
|
|
100
|
%
|
|
|
164
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
15
|
|
|
|
23
|
%
|
|
|
16
|
|
|
|
23
|
%
|
|
|
16
|
|
|
|
23
|
%
|
Jet fuel
|
|
|
15
|
|
|
|
23
|
|
|
|
17
|
|
|
|
25
|
|
|
|
18
|
|
|
|
25
|
|
Diesel fuel
|
|
|
12
|
|
|
|
19
|
|
|
|
12
|
|
|
|
17
|
|
|
|
11
|
|
|
|
15
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
23
|
|
|
|
35
|
|
|
|
24
|
|
|
|
35
|
|
|
|
26
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
65
|
|
|
|
100
|
%
|
|
|
69
|
|
|
|
100
|
%
|
|
|
71
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Continent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
59
|
|
|
|
57
|
%
|
|
|
62
|
|
|
|
58
|
%
|
|
|
63
|
|
|
|
56
|
%
|
Jet fuel
|
|
|
10
|
|
|
|
10
|
|
|
|
9
|
|
|
|
8
|
|
|
|
10
|
|
|
|
9
|
|
Diesel fuel
|
|
|
26
|
|
|
|
25
|
|
|
|
27
|
|
|
|
25
|
|
|
|
30
|
|
|
|
26
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
9
|
|
|
|
8
|
|
|
|
10
|
|
|
|
9
|
|
|
|
10
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
104
|
|
|
|
100
|
%
|
|
|
108
|
|
|
|
100
|
%
|
|
|
113
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
232
|
|
|
|
46
|
%
|
|
|
268
|
|
|
|
46
|
%
|
|
|
275
|
|
|
|
44
|
%
|
Jet fuel
|
|
|
68
|
|
|
|
13
|
|
|
|
70
|
|
|
|
12
|
|
|
|
78
|
|
|
|
12
|
|
Diesel fuel
|
|
|
103
|
|
|
|
20
|
|
|
|
114
|
|
|
|
20
|
|
|
|
143
|
|
|
|
23
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
106
|
|
|
|
21
|
|
|
|
127
|
|
|
|
22
|
|
|
|
129
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
509
|
|
|
|
100
|
%
|
|
|
579
|
|
|
|
100
|
%
|
|
|
625
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
Marine. We time charter four
U.S.-flag
tankers and four foreign-flag tankers to optimize the
transportation of crude oil and refined products within our
refinery system and ensure adequate shipping capacity. All of
the tankers are double-hulled. The foreign-flag tankers, with
charters that expire between 2011 and 2013, include three
Aframax and one Suezmax class vessels. We chartered two new
U.S.-flag
tankers in 2010 that we use to move crude and products between
Alaska, Hawaii and the U.S. West Coast. The
U.S.-flag
tankers charters will expire between 2012 and 2013 unless
we exercise renewal options. Additionally, we time charter seven
barges and two tugs over varying terms ending in 2011 to 2016.
Pipelines and Storage. We receive crude oils
and ship refined products through owned and third-party
pipelines. We own and operate over 900 miles of crude oil
and product pipelines, located primarily in North Dakota,
Montana, Alaska and Hawaii, through which we transport more than
355 Mbpd within our refining system.
In September 2007, Gunvor SA (Gunvor), formerly
Castor Petroleum, entered into a Transportation and Storage
Agreement (TSA) with Petroterminal de Panama, S.A.
(PTP). Concurrent with the execution of the TSA,
Tesoro Panama Company Sociedad Anonima (TPSA), a
wholly owned subsidiary of Tesoro, entered into a Transportation
and Storage Agreement (the TPSA Agreement) with
Gunvor. The TSA provides Gunvor the use of the Trans-Panama
pipeline (Pipeline) and several tanks at the
Atlantic and Pacific terminals for a seven-year period. The
Pipeline is 81 miles long, with a capacity exceeding 860
Mbpd, and runs across Panama near the Costa Rican border from
Port Chiriqui Grande, Bocas del Toro on the Caribbean to Port
Charco Azul on the Pacific coast. The TPSA Agreement with Gunvor
allocates and delegates a portion of Gunvors rights,
duties, and obligations set forth in Gunvors TSA agreement
with PTP to TPSA. TPSA has leased access to, and is obligated
for, pipeline capacity of more than 100 Mbpd and tank capacity
of approximately 4.4 million barrels. The pipeline allows
us to deliver crude oils acquired in Africa, the Atlantic region
of South America and the North Sea to refineries in the Pacific
basin.
Trucking. We operate a proprietary trucking
business at three of our refineries to transport crude oil to
the refinery or refined products to our retail outlets and other
customers.
Terminalling. We operate 18 refined products
terminals at our refineries and other locations in California,
Washington, Alaska, Hawaii, North Dakota, Utah and Idaho. We
also distribute products through third-party terminals and truck
racks in our market areas and through purchases and exchange
arrangements with other refining and marketing companies.
Tesoro Logistics LP. On January 4, 2011,
Tesoro Logistics LP, a wholly owned subsidiary of Tesoro
Corporation, filed a registration statement on
Form S-1
with the SEC in connection with a proposed initial public
offering of its common units representing limited partner
interests. On February 9, 2011, Tesoro Logistics LP filed
an amendment to the initial
Form S-1
on
Form S-1/A.
The number of common units to be offered and the price range for
the offering have not yet been determined. Tesoro Logistics LP
was formed by Tesoro Corporation to own, operate, develop and
acquire crude oil and refined products logistics assets.
Headquartered in San Antonio, Texas, Tesoro Logistics
LPs initial assets will consist of a crude oil gathering
system in the Bakken Shale/Williston Basin area, eight refined
products terminals in the western United States, and a crude oil
and refined products storage facility and five related
short-haul pipelines in Utah.
At the date of this report, the registration statement is not
effective. The completion of the offering is subject to numerous
conditions, including market conditions, and we can provide no
assurance that it will be successfully completed. The securities
offered under the registration statement may not be sold, nor
may offers to buy be accepted prior to the time that the
registration statement becomes effective. The information
contained in this
Form 10-K
with respect to this offering shall not constitute an offer to
sell or a solicitation of an offer to buy these securities.
California
Refineries
Golden
Eagle
Refining. Our 166 Mbpd Golden Eagle refinery
is located in Martinez, California on approximately
2,200 acres about 30 miles east of San Francisco.
We source crude oil for our Golden Eagle refinery from
California, Alaska and foreign locations. The Golden Eagle
refinery also processes intermediate feedstocks. The
refinerys major upgrading units include fluid catalytic
cracking, delayed coking, hydrocracking, naphtha reforming,
vacuum distillation, hydrotreating and alkylation units. The
refinery produces a high proportion of transportation fuels,
including cleaner-burning California Air Resources Board
(CARB) gasoline and CARB
6
diesel fuel, as well as conventional gasoline and diesel fuel.
The refinery also produces heavy fuel oils, liquefied petroleum
gas and petroleum coke.
Transportation. Our Golden Eagle
refinerys two marine terminals have access through the
San Francisco Bay that enables us to receive crude oil and
ship refined products. In addition, the refinery can receive
crude oil through a third-party marine terminal at Martinez. We
also receive California crude oils and ship refined products
from the refinery through third-party pipelines.
Terminals. We operate refined products
terminals at Stockton, California and at the refinery. We
distribute refined products through third-party terminals in our
market areas and through purchase and exchange arrangements with
other refining and marketing companies. We also lease
third-party clean product tanks with access to the
San Francisco Bay.
Los
Angeles
Refining. Our 97 Mbpd Los Angeles refinery is
located in Wilmington, California on approximately
300 acres about 20 miles south of Los Angeles. We
source crude oil for our Los Angeles refinery from California as
well as foreign locations. The Los Angeles refinery also
processes intermediate feedstocks. The refinerys major
upgrading units include fluid catalytic cracking, delayed
coking, hydrocracking, vacuum distillation, hydrotreating,
reforming, butane isomerization and alkylation units. The
refinery produces a high proportion of transportation fuels,
including CARB gasoline and CARB diesel fuel, as well as
conventional gasoline, diesel fuel and jet fuel. The refinery
also produces heavy fuel oils, liquefied petroleum gas and
petroleum coke.
Transportation. Our Los Angeles refinery
leases a marine terminal at the Port of Long Beach that enables
us to receive crude oil and ship refined products. The refinery
can also receive crude oil from the San Joaquin Valley and
the Los Angeles Basin through third-party pipelines.
Terminals. We operate a refined products
terminal at the Los Angeles refinery and distribute refined
products through third-party terminals in our market areas and
through purchases and exchange arrangements with other refining
and marketing companies. We also lease refined product storage
tanks at third-party terminals in Southern California, the
majority of which have access to marine terminals.
Pacific
Northwest Refineries
Washington
Refining. Our 120 Mbpd Anacortes, Washington
refinery is located in northwest Washington on approximately
900 acres about 70 miles north of Seattle. We source
our Washington refinerys crude oil from Alaska, Canada and
other foreign locations. The Washington refinery also processes
intermediate feedstocks, primarily heavy vacuum gas oil,
produced by some of our other refineries and purchased in the
spot-market from third-parties. The refinerys major
upgrading units include fluid catalytic cracking, butane
isomerization, alkylation, hydrotreating, vacuum distillation,
deasphalting and naphtha reforming units, which enable us to
produce a high proportion of transportation fuels, such as
gasoline including CARB gasoline and components for CARB
gasoline, diesel fuel and jet fuel. The refinery also produces
heavy fuel oils, liquefied petroleum gas and asphalt.
On April 2, 2010, the naphtha hydrotreater unit at our
Washington refinery was involved in a fire. Subsequent to the
incident, refinery processing was temporarily shut down until
after the unit reconstruction was completed. The Washington
refinery resumed operations at planned rates in November 2010.
Transportation. Our Washington refinery
receives Canadian crude oil through a third-party pipeline
originating in Edmonton, Alberta, Canada. We receive other crude
oils through our Washington refinerys marine terminal. The
refinery ships transportation fuels including gasoline, jet fuel
and diesel fuel through a third-party pipeline system, which
serves western Washington and Portland, Oregon. We also deliver
refined products through our marine terminal via ships and
barges to West Coast and Pacific Rim markets.
Terminals. We operate a distillate terminal at
our Washington refinery and operate refined products terminals
at Port Angeles and Vancouver, Washington, all of which are
supplied primarily by our refinery. We also distribute refined
products through third-party terminals in our market areas, and
through purchases and exchange arrangements with other refining
and marketing companies.
7
Alaska
Refining. Our 72 Mbpd Alaska refinery is
located on the Cook Inlet near Kenai on approximately
450 acres about 60 miles southwest of Anchorage. Our
Alaska refinery processes crude oil from Alaska and, to a lesser
extent, foreign locations. The refinerys major upgrading
units include vacuum distillation, distillate hydrocracking,
hydrotreating, naphtha reforming, diesel desulfurizing and light
naphtha isomerization units which produce transportation fuels,
including gasoline and gasoline blendstocks, jet fuel and diesel
fuel, as well as other products, including heating oil, heavy
fuel oils, liquefied petroleum gas and asphalt.
Transportation. We receive crude oil into our
Kenai marine terminal by tanker and through our owned and
operated crude oil pipeline. Our crude oil pipeline is a
24-mile
common-carrier pipeline connected to the eastside Cook Inlet oil
field. We also own and operate a common-carrier refined products
pipeline that runs from the Alaska refinery to our two terminal
facilities in Anchorage and to the Anchorage International
Airport. This
69-mile
pipeline has the capacity to transport approximately 48 Mbpd of
refined products and allows us to transport gasoline, diesel
fuel and jet fuel. Both of our owned pipelines are subject to
regulation by various federal, state and local agencies,
including the Federal Energy Regulatory Commission
(FERC). We also deliver refined products through our
Kenai marine terminal and from the Port of Anchorage marine
facility to customers via ships and barges.
Terminals. We operate refined products
terminals at Nikiski and Anchorage, which are supplied by our
Alaska refinery. We also distribute refined products through a
third-party terminal which is supplied through an exchange
arrangement with another refining company.
Mid-Pacific
Refinery
Hawaii
Refining. Our 94 Mbpd Hawaii refinery is
located in Kapolei on approximately 130 acres about
20 miles west of Honolulu. We supply the refinery with
crude oil from Southeast Asia, the Middle East, Russia and other
foreign sources. The refinerys major upgrading units
include vacuum distillation, hydrocracking, hydrotreating,
visbreaking and naphtha reforming units which produce gasoline
and gasoline blendstocks, jet fuel, diesel fuel, heavy fuel
oils, liquefied petroleum gas and asphalt.
Transportation. We transport crude oil to
Hawaii in tankers, which discharge through our single-point
mooring, approximately two miles offshore from the refinery. Our
three underwater pipelines from the single-point mooring allow
crude oil and refined products to be transferred to and from the
refinery. We own and operate a refined products pipeline from
our Hawaii refinery to our Sand Island terminal and third-party
terminals on the island of Oahu. Furthermore, our refined
products pipelines connect the Hawaii refinery to Barbers Point
Harbor, approximately three miles away, where refined products
are loaded on ships and barges to transport to the neighboring
islands.
Terminals. We operate refined products
terminals on Maui and on the Big Island of Hawaii and operate a
diesel terminal on Oahu. We also have an aviation fuel terminal
in Kauai, and distribute refined products from our refinery to
customers through third-party terminals in our market areas.
Mid-Continent
Refineries
North
Dakota
Refining. Our 58 Mbpd North Dakota refinery is
located on the Missouri River near Mandan on approximately
950 acres. We supply the refinery primarily with crude oil
produced from the Williston Basin gathered and transported by
our crude oil pipeline system. The refinery also has the ability
to access other crude oil supplies, including Canadian crude
oil. The refinerys major upgrading units include fluid
catalytic cracking, naphtha reforming, hydrotreating and
alkylation units which produce transportation fuels, including
gasoline, diesel fuel and jet fuel, as well as other products,
including heavy fuel oils and liquefied petroleum gas.
8
Transportation. We own a crude oil pipeline
system, consisting of an approximate 23 Mbpd truck-based crude
oil gathering operation and approximately 700 miles of
trunkline and gathering pipelines and related storage assets
with the current capacity to deliver up to 70 Mbpd to our North
Dakota refinery. This system gathers and transports crude oil
produced from the Williston Basin, including production from the
Bakken Shale formation, to our refinery. We also have the
ability to transport crude oil from Canada on this system
through third-party pipeline connections. Our pipeline system is
also able to transport crude oil to other points in the region
where there is additional demand. This pipeline system is a
common carrier line subject to regulation by various federal,
state and local agencies, including the FERC. We distribute a
significant portion of our refinerys production through a
third-party refined products pipeline system which serves
various areas from Mandan, North Dakota to Minneapolis,
Minnesota. Most of the gasoline and distillate products from our
refinery can be shipped through that pipeline system to
third-party terminals.
Terminals. We operate a refined products
terminal at the North Dakota refinery. The terminal consists of
a truck loading rack located within the refinery gates. The
truck loading rack consists of three light product bays and one
residual fuel bay, each connected to pipelines that transport
product from the refinery tank farm to the terminal. We also
distribute refined products through a third-party pipeline
system which connects to third-party terminals in our market
areas.
Utah
Refining. Our 58 Mbpd Utah refinery is located
in Salt Lake City on approximately 150 acres. Our Utah
refinery processes crude oils primarily from Utah, Colorado,
Wyoming and Canada. The refinerys major upgrading units
include fluid catalytic cracking, naphtha reforming, alkylation
and hydrotreating units which produce transportation fuels,
including gasoline, diesel fuel and jet fuel, as well as other
products, including heavy fuel oils and liquefied petroleum gas.
Transportation. Our Utah refinery receives
crude oil primarily through third-party pipelines from oil
fields in Utah, Colorado, Wyoming and Canada. We use proprietary
trucking to supply the remainder of our Utah refinerys
crude oil requirements. We distribute the refinerys
production through a system of both owned and third-party
terminals and third-party pipeline systems, primarily in Utah,
Idaho and eastern Washington, with some refined products
delivered by truck to Nevada and Wyoming.
Terminals. We operate a refined products
terminal adjacent to our refinery. The terminal has the ability
to receive refined products, including gasoline, diesel and jet
fuel from our refinery through our proprietary interconnecting
pipelines that run between two facilities. Refined products
received at this terminal are sold locally and regionally by
both us and third-parties through our truck loading rack. We
also own and operate refined products terminals in Boise and
Burley, Idaho that are supplied by pipeline from our Utah
refinery.
Wholesale
Marketing and Refined Product Distribution
We sell refined products including gasoline and gasoline
blendstocks, jet fuel, diesel fuel, heavy fuel oils and residual
products in both the bulk and wholesale markets. We currently
sell over 250 Mbpd in the wholesale market primarily through
independent unbranded distributors that sell refined products
purchased from us through more than 60 owned and third-party
terminals. Our bulk sales are primarily to independent unbranded
distributors, other refining and marketing companies, utilities,
railroads, airlines and marine and industrial end-users. These
products are distributed by pipelines, ships, barges, railcars
and trucks. Our sales include refined products that we
manufacture, purchase or receive through exchange arrangements.
Our refined product sales, including intersegment sales to our
retail operations, consisted of (in Mbpd):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Refined Product Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
288
|
|
|
|
306
|
|
|
|
326
|
|
Jet fuel
|
|
|
92
|
|
|
|
84
|
|
|
|
92
|
|
Diesel fuel
|
|
|
116
|
|
|
|
121
|
|
|
|
144
|
|
Heavy oils, residual products and other
|
|
|
76
|
|
|
|
85
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refined Product Sales
|
|
|
572
|
|
|
|
596
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and Gasoline Blendstocks. We sell
gasoline and gasoline blendstocks in both the bulk and wholesale
markets in the western United States. The demand for gasoline is
seasonal in many of these markets, with lowest demand typically
during the winter months. We sell gasoline to wholesale
customers and several other refining and marketing companies
under various supply agreements and exchange arrangements. We
sell, at wholesale, to unbranded distributors and high-volume
retailers, and we distribute refined product through owned and
third-party terminals.
9
Jet Fuel. We supply jet fuel to passenger and
cargo airlines at airports in Alaska, Hawaii, California,
Washington, Utah and other western states. We also supply jet
fuel to the U.S. military from our refineries in Alaska,
Hawaii and North Dakota.
Diesel Fuel. We sell diesel fuel primarily on
a wholesale basis for marine, transportation, industrial and
agricultural use. We sell lesser amounts to end-users through
marine terminals and for power generation in Hawaii and
Washington. We are able to manufacture Ultra-Low Sulfur Diesel
(ULSD) at all of our refineries and we currently are
the sole producer of ULSD in both Alaska and Hawaii.
Heavy Fuel Oils and Residual Products. We sell
heavy fuel oils to other refiners, third-party resellers,
electric power producers and marine and industrial end-users.
Our refineries supply substantially all of the marine fuels that
we sell through facilities at Port Angeles, Seattle, and Tacoma,
Washington, and Portland, Oregon, and through our refinery
terminals in Washington, Alaska and Hawaii. Our Golden Eagle and
Los Angeles refineries produce petroleum coke that we sell
primarily to industrial end-users. Tesoro is also a key supplier
of liquid asphalt for paving and construction companies in
Washington, Alaska and Hawaii.
Sales of Purchased Products. In the normal
course of business we purchase refined products manufactured by
others for resale to our customers to meet local market demands.
We purchase these refined products, primarily gasoline, jet
fuel, diesel fuel and industrial and marine fuel blendstocks
mainly in the spot market. Our gasoline and diesel fuel purchase
and resale transactions are principally on the U.S. West
Coast. Our primary jet fuel resale activity consists of
supplying markets in Alaska, California, Washington, Hawaii and
Utah. We also purchase for resale a lesser amount of gasoline
and other refined products for sales outside of our
refineries markets.
10
RETAIL
We sell gasoline and diesel fuel in the western United States
through company-operated retail stations and agreements with
third-party branded dealers and distributors (or
jobber/dealers). Our retail network provides a
committed outlet for a portion of the transportation fuels
produced by our refineries. Many of our company-operated retail
stations include convenience stores that sell a wide variety of
merchandise items.
As of December 31, 2010, our retail segment included a
network of 880 branded retail stations under the
Tesoro®,
Shell®,
USA Gasoline
tm
and
Mirastar®
brands. Our
Mirastar®
brand is used exclusively at 29 Wal-Mart stores in 8 western
states under a
long-term
agreement. We also operate under the
Shell®
brand at certain retail stations in California through a
long-term
agreement and own the exclusive rights to the USA
Gasolinetm
brand in California, New Mexico and Washington. Our retail
stations (summarized by type and brand) were located in the
following states as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
|
Brand
|
|
|
|
Company-
|
|
|
Jobber/
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
|
|
|
|
|
|
State
|
|
Operated
|
|
|
Dealer
|
|
|
Total
|
|
|
Tesoro(a)
|
|
|
Shell®
|
|
|
Gasolinetm
|
|
|
Mirastar®
|
|
|
Total
|
|
|
California
|
|
|
252
|
|
|
|
204
|
|
|
|
456
|
|
|
|
11
|
|
|
|
347
|
|
|
|
96
|
|
|
|
2
|
|
|
|
456
|
|
North Dakota
|
|
|
|
|
|
|
88
|
|
|
|
88
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Alaska
|
|
|
29
|
|
|
|
46
|
|
|
|
75
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
Minnesota
|
|
|
|
|
|
|
70
|
|
|
|
70
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
Utah
|
|
|
29
|
|
|
|
34
|
|
|
|
63
|
|
|
|
38
|
|
|
|
20
|
|
|
|
|
|
|
|
5
|
|
|
|
63
|
|
Washington
|
|
|
22
|
|
|
|
20
|
|
|
|
42
|
|
|
|
30
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
|
|
42
|
|
Hawaii
|
|
|
29
|
|
|
|
3
|
|
|
|
32
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Idaho
|
|
|
6
|
|
|
|
23
|
|
|
|
29
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
29
|
|
Other states(b)
|
|
|
14
|
|
|
|
11
|
|
|
|
25
|
|
|
|
11
|
|
|
|
1
|
|
|
|
|
|
|
|
13
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
381
|
|
|
|
499
|
|
|
|
880
|
|
|
|
381
|
|
|
|
368
|
|
|
|
102
|
|
|
|
29
|
|
|
|
880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Tesoro brand includes stores operated under the
Tesoro®,
Tesoro
Alaska®
and 2-Go
Tesoro®
brand names. |
|
(b) |
|
Other states include New Mexico, South Dakota, Colorado, Oregon,
Nevada, Arizona and Wyoming. |
11
The following table summarizes our retail operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Fuel Revenues (in millions)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
$
|
2,196
|
|
|
$
|
1,877
|
|
|
$
|
2,620
|
|
Jobber/dealer
|
|
|
1,387
|
|
|
|
1,123
|
|
|
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fuel Revenues
|
|
$
|
3,583
|
|
|
$
|
3,000
|
|
|
$
|
4,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Branded Retail Stations (end of year)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
381
|
|
|
|
387
|
|
|
|
389
|
|
Jobber/dealer
|
|
|
499
|
|
|
|
499
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Stations
|
|
|
880
|
|
|
|
886
|
|
|
|
879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Number of Branded Retail Stations (during the
year)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
383
|
|
|
|
388
|
|
|
|
422
|
|
Jobber/dealer
|
|
|
499
|
|
|
|
487
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Average Retail Stations
|
|
|
882
|
|
|
|
875
|
|
|
|
911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Sales (millions of gallons)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
739
|
|
|
|
746
|
|
|
|
786
|
|
Jobber/dealer
|
|
|
597
|
|
|
|
583
|
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fuel Sales
|
|
|
1,336
|
|
|
|
1,329
|
|
|
|
1,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We have reclassified fuel revenues and fuel sale volumes
associated with retail stations where Tesoro delivers the fuel,
but the sites are owned and operated by independent dealers from
company-operated to jobber/dealer to conform to the current
presentation. The fuel revenues related to these stations were
$561 million and $788 million for the years ended
December 31, 2009 and 2008, respectively. The fuel sales
volumes related to these stations were 281 million gallons
and 286 million gallons for the years ended
December 31, 2009 and 2008, respectively. |
COMPETITION
The refining industry is highly competitive. Our competitors
include a number of companies that have greater financial and
other resources. We compete on the world market for the crude
oil and feedstocks we process, and then we compete for the
customers who purchase our refined products. The availability
and cost of crude oil and other feedstocks, as well as the
prices of the products we produce, are heavily influenced by
global supply and demand dynamics. We obtain all of our crude
oil from third-party sources and compete with other refiners for
those limited supplies. We compete with a number of major,
integrated multi-national oil companies who can supply their
refineries with crude oil from their own production.
We sell gasoline through our network of retail stations as well
as on a wholesale basis. We sell most of our distillate
production through wholesale channels. We compete with other
refiners and with importers for customers in most of our market
areas. Competition and concentrations specific to each of our
refineries are as follows:
|
|
|
|
|
Our Golden Eagle, Los Angeles and Washington refineries compete
with several refineries in the contiguous west coast states.
When regional demand exceeds supply, products are imported to
the U.S. West Coast from other parts of the country and the
world. These are typically pipeline shipments from the
U.S. Gulf Coast but can also include imports from foreign
sources such as the Far East, Europe and Canada.
|
|
|
|
Our Alaska refinery competes with three other in-state
refineries that together have a crude oil processing capacity of
approximately 294 Mbpd. It also competes with refineries on the
U.S. West Coast. Our jet fuel sales in Alaska are
concentrated in Anchorage, where we are one of the principal
suppliers at the Anchorage International Airport.
|
12
|
|
|
|
|
Our Hawaii refinery competes primarily with one other in-state
refinery, also located in Kapolei. It is owned by a major
integrated oil company and has a crude oil capacity of
approximately 54 Mbpd. All crude oil processed in Hawaii is from
out of state. Product imports from the U.S. mainland and
foreign sources are also required to meet the states fuel
demand. Our jet fuel sales are concentrated at the Honolulu
International Airport, where we are the principal supplier. We
serve five airports on other Hawaiian islands and compete with
other suppliers for U.S. military contracts.
|
|
|
|
Our North Dakota refinery is the only refinery in the state and
primarily competes with refineries in Wyoming, Montana, the
Midwest and pipeline supply from the U.S. Gulf Coast
region. The Midwest region ranks second in crude oil demand in
the United States and is dependent on crude oil imports,
primarily from Canada.
|
|
|
|
Our Utah refinery is the largest of five refineries located in
Utah. The other refineries have a combined capacity to process
approximately 110 Mbpd of crude oil. These five refineries
collectively supply a high proportion of the gasoline and
distillate products consumed in the states of Utah and Idaho,
with additional supplies provided from refineries in surrounding
states.
|
Our retail marketing operations compete with other independent
marketers, integrated oil companies and
high-volume
retailers. We sell gasoline in Alaska, California, Hawaii, North
Dakota, Utah, Washington and other western states through a
network of company-operated retail stations and branded and
unbranded jobber/dealers. Competitive factors that affect retail
marketing include product price, station appearance, location
and brand awareness. Large national retailers as well as
regional retailers continue to enter the fuel retail business.
Many of these competitors are substantially larger than we are
and through their greater resources may be better able to
withstand volatile market conditions and lower profitability.
GOVERNMENT
REGULATION AND LEGISLATION
Environmental
Controls and Expenditures
All of our operations, like those of other companies engaged in
similar businesses, are subject to extensive and frequently
changing federal, state, regional and local laws, regulations
and ordinances relating to the protection of the environment,
including those governing emissions or discharges to the land,
air and water, the handling and disposal of solid and hazardous
wastes and the remediation of contamination. While we believe
our facilities are in substantial compliance with current
requirements, we will continue to engage in efforts to meet new
legislative and regulatory requirements applicable to our
operations. Compliance with these laws and regulations will
require us to make significant expenditures. For example, the
U.S. Environmental Protection Agency (EPA) has
proposed multiple regulations to control greenhouse gas
emissions under the federal Clean Air Act. Concurrent to this
activity, the U.S. Congress may also consider legislation
regarding greenhouse gas emissions in 2011. The federal Clean
Air Act mandates the blending of increasing amounts of renewable
fuels annually in the supply of transportation fuels used
domestically. This use of renewable fuels is required of all
manufacturers of transportation fuels sold domestically on a
prorated basis. The EPA implements the renewable fuel standard
(RFS) through regulation and requires transportation
fuel manufacturers to provide proof of purchase of these
renewable fuels. The costs associated with RFS compliance
fluctuate with market dynamics and are not certain.
The impact of these regulatory and legislative developments, if
enacted or implemented, or both, is likely to result in
increased compliance costs, additional operating restrictions on
our business and an increase in the cost of the products we
manufacture. Depending on market conditions, we will attempt to
pass these increased costs to consumers. If, however, that is
not possible, the changes could have an adverse impact on our
financial position, results of operations, and liquidity. We
cannot currently determine the amounts of such future impacts.
For additional information regarding our environmental matters
see Environmental and Other Matters in
Managements Discussion and Analysis of Financial Condition
and Results of Operations in Item 7.
13
Oil
Spill Prevention and Response
We operate in environmentally sensitive coastal waters, where
tanker, pipeline and other petroleum product transportation
operations are regulated by federal, state and local agencies
and monitored by environmental interest groups. The
transportation of crude oil and refined products over water
involves risk and subjects us to the provisions of the Federal
Oil Pollution Act of 1990 and related state requirements, which
require that most oil refining, transport and storage companies
maintain and update various oil spill prevention and oil spill
contingency plans. We have submitted these plans and received
federal and state approvals necessary to comply with the Federal
Oil Pollution Act of 1990 and related regulations. We frequently
review and modify our oil spill prevention plans and procedures
to prevent crude oil and refined product releases and to
minimize potential impacts should a release occur.
We currently use time charter tankers to ship crude oil from
foreign and domestic sources to our California, Mid-Pacific and
Pacific-Northwest refineries. The tanker owners contract with
Federally Certified Oil Spill Response Organizations
(OSROs) to comply with federal, state and local
requirements, except in Alaska where we contract with the OSROs.
The OSROs are capable of responding to an oil spill equal to the
greatest tanker volume delivering crude oil to our refineries.
Those volumes range from 350,000 barrels at our California
refineries to one million barrels at our Hawaii refinery. We
maintain our own spill-response resources to mitigate the impact
of a spill from a tanker at our refineries until an OSRO can
deploy its resources.
We have entered into spill-response contracts with various OSROs
to provide spill-response services, if required, to respond to a
spill of oil originating from our facilities. We have
spill-response agreements in Alaska with Cook Inlet Spill
Prevention and Response, Incorporated and with Alyeska Pipeline
Service Company. We have a spill-response services agreement in
Hawaii with Clean Islands Council. We also have entered into
contracts with Marine Spill Response Corporation for Hawaii, the
San Francisco Bay, Puget Sound, the Port of Los Angeles and
the Port of Long Beach, Clean Rivers Cooperative, Inc. for the
Columbia River, and Bay West, Inc. in our
Mid-Continent
region. These OSROs are capable of responding to an oil spill on
water equal to the greatest volume above ground storage tank at
our facilities. Those volumes range from 50,000 to
600,000 barrels. We also contract with two spill-response
organizations outside the U.S. to support our shipments in
foreign waters. In addition, we contract with various
spill-response specialists to ensure appropriate expertise is
available for any contingency. We believe these contracts
provide the additional services necessary to meet or exceed all
regulatory spill-response requirements and support our
commitment to environmental stewardship.
The services provided by the OSROs principally consist of
operating response-related equipment, managing certain aspects
of a response and providing technical expertise. The OSROs
provide various resources in response to an oil spill. The
resources include dedicated vessels that have skimming equipment
to recover oil, storage barges to temporarily store recovered
oil, containment boom to control the spread of oil on water and
land and to protect shorelines, and various pumps and other
equipment supporting oil recovery efforts and the protection of
natural resources. The OSROs have full-time personnel and
contract with third-parties to provide additional personnel when
needed.
As a general matter, our agreements with these organizations do
not contain specific physical or financial limitations. General
physical limitations of these organizations would include the
geographical area for which services are available and the
amount of resources available at the initiation of a request for
services or the duration of response and recovery efforts.
Additionally, we require all chartered vessels used for the
transportation of crude oil and heavy products over water to be
double-hulled. All vessels used by us to transport crude oil and
refined products over water are examined or evaluated and
subject to our approval prior to their use.
Regulation
of Pipelines
Our crude oil pipeline system in North Dakota and our pipeline
systems in Alaska are common carriers subject to regulation by
various federal, state and local agencies, including the FERC
under the Interstate Commerce Act. The Interstate Commerce Act
provides that, to be lawful, the rates charged by common carrier
petroleum pipelines must be just and reasonable and
not unduly discriminatory. Portions of our pipelines are
regulated by the U.S. Department of Transportation in
Alaska, California, Hawaii, North Dakota and Utah.
The intrastate operations of our North Dakota crude oil pipeline
system are subject to regulation by the North Dakota Public
Services Commission. The intrastate operations of our Alaska
pipelines are subject to regulation by the Regulatory Commission
of Alaska. Like the FERC, the state regulatory authorities
require that we notify shippers of proposed tariff increases to
provide the shippers an opportunity to protest the increases.
The North Dakota Public Services Commission also files with
the state authorities copies of interstate tariff charges filed
with the FERC. In addition to challenges to new or proposed
rates, challenges to intrastate rates that have already become
effective are permitted by complaint of an interested person or
by independent action of the appropriate regulatory authority.
14
WORKING
CAPITAL
We fund our business operations through a combination of
available cash and equivalents and cash flows generated from
operations. In addition, our revolving lines of credit are
available for additional working capital needs. For additional
information regarding working capital see the Capital
Resources and Liquidity section in Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Item 7.
SEASONALITY
Generally, demand for gasoline is higher during the spring and
summer months than during the fall and winter months in most of
our markets due to seasonal changes in highway traffic. As a
result, our operating results for the first and fourth quarters
are generally lower than for those in the second and third
quarters.
EMPLOYEES
At December 31, 2010, we had approximately
5,300 full-time employees approximately 1,350
of whom are covered by collective bargaining agreements. The
agreements expire on February 1, 2012 for approximately
1,100 employees and on May 1, 2012 for approximately
250 employees. We consider our relations with our employees
to be satisfactory.
PROPERTIES
Our principal properties are described above under the captions
Refining and Retail. We believe that our
properties and facilities are adequate for our operations and
that our facilities are adequately maintained. We are the lessee
under a number of cancellable and noncancellable leases for
certain properties, including office facilities, retail
facilities, ship charters, barges and equipment used in the
storage, transportation and production of feedstocks and refined
products. We conduct our retail business under the
Tesoro®,
Shell®,
USA
Gasolinetm
and
Mirastar®
brands through a network of 880 retail stations, of which 381
are company-operated. See Notes J and N to our consolidated
financial statements in Item 8.
15
GLOSSARY
OF TERMS
Alkylation A process that chemically combines
isobutane with other hydrocarbons through the control of
temperature and pressure in the presence of an acid catalyst.
This process produces alkylates, which have a high octane value
and are blended into gasoline to improve octane values.
API American Petroleum Institute
the main U.S trade association for the oil and natural gas
industry.
API Gravity A scale for denoting the
lightness or heaviness of crude oils and other liquid
hydrocarbons. Calibrated in API degrees (or degrees API), it is
used universally to express a crude oils relative density
in an inverse measure the lighter the crude, the
higher the API gravity, and vice versa.
CARB California Air Resources
Board Gasoline and diesel fuel sold in the state of
California are regulated by CARB and require stricter quality
and emissions reduction performance than required by other
states.
Cracking The process of breaking down larger
hydrocarbon molecules into smaller molecules, using catalysts
and/or
elevated temperatures and pressures.
Deasphalting A solvent extraction process of
recovering higher-value oils from refining residues.
Delayed Coking A process by which the
heaviest crude oil fractions can be thermally cracked under
conditions of elevated temperatures to produce both refined
products and petroleum coke.
Distillate Hydrocracking A catalytic
hydrocracking process designed to produce primarily diesel fuel
and jet fuel.
Exchange Arrangement An agreement providing
for the delivery of crude oil or refined products to a
third-party, in exchange for the delivery of crude oil or
refined products from the third-party.
Fluid Catalytic Cracking Catalytic cracking
is the refining process of breaking down larger, heavier, and
more complex hydrocarbon molecules into simpler and lighter
molecules through the use of a catalytic agent to increase the
yield of gasoline. Fluid catalytic cracking uses a catalyst in
the form of very fine particles, which behave as a fluid when
aerated with a vapor.
Gross Refining Margin The margin on products
manufactured and purchased, including those sold to our retail
segment. Gross refining margin is calculated as revenues less
costs of feedstocks, purchased refined products, transportation
and distribution.
Heavy Crude Oil Crude oil with an API gravity
of 24 degrees or less. Heavy crude oils are generally sold at a
discount to lighter crude oils.
Heavy Fuel Oils, Residual Products, Internally Produced Fuel
and Other Products other than gasoline, jet fuel
and diesel fuel produced in the refining process. These products
include residual fuels, gas oils, propane, petroleum coke,
asphalt and internally produced fuel.
Hydrocracking The process of using a catalyst
to crack heavy hydrocarbon molecules in the presence of
hydrogen. Major products from hydrocracking are jet fuel,
naphtha, propane and gasoline components such as butane.
Hydrotreating The process of removing sulfur
from refined products in the presence of catalysts and
substantial quantities of hydrogen to reduce sulfur dioxide
emissions that result from the use of the products.
Isomerization A process that alters the
fundamental arrangement of atoms in the molecule without adding
or removing anything from the original material. The process is
used to convert normal butane into isobutane and normal pentane
into isopentane and hexane into isohexane. Both isopentane and
isohexane are high-octane gasoline components.
Jobber/Dealer Stations Retail stations owned
by third-parties that sell products purchased from or through us
and carry one of our brands.
Light Crude Oil Crude oil with an API gravity
greater than 24 degrees. Light crude oils are generally sold at
a premium to heavy crude oils.
Manufacturing Costs Costs associated directly
with the manufacturing process including cash operating
expenses, but excluding depreciation and amortization.
16
Mbpd Thousand barrels per day.
Naphtha Refined product used as a gasoline
blending component, a feedstock for reforming and as a
petrochemical feedstock.
Refining Yield Volumes of product produced
from crude oils and feedstocks.
Reforming A process using controlled heat and
pressure with catalysts to rearrange certain hydrocarbon
molecules into petrochemical feedstocks and higher octane stocks
suitable for blending into finished gasoline.
Retail Fuel Margin The margin on fuel
products sold through our retail segment calculated as revenues
less cost of sales. Cost of sales in fuel margin are based on
purchases from our refining segment and third-parties using
average bulk market prices adjusted for transportation and other
differentials.
Throughput The quantity of crude oil and
other feedstocks processed at a refinery measured in barrels per
day.
Turnaround The scheduled shutdown of a
refinery processing unit for significant overhaul and
refurbishment. Turnaround expenditures are capitalized and
amortized over the period of time until the next planned
turnaround of the unit.
Ultra-Low Sulfur Diesel (ULSD) Diesel
fuel produced with lower sulfur content to lower emissions,
which has been required for on-road use in the
U.S. beginning in 2006.
Vacuum Distillation Distillation under
reduced pressure which lowers the boiling temperature of crude
oils in order to distill crude oil components that have high
boiling points.
Visbreaking A thermal cracking process in
which heavy atmospheric or vacuum unit residues are cracked at
moderate temperatures to increase production of distillate
products and reduce viscosity of the distillate residues.
17
EXECUTIVE
OFFICERS OF THE REGISTRANT
The following is a list of our executive officers, their ages
and their positions at Tesoro, effective as of February 21,
2011.
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Name
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Age
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Position
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Position Held Since
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Gregory J. Goff
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54
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President and Chief Executive Officer
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May 2010
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Everett D. Lewis
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63
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Executive Vice President, Chief Operating Officer
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March 2008
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Charles S. Parrish
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53
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Executive Vice President, General Counsel and Secretary
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April 2009
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G. Scott Spendlove
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47
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Senior Vice President, Chief Financial Officer
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May 2010
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Chuck A. Flagg
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57
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Senior Vice President, Strategy and Business Development
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November 2010
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Arlen O. Glenewinkel, Jr.
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54
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Vice President and Controller
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December 2006
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Tracy D. Jackson
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41
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Vice President, Finance and Treasurer
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February 2011
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There are no family relationships among the officers listed, and
there are no arrangements or understandings pursuant to which
any of them were elected as officers. Officers are elected
annually by our Board of Directors in conjunction with the
annual meeting of stockholders. The term of each office runs
until the corresponding meeting of the Board of Directors in the
next year or until a successor has been elected or qualified.
Positions held for at least the past five years for each of our
executive officers are described below (positions, unless
otherwise specified, are with Tesoro).
Gregory J. Goff was named President and Chief Executive
Officer in May 2010. Previously he has served as Senior Vice
President, Commercial for ConocoPhillips Corporation
(ConocoPhillips), an international, integrated
energy company, since 2008. Mr. Goff has held various other
positions at ConocoPhillips since 1981, including director and
CEO of Conoco JET Nordic from 1998 to 2000; Chairman and
Managing Director of Conoco Limited, a UK-based refining and
marketing affiliate, from 2000 to 2002; President of
ConocoPhillips European and Asia Pacific downstream operations
from 2002 to 2004; President of ConocoPhillips U.S. Lower
48 and Latin America exploration and production business from
2004 to 2006; and President of ConocoPhillips specialty
businesses and business development from 2006 to 2008.
Everett D. Lewis was named Executive Vice President and
Chief Operating Officer in March 2008. Prior to that he served
as Executive Vice President, Strategy and Asset Management
beginning in January 2007 and as Executive Vice President,
Strategy beginning in January 2005.
Charles S. Parrish was named Executive Vice President,
General Counsel and Secretary in April 2009. Prior to that, he
served as Senior Vice President, General Counsel and Secretary
beginning in May 2006; Vice President, General Counsel and
Secretary beginning in March 2005 and as Vice President,
Assistant General Counsel and Secretary beginning in November
2004.
G. Scott Spendlove was named Senior Vice President
and Chief Financial Officer in February 2011. Mr. Spendlove
served as the Companys Senior Vice President, Chief
Financial Officer, and Treasurer starting in May 2010. Prior to
that, he served as Senior Vice President, Risk Management
beginning in June 2008, Vice President, Asset Enhancement and
Planning beginning in August 2007, Vice President, Strategy and
Long-Term Planning beginning in December 2006 and Vice President
and Controller beginning in March 2006. Mr. Spendlove also
served as Vice President, Finance and Treasurer beginning in
March 2003 and Vice President, Finance beginning in January 2002.
18
Chuck A. Flagg was named Senior Vice President, Strategy
and Business Development in November 2010. Prior to being in his
current position, he served as Senior Vice President, System
Optimization beginning in February 2005. He joined Tesoro in
January 2005 as Senior Vice President of Planning and
Optimization.
Arlen O. Glenewinkel, Jr. was named Vice President
and Controller in December 2006. Prior to that, he served as
Vice President, Enterprise Risk beginning in April 2005 and Vice
President, Internal Audit, from August 2002 to April 2005.
Tracy D. Jackson was named Vice President, Finance and
Treasurer in February 2011. Ms. Jackson served as the
Companys Vice President, Finance starting in November 2010
and the Vice President of Internal Audit beginning in May 2007.
Prior to that, she served as Executive Director of Internal
Audit at Valero Corporation beginning in May 2005.
19
BOARD OF
DIRECTORS OF THE REGISTRANT
The following is a list of our Board of Directors, effective as
of February 21, 2011:
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Steven H. Grapstein
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Non-executive Chairman of the Board of Tesoro Corporation; Chief
Executive Officer of Como Holdings USA, Inc. (formerly known as
Kuo Investment Company).
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Rodney F. Chase
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Chairman of the Audit Committee of Tesoro Corporation;
Non-Executive Chairman of Petrofac, Ltd.; Director of Computer
Sciences Corporation; Director of Nalco Holding Co.
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Gregory J. Goff
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President and Chief Executive Officer of Tesoro Corporation.
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Robert W. Goldman
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Chairman of the Governance Committee of Tesoro Corporation;
Director of El Paso Corporation; Director of The Babcock
& Wilcox Company; Director of Parker Drilling Co.
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William J. Johnson
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President, Director and sole shareholder of JonLoc Inc.
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J.W. Nokes
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Chairman of the Environmental, Health and Safety Committee of
Tesoro Corporation; Retired Executive Vice President for
ConocoPhillips; Director of Post Oak Bank (Houston, Texas);
Director of Albemarle Corporation.
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Donald H. Schmude
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Retired Vice President of Texaco and President and Chief
Executive Officer of Texaco Refining & Marketing, Inc.
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Susan Tomasky
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President of AEP Transmission, a division of American Electric
Power Company, Inc.; Director of Federal Reserve Bank of
Cleveland.
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Michael E. Wiley
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Chairman of the Compensation Committee of Tesoro Corporation;
Retired Chairman, President and Chief Executive Officer of Baker
Hughes, Inc.; Trustee of Fidelity Funds; Director of Bill
Barrett Corporation; Director of Post Oak Bank (Houston, Texas).
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Patrick Y. Yang
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Head of Global Technical Operations for F.
Hoffmann-La Roche Ltd.
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20
Additional
adverse changes in global economic conditions and the demand for
transportation fuels may continue to impact our business and
financial condition in ways that we currently cannot
predict.
The economic recession, including declines in consumer and
business confidence and spending as well as increased
unemployment and reduced demand for transportation fuels
continues to adversely affect the business and economic
environment in which we operate. These conditions increase the
risks associated with the creditworthiness of our suppliers,
customers and business partners. The consequences of such
adverse effects could include interruptions or delays in our
suppliers performance of our contracts, reductions and
delays in customer purchases, delays in or the inability of
customers to obtain financing to purchase our products, and
bankruptcy of customers. Any of these events may adversely
affect our cash flow, profitability and financial condition.
Competition
from companies that produce their own supply of feedstocks, have
more extensive retail outlets, or have greater financial
resources could materially affect our business, financial
condition and results of operations.
We compete on a global basis with a number of integrated and
nationally owned oil companies who produce crude oil, some of
which is used in their refining operations. Unlike these oil
companies, we must purchase all of our crude oil from
unaffiliated sources. Because these companies benefit from
increased commodity prices, have greater access to capital and
have stronger capital structures, they are able to better
withstand poor and volatile market conditions, such as a lower
refining margin environment, shortages of crude oil and other
feedstocks or extreme price fluctuations. In addition, we
compete with producers and marketers in other industries that
supply alternative forms of energy and fuels to satisfy the
requirements of our industrial, commercial and individual
customers.
We also face strong competition in the market for the sale of
retail gasoline and merchandise. Our competitors include service
stations operated by fully integrated major oil companies and
other well-recognized national or regional retail outlets, often
selling gasoline or merchandise at aggressively competitive
prices.
Some of our competitors also have materially greater financial
and other resources than we have. Such competitors have a
greater ability to bear the economic risks inherent in all
phases of our industry. The actions of our competitors, along
with changes in the supply and price of foreign imports, could
lead to lower prices or reduced margins for the products we
sell, which could have an adverse effect on our business,
financial condition and results of operations.
Meeting
the requirements of evolving environmental, health and safety
laws and regulations including those related to climate change
could adversely affect our performance.
Consistent with the experience of other U.S. refiners,
environmental laws and regulations have raised operating costs
and require significant capital investments at our refineries.
We believe that existing physical facilities at our refineries
are substantially adequate to maintain compliance with existing
applicable laws and regulatory requirements. However, we may be
required to address conditions that may be discovered in the
future and require a response. Also, potentially material
expenditures could be required in the future as a result of
evolving environmental, health and safety, and energy laws,
regulations or requirements that may be adopted or imposed in
the future. Future developments in federal laws and regulations
governing environmental, health and safety and energy matters
are especially difficult to predict.
Currently, multiple legislative and regulatory measures to
address greenhouse gas emissions (including carbon dioxide,
methane and nitrous oxides) are in various phases of
consideration, promulgation or implementation. These include
requirements effective in January 2010 to report emissions of
greenhouse gases to the EPA and proposed federal legislation and
regulation as well as state actions to develop statewide or
regional programs, each of which require or could require
reductions in our greenhouse gas emissions. Requiring reductions
in our greenhouse gas emissions could result in increased costs
to (i) operate and maintain our facilities,
(ii) install new emission controls at our facilities and
(iii) administer and manage any greenhouse gas emissions
programs, including acquiring emission credits or allotments.
21
Requiring reductions in our greenhouse gas emissions and
increased use of renewable fuels could also decrease the demand
for our refined products, and could have a material adverse
effect on our business, financial condition and results of
operations. For example:
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In California, Assembly Bill 32 (AB 32), created a
statewide cap on greenhouse gas emissions and requires that the
state return to 1990 emission levels by 2020. AB 32 also created
a low carbon fuel standard which requires a 10% reduction in the
carbon intensity of fuels by 2020.
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In December 2007, the U.S. Congress passed the Energy
Independence and Security Act that created a second renewable
fuels standard (RFS2). This standard requires the
total volume of renewable transportation fuels (including
ethanol and advanced biofuels) sold or introduced in the
U.S. to reach 13.95 billion gallons in 2011 and rise
to 36 billion gallons by 2022.
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In 2009, the EPA proposed regulations that would require the
reduction of emissions of greenhouse gases from light trucks and
cars, and would establish permitting thresholds for stationary
sources that emit greenhouse gases and require emissions
controls for those sources. Promulgation of the final rule on
April 1, 2010, has resulted in a cascade of related
rulemakings by the EPA pursuant to the Clean Air Act relative to
controlling greenhouse gas emissions.
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Our
operations are subject to operational hazards that could expose
us to potentially significant losses.
Our operations are subject to potential operational hazards and
risks inherent in refining operations and in transporting and
storing crude oil and refined products, such as fires, major
accidents, severe weather, natural disasters, explosions,
maritime disasters, labor disputes, security breaches, pipeline
ruptures and spills and mechanical failure of equipment at our
or third-party facilities, any of which can result in business
interruptions or shutdowns and damage to our properties and the
properties of others. A serious accident at our facilities could
also result in serious injury or death to our employees or
contractors and could expose us to significant liability for
personal injury claims and reputational risk. Any such event or
unplanned shutdown could have a material adverse effect on our
business, financial condition and results of operations.
We carry property, casualty and business interruption insurance
but we do not maintain insurance coverage against all potential
losses. Marine vessel charter agreements do not include
indemnity provisions for oil spills so we also carry marine
charterers liability insurance. We could suffer losses for
uninsurable or uninsured risks or in amounts in excess of
existing insurance coverage. The occurrence of an event that is
not fully covered by insurance or failure by one or more
insurers to honor its coverage commitments for an insured event
could have a material adverse effect on our business, financial
condition and results of operations.
While we do not act as an owner or operator of any marine
tankers, we do maintain marine charterers liability
insurance with a primary coverage of $500 million, subject
to a $25,000 deductible, and an additional $500 million in
umbrella policies for a total of $1 billion in coverage for
liabilities, costs and expenses arising from a discharge of
pollutants. In addition, Tesoro maintains $10 million in
marine terminal operators liability coverage, subject to a
$150,000 deductible, and an additional $500 million in
umbrella coverage for a total of $510 million in coverage
for sudden and accidental pollution events and liability arising
from marine terminal operations. We cannot assure you that we
will not suffer losses in excess of such coverage.
Our
business is impacted by environmental risks inherent in refining
operations.
The operation of refineries, pipelines and refined products
terminals is inherently subject to the risks of spills,
discharges or other inadvertent releases of petroleum or
hazardous substances. If any of these events had previously
occurred or occurs in the future in connection with any of our
refineries, pipelines or refined products terminals, or in
connection with any facilities which receives our wastes or
by-products for treatment or disposal, other than events for
which we are indemnified, we could be liable for all costs and
penalties associated with their remediation under federal, state
and local environmental laws or common law, and could be liable
for property damage to
third-parties
caused by contamination from releases and spills. The penalties
and clean-up
costs that we may have to pay for releases or the amounts that
we may have to pay to third-parties for damages to their
property, could be significant and the payment of these amounts
could have a material adverse effect on our business, financial
condition and results of operations.
We operate in and adjacent to environmentally sensitive coastal
waters where tanker, pipeline and refined product transportation
and storage operations are closely regulated by federal, state
and local agencies and
22
monitored by environmental interest groups. Our California,
Mid-Pacific and Pacific Northwest refineries import crude oil
and other feedstocks by tanker. Transportation and storage of
crude oil and refined products over and adjacent to water
involves inherent risk and subjects us to the provisions of the
Federal Oil Pollution Act of 1990 and state laws in California,
Hawaii, Washington and Alaska. Among other things, these laws
require us and the owners of tankers that we charter to deliver
crude oil to our refineries to demonstrate in some situations
the capacity to respond to a spill up to one million barrels of
oil from a tanker and up to 600,000 barrels of oil from an
above ground storage tank adjacent to water (a worst case
discharge) to the maximum extent possible.
We and the owners of tankers we charter have contracted with
various spill response service companies in the areas in which
we transport and store crude oil and refined products to meet
the requirements of the Federal Oil Pollution Act of 1990 and
state and foreign laws. However, there may be accidents
involving tankers, pipelines or above ground storage tanks
transporting or storing crude oil or refined products, and
response services may not respond to a worst case
discharge in a manner that will adequately contain that
discharge, or we may be subject to liability in connection with
a discharge. Additionally, we cannot ensure that all resources
noted above could be available for our or a chartered tanker
owners use at any given time. There are many factors that
could inhibit the availability of these resources, including,
but not limited to, weather conditions, governmental regulations
or other global events. By requirement of state or federal
ruling, these resources could be diverted to respond to other
global events.
Our
operations are subject to general environmental risks, expenses
and liabilities which could affect our results of
operations.
From time to time we have been, and presently are, subject to
litigation and investigations with respect to environmental and
related matters, including product liability claims related to
the oxygenate methyl tertiary butyl ether (MTBE). We
may become involved in further litigation or other proceedings,
or we may be held responsible in any existing or future
litigation or proceedings, the costs of which could be material.
We operate and have in the past operated retail stations with
underground storage tanks in various jurisdictions. Federal and
state regulations and legislation govern the storage tanks, and
compliance with these requirements can be costly. The operation
of underground storage tanks poses certain risks, including
leaks. Leaks from underground storage tanks which may occur at
one or more of our retail stations, or which may have occurred
at our previously operated retail stations, may impact soil or
groundwater and could result in fines or civil liability for us.
The
volatility of crude oil prices, refined product prices and
natural gas and electrical power prices may have a material
adverse effect on our cash flow and results of
operations.
Our earnings and cash flows from our refining and wholesale
marketing operations depend on a number of factors, including
fixed and variable expenses (including the cost of crude oil and
other refinery feedstocks) and the margin relative to those
expenses at which we are able to sell refined products. In
recent years, the prices of crude oil and refined products have
fluctuated substantially. These prices depend on numerous
factors beyond our control, including the global supply and
demand for crude oil, gasoline and other refined products, which
are subject to, among other things:
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changes in the global economy and the level of foreign and
domestic production of crude oil and refined products;
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availability of crude oil and refined products and the
infrastructure to transport crude oil and refined products;
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local factors, including market conditions, the level of
operations of other refineries in our markets, and the volume of
refined products imported;
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threatened or actual terrorist incidents, acts of war, and other
global political conditions;
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government regulations; and
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weather conditions, hurricanes or other natural disasters.
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Prices for refined products are influenced by the price of crude
oil. We do not produce crude oil and must purchase all of the
crude oil we process. Many crude oils available on the world
market will not meet the quality restrictions for use in our
refineries. Others are not economical to use due to excessive
transportation costs or for
23
other reasons. The price of the crude oils used in our
refineries fluctuates on worldwide market conditions. Generally,
an increase or decrease in the price of crude oil affects the
price of gasoline and other refined products. However, the
prices for crude oil and prices for our refined products can
fluctuate differently based on global and local market
conditions. In addition, the timing of the relative movement of
the prices (both among different classes of refined products and
among various global markets for similar refined products) as
well as the overall change in refined product prices, can reduce
profit margins and could have a significant impact on our
refining and wholesale marketing operations, earnings and cash
flow. Also, crude oil supply contracts generally have
market-responsive pricing provisions. We purchase our refinery
feedstocks weeks before manufacturing and selling the refined
products. Price level changes during the period between
purchasing feedstocks and selling the manufactured refined
products from these feedstocks could have a significant effect
on our financial results. We also purchase refined products
manufactured by others for sale to our customers. Price level
changes during the periods between purchasing and selling these
refined products also could have a material adverse effect on
our business, financial condition and results of operations.
Volatile prices for natural gas and electrical power used by our
refineries and other operations affect manufacturing and
operating costs. Natural gas and electricity prices have been,
and will continue to be, affected by supply and demand for fuel
and utility services in both local and regional markets.
We are
subject to interruptions of supply and increased costs as a
result of our reliance on third-party transportation of crude
oil and refined products.
Our Washington refinery receives all of its Canadian crude oil
and delivers a high proportion of its gasoline, diesel fuel and
jet fuel through third-party pipelines and the balance through
marine vessels. Our Hawaii and Alaska refineries receive most of
their crude oil and transport a substantial portion of their
refined products through ships and barges. Our Utah refinery
receives substantially all of its crude oil and delivers
substantially all of its refined products through third-party
pipelines. Our North Dakota refinery delivers substantially all
of its refined products through a third-party pipeline system.
Our Golden Eagle refinery receives approximately one-third of
its crude oil through third-party pipelines and the balance
through marine vessels. Substantially all of our Golden Eagle
refinerys production is delivered through third-party
pipelines, ships and barges. Our Los Angeles refinery receives
California crudes through third-party pipelines and the balance
of its crude supply through marine vessels. Approximately
two-thirds of our Los Angeles refinerys production is
delivered through third-party pipelines, terminals, ships and
barges. In addition to environmental risks discussed above, we
could experience an interruption of supply or an increased cost
to deliver refined products to market if the ability of the
pipelines or vessels to transport crude oil or refined products
is disrupted because of accidents, governmental regulation or
third-party action. A prolonged disruption of the ability of a
pipeline or vessels to transport crude oil or refined product
could have a material adverse effect on our business, financial
condition and results of operations.
Terrorist
attacks and threats or actual war may negatively impact our
business.
Our business is affected by global economic conditions and
fluctuations in consumer confidence and spending, which can
decline as a result of numerous factors outside of our control,
such as actual or threatened terrorist attacks and acts of war.
Terrorist attacks, as well as events occurring in response to or
in connection with them, including future terrorist attacks
against U.S. targets, rumors or threats of war, actual
conflicts involving the United States or its allies, or military
or trade disruptions impacting our suppliers or our customers or
energy markets in general, may adversely impact our operations.
As a result, there could be delays or losses in the delivery of
supplies and raw materials to us, delays in our delivery of
refined products, decreased sales of our refined products and
extension of time for payment of accounts receivable from our
customers. Strategic targets such as energy-related assets
(which could include refineries such as ours) may be at greater
risk of future terrorist attacks than other targets in the
United States. These occurrences could significantly impact
energy prices, including prices for our crude oil and refined
products, and have a material adverse impact on the margins from
our refining and wholesale marketing operations. In addition,
significant increases in energy prices could result in
government-imposed price controls. Any one of, or a combination
of, these occurrences could have a material adverse effect on
our business, financial condition and results of operations.
24
Our
operating results are seasonal and generally are lower in the
first and fourth quarters of the year.
Generally, demand for gasoline is higher during the spring and
summer months than during the winter months in most of our
markets due to seasonal changes in highway traffic. As a result,
our operating results for the first and fourth quarters are
generally lower than for those in the second and third quarters.
Compliance
with and changes in tax laws could adversely affect our
performance.
We are subject to extensive tax laws and regulations, including
federal, state, and foreign income taxes and transactional taxes
such as excise, sales/use, payroll, franchise, and ad valorem
taxes. New tax laws and regulations and changes in existing tax
laws and regulations are continuously being enacted that could
result in increased tax expenditures in the future. Many of
these tax liabilities are subject to audits by the respective
taxing authority. These audits may result in additional taxes as
well as interest and penalties.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
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ITEM 3.
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LEGAL
PROCEEDINGS
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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 to
resolve. Although we cannot provide assurance, we believe that
an adverse resolution of these matters described below will not
have a material adverse effect on our financial position or
results of operations.
On February 21, 2011 we received notice from the California
Attorney General of alleged violations at twelve of our retail
gasoline sites in California. In the notice we were informed
that the State Water Resources Control Board referred an
investigation to the Attorney General alleging violations of the
California Health and Safety Code. The allegations relate to the
testing, monitoring, repair and reporting of information
concerning the underground storage tanks at the sites but no
fine or penalty is proposed. We are investigating the
allegations but do not believe the resolution of this matter
will have a material impact on our operations or financial
condition.
In February 2011, Tesoro Corporation, Tesoro Refining and
Marketing Company and other defendants were named in a lawsuit
brought by the estates and families of six of the seven fatally
injured employees arising from the April 2, 2010 Washington
refinery incident. In addition, a third-party propane truck
driver has alleged damages in the lawsuit. The lawsuit includes
allegations of negligence, premises liability, strict liability,
product liability and seeks unspecified compensatory and
punitive damages. The Company believes that it has defenses to
the allegations contained in the lawsuit. The case of Donald
and Peggy Zimmerman et al. v. Tesoro Corporation and Tesoro
Refining and Marketing et al. is proceeding in the Superior
Court of the State of Washington, Skagit County. We are still
evaluating the allegations contained in the lawsuit, however we
believe that the outcome will not materially impact our
liquidity and consolidated financial position.
In October 2010, the Washington State Department of
Labor & Industries (L&I) issued
citations to us and assessed a penalty of $2.4 million for
alleged violations of state health and safety regulations
related to the fire that occurred at our Washington refinery on
April 2, 2010. On October 22, 2010, we filed an appeal
of the citation, L&I reassumed jurisdiction of the citation
and affirmed the allegations on December 29, 2010. We
disagree with L&Is characterizations of Tesoros
operations at our Washington refinery and believe, based on
available evidence and scientific reviews, that many of the
agencys conclusions are mistaken. On January 29, 2011
we filed an appeal of the citation. The U.S. Chemical
Safety and Hazard Investigation Board (CSB) and the
U.S. Environmental Protection Agency (EPA) are
also conducting investigations concerning the fire. As a result
of the fire, seven employees were fatally injured. We cannot
predict with certainty the ultimate resolution of the appeal of
the L&I citations and are unable to predict the CSBs
findings or estimate what actions the EPA may require or what
penalties they might assess.
During 2009, Chevron filed a lawsuit against us claiming they
are entitled to a share of the refunds we received in 2008 from
the owners of the Trans Alaska Pipeline System
(TAPS). We received $50 million in 2008, net of
contingent legal fees, for excessive intrastate rates charged by
TAPS during 1997 though 2000, and the period of 2001 through
June 2003. Chevron is asserting that it is entitled to a share
of its portion of the refunds for retroactive price adjustments
under our previous crude oil contracts with them. In September
2010, the trial court judge granted Chevrons motion for
summary judgment and awarded them $16 million. We disagree
with the trial court and have appealed the decision to the
Alaska Supreme Court in which the proceeding is now pending. We
have established an accrual for this matter and believe that the
outcome will not materially impact our liquidity and
consolidated financial position.
25
We are a defendant, along with other manufacturing, supply and
marketing defendants, in six lawsuits alleging MTBE
contamination in groundwater. We were served with the sixth
lawsuit in April 2010. The defendants are being sued for having
manufactured MTBE and having manufactured, supplied and
distributed gasoline containing MTBE. The plaintiffs in the six
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. We
intend to vigorously assert our defenses against these claims.
The names of the courts in which the proceedings are pending and
the date instituted are as follows:
|
|
|
|
|
|
|
|
|
|
Name of Court where
|
|
|
|
Name of Case
|
|
|
proceeding is pending
|
|
|
Date Instituted
|
The People of the State of California et al. v. Atlantic
Richfield Company et al., Tesoro Petroleum Corporation and
Tesoro Refining and Marketing Company
|
|
|
Superior Court of California, County of Sacramento
|
|
|
October 31, 2003
|
City of Fresno v. Chevron USA Inc., et al., Tesoro
Petroleum Corporation and Tesoro Refining and Marketing Company,
Inc.
|
|
|
United States District Court of Southern District of New York
|
|
|
October 29, 2004
|
Orange County Water District v. Unocal Corporation et al.,
Tesoro Petroleum Corporation and Tesoro Refining and Marketing
Company, Inc.
|
|
|
United States District Court of Southern District of New York
|
|
|
October 28, 2004
|
City of Pomona v. Chevron USA Inc., Tesoro Corporation and
Tesoro Refining and Marketing Inc.
|
|
|
United States District Court of Southern District of New York
|
|
|
January 16, 2009
|
Great Oaks Water Company v. USA Petroleum Corporation, et
al., Tesoro Corporation and Tesoro Refining and Marketing Company
|
|
|
Superior Court of California, County of Santa Clara
|
|
|
January 4, 2010
|
City of Santa Barbara v. Chevron USA, Inc., et al.,
Tesoro Refining and Marketing Company
|
|
|
Superior Court of California, County of Contra Costa
|
|
|
April 6, 2010
|
|
|
|
|
|
|
|
On February 5, 2010, the EPA filed suit against us alleging
violations of the Clean Air Act and corresponding regulatory
requirements concerning the testing and reporting of
transportation fuels and fuel additives. In February 2009, we
received a Notice of Violation (NOV) from the EPA
for the alleged violations arising from a compliance review
conducted by the EPA in 2006 for the years 2003 through the time
of the review in 2006. We are discussing the alleged violations
contained in the suit with the EPA and the U.S. Department
of Justice and have not established an accrual for this matter.
On the basis of existing information, we believe that the
resolution of this matter will not have a material adverse
effect on our financial position or results of operations.
In June 2010, we settled an enforcement action brought by the
Alaska Department of Environmental Conservation
(ADEC) related to the grounding of a vessel in the
Alaska Cook Inlet on February 2, 2006. We settled this
matter for a total of $265,000. The ADEC had alleged that two
vessels chartered by us violated provisions of our Cook Inlet
Vessel Oil Prevention and Contingency Plan from December 2004 to
February 2006.
In June 2010, we accepted a final settlement offer that was less
than the original settlement offer, from the Bay Area Air
Quality Management District (the District) to settle
44 NOVs. The NOVs were issued from May 2006 to April 2008 and
allege violations of air quality regulations at our Golden Eagle
refinery. The Districts original 2008 settlement offer was
$740,000.
On July 1, 2010, we received an offer from the District to
settle 46 NOVs for $620,000. The NOVs were issued from June 2006
to September 2009 and allege violations of air quality
regulations at our Golden Eagle refinery. We are evaluating the
allegations contained in the settlement offer and will seek to
negotiate a settlement of the NOVs with the District. The
resolution of this matter will not have a material adverse
effect on our financial position or results of operations.
|
|
ITEM 4.
|
REMOVED
AND RESERVED
|
26
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Performance
Graph
The following performance graph and related information will
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor will such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
Tesoro specifically incorporates it by reference into such
filing.
The performance graph below compares the cumulative total return
of our common stock to (a) the cumulative total return of
the S&P 500 Composite Index, (b) a composite new peer
group (the New Peer Group) of four companies
selected by Tesoro and (c) a composite peer group
previously used by Tesoro (the Old Peer Group). The
composite New Peer Group includes Frontier Oil Corporation,
Holly Corporation, Sunoco, Inc. and Valero Energy Corporation.
The graph below is for the five year period commencing
December 31, 2005 and ending December 31, 2010.
The New Peer Group was selected by the Company and contains four
domestic refining companies believed by the Company to follow a
similar business model to that of Tesoros including
refining, transporting, storing and marketing transportation
fuels and related products. The New Peer Group is more
representative of companies that we internally benchmark
against. The change in Peer Group from 2009 is the removal of
Alon USA Energy and Western Refining.
Comparison
of Five Year Cumulative Total Return*
Among the Company, the S&P Composite 500 Index and
Composite Peer Groups
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2005
|
|
|
12/31/2006
|
|
|
12/31/2007
|
|
|
12/31/2008
|
|
|
12/31/2009
|
|
|
12/31/2010
|
|
|
Tesoro
|
|
$
|
100
|
|
|
$
|
107.51
|
|
|
$
|
157.00
|
|
|
$
|
44.35
|
|
|
$
|
46.72
|
|
|
$
|
63.93
|
|
S&P 500
|
|
$
|
100
|
|
|
$
|
115.78
|
|
|
$
|
122.14
|
|
|
$
|
76.96
|
|
|
$
|
97.33
|
|
|
$
|
111.99
|
|
Old Peer Group
|
|
$
|
100
|
|
|
$
|
101.30
|
|
|
$
|
131.89
|
|
|
$
|
47.85
|
|
|
$
|
37.75
|
|
|
$
|
55.47
|
|
New Peer Group
|
|
$
|
100
|
|
|
$
|
100.64
|
|
|
$
|
133.12
|
|
|
$
|
48.52
|
|
|
$
|
38.57
|
|
|
$
|
56.31
|
|
|
|
* |
Assumes that the value of the investments in common stock and
each index was $100 on December 31, 2005, and that all
dividends were reinvested. Investment is weighted on the basis
of market capitalization.
|
Note: The stock price performance shown on the graph is not
necessarily indicative of future performance.
27
Stock
Prices and Dividends per Common Share
Our common stock is listed under the symbol TSO on
the New York Stock Exchange. Summarized below are high and low
sales prices of and dividends declared on our common stock on
the New York Stock Exchange during 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Prices per
|
|
Dividends
|
|
|
Common Share
|
|
per
|
Quarter Ended
|
|
High
|
|
Low
|
|
Common Share
|
|
December 31, 2010
|
|
$
|
18.94
|
|
|
$
|
12.79
|
|
|
$
|
0.00
|
|
September 30, 2010
|
|
$
|
13.50
|
|
|
$
|
10.40
|
|
|
$
|
0.00
|
|
June 30, 2010
|
|
$
|
14.43
|
|
|
$
|
10.76
|
|
|
$
|
0.00
|
|
March 31, 2010
|
|
$
|
15.33
|
|
|
$
|
11.48
|
|
|
$
|
0.00
|
|
December 31, 2009
|
|
$
|
16.93
|
|
|
$
|
12.26
|
|
|
$
|
0.05
|
|
September 30, 2009
|
|
$
|
16.04
|
|
|
$
|
10.62
|
|
|
$
|
0.10
|
|
June 30, 2009
|
|
$
|
18.77
|
|
|
$
|
12.25
|
|
|
$
|
0.10
|
|
March 31, 2009
|
|
$
|
19.16
|
|
|
$
|
11.75
|
|
|
$
|
0.10
|
|
Dividend
Policy
In February 2010, our Board of Directors suspended indefinitely
our quarterly cash dividend on common stock as described in
Managements Discussion and Analysis of Financial Condition
and Results of Operations in Item 7. At February 21,
2011, there were approximately 1,663 holders of record of our
143,174,369 outstanding shares of common stock.
Purchases
of Equity Securities
Tesoro may acquire shares to satisfy tax withholding obligations
in connection with the vesting of restricted stock issued to
certain employees. There were no such shares acquired during the
three-month period ended December 31, 2010.
2011
Annual Meeting of Stockholders
The 2011 Annual Meeting of Stockholders will be held at
4:00 P.M. Central Time on Wednesday, May 4, 2011, at
Tesoro Corporate Headquarters, 19100 Ridgewood Parkway,
San Antonio, Texas. Holders of common stock of record at
the close of business on March 15, 2011 are entitled to
notice of and to vote at the annual meeting.
28
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following table sets forth certain selected consolidated
financial data of Tesoro as of and for each of the five years in
the period ended December 31, 2010. The selected
consolidated financial information presented below has been
derived from our historical financial statements. The following
table should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 and our consolidated financial
statements in Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007(a)(b)
|
|
|
2006(b)
|
|
|
|
(Dollars in millions except per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
20,583
|
|
|
$
|
16,872
|
|
|
$
|
28,416
|
|
|
$
|
21,976
|
|
|
$
|
18,061
|
|
Net Earnings (Loss)(c)
|
|
$
|
(29
|
)
|
|
$
|
(140
|
)
|
|
$
|
278
|
|
|
$
|
566
|
|
|
$
|
801
|
|
Net Earnings (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.21
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
2.03
|
|
|
$
|
4.17
|
|
|
$
|
5.89
|
|
Diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
2.00
|
|
|
$
|
4.06
|
|
|
$
|
5.73
|
|
Weighted Shares Outstanding (millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
140.6
|
|
|
|
138.2
|
|
|
|
136.8
|
|
|
|
135.7
|
|
|
|
136.0
|
|
Diluted
|
|
|
140.6
|
|
|
|
138.2
|
|
|
|
139.2
|
|
|
|
139.5
|
|
|
|
139.8
|
|
Dividends per share
|
|
$
|
0.00
|
|
|
$
|
0.35
|
|
|
$
|
0.40
|
|
|
$
|
0.35
|
|
|
$
|
0.20
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
2,928
|
|
|
$
|
2,223
|
|
|
$
|
1,646
|
|
|
$
|
2,600
|
|
|
$
|
2,811
|
|
Property, Plant and Equipment, Net
|
|
$
|
5,170
|
|
|
$
|
5,190
|
|
|
$
|
5,081
|
|
|
$
|
4,780
|
|
|
$
|
2,687
|
|
Total Assets
|
|
$
|
8,732
|
|
|
$
|
8,070
|
|
|
$
|
7,433
|
|
|
$
|
8,128
|
|
|
$
|
5,904
|
|
Current Liabilities
|
|
$
|
2,496
|
|
|
$
|
1,889
|
|
|
$
|
1,441
|
|
|
$
|
2,494
|
|
|
$
|
1,672
|
|
Total Debt(d)
|
|
$
|
1,995
|
|
|
$
|
1,841
|
|
|
$
|
1,611
|
|
|
$
|
1,659
|
|
|
$
|
1,046
|
|
Stockholders Equity
|
|
$
|
3,215
|
|
|
$
|
3,087
|
|
|
$
|
3,218
|
|
|
$
|
3,052
|
|
|
$
|
2,502
|
|
Current Ratio
|
|
|
1.2:1
|
|
|
|
1.2:1
|
|
|
|
1.1:1
|
|
|
|
1.0:1
|
|
|
|
1.7:1
|
|
Working Capital
|
|
$
|
432
|
|
|
$
|
334
|
|
|
$
|
205
|
|
|
$
|
106
|
|
|
$
|
1,139
|
|
Total Debt to Capitalization(d)
|
|
|
38
|
%
|
|
|
37
|
%
|
|
|
33
|
%
|
|
|
35
|
%
|
|
|
29
|
%
|
Common Stock Outstanding (millions of shares)
|
|
|
143.2
|
|
|
|
140.4
|
|
|
|
138.4
|
|
|
|
137.0
|
|
|
|
135.8
|
|
Book Value Per Common Share
|
|
$
|
22.45
|
|
|
$
|
21.99
|
|
|
$
|
23.25
|
|
|
$
|
22.28
|
|
|
$
|
18.42
|
|
Cash Flows From (Used In)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
385
|
|
|
$
|
663
|
|
|
$
|
716
|
|
|
$
|
1,322
|
|
|
$
|
1,139
|
|
Investing Activities
|
|
|
(295
|
)
|
|
|
(436
|
)
|
|
|
(610
|
)
|
|
|
(2,838
|
)
|
|
|
(430
|
)
|
Financing Activities(d)
|
|
|
145
|
|
|
|
166
|
|
|
|
(109
|
)
|
|
|
553
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
$
|
235
|
|
|
$
|
393
|
|
|
$
|
(3
|
)
|
|
$
|
(963
|
)
|
|
$
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
$
|
287
|
|
|
$
|
401
|
|
|
$
|
619
|
|
|
$
|
789
|
|
|
$
|
453
|
|
|
|
|
(a) |
|
Our financial results include the results of our Los Angeles
refinery and Shell and USA Gasoline retail stations since
acquisition in May 2007. |
|
(b) |
|
Share and per share amounts have been adjusted to reflect our
May 2007
two-for-one
stock split. |
|
(c) |
|
Net earnings (loss) included the following pre-tax items that
affect the comparability of the periods presented. During 2010,
we recorded approximately $67 million from insurance
recoveries and $27 million in charges directly related to
the April 2, 2010 incident at our Washington refinery and a
$48 million gain from the elimination of postretirement
life insurance benefits for current and future retirees. During
2009, we incurred a $43 million goodwill write-off in our
refining segment and reduced inventories resulting in a
last-in-first-out
(LIFO) liquidation or reduction in cost of sales of
$69 million. During 2008, we incurred a $91 million
bad debt charge, reduced inventories resulting in a LIFO
liquidation or reduction in cost of sales of $138 million
and received net refunds of $50 million from the Trans
Alaska Pipeline System associated with our protest of prior year
intrastate rates. During 2006, we incurred charges of
$28 million for termination of a delayed coker project at
the Washington refinery. |
|
(d) |
|
During 2009, we issued $300 million in senior notes for
general corporate purposes and during 2007 we issued
$500 million in senior notes primarily to fund the
acquisition of the Los Angeles refinery. Total debt includes
capital lease obligations. |
29
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following information concerning our results of operations
and financial condition should be read in conjunction with
Business in Item 1 and our consolidated financial
statements in Item 8.
IMPORTANT
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
(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 Annual Report on
Form 10-K,
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:
|
|
|
|
|
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 credit lenders;
|
|
|
|
the timing and extent of changes in commodity prices and
underlying demand for our refined products;
|
|
|
|
state and federal environmental, economic, health and safety,
energy and other policies and regulations, including those
related to climate change and any changes therein, and any legal
or regulatory investigations, delays or other factors beyond our
control;
|
|
|
|
operational hazards inherent in refining operations and in
transporting and storing crude oil and refined products;
|
|
|
|
changes in capital requirements or in execution of planned
capital projects;
|
|
|
|
disruptions due to equipment interruption or failure at our
facilities or third-party facilities;
|
|
|
|
the availability and costs of crude oil, other refinery
feedstocks and refined products;
|
|
|
|
changes in our cash flow from operations;
|
|
|
|
changes in the cost or availability of third-party vessels,
pipelines and other means of transporting crude oil feedstocks
and refined products;
|
|
|
|
actions of customers and competitors;
|
|
|
|
direct or indirect effects on our business resulting from actual
or threatened terrorist incidents or acts of war;
|
|
|
|
political developments;
|
|
|
|
changes in our inventory levels and carrying costs;
|
|
|
|
seasonal variations in demand for refined products;
|
|
|
|
changes in fuel and utility costs for our facilities;
|
|
|
|
risks related to labor relations and workplace safety;
|
|
|
|
changes in insurance markets impacting costs and the level and
types of coverage available;
|
|
|
|
adverse rulings, judgments, or settlements in litigation or
other legal or tax matters, including unexpected environmental
remediation costs in excess of any reserves;
|
30
|
|
|
|
|
weather conditions affecting our operations or the areas in
which our refined products are marketed; and
|
|
|
|
earthquakes or other natural disasters affecting operations.
|
Many of these factors, as well as other factors, are described
in greater detail in Competition on page 12 and
Risk Factors on page 21. 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. The forward-looking statements in
this Annual Report on
Form 10-K
speak only as of the date of this Annual Report on
Form 10-K.
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 Annual Report on
Form 10-K.
BUSINESS
STRATEGY AND OVERVIEW
Strategy
and Goals
Our vision is to be the premier low-cost supplier of
transportation fuels in the refining and marketing business in
our markets, providing value for our customers while delivering
industry leading returns for our shareholders and conducting
ourselves responsibly in the communities in which we operate. To
achieve these goals we are pursuing the following strategic
priorities:
|
|
|
|
|
improve operational efficiency and effectiveness by focusing on
safety and reliability, system improvements and cost leadership;
|
|
|
|
drive commercial excellence by strengthening our supply and
trading activities to provide additional value to the business;
|
|
|
|
strengthen our financial position by exercising capital
discipline and focusing on improving our liquidity; and
|
|
|
|
capture value-driven growth through a focus on our logistics
assets and growing our marketing business.
|
During 2010, our goals were focused on optimizing cash flows
from operations by improving our capture of available margins,
devoting capital to income improvement projects, lowering
administrative costs and lowering our energy and maintenance
costs. Relative to these goals, during 2010 we:
|
|
|
|
|
improved our gross refining margin by $191 million and
improved our cash balance approximately $235 million as a
result of our capital and non-capital initiatives to lower
transportation and feedstock costs, increase product margins and
improve refinery yields;
|
|
|
|
funded our capital spending of $287 million through cash
flows from operations of $385 million of which
approximately 10% was devoted to income improvement
projects; and
|
|
|
|
significantly reduced our employee benefit obligation by
$207 million primarily through changes to our
post-retirement life, medical and pension benefit programs.
|
Tesoro
Logistics LP
On January 4, 2011, Tesoro Logistics LP, a wholly owned
subsidiary of Tesoro Corporation, filed a registration statement
on
Form S-1
with the SEC in connection with a proposed initial public
offering of its common units representing limited partner
interests. On February 9, 2011, Tesoro Logistics LP filed
an amendment to the initial
Form S-1
on
Form S-1/A.
The number of common units to be offered and the price range for
the offering have not yet been determined. Tesoro Logistics LP
was formed by Tesoro Corporation to own, operate, develop and
acquire crude oil and refined products logistics assets.
Headquartered in San Antonio, Texas, Tesoro Logistics
LPs initial assets will consist of a crude oil gathering
system in the Bakken Shale/Williston Basin area, eight refined
products terminals in the western United States, and a crude oil
and refined products storage facility and five related
short-haul pipelines in Utah.
31
At the date of this report, the registration statement is not
effective. The completion of the offering is subject to numerous
conditions, including market conditions, and we can provide no
assurance that it will be successfully completed. The securities
offered under the registration statement may not be sold, nor
may offers to buy be accepted prior to the time that the
registration statement becomes effective. The information
contained in this
Form 10-K
with respect to this offering shall not constitute an offer to
sell or a solicitation of an offer to buy these securities.
Tesoro
Panama Company Sociedad Anonima (TPSA)
As part of our business strategy, we formed TPSA to use our
leased pipeline and tank facilities in Panama by enhancing
strategic partnerships, developing economies of scale around
freight and storage opportunities, providing discretionary crude
oil trading, expanding global commercial relationships and
evaluating opportunities to source crude from alternative supply
markets. TPSA is:
|
|
|
|
|
a directly and wholly consolidated subsidiary of Tesoro
Corporation;
|
|
|
|
not a subsidiary guarantor of our senior notes;
|
|
|
|
an excluded subsidiary (as defined) in the Fourth Amended and
Restated Credit Agreement (financing and credit obtained by TPSA
is not guaranteed by Tesoro Corporation); and
|
|
|
|
an unrestricted subsidiary and will not be subject to the
restrictive covenants in Tesoro Corporations indentures.
|
The TPSA Agreement with Gunvor allocates and delegates a portion
of Gunvors rights, duties, and obligations set forth in
Gunvors TSA agreement with PTP to TPSA. TPSA has leased
access to, and is obligated for, pipeline capacity of more than
100 Mbpd and tank capacity of approximately 4.4 million
barrels. In October 2010, TPSA entered into a revolving credit
agreement which provides for an uncommitted, secured revolving
credit facility (TPSA Revolving Credit Facility).
The TPSA Revolving Credit Facility is non-recourse to the
Company, meaning only TPSA is liable for any borrowings or
interest under this credit agreement.
Industry
Overview
Our profitability is heavily influenced by the cost of crude oil
and the aggregate value of the products we make from that crude
oil and is also affected by changes in economic conditions.
Product values and crude oil costs are set by the market and are
outside of the control of independent refiners.
Crude Oil
Price and Product Margin Analysis
The overall U.S. economy, including that of the West Coast,
has shown signs of improvement, though these improvements have
not consistently translated into stronger demand for refined
products. Measures of commercial activity that are correlated
with oil demand showed improvement, particularly in the second
half of 2010. Container traffic at the five largest West Coast
ports recovered to their 2007 levels in August 2010 and have
remained above 2008 levels since May 2010. In 2010,
self-reported available seat miles at the largest
U.S.-flagged
air carriers were 1.1% higher than the previous year, with
year-on-year
growth for the second half of 2010 of 3.7%.
U.S. Gross Domestic Product continues to grow. However, the
recovery to date has been without an accompanying improvement in
the labor sector as unemployment remains above 9%. Events in
other countries during 2010 affected regional supply and demand
fundamentals, such as outages at refineries in Chile and Mexico
during the first half of the year. The effect of these events
was relatively short-lived but provided upward pressure on
margins by decreasing excess refinery capacity.
32
The following table depicts average key crude oil pricing and
West Coast benchmark product margins for 2010 and 2009:
Improved West Coast distillate supply and demand fundamentals
led to improved diesel margins in 2010 as compared to 2009.
During 2010, U.S. West Coast benchmark diesel fuel margins
increased by approximately 37% due to strengthening commercial
activity, diesel exports and refinery outages. However, West
Coast gasoline margins decreased in 2010 by 13% over 2009
primarily due to continued lower demand, increased alternative
fuel supply and spare refining capacity.
Outlook
The slow recovery of the global and domestic economies, coupled
with persistent high unemployment in the U.S. is expected
to continue to negatively impact demand for refined products.
The impact of reduced demand has been compounded by excess
global refining capacity and historically high inventory levels.
These conditions have continued to put pressure on refined
product margins. Recently, we have seen improvements in regional
margins and expect margins to be slightly higher in 2011 as
compared to 2010.
In addition to current market conditions, there are long-term
factors that may impact the supply and demand of refined
products in the U.S. These factors include:
|
|
|
|
|
higher fuel efficiency standards for vehicles;
|
|
|
|
mandated renewable fuels standards;
|
|
|
|
potential and enacted climate change legislation, including the
EPA regulation of greenhouse gas emissions under the Clean Air
Act; and
|
|
|
|
competing refineries being built overseas.
|
33
RESULTS
OF OPERATIONS
A discussion and analysis of the factors contributing to our
results of operations is presented below. The accompanying
consolidated financial statements in Item 8, together with
the following information, are intended to provide investors
with a reasonable basis for assessing our historical operations,
but should not serve as the only criteria for predicting our
future performance.
Summary
Our net loss in 2010 was $29 million ($0.21 per diluted
share) compared with a net loss of $140 million ($1.01 per
diluted share) in 2009. The increase in net earnings of $0.80
per diluted share was primarily due to the following:
|
|
|
|
|
contribution from our capital and non-capital initiative program
during 2010 which increased our overall margin through reduced
transportation and feedstock costs, increased product margins,
and improved refinery yields;
|
|
|
|
increased gross refining margins due to local crude discounts
and improved distillate margins partially offset by weaker
gasoline margins;
|
|
|
|
a $48 million gain from the elimination of postretirement
life insurance benefits for current and future retirees as part
of our strategy to reduce overhead and benefit expenses;
|
|
|
|
a $39 million decrease in losses on our derivative
instruments;
|
|
|
|
improved contribution of $14 million from our retail
marketing segment; and
|
|
|
|
a goodwill write-off of $10 million in 2010 compared to
$43 million in 2009.
|
The increase in net earnings during 2010 relative to 2009 was
partially offset by the following:
|
|
|
|
|
lower throughput primarily from the temporary shut-down of
processing at our Washington refinery and completion of
scheduled refinery turnarounds at several of our other
refineries. The gross margin impact of the temporary shut-down
at the Washington refinery was partially offset by the receipt
of $55 million in business interruption insurance
recoveries;
|
|
|
|
a $51 million increase in incentive and stock-based
compensation expense. The increase in stock based compensation
is related to our stock appreciation rights and phantom stock
options which increased primarily as a result of increases in
Tesoro stock prices during 2010 as compared to 2009;
|
|
|
|
a reduction in cost of sales of $69 million resulting from
a LIFO liquidation benefit during 2009; and
|
|
|
|
additional operating expenses of $27 million directly
related to the April 2, 2010, incident at our Washington
refinery, partially offset by $12 million in property
insurance recoveries.
|
Our net loss in 2009 was $140 million ($1.01 per diluted
share) compared with net earnings of $278 million ($2.00
per diluted share) in 2008. The decrease in net earnings of
$3.01 per diluted share 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;
|
|
|
|
a lower LIFO liquidation benefit of $69 million in 2009
compared to $138 million in 2008;
|
|
|
|
a goodwill write-off of $43 million;
|
|
|
|
the impact of scheduled and unscheduled downtime; and
|
|
|
|
refunds received in 2008 totaling $50 million in connection
with our protest of intrastate pipeline rates.
|
The decrease in net earnings during 2009 relative to 2008 was
partially offset by the following:
|
|
|
|
|
higher industry gasoline margins on the U.S. West Coast;
|
|
|
|
reduced refining operating expenses by $149 million
primarily reflecting decreased utility costs and lower refining
throughput; and
|
|
|
|
a $91 million bad debt charge in 2008.
|
34
Refining
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions except per
|
|
|
|
barrel amounts)
|
|
|
Revenues (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined products
|
|
$
|
19,038
|
|
|
$
|
15,674
|
|
|
$
|
26,759
|
|
Crude oil resales and other
|
|
|
1,039
|
|
|
|
691
|
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
20,077
|
|
|
$
|
16,365
|
|
|
$
|
27,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput (Mbpd)
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy crude(b)
|
|
|
181
|
|
|
|
177
|
|
|
|
192
|
|
Light crude
|
|
|
270
|
|
|
|
335
|
|
|
|
369
|
|
Other feedstocks
|
|
|
29
|
|
|
|
37
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Throughput
|
|
|
480
|
|
|
|
549
|
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Heavy Crude Oil of Total Refining Throughput (b)
|
|
|
38
|
%
|
|
|
32
|
%
|
|
|
32
|
%
|
Yield (Mbpd)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
232
|
|
|
|
268
|
|
|
|
275
|
|
Jet Fuel
|
|
|
68
|
|
|
|
70
|
|
|
|
78
|
|
Diesel Fuel
|
|
|
103
|
|
|
|
114
|
|
|
|
143
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
106
|
|
|
|
127
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Yield
|
|
|
509
|
|
|
|
579
|
|
|
|
625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin ($/throughput bbl)(c)(d)(e)
|
|
$
|
11.26
|
|
|
$
|
8.90
|
|
|
$
|
11.50
|
|
Manufacturing cost ($/throughput bbl)(e)
|
|
$
|
5.83
|
|
|
$
|
5.01
|
|
|
$
|
5.19
|
|
|
|
|
(a) |
|
Refined products sales include intersegment sales to our retail
segment, at prices which approximate market of
$3.3 billion, $2.7 billion, and $3.9 billion in
2010, 2009, and 2008, respectively. |
|
(b) |
|
We define heavy crude oil as crude oil with an American
Petroleum Institute gravity of 24 degrees or less. |
|
(c) |
|
Reductions in petroleum inventories resulted in decreases of
last-in-first-out
layers acquired at lower
per-barrel
costs. These inventory reductions resulted in decreases to cost
of sales of $69 million and $138 million during the
years ended December 31, 2009 and 2008, respectively. |
|
(d) |
|
Includes $55 million in business interruption insurance
recoveries related to the April 2, 2010 incident at our
Washington refinery for the year ended December 31, 2010. |
|
(e) |
|
Management uses gross refining margin per barrel to evaluate
performance and compare profitability to other companies in the
industry. There are a variety of ways to calculate gross
refining margin per barrel; different companies may calculate it
in different ways. We calculate gross refining margin per barrel
by dividing gross refining margin (revenue less costs of
feedstocks, purchased refined products, transportation and
distribution) by total refining throughput. Management uses
manufacturing costs per barrel to evaluate the efficiency of
refinery operations. There are a variety of ways to calculate
manufacturing cost per barrel; different companies may calculate
it in different ways. We calculate manufacturing costs per
barrel by dividing manufacturing costs by total refining
throughput. Investors and analysts use these financial measures
to help analyze and compare companies in the industry on the
basis of operating performance. These financial measures should
not be considered alternatives to segment operating income,
revenues, cost of sales, operating expenses or any other measure
of financial performance presented in accordance with accounting
principles generally accepted in the United States of America
(US GAAP). |
35
Refining
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions except per
|
|
|
|
barrel amounts)
|
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin(c)(f)
|
|
$
|
1,974
|
|
|
$
|
1,783
|
|
|
$
|
2,506
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing costs
|
|
|
1,022
|
|
|
|
1,004
|
|
|
|
1,131
|
|
Other operating expenses
|
|
|
254
|
|
|
|
262
|
|
|
|
284
|
|
Selling, general and administrative expenses
|
|
|
30
|
|
|
|
32
|
|
|
|
127
|
|
Depreciation and amortization expense(g)
|
|
|
365
|
|
|
|
359
|
|
|
|
326
|
|
Loss on asset disposals and impairments(h)
|
|
|
48
|
|
|
|
71
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income(i)
|
|
$
|
255
|
|
|
$
|
55
|
|
|
$
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales (Mbpd)(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
288
|
|
|
|
306
|
|
|
|
326
|
|
Jet fuel
|
|
|
92
|
|
|
|
84
|
|
|
|
92
|
|
Diesel fuel
|
|
|
116
|
|
|
|
121
|
|
|
|
144
|
|
Heavy oils, residual products and other
|
|
|
76
|
|
|
|
85
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refined Product Sales
|
|
|
572
|
|
|
|
596
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales Margin ($/bbl)(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price
|
|
$
|
91.03
|
|
|
$
|
72.17
|
|
|
$
|
112.06
|
|
Average cost of sales
|
|
|
82.66
|
|
|
|
64.93
|
|
|
|
102.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales Margin
|
|
$
|
8.37
|
|
|
$
|
7.24
|
|
|
$
|
9.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f) |
|
Consolidated gross refining margin combines gross refining
margin for each of our regions adjusted for other amounts not
directly attributable to a specific region. These amounts
resulted in an increase of $2 million for the years ended
December 31, 2010 and 2009 and an increase of
$5 million for the year ended December 31, 2008. 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. |
|
(g) |
|
Includes manufacturing depreciation and amortization per
throughput barrel of approximately $1.97, $1.69, and $1.40 for
2010, 2009 and 2008, respectively. |
|
(h) |
|
Loss on asset disposals and impairments is included in refining
segment operating income but excluded from the regional
operating costs per barrel. Includes goodwill write-offs related
to two separate reporting units for $10 million and
$43 million for the years ended December 31, 2010 and
2009, respectively, and impairment charges related to refining
equipment at our Los Angeles refinery of $20 million and
$12 million, respectively. |
|
(i) |
|
Includes a $36 million gain for the year ended
December 31, 2010 from the elimination of postretirement
life insurance benefits for current and future retirees. |
|
(j) |
|
Sources of total refined product sales included refined products
manufactured at the refineries and refined products purchased
from third-parties. The total refined product sales margin
includes margins on sales of manufactured and purchased refined
products. |
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions except per barrel amounts)
|
|
|
Refining Data by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
California (Golden Eagle and Los Angeles)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (Mbpd)(k)
|
|
|
223
|
|
|
|
241
|
|
|
|
258
|
|
Gross refining margin
|
|
$
|
979
|
|
|
$
|
897
|
|
|
$
|
1,332
|
|
Gross refining margin ($/throughput bbl)(e)
|
|
$
|
12.03
|
|
|
$
|
10.18
|
|
|
$
|
14.08
|
|
Manufacturing cost ($/throughput bbl)(e)
|
|
$
|
7.54
|
|
|
$
|
6.86
|
|
|
$
|
7.18
|
|
Pacific Northwest (Washington and Alaska)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (Mbpd)(k)
|
|
|
93
|
|
|
|
135
|
|
|
|
159
|
|
Gross refining margin(d)
|
|
$
|
367
|
|
|
$
|
376
|
|
|
$
|
396
|
|
Gross refining margin ($/throughput barrel)(c)(e)
|
|
$
|
10.84
|
|
|
$
|
7.65
|
|
|
$
|
6.82
|
|
Manufacturing cost ($/throughput bbl)(e)
|
|
$
|
5.88
|
|
|
$
|
3.81
|
|
|
$
|
3.99
|
|
Mid-Pacific (Hawaii)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (Mbpd)(k)
|
|
|
64
|
|
|
|
68
|
|
|
|
69
|
|
Gross refining margin
|
|
$
|
88
|
|
|
$
|
90
|
|
|
$
|
170
|
|
Gross refining margin ($/throughput bbl)(e)
|
|
$
|
3.77
|
|
|
$
|
3.62
|
|
|
$
|
6.72
|
|
Manufacturing cost ($/throughput bbl)(e)
|
|
$
|
3.18
|
|
|
$
|
3.18
|
|
|
$
|
3.30
|
|
Mid-Continent (North Dakota and Utah)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (Mbpd)(k)
|
|
|
100
|
|
|
|
105
|
|
|
|
109
|
|
Gross refining margin
|
|
$
|
538
|
|
|
$
|
418
|
|
|
$
|
603
|
|
Gross refining margin ($/throughput bbl)(e)
|
|
$
|
14.62
|
|
|
$
|
10.95
|
|
|
$
|
15.12
|
|
Manufacturing cost ($/throughput bbl)(e)
|
|
$
|
3.68
|
|
|
$
|
3.49
|
|
|
$
|
3.44
|
|
|
|
|
(k) |
|
We experienced reduced throughput due to scheduled turnarounds
at our Hawaii, North Dakota, Golden Eagle and Utah refineries in
2010. We also temporarily shut-down processing at the Washington
refinery beginning in April 2010, and resumed operations at
planned rates in November 2010. We experienced reduced
throughput due to scheduled turnarounds at our Alaska and Golden
Eagle refineries, unscheduled downtime at our Los Angeles
refinery and scheduled maintenance at our Washington refinery
during 2009, and scheduled turnarounds at the Golden Eagle and
Washington refineries during 2008. |
2010
Compared to 2009
Overview. Operating income for our refining
segment increased by $200 million, or 364% to
$255 million during 2010 as compared to $55 million
during 2009. The increase primarily reflects improved total
gross refining margins of $191 million during the year. The
increase in gross margin was partially offset by an increase of
$10 million in manufacturing and other operating expenses.
Gross Refining Margins. Our gross refining
margin per barrel increased by $2.36 per barrel, or 27%, to
$11.26 per barrel in 2010 as compared to $8.90 per barrel in
2009, primarily due to significantly higher industry diesel fuel
margins and our initiatives to improve our margin capture rates,
partially offset by lower industry margins for gasoline.
Industry diesel fuel margins in the U.S. West Coast region
increased, primarily due to strong exports and increased
manufacturing activity nationwide. Industry gasoline margins on
the U.S. West Coast decreased in 2010 as compared to 2009
reflecting poor global demand and higher inventories resulting
from high domestic unemployment rates.
During 2010, we reduced our transportation and feedstock costs,
realized better refinery yields and improved margins on finished
products, which improved consolidated gross margin. Our
California refineries benefited from improved product yields and
increased throughput of discounted foreign heavy crude oils as
these refineries run a high proportion of heavy crude oils (72%
of total refining throughput during 2010). In addition, we
experienced higher gross refining margins at our Mid-Continent
refineries due to increased use of discounted local crudes and
downtime at other refineries in the region. See Industry
Overview for additional information on the increase in
industry diesel margins and the decrease in industry gasoline
margins during 2010.
37
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 non-trading 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 $29 million during 2010 versus $68 million
during 2009. Crude prices increased significantly during 2009
compared to marginal increases during 2010. This pricing
difference and lower price volatility improved derivative
results during 2010.
Refining Throughput. Total refining throughput
declined 69 Mbpd, or 13%, to 480 Mbpd during 2010 as compared to
549 Mbpd during 2009 primarily due to the following:
|
|
|
|
|
the temporary shutdown of processing at the Washington refinery
subsequent to the April 2, 2010, naphtha hydrotreater fire.
The gross margin impact of the reduced throughput was partially
offset by $55 million in business interruption insurance
recoveries recorded as an offset to cost of sales;
|
|
|
|
scheduled turnarounds at our Hawaii, North Dakota, Golden Eagle
and Utah refineries.
|
Total refining throughput during 2009 was impacted by scheduled
turnarounds at our Alaska and Golden Eagle refineries, scheduled
maintenance at our Washington refinery and unscheduled downtime
at the Los Angeles refinery.
Refined Products Sales. Revenues from sales of
refined products increased $3.3 billion, or 21%, to
$19.0 billion in 2010 as compared to $15.7 billion in
2009, primarily due to higher average refined product sales
prices, partially offset by lower refined product sales volumes.
Our average product sales price increased $18.86 per barrel, or
26%, to $91.03 per barrel in 2010 as compared to $72.17 in 2009,
due to higher average crude oil prices placing upward pressure
on product prices. Total refined product sales decreased by 24
Mbpd, or 4%, to 572 Mbpd in 2010 as compared to 596 Mbpd in
2009, primarily reflecting lower product demand.
Cost of Sales and Expenses. Our average cost
of sales increased by $17.73 per barrel, or 27%, to $82.66 per
barrel during 2010 as compared to $64.93 during 2009, reflecting
higher average crude oil prices. Manufacturing and other
operating expenses increased by $10 million, or 1%, to
$1.3 billion in 2010, primarily due to $15 million in
charges, net of property insurance recoveries, directly related
to the April 2, 2010, incident at the Washington refinery
coupled with higher natural gas costs at our California
refineries, partially offset by a $32 million gain in
operating expenses from the elimination of postretirement life
insurance benefits. Refining depreciation and amortization
expenses and selling, general and administrative expenses had
nominal changes in 2010 with an increase of $6 million and
decrease of $2 million, respectively.
Loss on Asset Disposals and Impairments. Loss
on asset disposals decreased by $23 million, or 32%,
primarily due to a decrease in the goodwill write-offs of
$33 million, partially offset by an increase in refining
equipment impairment charges at our Los Angeles refinery of
$8 million. The 2010 goodwill write-off of $10 million
was a result of an increase in the net book value of our Hawaii
refinery reporting unit compared to a decrease in its fair value
resulting from decreases in forecasted cash flows. For further
discussion, see Note E to our consolidated financial
statements in Item 8. The $20 million loss on asset
disposals at our Los Angeles refinery in 2010 relates to the
deferral of a capital project at our Los Angeles refinery, which
resulted in a write-down to fair value of equipment specifically
manufactured and uniquely configured for the project.
2009
Compared to 2008
Overview. Operating income for our refining
segment decreased by $572 million, or 91%, to
$55 million during 2009 as compared to $627 million
during 2008. The decrease primarily reflects a lower gross
refining margin partially offset by a decrease in manufacturing
and other operating expenses of $149 million. The impact of
a lower per barrel gross refining margin decreased total gross
refining margins by $723 million during the year. Operating
income included a goodwill write-off of $43 million during
2009 and a bad debt charge of $91 million during 2008. Our
operating income in both periods benefited from a reduction in
cost of sales from decreasing LIFO inventory layers acquired at
lower
per-barrel
costs. These inventory reductions resulted in operating income
improvements of $69 million during 2009 and
$138 million during 2008.
38
Gross Refining Margins. Our gross refining
margin per barrel decreased by $2.60 per barrel, or 23%, to
$8.90 per barrel in 2009 as compared to $11.50 per barrel in
2008, due to 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 throughout 2009 reflected lower global demand and
significantly higher U.S. inventories. Industry gasoline
margins on the U.S. West Coast improved in 2009 as compared
to 2008 primarily due to heavy scheduled and unscheduled
industry downtime and lower average gasoline inventories. Our
California region was negatively impacted by a reduction in
heavy and light crude oil price differentials that reduced gross
refining margin during 2009, because our California refineries
run a high proportion of heavy crude oils (66% of total refining
throughput during 2009).
Our derivative losses totaled $68 million during 2009
versus $107 million during 2008. The decrease in our losses
reflected the impact of changing our hedging strategy. 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 on
the day of processing.
Refining Throughput. Total refining throughput
declined 46 Mbpd, or 8%, to 549 Mbpd during 2009 as compared to
595 Mbpd during 2008, primarily due to matching production to
lower demand and the following:
|
|
|
|
|
refinery-wide turnarounds at the Alaska and Golden Eagle
refineries;
|
|
|
|
scheduled maintenance at the Washington refinery; and
|
|
|
|
unscheduled downtime of the delayed coker at the Los Angeles
refinery.
|
Total refining throughput during 2008 was impacted by
turnarounds at our Golden Eagle and Washington refineries.
Refined Products Sales. Revenues from sales of
refined products decreased $11.1 billion, or 41%, to
$15.7 billion in 2009 as compared to $26.8 billion in
2008, primarily due to significantly lower average refined
product sales prices and lower refined product sales volumes.
Our average product sales price decreased $39.89 per barrel, or
36% to $72.17 per barrel in 2009 as compared to $112.06 per
barrel in 2008, reflecting lower product demand and lower
average crude oil prices. Total refined product sales decreased
60 Mbpd, or 9%, to 596 Mbpd in 2009 as compared to 656 Mbpd in
2008, primarily due to lower product demand.
Cost of Sales and Expenses. Our average cost
of sales decreased $37.44, or 37%, to $64.93 per barrel during
2009 as compared to $102.37 per barrel during 2008, reflecting
significantly lower average crude oil prices. Manufacturing and
other operating expenses decreased $149 million, or 11%, to
$1.3 billion in 2009 as compared to $1.4 billion in
2008, due to lower natural gas utility costs and lower refining
throughput. Depreciation and amortization increased by
$33 million, or 10%, to $359 million during 2009 as
compared to $326 million during 2008, reflecting the
completion of several capital projects during 2008, including
the $600 million delayed coker at the Golden Eagle
refinery. The decrease in selling, general and administrative
costs of $95 million, or 75%, from 2008 is related to a
$91 million bad debt charge in 2008. The increase of
$60 million in loss on asset disposals and impairments
primarily reflects a goodwill write-off of $43 million and
a net termination charge of $12 million related to a
cancelled purchase of equipment associated with a capital
project at our Los Angeles refinery. The equipment purchase was
cancelled as we re-evaluated the scope and timing of the project.
39
Retail
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions except per
|
|
|
|
gallon amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
|
|
$
|
3,583
|
|
|
$
|
3,000
|
|
|
$
|
4,184
|
|
Merchandise and other
|
|
|
227
|
|
|
|
235
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
3,810
|
|
|
$
|
3,235
|
|
|
$
|
4,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Sales (millions of gallons)
|
|
|
1,336
|
|
|
|
1,329
|
|
|
|
1,354
|
|
Fuel Margin ($/gallon)(a)
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
Merchandise Margin (in millions)
|
|
$
|
53
|
|
|
$
|
53
|
|
|
$
|
57
|
|
Merchandise Margin (percent of revenues)
|
|
|
26
|
%
|
|
|
25
|
%
|
|
|
26
|
%
|
Number of Retail Stations (end of year):
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
381
|
|
|
|
387
|
|
|
|
389
|
|
Jobber/dealer
|
|
|
499
|
|
|
|
499
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Stations
|
|
|
880
|
|
|
|
886
|
|
|
|
879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Number of Retail Stations (during the year)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
383
|
|
|
|
388
|
|
|
|
422
|
|
Branded jobber/dealer
|
|
|
499
|
|
|
|
487
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Average Retail Stations
|
|
|
882
|
|
|
|
875
|
|
|
|
911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel(b)
|
|
$
|
279
|
|
|
$
|
273
|
|
|
$
|
286
|
|
Merchandise and other non-fuel
|
|
|
79
|
|
|
|
77
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Margins
|
|
|
358
|
|
|
|
350
|
|
|
|
364
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
198
|
|
|
|
202
|
|
|
|
216
|
|
Selling, general and administrative expenses
|
|
|
18
|
|
|
|
23
|
|
|
|
24
|
|
Depreciation and amortization expense
|
|
|
39
|
|
|
|
39
|
|
|
|
49
|
|
Loss on asset disposals and impairments(c)
|
|
|
6
|
|
|
|
3
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
$
|
97
|
|
|
$
|
83
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Management uses fuel margin per gallon to compare profitability
to other companies in the industry. There are a variety of ways
to calculate fuel margin per gallon; different companies may
calculate it in different ways. We calculate fuel margin per
gallon by dividing fuel gross margin by fuel sales volumes.
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 as an alternative to segment operating income and
revenues or any other measure of financial performance presented
in accordance with US GAAP. |
|
(b) |
|
Includes the effect of intersegment purchases from our refining
segment at prices which approximate market. |
|
(c) |
|
Includes impairment charges during 2008 related to the closure
of 42 Mirastar retail stations and a potential sale of 20 retail
stations. |
2010
Compared to 2009
Operating Income. Our retail segment operating
income increased $14 million, or 17% to $97 million
during 2010 as compared to $83 million during 2009 due to
increased fuel sale volumes and lower expenses. Fuel gross
margins increased $6 million as retail fuel margin per
barrel remained consistent at $0.21 per gallon with an increase
in fuel sales volume of 7 million gallons. Merchandise and
other non-fuel gross margins also had a slight
40
increase of $2 million resulting from higher average 2010
retail station counts. As a result, total gross margins
increased $8 million, or 2%, to $358 million in 2010
as compared to $350 million in 2009.
Fuel sale revenues increased $583 million, or 19%, to
$3.6 billion in 2010 as compared to $3.0 billion in
2009, reflecting significantly higher average sales prices and a
minor increase in fuel sales volumes. Cost of sales increased
from 2009 due to higher prices for purchased fuel. Our other
expenses, excluding the loss on asset disposals and impairments,
decreased by $9 million, or 3%, to $255 million during
2010 as compared to $264 million during 2009 primarily due
to cost savings from the elimination of postretirement life
insurance for current and future retirees of $4 million.
2009
Compared to 2008
Operating Income. Our retail segment operating
income increased $37 million, or 80%, to $83 million
during 2009 as compared to $46 million in 2008 reflecting
lower expenses partially offset by lower gross margins.
Operating income during 2008 included impairment charges of
$29 million related to closing 42 Mirastar retail stations
and a write-down of 20 other retail stations associated with a
potential sale. Total gross margins decreased $14 million,
or 4%, to $350 million in 2009 as compared to
$364 million in 2008, reflecting lower sales volumes due to
lower gasoline demand and a lower average retail station count.
The decrease in average retail station count from 2008 related
to closing the 42 Mirastar retail stations.
Fuel sale revenues decreased $1.2 billion, or 28%, to
$3.0 billion in 2009, from $4.2 billion in 2008,
reflecting significantly lower sales prices and decreased fuel
sales volumes. Cost of sales decreased from 2008 due to lower
prices for purchased fuel. Our other expenses, excluding the
loss on asset disposals and impairments, decreased by
$25 million, or 9%, to $264 million during 2009 as
compared to $289 million during 2008 reflecting a decrease
of 36 average retail stations.
Consolidated
Results of Operations
Selling, General and Administrative
Expenses. Our selling, general and administrative
expenses increased $21 million or 10% to $242 million
in 2010 from $221 million in 2009. The increase was
primarily due to the impact of higher stock prices on
stock-based compensation expense recorded for our stock
appreciation rights and phantom stock options which increased by
$15 million and $4 million, respectively. Our stock
appreciation rights and phantom stock options are adjusted to
fair value at the end of each reporting period. In addition,
incentive compensation costs increased by $13 million
during 2010. The increase in 2010 was partially offset by a
$15 million gain recognized on the elimination of the
postretirement life insurance benefits for current and future
retirees. Of this gain $4 million, $2 million and
$9 million relate to refining, retail and corporate,
respectively. Selling, general and administrative expenses
decreased by $104 million or 32% to $221 million in
2009 from $325 million in 2008 primarily due to a
$91 million bad debt charge recorded in 2008.
Interest and Financing Costs. Interest and
financing cost increased $27 million or 21% to
$157 million in 2010 from $130 million in 2009
primarily due to additional interest expense recognized in 2010
as a result of the issuance of our $300 million senior
notes in June 2009 and due to increases in our letter of credit
fees resulting from the February 2010 amendment to the Tesoro
Corporation Revolving Credit Facility (Revolving Credit
Facility). Interest and financing costs increased
$19 million or 17% to $130 million in 2009 from
$111 million in 2008 due to the issuance of our
$300 million senior notes in June 2009, partially offset by
lower outstanding revolver borrowings.
Other Income (Expense). We recorded other
expense of $13 million in 2010 primarily as a result of a
summary judgment award of $16 million granted in late 2010
related to Chevrons assertion that it was entitled to a
share of our 2008 refund from the Trans Alaska Pipeline System
(TAPS). In 2008, we recorded $50 million of
other income related to a refund we received from TAPS in
connection with rulings made by the Regulatory Commission of
Alaska concerning our protest of intrastate pipeline rates.
Income Tax Expense (Benefit). Income tax
expense was $4 million in 2010 compared to a benefit of
$48 million in 2009 and an expense of $151 million in
2008. The combined federal and state effective tax rates were
(16%), 26% and 35% in 2010, 2009 and 2008, respectively. The
$4 million of tax expense in 2010 included a
$7 million charge relating to the passage of the 2010
health care legislation. The health care legislation made
retiree prescription health care costs non-deductible to the
extent of Medicare prescription heath care subsidies received
after 2012.
41
The 2009 tax benefit was reduced by $17 million relating to
a goodwill write-off for which there was no corresponding tax
basis. The 2008 tax expense benefited from the favorable
settlement of federal tax audits for the years 1996 through 2005.
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 factors include the level of consumer demand for
transportation fuels, weather conditions, fluctuations in
seasonal demand, governmental regulations, geo-political
conditions and overall market and global economic conditions.
See Important Information Regarding Forward-Looking
Statements on page 30 for further information related
to risks and other factors. Future capital expenditures, as well
as borrowings under our credit facilities 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 2010 with $648 million of cash and cash
equivalents, no borrowings under the Revolving Credit Facility
and $150 million in borrowings under the TPSA Revolving
Credit Facility. Further, we had borrowing ability under our
credit agreements as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Outstanding
|
|
|
|
|
|
|
Total
|
|
|
Borrowed
|
|
|
Letters of
|
|
|
Available
|
|
|
|
Capacity
|
|
|
to date
|
|
|
Credit
|
|
|
Capacity
|
|
|
Tesoro Corporation Revolving Credit Facility(a)
|
|
$
|
1,860
|
|
|
$
|
|
|
|
$
|
755
|
|
|
$
|
1,105
|
|
Letter of Credit Agreements
|
|
|
550
|
|
|
|
|
|
|
|
324
|
|
|
|
226
|
|
TPSA Revolving Credit Facility
|
|
|
350
|
|
|
|
150
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit agreements
|
|
$
|
2,760
|
|
|
$
|
150
|
|
|
$
|
1,079
|
|
|
$
|
1,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Borrowing base is the lesser of the amount of the periodically
adjusted borrowing base or the agreements total capacity |
We believe available capital resources will be adequate to meet
our capital expenditure, working capital and debt service
requirements. We continue to focus on maximizing our available
cash through the management of working capital, capital
expenditures and operating expenses.
Credit
Facilities
Tesoro
Corporation Revolving Credit Facility
We amended our Revolving Credit Facility in February 2010.
Modifications included: lowering the minimum required tangible
net worth, the purchase or sale of certain assets is no longer
subject to the fixed charge coverage ratio, the covenant
permitting additional unsecured indebtedness increased the
allowable amount of unsecured indebtedness, letters of credit
allowed under separate letter of credit agreements are no longer
subject to a cap, the applicable margin was adjusted and the
annual rate of commitment fees for the unused portion of the
Revolving Credit Facility was lowered.
Our Revolving Credit Facility and senior notes impose various
restrictions and covenants that could potentially limit our
ability to respond to market conditions, raise additional debt
or equity capital, pay cash dividends, or repurchase stock. The
indentures for our senior notes contain covenants and
restrictions which are customary for notes of this nature. These
covenants and restrictions limit, among other things, our
ability to:
|
|
|
|
|
pay dividends and make other distributions with respect to our
capital stock and purchase, redeem or retire our capital stock;
|
|
|
|
incur additional indebtedness and issue preferred stock;
|
|
|
|
sell assets unless the proceeds from those sales are used to
repay debt or are reinvested in our business;
|
|
|
|
incur liens on assets to secure certain debt;
|
|
|
|
engage in certain business activities;
|
42
|
|
|
|
|
make certain payments and distributions from our subsidiaries;
|
|
|
|
engage in certain mergers or consolidations and transfers of
assets; and
|
|
|
|
enter into transactions with affiliates.
|
Borrowing availability under the Revolving Credit Facility is
based on a minimum fixed charge coverage ratio. We have a
default covenant, which requires us to maintain specified levels
of tangible net worth. We were in compliance with the tangible
net worth requirement for the year ended December 31, 2010.
The Revolving Credit Facility is guaranteed by substantially all
of Tesoros active domestic subsidiaries and allows up to
$100 million of restricted payments during any four-quarter
period subject to credit availability exceeding 20% of the
borrowing base.
At December 31, 2010, our Revolving Credit Facility
provided for borrowings (including letters of credit) up to the
lesser of the amount of a periodically adjusted borrowing base
of approximately $2.2 billion (based upon an Alaska North
Slope crude oil price of $84 per barrel), consisting of
Tesoros eligible cash and cash equivalents, receivables
and petroleum inventories, net of the standard reserve as
defined, or the Revolving Credit Facilitys total capacity
of $1.86 billion. The total capacity can be further
increased from $1.86 billion up to $2.0 billion.
Borrowings under the Revolving Credit Facility bear interest at
either a base rate (3.25% at December 31, 2010), or a
Eurodollar rate (0.26% at December 31, 2010) plus an
applicable margin. The applicable margin at December 31,
2010, was 2.25% in the case of the Eurodollar rate, but varies
based upon our Revolving Credit Facilitys credit
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 (2.25% at
December 31, 2010). We also incur commitment fees for the
unused portion of the Revolving Credit Facility at an annual
rate of 0.50% as of December 31, 2010. Our Revolving Credit
Facility expires in May 2012.
Letter of
Credit Agreements
The Revolving Credit Facility allows us to obtain letters of
credit under separate letter of credit agreements for foreign
crude oil purchases. At December 31, 2010, we had three
separate letter of credit agreements. Letters of credit
outstanding under these agreements incur fees and are secured by
the petroleum inventories for which they are issued. The letter
of credit agreements may be terminated by either party, at any
time.
TPSA
Revolving Credit Facility
On October 18, 2010, TPSA, a directly and wholly owned
subsidiary of Tesoro, entered into a
364-day
uncommitted, secured revolving credit agreement. TPSA is an
excluded and unrestricted subsidiary from Tesoros Fourth
Amended and Restated Credit Agreement and outstanding
indentures. The TPSA Revolving Credit Facility is non-recourse
to Tesoro and is guaranteed by TPSAs assets. The TPSA
Revolving Credit Facility includes two uncommitted facilities,
which provide for revolving borrowings (Revolving
Borrowings), swing line loans and daylight overdraft loans
(TPSA Loans) and letters of credit. Our total
capacity under the TPSA facilities can be further increased up
to $700 million provided the facilities maximum
amounts do not exceed $550 million and $350 million,
respectively.
Revolving Borrowings bear interest at a Eurodollar rate plus an
applicable margin (2.75% as of December 31, 2010), or an
alternative base rate (3.25% as of December 31,
2010) plus an applicable margin (1.75% as of
December 31, 2010). TPSA Loans bear interest at the
alternative base rate plus the applicable margin plus 0.50% per
annum.
At December 31, 2010, our TPSA Revolving Credit Facility
provided for borrowings (including letters of credit) up to the
lesser of the amount of a periodically adjusted borrowing base
consisting of TPSA eligible receivables and petroleum
inventories, net of reserves or the agreements capacity
based on the new worth of TPSA. As of December 31, 2010
TPSAs net worth limited the facility to a maximum capacity
of $350 million.
The TPSA Revolving Credit Facility contains certain default
covenants and conditions relative to TPSAs financial
results that, among other things, limit TPSAs ability to
incur indebtedness or carry inventory levels above certain
thresholds. TPSA is also required to maintain specified levels
of adjusted tangible net worth (as defined) and adjusted net
working capital (as defined). We were in compliance with all of
the TPSA Revolving Credit Facilitys covenants and
conditions as of December 31, 2010.
43
Capitalization
Our capital structure at December 31, 2010 was comprised of
(in millions):
|
|
|
|
|
Debt, including current maturities:
|
|
|
|
|
Tesoro Corporation Revolving Credit Facility
|
|
$
|
|
|
TPSA Revolving Credit Facility
|
|
|
150
|
|
93/4% Senior
Notes Due 2019 (net of unamortized discount of $10)
|
|
|
290
|
|
61/2% Senior
Notes Due 2017
|
|
|
500
|
|
65/8% Senior
Notes Due 2015
|
|
|
450
|
|
61/4% Senior
Notes Due 2012
|
|
|
450
|
|
Junior subordinated notes due 2012 (net of unamortized discount
of $16)
|
|
|
134
|
|
Capital lease obligations and other
|
|
|
21
|
|
|
|
|
|
|
Total Debt
|
|
|
1,995
|
|
Stockholders Equity
|
|
|
3,215
|
|
|
|
|
|
|
Total Capitalization
|
|
$
|
5,210
|
|
|
|
|
|
|
At December 31, 2010, our
debt-to-capitalization
ratio was 38%, compared to 37% at year-end 2009, reflecting
$150 million of borrowings outstanding on the TPSA
Revolving Credit Facility.
Cash
Dividends
We did not pay any cash dividends during 2010. During 2009 and
2008, we paid cash dividends on common stock totaling $0.35 per
share and $0.40 per share, respectively.
Cash
Flow Summary
Components of our cash flows are set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash Flows from (Used In):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
385
|
|
|
$
|
663
|
|
|
$
|
716
|
|
Investing activities
|
|
|
(295
|
)
|
|
|
(436
|
)
|
|
|
(610
|
)
|
Financing activities
|
|
|
145
|
|
|
|
166
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and cash equivalents
|
|
$
|
235
|
|
|
$
|
393
|
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
Compared to 2009
Net cash from operating activities decreased $278 million,
or 42%, to $385 million in 2010 as compared to
$663 million in 2009 primarily due to higher working
capital requirements partially offset by a decrease in net
losses for the period. Net cash used in investing activities
decreased $141 million, or 32% to $295 million in 2010
as compared to $436 million in 2009 primarily due to a
decrease in capital expenditures. Net cash from financing
activities decreased $21 million or 13% to
$145 million in 2010 from $166 million in 2009
primarily due to $150 million in net borrowings under the
TPSA Revolving Credit Facility in 2010 offset by net proceeds on
our senior note issuance of $282 million, net repayments on
our revolver of $66 million and dividend payments of
$49 million in 2009.
Working capital (excluding cash) was a source of
$137 million in cash for the year ending December 31,
2010, primarily related to a
run-up in
crude and product prices towards the end of the year. We collect
our receivables approximately three times faster than we pay our
payables, the majority of which settle on the 20th of the month
following the date of crude delivery. In a period of rising
crude oil and product prices, we collect higher product prices
sooner than we pay for more expensive crude purchases.
Inventories increased by approximately seven million barrels
from December 31, 2009. This was offset by corresponding
increases in accounts payable and current maturities of
long-term debt in the statement of consolidated cash flows.
44
2009
Compared to 2008
Net cash from operating activities decreased $53 million,
or 7%, to $663 million in 2009 as compared to
$716 million in 2008 primarily due to lower cash earnings,
partially offset by lower working capital requirements. Net cash
used in investing activities decreased $174 million, or
29%, to $436 million in 2009 as compared to
$610 million in 2008 primarily as a result of decreased
capital expenditures. Net cash from (used in) financing
activities increased $275 million or 252% to
$166 million in 2009 from $(109) million in 2008
primarily due to the net proceeds from our senior notes issuance
partially offset by repayments on our revolver and dividend
payments.
Gross borrowings under our revolving credit agreement totaled
$418 million, and we repaid $484 million in borrowings
during 2009. Working capital (excluding cash) decreased
$264 million at December 31, 2009 from
$185 million at December 31, 2008, as payables
increased by a larger amount than both receivables and
inventories due to higher crude oil prices at year end.
Inventories decreased by approximately 4 million barrels
from December 31, 2008 reflecting our initiatives to
optimize working capital and matching production to lower
product demand.
Capital
Expenditures
Our capital budget for 2011 is $380 million. Our capital
spending during 2010 was $287 million compared to our 2010
capital budget of $470 million. Our 2011 budgeted and 2010
actual capital spending amounts are comprised of the following
project categories at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Percent of 2011
|
|
Percent of 2010
|
Project Category
|
|
Capital Budget
|
|
Capital Spending
|
|
Regulatory
|
|
|
40
|
%
|
|
|
60
|
%
|
Sustaining
|
|
|
30
|
%
|
|
|
30
|
%
|
Income Improvement
|
|
|
30
|
%
|
|
|
10
|
%
|
The capital spending plans for 2011 reflect the Companys
strategic priorities including continued focus on safety and
reliability and greater focus on value-driven growth. Sustaining
capital expenditures, primarily repairs and maintenance not
related to turnaround activity, are expected to remain at about
30% of our total capital expenditures in 2011. Spending on
income improvement projects is expected to increase from 10% of
all capital dollars to 30% in 2011 as the company puts greater
focus on these value-added projects which are expected to
improve yields, reduce costs and expand our infrastructure.
Regulatory spending as a percent of total spending declines
though total dollars expected to be spent remains relatively
constant. See Business Strategy and Overview and
Environmental Capital Expenditures for additional
information.
Refinery
Turnaround Spending
Our 2011 budget for refinery turnarounds and catalyst is
$160 million. The turnaround spending is primarily at our
Golden Eagle and Los Angeles refineries. Refining throughput and
yields in 2011 will be affected by these turnarounds. During
2010, we spent $140 million for refinery turnarounds and
catalyst, primarily at our Utah, Golden Eagle, North Dakota and
Hawaii refineries.
45
Long-Term
Commitments
Contractual
Commitments
We have numerous contractual commitments for purchases
associated with the operation of our refineries, debt service
and leases (see Notes J and N to our consolidated financial
statements in Item 8). We also have minimum contractual
spending requirements for certain capital projects. The
following table summarizes our annual contractual commitments as
of December 31, 2010 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligation
|
|
Total
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Long-term debt obligations(a)
|
|
$
|
2,671
|
|
|
$
|
284
|
|
|
$
|
721
|
|
|
$
|
92
|
|
|
$
|
91
|
|
|
$
|
537
|
|
|
$
|
946
|
|
Capital lease obligations(b)
|
|
|
33
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
3
|
|
|
|
14
|
|
Operating lease obligations(b)
|
|
|
1,077
|
|
|
|
220
|
|
|
|
187
|
|
|
|
129
|
|
|
|
97
|
|
|
|
85
|
|
|
|
359
|
|
Crude oil supply obligations(c)
|
|
|
9,336
|
|
|
|
5,744
|
|
|
|
1,245
|
|
|
|
941
|
|
|
|
940
|
|
|
|
466
|
|
|
|
|
|
Other purchase obligations(d)
|
|
|
1,008
|
|
|
|
176
|
|
|
|
111
|
|
|
|
93
|
|
|
|
97
|
|
|
|
96
|
|
|
|
435
|
|
Capital expenditure obligations(e)
|
|
|
21
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities(f)
|
|
|
350
|
|
|
|
|
|
|
|
56
|
|
|
|
59
|
|
|
|
61
|
|
|
|
65
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
14,496
|
|
|
$
|
6,449
|
|
|
$
|
2,324
|
|
|
$
|
1,318
|
|
|
$
|
1,290
|
|
|
$
|
1,252
|
|
|
$
|
1,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes maturities of principal and interest payments,
excluding capital lease obligations. Amounts and timing may be
different from our estimated commitments due to potential
voluntary debt prepayments and borrowings. |
|
(b) |
|
Capital lease obligations include amounts classified as
interest. Operating lease obligations primarily represent our
future minimum noncancellable lease commitments. Operating lease
obligations primarily include lease arrangements with initial or
remaining noncancellable terms in excess of one year and are not
reduced by minimum rentals to be received by us under subleases. |
|
(c) |
|
Represents an estimate of our short-term and long-term
contractual purchase commitments for crude oil, with remaining
terms ranging from six months to five years. Prices under these
term agreements fluctuate due to market-responsive pricing
provisions. To estimate our annual commitments under these
contracts, we estimated crude oil prices using actual market
prices by crude oil type as of December 31, 2010, with
prices ranging from $83 per barrel to $91 per barrel, and
volumes based on the contracts minimum purchase
requirements. We also purchase additional crude oil under
short-term renewable contracts and in the spot market, which is
not included in the table above. |
|
(d) |
|
Represents primarily long-term commitments for the
transportation of crude oil and refined products as well as to
purchase industrial gases, chemical processing services and
utilities at our refineries. These purchase obligations are
based on the contracts minimum volume requirements. |
|
(e) |
|
Minimum contractual spending requirements for certain capital
projects. |
|
(f) |
|
We have included the future estimated benefit payments for our
defined pension plans and other postretirement benefits as these
obligations represent the majority of our other noncurrent
liabilities. See Note M to our consolidated financial
statements in Item 8 for additional information. |
With the exception of amounts classified as current there is
uncertainty as to the timing of future cash flows related to
environmental liabilities and asset retirement obligations. As
such, we have excluded the future cash flows from the
contractual commitments table above. See additional information
on environmental liabilities and asset retirement obligations in
Note I and Note K, respectively, to our consolidated
financial statements in Item 8.
In addition, due to the uncertainty of the timing of future cash
flows with our unrecognized tax benefits, with the exception of
amounts classified as current, we are unable to make reasonably
reliable estimates of the period of cash settlement.
Accordingly, we have excluded $22 million of unrecognized
tax benefits recorded as liabilities, $1 million of which
is classified as current in the consolidated balance sheet, from
the contractual commitments table above. Related to these
unrecognized tax benefits, we have also recorded a liability for
potential interest and penalties of $11 million at
December 31, 2010, $1 million of which is classified
as current in the consolidated balance sheet. See Note L to
our consolidated financial statements in Item 8 for further
information.
46
Off-Balance
Sheet Arrangements
Other than our leasing arrangements described in Note N to
our consolidated financial statements in Item 8, 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. Although we cannot
predict the ultimate outcomes of these matters with certainty,
we have accrued for the estimated liabilities when appropriate.
We believe that the outcome of these matters will not 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.
Additionally, if applicable, we accrue receivables for probable
insurance or other third-party recoveries.
We are subject to extensive federal, state and local
environmental laws and regulations. These laws, which change
frequently, regulate the discharge of materials into the
environment and may require us to remove or mitigate the
environmental effects of the disposal or release of petroleum or
chemical substances at various sites, install additional
controls, or make other modifications to certain emission
sources.
Future expenditures may be required to comply with proposed
regulations under the Clean Air Act and other federal, state and
local requirements for our various sites, including our
refineries, tank farms, pipelines, operating retail stations,
closed retail stations operating refined products terminals and
closed refined products terminals. The impact of these
legislative and regulatory developments, including any
greenhouse gas
cap-and-trade
program or low carbon fuel standards, could result in increased
compliance costs, additional operating restrictions on our
business, and an increase in the cost of the products we
manufacture, which could have an adverse impact on our financial
position, results of operations, and liquidity.
In December 2007, the U.S. Congress passed the Energy
Independence and Security Act that created a second renewable
fuels standard (RFS2). This standard requires the
total volume of renewable transportation fuels (including
ethanol and advanced biofuels) sold or introduced in the
U.S. to reach 12.95 billion gallons in 2010,
13.95 billion gallons in 2011 and rise to 36 billion
gallons by 2022. The requirements could reduce future demand
growth for petroleum products that we manufacture. In the near
term, the RFS2 presents ethanol production and logistics
challenges for the ethanol, alternative fuel and refining and
marketing industries. Additional expenditures could be required
to logistically accommodate the increased use of renewable
transportation fuels.
In California, Assembly Bill 32 (AB 32), created a
statewide cap on greenhouse gas emissions and requires that the
state return to 1990 emission levels by 2020. AB 32 focuses on
using market mechanisms, such as a
cap-and-trade
program and a low carbon fuel standard (LCFS) to
achieve emission reduction targets. The LCFS became effective in
January 2010 and requires a 10% reduction in the carbon
intensity of gasoline and diesel fuel by 2020. Final regulations
for all other aspects of AB 32, including cap and trade
requirements, are being developed by CARB, will take effect in
2012, and will be fully implemented by 2020. The implementation
and implications of AB 32 will take many years to realize, and
we cannot currently predict its impact on our financial
position, results of operations and liquidity.
In 2009, the EPA proposed regulating greenhouse gas emissions
under the Clean Air Act. The first of these regulations
finalized on April 1, 2010, sets standards for the control
of greenhouse gas emissions from light trucks and cars. It could
reduce the demand for our manufactured transportation fuels. In
addition, other proposed regulations include permitting
requirements for stationary sources that emit greenhouse gases
above a certain threshold. The resulting permitting requirements
could impose emission controls that increase required capital
expenditures at our refineries.
We are subject to extensive federal, state and foreign tax laws
and regulations. Newly enacted tax laws and regulations, and
changes in existing tax laws and regulations, could result in
increased expenditures in the future. We are also subject to
audits by federal, state and foreign taxing authorities in the
normal course of business. It is possible that tax audits could
result in claims against us in excess of recorded liabilities.
We believe that resolution of any such claim(s) would 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
$12 million in the next twelve months through settlements
or other conclusions, primarily regarding state tax issues.
47
Environmental
Liabilities
We are, and expect to continue, incurring expenses for
environmental liabilities at a number of currently and
previously owned or operated refining, pipeline, terminal and
retail station properties. We have accrued liabilities for these
expenses and believe these accruals are adequate. At
December 31, 2010 and December 31, 2009, our accruals
for environmental expenditures totaled $108 million and
$106 million, respectively. Our environmental accruals are
based on estimates including engineering assessments and it is
possible that our estimates will change and additional costs
will be recorded 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.
These environmental liabilities totaled $62 million and
$73 million at December 31, 2010 and 2009,
respectively. We cannot reasonably determine the full extent of
remedial activities that may be required at the Golden Eagle
refinery. Therefore, it is possible that we will identify
additional remediation costs as more information becomes
available. We have filed insurance claims under environmental
insurance policies that provide coverage up to $190 million
for expenditures in excess of the $50 million in
self-insurance. 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 of the order, but we believe it will not
have a material adverse effect on our financial position or
results of operations.
Washington
Refinery Fire
On April 2, 2010, the naphtha hydrotreater unit at our
Washington refinery was involved in a fire, which fatally
injured seven employees and rendered the unit inoperable.
Subsequent to the incident, refinery processing was temporarily
shut down until after the unit reconstruction was completed. The
Washington refinery resumed operations at planned rates in
November 2010.
In February 2011, Tesoro Corporation, Tesoro Refining and
Marketing Company and other defendants were named in a lawsuit
brought by the estates and families of six of the seven fatally
injured employees arising from the April 2, 2010 Washington
refinery incident. In addition, a third-party propane truck
driver has alleged damages in the lawsuit. The lawsuit includes
allegations of negligence, premises liability, strict liability,
product liability and seeks unspecified compensatory and
punitive damages. The Company believes that it has defenses to
the allegations contained in the lawsuit. The case of Donald
and Peggy Zimmerman et al. v. Tesoro Corporation and Tesoro
Refining and Marketing et al. is proceeding in the Superior
Court of the State of Washington, Skagit County. We are still
evaluating the allegations contained in the lawsuit, however we
believe that the outcome will not materially impact our
liquidity and consolidated financial position.
We maintain comprehensive property (including business
interruption), workers compensation, and general liability
insurance policies with significant loss limits. Our business
interruption insurance deductible is satisfied after we have
exceeded both 60 days of operational disruption and
$25 million in losses primarily based on the operating plan
that existed prior to the incident. Our property damage
insurance has a $10 million deductible. We have filed
business interruption insurance claims and property damage
claims related to this incident.
During 2010, we collected $55 million in business
interruption insurance recoveries that relate to downtime from
April 2010 to August 2010, which were recorded as an offset to
cost of sales in the consolidated statement of operations. We
have filed additional business interruption insurance claims and
expect to settle remaining matters in the first half of 2011. We
also filed claims for $22 million in property damages and
recorded $12 million in property insurance recoveries, net
of the $10 million deductible. These amounts were recorded
in operating expenses in the consolidated statement of
operations. We do not believe that this tragic incident will
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 accruals for
these matters. 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.
48
During 2009, Chevron filed a lawsuit against us claiming they
are entitled to a share of the refunds we received in 2008 from
the owners of the Trans Alaska Pipeline System
(TAPS). We received $50 million in 2008, net of
contingent legal fees, for excessive intrastate rates charged by
TAPS during 1997 though 2000, and the period of 2001 through
June 2003. Chevron is asserting that it is entitled to a share
of its portion of the refunds for retroactive price adjustments
under our previous crude oil contracts with them. In September
2010, the trial court judge granted Chevrons motion for
summary judgment and awarded them $16 million. We disagree
with the trial court and have appealed the decision to the
Alaska Supreme Court in which the proceeding is now pending. We
have established an accrual for this matter and believe that the
outcome will not materially impact our liquidity and
consolidated financial position.
We are a defendant, along with other manufacturing, supply and
marketing defendants, in six lawsuits alleging MTBE
contamination in groundwater. We were served with the sixth
lawsuit in April 2010. The defendants are being sued for having
manufactured MTBE and having manufactured, supplied and
distributed gasoline containing MTBE. The plaintiffs in the six
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. We
intend to vigorously assert our defenses against these claims.
On February 5, 2010, the EPA filed suit against us alleging
violations of the Clean Air Act and corresponding regulatory
requirements concerning the testing and reporting of
transportation fuels and fuel additives. In February 2009, we
received a Notice of Violation (NOV) from the EPA
for the alleged violations arising from a compliance review
conducted by the EPA in 2006 for the years 2003 through the time
of the review in 2006. We are discussing the alleged violations
contained in the suit with the EPA and the U.S. Department
of Justice and have not established an accrual for this matter.
On the basis of existing information, we believe that the
resolution of this matter will not have a material adverse
effect on our financial position or results of operations.
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act, also known as the Financial Reform Act
of 2010, was signed into law. Key provisions of the act require
that standardized swaps be cleared through a registered
clearinghouse and executed on a registered trading platform with
specific margin requirements. These requirements could make
these products more complicated or costly by creating new
regulatory risks and increasing reporting, capital, and
administrative requirements for companies that use derivatives
for hedging and trading activities. Final rules on provisions in
the legislation will be established and will take effect twelve
months after the date of enactment. Although we cannot predict
the ultimate outcome of this legislation, new regulations in
this area may result in increased hedging costs and cash
collateral requirements, and ultimately affect liquidity and
working capital requirements.
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 have investigated the
allegations contained in the NOV and sent the EPA additional
information in 2009.
Environmental
Capital Expenditures
The EPA issued regulations in February 2007 that require the
reduction of benzene in gasoline. We spent $62 million in
2010, and plan to spend an additional $89 million through
2013 at five of our refineries to comply with the regulations.
Our California refineries will not require capital spending to
meet the benzene reduction standards.
We have evaluated alternative projects for wharves at our Golden
Eagle refinery to meet engineering and maintenance standards
issued by the State of California in February 2006 and expect a
commercial transaction could significantly reduce capital
spending requirements. We are currently working with a
counterparty on this agreement. Based on the updated
alternatives, we expect to spend $15 million through 2013.
The timing of these projects is being evaluated and is subject
to change.
49
Regulations issued by Californias South Coast Air Quality
Management District require the emission of nitrogen oxides to
be initially reduced in 2011 at our Los Angeles refinery.
Currently, we plan to meet this requirement by implementing
operational changes, small capital projects and the continued
management of our emissions credits. We do not expect
significant environmental capital expenditures in future years
to satisfy these reductions.
Other projects at our Los Angeles refinery include replacing
underground pipelines with above-ground pipelines to comply with
an order from the California Regional Water Quality Control
Board. We spent $3 million in 2010, and do not expect to
spend significant environmental capital in future years to
comply with these orders.
We spent approximately $12 million to reconfigure and
replace above-ground storage tank systems at our Golden Eagle
refinery during 2010 to comply with a California Regional Water
Quality Board Order. We do not expect significant environmental
capital expenditures in future years to comply with this order.
We spent $13 million in 2010 to install equipment in the
first quarter at our Golden Eagle refinery to eliminate the use
of atmospheric blowdown towers as emergency relief systems.
We were required under a consent decree with the EPA to reduce
air emissions at our North Dakota and Utah refineries. We spent
$5 million in 2010 to install emission controls for
nitrogen oxides on boilers and heaters at these refineries. We
do not expect significant environmental capital expenditures in
future years to comply with this order.
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.
Pension
Funding
We provide a qualified defined benefit retirement plan for all
eligible employees, with benefits based on years of service and
compensation. Our long-term expected return on plan assets is
7.5% as of December 31, 2010, and our funded employee
pension plan assets experienced a return of $30 million in
2010 and a return of $34 million in 2009. Based on a 5.55%
discount rate and fair values of plan assets as of
December 31, 2010, the fair values of the assets in our
funded employee pension plan were equal to approximately 52% of
the projected benefit obligation as of the end of 2010. At
January 1, 2010 the adjusted funding target attainment
percentage (a funding measure defined under applicable pension
regulations) was 97%. Although Tesoro had no minimum required
contribution obligation to its funded employee pension plan
under applicable laws and regulations in 2010, we voluntarily
contributed $34 million to improve the funded status of the
plan. We currently are not required to fund any contributions in
2011 and continue to evaluate our expected 2011 voluntary
contributions. Future contributions are affected by returns on
plan assets, discount rates, employee demographics, regulatory
environments and other factors. See Note M to our
consolidated financial statements in Item 8 for further
discussion.
ACCOUNTING
STANDARDS
Critical
Accounting Policies
Our accounting policies are described in Note A to our
consolidated financial statements in Item 8. We prepare our
consolidated financial statements in conformity with US GAAP,
which require us to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements
and accompanying footnotes. Actual results could differ from
those estimates. We consider the following policies to be the
most critical in understanding the judgments that are involved
in preparing our financial statements and the uncertainties that
could impact our financial condition and results of operations.
Receivables Our trade receivables are stated
at their invoiced amounts, less an allowance for potentially
uncollectible amounts. We monitor the credit and payment
experience of our customers and manage our loss exposure through
our credit policies and procedures. The estimated allowance for
doubtful accounts is based on our general loss experience and
identified loss exposures on individual accounts. Actual losses
could vary from estimates as global economic conditions and the
related credit environment could change.
Property, Plant and Equipment and Acquired
Intangibles We calculate depreciation and
amortization using the straight-line method based on estimated
useful lives and salvage values of our assets. When assets are
placed into service, we make estimates with respect to their
useful lives that we believe are reasonable. However, factors
such as maintenance levels, economic conditions impacting the
demand for these assets, and regulatory or environmental
requirements could cause us to change our estimates, thus
impacting the future calculation of depreciation and
50
amortization. We evaluate these assets for potential impairment
when an asset disposition is probable or when there are
indicators of impairment (for example, current period operating
losses combined with a history of operating losses or a
temporary shutdown of a refinery) and, if so, assessing whether
the asset net book values are recoverable from estimated future
undiscounted cash flows. The actual amount of an impairment loss
to be recorded, if any, is equal to the amount by which the
assets net book value exceeds its fair market value. Fair
market value is generally based on the present values of
estimated future cash flows in the absence of quoted market
prices. Estimates of future cash flows and fair market values of
assets require subjective assumptions with regard to several
factors, including an assessment of global market conditions,
future operating results and forecasts of the remaining useful
lives of the assets. Actual results could differ from those
estimates. At December 31, 2010, we evaluated certain of
our refineries for potential impairment and we determined that
no impairment charge was necessary.
Goodwill As of December 31, 2010 and
2009, we had goodwill of $36 million and $46 million,
respectively. Goodwill is not amortized, but is tested for
impairment annually or more frequently when indicators of
impairment exist for the underlying assets. We review the
recorded value of our goodwill for impairment annually during
the fourth quarter, or sooner if events or changes in
circumstances indicate the carrying amount may exceed fair
value. Recoverability is determined by comparing the estimated
fair value of a reporting unit to the carrying value, including
the related goodwill, of that reporting unit. We use an income
approach based on the present value of expected net cash flows
and a market approach based on recent sales transactions and
current stock prices to determine the estimated fair value of
our reporting units.
Market conditions associated with the economic recession,
including excess product inventories and rising crude oil costs,
reduced current period and forecasted earnings within our
business and industry as well as quoted market prices for
comparable company common stocks and refinery sales
transactions. Decreased forecasted cash flows and quoted market
prices reduced our estimated fair value below carrying value at
certain of our refining reporting units resulting in a goodwill
write-off of $10 million and $43 million, for the
years ended 2010 and 2009, respectively. The estimated fair
value of our largest remaining reporting unit with goodwill of
approximately $30 million significantly exceeded its
carrying value at year-end. However, our impairment test is
subject to change from period to period as it requires us to
make cash flow assumptions about many things including, future
margins, volumes, operating costs, capital expenditures, growth
rates and discount rates. Our assumptions regarding future
margins and volumes require significant judgment as actual
margins and volumes have fluctuated in the past and will likely
continue to do so. Changes in market conditions could result in
impairment charges in the future.
Environmental Liabilities At
December 31, 2010 and 2009, our total environmental
liabilities included in accrued liabilities and other noncurrent
liabilities were $108 million and $106 million,
respectively. We record environmental liabilities when
environmental assessments
and/or
proposed environmental remedies are probable and can be
reasonably estimated. Generally, the timing of our accruals
coincides with assessing the liability and then completing a
feasibility study or committing to a formal plan of action. When
we complete our analysis or when we commit to a plan of action,
we accrue a liability based on the minimum range of the expected
costs, unless we consider another amount more likely. We base
our cost estimates on the extent of remedial actions required by
applicable governing agencies, experience gained from similar
environmental projects and the amounts to be paid by other
responsible parties. Accruals for our environmental liabilities
require judgment due to the uncertainties related to the
magnitude of the liability and timing of the remediation effort.
Our environmental liability estimates are subject to change due
to potential changes in environmental laws, regulations or
interpretations, additional information related to the extent
and nature of the liability, and potential improvements in
remediation technologies. We do not discount our estimated
liabilities to present value.
Legal Liabilities In the ordinary course of
business, we become party to lawsuits, administrative
proceedings, and governmental investigations. These matters may
involve large or unspecified damages or penalties that may be
sought from us and may require years to resolve. We record a
liability related to a loss contingency attributable to such
legal matters if we determine the loss to be both probable and
estimable. The liability is recorded for an amount that is
managements best estimate of the loss, or when a best
estimate cannot be made, the minimum loss amount of a range of
possible outcomes. Significant judgment is required in
estimating such liabilities, the results of which can vary
significantly from actual litigation results.
Income Taxes As part of the process of
preparing our consolidated financial statements, we must assess
the likelihood that our deferred income tax assets will be
recovered through future taxable income. We must establish a
valuation allowance to the extent we believe that recovery is
not likely. Significant management judgment is required in
determining any valuation allowance recorded against deferred
income tax assets. We have recorded a
51
valuation allowance of $9 million on certain state credit
carryforwards as of December 31, 2010 based on our
estimates of taxable income in each jurisdiction in which we
operate and the period over which deferred income tax assets
will be recoverable. We may need to establish an additional
valuation allowance if actual results differ from these
estimates or we make adjustments to these estimates in future
periods. We also recognize the financial statement effects of a
tax position when it is more likely than not that the position
will be sustained upon examination. Tax positions that are not
recognized that we have taken or expect to take, are recorded as
liabilities. Our liability for unrecognized tax benefits,
including interest and penalties totaled $33 million and
$57 million at December 31, 2010 and 2009,
respectively.
Asset Retirement Obligations Our asset
retirement obligations totaled $30 million and
$34 million at December 31, 2010 and 2009,
respectively. We record asset retirement obligations in the
period in which the obligations are incurred and a reasonable
estimate of fair value can be made. We use the present value of
expected cash flows using third-party estimates or historical
data to estimate fair value. The calculation of fair value is
based on several estimates and assumptions, including projected
cash flows, inflation, a discount rate, the settlement dates or
a range of potential settlement dates and the probabilities
associated with settlement. We consider our past practice,
industry practice, managements intent and estimated
economic lives to estimate settlement dates. Our estimates are
subject to change due to potential changes in laws, regulations
or interpretations, additional information related to the extent
and nature of the retirement and technological improvements
associated with the retirement activities. We cannot currently
make reasonable estimates of the fair values of some retirement
obligations, principally those associated with our refineries,
pipelines and certain terminals and retail stations, because the
related assets have indeterminate useful lives which preclude
development of assumptions about the potential timing of
settlement dates. Such obligations will be recognized in the
period in which sufficient information exists to estimate a
range of potential settlement dates.
Pension and Other Postretirement Benefits
Accounting for pensions and other postretirement benefits
involves several assumptions and estimates including discount
rates, expected rate of return on plan assets, rates of
compensation, health care cost trends, inflation, retirement
rates and mortality rates. We must assume a rate of return on
funded pension plan assets in order to estimate our obligations
under our defined benefit plans. Due to the nature of these
calculations, we engage an actuarial firm to assist with these
estimates and the calculation of certain employee benefit
expenses. We record an asset for our plans overfunded status or
a liability if the plans are underfunded. The funded status
represents the difference between the fair value of our plans
assets and its projected benefit obligations. While we believe
the assumptions we used are appropriate, significant differences
in actual experience or significant changes in assumptions would
affect pension and other postretirement benefits costs and
obligations. We determine the discount rate primarily by
reference to rates of high quality corporate bonds that mature
in a pattern similar to the expected payments to be made under
our plans. The expected return on plan assets is based upon the
weighted averages of the expected long-term rates of return for
the broad categories of investments held in our plans. These
assumptions can have a significant effect on the amounts
reported in our consolidated financial statements.
A one-percentage-point change in the expected return on plan
assets and discount rate for the pension plans would have had
the following effects in 2010 (in millions):
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1-Percentage-
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1-Percentage-
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Point Increase
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Point Decrease
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Expected Rate of Return:
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Effect on net periodic pension expense
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$
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(3
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)
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$
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3
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Discount Rate:
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Effect on net periodic pension expense
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$
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(13
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)
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$
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15
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Effect on projected benefit obligation
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$
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(82
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)
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$
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97
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See Note M to our consolidated financial statements in
Item 8 for more information regarding costs and assumptions.
52
Stock-Based Compensation We follow the fair
value method of accounting for stock-based compensation. We
estimate the fair value of options and certain other stock-based
awards using the Black-Scholes option-pricing model or a Monte
Carlo simulation with assumptions based primarily on historical
data. The Black-Scholes option-pricing model requires
assumptions including the expected term the stock-based awards
are held until exercised, the estimated volatility of our stock
price over the expected term, and the number of awards that will
be forfeited prior to vesting. The Monte-Carlo simulation takes
into account the same input assumptions as the Black-Scholes
option-pricing model as outlined above, however, it also
incorporates into the fair-value determination the possibility
that the market condition may not be satisfied and impact of the
possible differing stock price paths. Changes in our assumptions
may impact the expenses related to our stock-based awards. The
fair values of our stock appreciation rights, phantom stock
options and performance unit awards are estimated at the end of
each reporting period and are recorded as liabilities. Changes
in our assumptions may impact our liabilities and expenses
associated with our stock-based awards.
New
Accounting Standards and Disclosures
Fair
Value Measurements
We adopted a standard on January 1, 2009, that expanded the
framework and disclosures for measuring the fair value of
nonfinancial assets and nonfinancial liabilities, including:
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acquired or impaired goodwill;
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the initial recognition of asset retirement obligations; and
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impaired property, plant and equipment.
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The adoption of this standard did not impact our financial
position or results of operations.
In January 2010, the FASB amended the standard covering fair
value measurements to require additional disclosures, including
transfers in and out of levels 1 and 2 fair value
measurements, the gross basis presentation of the reconciliation
of level 3 fair value measurements, and fair value
measurement disclosure at the class level, as opposed to
category level, as previously required. This guidance is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for disclosures related to
level 3 fair value measurements, which are effective for
fiscal years beginning after December 15, 2010 (including
interim periods). The adoption of the amendment did not impact
our financial position or results of operations.
Variable
Interest Entities
The FASB issued a standard in June 2009 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(s) give it a controlling
financial interest in a variable interest entity. This standard
became effective January 1, 2010, and did not impact our
financial position or results of operations.
53
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Our primary source of market risk is the difference between the
prices we sell our refined products for and the prices we pay
for crude oil and other feedstocks. We may use derivative
instruments to manage the risks from changes in the prices of
crude oil and refined products, fluctuations in foreign currency
exchange rates, or to capture market opportunities. We have a
risk committee whose responsibilities include reviewing a
quarterly assessment of risks to the corporation and presenting
a quarterly risk report to executive management for
consideration.
Commodity
Price Risks
Tesoro
Refining and Marketing
Our earnings and cash flows from operations depend on the
margin, relative to fixed and variable expenses (including the
costs of crude oil and other feedstocks), at which we are able
to sell our refined products. The prices of crude oil and
refined products have fluctuated substantially in recent years
and depend on many factors. These factors include the global
supply and demand for crude oil and refined products. This
demand is impacted by changes in the global economy, the level
of foreign and domestic production of crude oil 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 sell our refined products
for 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 the average throughput
from 2008 to 2010 of 541 Mbpd, would change annualized pretax
operating income by approximately $200 million.
We maintain inventories of crude oil, intermediate products and
refined products, the values of which are subject to
fluctuations in market prices. Our inventories of refinery
feedstocks and refined products totaled 27 million barrels
and 20 million barrels at December 31, 2010 and 2009,
respectively. The average cost of our refinery feedstocks and
refined products at December 31, 2010, was approximately
$42 per barrel on a LIFO basis, compared to market prices of
approximately $96 per barrel. If market prices decline to a
level below the average cost of these inventories, we would be
required to write down the carrying 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 non-trading derivative instruments to manage price
risks associated with inventories above or below our target
levels. These derivative instruments typically include
exchange-traded futures and
over-the-counter
swaps and options, generally with durations of less than one
year. We continue to monitor our hedging strategy in 2011.
We
mark-to-market
our derivative instruments and recognize the changes in their
fair value in our statements of consolidated operations. We
elected not to designate our derivative instruments as fair
value hedges during 2009. In the fourth quarter of 2010, we
began using fair value hedge accounting for a portion of our
TPSA inventory.
Net earnings during 2010 and 2009 included net losses of
$29 million and $68 million, respectively, on our
derivative positions comprised of the following (dollars in
millions and volumes in millions of barrels):
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2010
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2009
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Contract
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Net
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Contract
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Net Gain
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Volumes
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Loss
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Volumes
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(Loss)
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Unrealized loss carried on open positions from prior year
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1
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$
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(2
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)
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1
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$
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(18
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)
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Settled derivative positions
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427
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(18
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)
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287
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(52
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)
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Unrealized gain (loss) on open positions
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5
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(9
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)
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1
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2
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Net loss
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$
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(29
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)
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$
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(68
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Our open positions at December 31, 2010, will expire at
various times primarily during 2011. We prepared a sensitivity
analysis to estimate our exposure to market risk associated with
our derivative instruments. This analysis may differ from actual
results. Based on our open net positions of five million barrels
at December 31, 2010, a $1.00
54
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 $5 million.
Tesoro
Panama Company Sociedad Anonima
We formed TPSA to use our leased pipeline and tank facilities in
Panama by enhancing strategic partnerships, developing economies
of scale around freight and storage opportunities, providing
discretionary crude oil trading, expanding global commercial
relationships and evaluating opportunities to source crude from
alternative supply markets. We may use our excess storage
capacity in Panama to take advantage of contango markets, when
the price of crude oil is higher in the future than the current
spot price. We use commodity derivatives to hedge crude oil held
in connection with these arbitrage opportunities. The above
table and sensitivity analysis includes approximately two
million barrels in open derivative positions at
December 31, 2010, entered into to manage exposure to
commodity price risks associated with TPSA. The above
sensitivity analysis, as it relates to these derivative
instruments on a stand-alone basis, would not materially change
the fair value of trading derivative instruments or pre-tax
operating income.
We use fair value hedge accounting for certain derivatives
instruments acquired by TPSA and the crude oil inventory
underlying these instruments. If we designate a hedging
relationship as a fair value hedge, we record the changes in
fair value of the hedged asset or liability and any ineffective
portion in cost of sales in our statements of consolidated
operations.
Risk
Management
The Company has a system of governance and management oversight
and has put in place a number of controls to ensure procedures
are properly followed and accountability is present at the
appropriate levels. For example, the Company has put in place
controls designed to:
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create and maintain a comprehensive risk management policy;
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provide for authorization by the appropriate levels of
management;
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provide for segregation of duties;
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maintain an appropriate level of knowledge regarding the
execution of and the accounting for derivative
instruments; and
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have key performance indicators in place to adequately measure
the performance of its hedging activities.
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The Company believes the governance structure that it has in
place is adequate given the size and sophistication of its
hedging program.
Counterparty
Credit Risk
We have exposure to concentrations of credit risk related to the
ability of our counterparties to meet their contractual payment
obligations, and the potential non-performance of counterparties
to deliver contracted commodities or services at the contracted
price. We have risk management policies in place, and continue
to monitor closely the status of our counterparties. We perform
ongoing credit evaluations of our customers financial
condition, and in certain circumstances, require prepayments,
letters of credit or other collateral.
Foreign
Currency Risk
We are exposed to exchange rate fluctuations on our purchases of
Canadian crude oil. Beginning in August 2009, we have entered
into forward contracts of Canadian dollars to manage any monthly
exchange rate fluctuations. We had approximately $1 million
in losses related to these transactions for the year ended
December 31, 2010. As of December 31, 2010, we had a
forward contract to purchase 65 million Canadian dollars
that matured on January 25, 2011. Based on our open forward
contract position, a $0.01 change in the Canadian dollar to
U.S. dollar exchange rate would change operating income by
less than $1 million.
55
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ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Tesoro Corporation
We have audited the accompanying consolidated balance sheets of
Tesoro Corporation as of December 31, 2010 and 2009, and
the related consolidated statements of operations, comprehensive
income (loss) and stockholders equity, and cash flows for
each of the three years in the period ended December 31,
2010. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Tesoro Corporation at December 31,
2010 and 2009, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2010, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Tesoro Corporations internal control over financial
reporting as of December 31, 2010, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 1, 2011 expressed an
unqualified opinion thereon.
San Antonio, Texas
March 1, 2011
56
TESORO
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions except per share
|
|
|
|
|
|
|
amounts)
|
|
|
|
|
|
REVENUES(a)
|
|
$
|
20,583
|
|
|
$
|
16,872
|
|
|
$
|
28,416
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales(a)
|
|
|
18,251
|
|
|
|
14,739
|
|
|
|
25,546
|
|
Operating expenses
|
|
|
1,474
|
|
|
|
1,469
|
|
|
|
1,631
|
|
Selling, general and administrative expenses
|
|
|
242
|
|
|
|
221
|
|
|
|
325
|
|
Depreciation and amortization expense
|
|
|
422
|
|
|
|
426
|
|
|
|
401
|
|
Loss on asset disposals and impairments
|
|
|
54
|
|
|
|
74
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
140
|
|
|
|
(57
|
)
|
|
|
471
|
|
Interest and financing costs
|
|
|
(157
|
)
|
|
|
(130
|
)
|
|
|
(111
|
)
|
Interest income
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
Foreign currency exchange gain (loss)
|
|
|
2
|
|
|
|
(5
|
)
|
|
|
12
|
|
Other income (expense)
|
|
|
(13
|
)
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES
|
|
|
(25
|
)
|
|
|
(188
|
)
|
|
|
429
|
|
Income tax expense (benefit)
|
|
|
4
|
|
|
|
(48
|
)
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS)
|
|
$
|
(29
|
)
|
|
$
|
(140
|
)
|
|
$
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.21
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
2.03
|
|
Diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
2.00
|
|
WEIGHTED AVERAGE COMMON SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
140.6
|
|
|
|
138.2
|
|
|
|
136.8
|
|
Diluted
|
|
|
140.6
|
|
|
|
138.2
|
|
|
|
139.2
|
|
DIVIDENDS PER SHARE
|
|
$
|
0.00
|
|
|
$
|
0.35
|
|
|
$
|
0.40
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes excise taxes collected by our retail segment
|
|
$
|
330
|
|
|
$
|
283
|
|
|
$
|
278
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
57
TESORO
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in millions except per share amounts)
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
648
|
|
|
$
|
413
|
|
Receivables, less allowance for doubtful accounts
|
|
|
908
|
|
|
|
1,116
|
|
Inventories
|
|
|
1,257
|
|
|
|
622
|
|
Prepayments and other
|
|
|
115
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
2,928
|
|
|
|
2,223
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Refining
|
|
|
5,984
|
|
|
|
5,789
|
|
Retail
|
|
|
659
|
|
|
|
647
|
|
Corporate and other
|
|
|
204
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,847
|
|
|
|
6,649
|
|
Less accumulated depreciation and amortization
|
|
|
(1,677
|
)
|
|
|
(1,459
|
)
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
5,170
|
|
|
|
5,190
|
|
|
|
|
|
|
|
|
|
|
OTHER NONCURRENT ASSETS
|
|
|
|
|
|
|
|
|
Acquired intangibles, net
|
|
|
246
|
|
|
|
255
|
|
Other, net
|
|
|
388
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
Total Other Noncurrent Assets
|
|
|
634
|
|
|
|
657
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,732
|
|
|
$
|
8,070
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,852
|
|
|
$
|
1,441
|
|
Accrued liabilities
|
|
|
492
|
|
|
|
444
|
|
Current maturities of debt
|
|
|
152
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
2,496
|
|
|
|
1,889
|
|
|
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES
|
|
|
616
|
|
|
|
505
|
|
OTHER NONCURRENT LIABILITIES
|
|
|
562
|
|
|
|
752
|
|
DEBT
|
|
|
1,843
|
|
|
|
1,837
|
|
COMMITMENTS AND CONTINGENCIES (Note N)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.162/3;
authorized 200,000,000 shares; 149,105,570 shares
issued (147,295,424 in 2009)
|
|
|
25
|
|
|
|
24
|
|
Additional paid-in capital
|
|
|
970
|
|
|
|
947
|
|
Retained earnings
|
|
|
2,398
|
|
|
|
2,427
|
|
Treasury stock, 5,925,541 common shares (6,867,848 in 2009), at
cost
|
|
|
(128
|
)
|
|
|
(140
|
)
|
Accumulated other comprehensive loss
|
|
|
(50
|
)
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
3,215
|
|
|
|
3,087
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
8,732
|
|
|
$
|
8,070
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
58
TESORO
CORPORATION
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
Comprehensive
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Treasury Stock
|
|
|
Income
|
|
|
|
Income (Loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
(Loss)
|
|
|
|
(In millions)
|
|
|
AT DECEMBER 31, 2007
|
|
|
|
|
|
|
144.5
|
|
|
$
|
24
|
|
|
$
|
876
|
|
|
$
|
2,393
|
|
|
|
(7.5
|
)
|
|
$
|
(151
|
)
|
|
$
|
(90
|
)
|
Net earnings
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(5
|
)
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
0.3
|
|
|
|
9
|
|
|
|
|
|
Excess tax benefits from stock-based compensation arrangements
exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common stock grants and amortization
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other benefit liability adjustments (net of tax
benefit of $65)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2008
|
|
|
|
|
|
|
145.8
|
|
|
$
|
24
|
|
|
$
|
916
|
|
|
$
|
2,616
|
|
|
|
(7.4
|
)
|
|
$
|
(147
|
)
|
|
$
|
(191
|
)
|
Net loss
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(2
|
)
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
0.6
|
|
|
|
9
|
|
|
|
|
|
Restricted common stock grants and amortization
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other benefit liability adjustments (net of tax
expense of $13)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Loss
|
|
$
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2009
|
|
|
|
|
|
|
147.3
|
|
|
$
|
24
|
|
|
$
|
947
|
|
|
$
|
2,427
|
|
|
|
(6.9
|
)
|
|
$
|
(140
|
)
|
|
$
|
(171
|
)
|
Net loss
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(2
|
)
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
0.9
|
|
|
|
1
|
|
|
|
11
|
|
|
|
|
|
|
|
1.1
|
|
|
|
14
|
|
|
|
|
|
Excess tax benefits from stock-based compensation arrangements
exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common stock grants and amortization
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other benefit liability adjustments (net of tax
expense of $77)
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2010
|
|
|
|
|
|
|
149.1
|
|
|
$
|
25
|
|
|
$
|
970
|
|
|
$
|
2,398
|
|
|
|
(5.9
|
)
|
|
$
|
(128
|
)
|
|
$
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
TESORO
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(29
|
)
|
|
$
|
(140
|
)
|
|
$
|
278
|
|
Adjustments to reconcile net earnings (loss) to net cash from
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
422
|
|
|
|
426
|
|
|
|
401
|
|
Amortization of debt issuance costs and discounts
|
|
|
18
|
|
|
|
13
|
|
|
|
11
|
|
Loss on asset disposals and impairments
|
|
|
54
|
|
|
|
74
|
|
|
|
42
|
|
Stock-based compensation expense
|
|
|
58
|
|
|
|
46
|
|
|
|
14
|
|
Provision for bad debts
|
|
|
1
|
|
|
|
9
|
|
|
|
95
|
|
Deferred income taxes
|
|
|
9
|
|
|
|
95
|
|
|
|
89
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Other changes in non-current assets and liabilities
|
|
|
(136
|
)
|
|
|
(103
|
)
|
|
|
(64
|
)
|
Changes in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
208
|
|
|
|
(387
|
)
|
|
|
410
|
|
Inventories
|
|
|
(635
|
)
|
|
|
165
|
|
|
|
413
|
|
Prepayments and other
|
|
|
(34
|
)
|
|
|
17
|
|
|
|
28
|
|
Accounts payable and accrued liabilities
|
|
|
452
|
|
|
|
450
|
|
|
|
(998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
385
|
|
|
|
663
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(297
|
)
|
|
|
(437
|
)
|
|
|
(650
|
)
|
Proceeds from asset sales
|
|
|
2
|
|
|
|
1
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(295
|
)
|
|
|
(436
|
)
|
|
|
(610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt offerings, net of discount and issuance costs
|
|
|
|
|
|
|
282
|
|
|
|
|
|
Borrowings under revolving credit agreements
|
|
|
216
|
|
|
|
418
|
|
|
|
5,658
|
|
Repayments on revolving credit agreements
|
|
|
(66
|
)
|
|
|
(484
|
)
|
|
|
(5,712
|
)
|
Repayments of debt
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Dividend payments
|
|
|
|
|
|
|
(49
|
)
|
|
|
(55
|
)
|
Proceeds from stock options exercised
|
|
|
5
|
|
|
|
4
|
|
|
|
5
|
|
Repurchases of common stock
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
3
|
|
|
|
2
|
|
|
|
3
|
|
Financing costs and other
|
|
|
(8
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
145
|
|
|
|
166
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
235
|
|
|
|
393
|
|
|
|
(3
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
413
|
|
|
|
20
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
648
|
|
|
$
|
413
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURES
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of capitalized interest
|
|
$
|
115
|
|
|
$
|
95
|
|
|
$
|
84
|
|
Income taxes paid (refunded), net
|
|
$
|
(112
|
)
|
|
$
|
(18
|
)
|
|
$
|
45
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued
liabilities at end of period
|
|
$
|
23
|
|
|
$
|
34
|
|
|
$
|
70
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
TESORO
CORPORATION
|
|
NOTE A
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Description
and Nature of Business
As used in this report, the terms Tesoro,
we, us, or our may refer to
Tesoro Corporation, one or more of its consolidated subsidiaries
or all of them taken as a whole.
Tesoro Corporation was incorporated in Delaware in 1968. Based
in San Antonio, Texas, we are one of the largest
independent petroleum refiners and marketers in the United
States. Our subsidiaries, operating through two business
segments, primarily manufacture and sell transportation fuels.
Our refining operating segment (refining), which
operates seven refineries in the western United States, refines
crude oil and other feedstocks into transportation fuels, such
as gasoline, gasoline blendstocks, jet fuel and diesel fuel, as
well as other products, including heavy fuel oils, liquefied
petroleum gas, petroleum coke and asphalt. Our refineries have a
combined crude oil capacity of 665 thousand barrels per day
(Mbpd). This operating segment sells refined
products in wholesale and bulk markets to a wide variety of
customers within the operations area. Our retail operating
segment (retail) sells transportation fuels and
convenience products in 15 states through a network of 880
retail stations, primarily under the
Tesoro®,
Shell®,
USA
Gasolinetm,
and
Mirastar®
brands.
Our earnings, cash flows from operations and liquidity depend
upon many factors, including producing and selling refined
products at margins above fixed and variable expenses. The
prices of crude oil and refined products have fluctuated
substantially in our markets. Our operations are significantly
influenced by the timing of changes in crude oil costs and how
quickly refined product prices adjust to reflect these changes.
These price fluctuations depend on numerous factors beyond our
control, including the global supply and demand for crude oil
and refined products, which are subject to, among other things,
changes in the global economy and the level of foreign and
domestic production of crude oil and refined products,
geo-political conditions, availability of crude oil and refined
product imports, the infrastructure to transport crude oil and
refined products, weather conditions, earthquakes and other
natural disasters, seasonal variations, government regulations,
threatened or actual terrorist incidents or acts of war, and
local factors, including market conditions and the level of
operations of other suppliers in our markets. As a result of
these factors, margin fluctuations during any reporting period
can have a significant impact on our results of operations, cash
flows, liquidity and financial position.
Principles
of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Tesoro and its subsidiaries. All intercompany
accounts and transactions have been eliminated. Certain
investments are carried at cost. These investments are not
material, either individually or in the aggregate, to
Tesoros financial position, results of operations or cash
flows. We have evaluated subsequent events through the filing of
this
Form 10-K.
Any material subsequent events that occurred during this time
have been properly recognized or disclosed in our financial
statements.
Use of
Estimates
We prepare our consolidated financial statements in conformity
with accounting principles generally accepted in the United
States of America, 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 year. We review our
estimates on an ongoing basis, based on currently available
information. Changes in facts and circumstances may result in
revised estimates and actual results could differ from those
estimates.
Cash
and Cash Equivalents
Cash and cash equivalents include bank deposits and low-risk
short-term investments with original maturities of three months
or less at the time of purchase. Our cash investment policy
disallows investments with
sub-prime
market exposure. Cash equivalents are stated at cost, which
approximates market value.
61
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Receivables
Our receivables primarily consist of customer accounts
receivable, including proprietary credit card receivables.
Credit is extended based on an evaluation of the customers
financial condition and in certain circumstances, collateral,
such as letters of credit or guarantees, is required. Our
reserve for bad debts is based on factors including current
sales amounts, historical charge-offs and specific accounts
identified as high risk. Uncollectible accounts receivable are
charged against the allowance for doubtful accounts when
reasonable efforts to collect the amounts due have been
exhausted.
Financial
Instruments
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 estimate the fair value for
our debt primarily using quoted market prices.
Inventories
Inventories are stated at the lower of cost or market. We use
last-in,
first-out (LIFO) as the primary method to determine
the cost of crude oil held by our U.S. subsidiaries
(domestic crude oil) and refined product inventories
in our refining and retail segments. We determine the carrying
value of inventories of crude oil held by our foreign
subsidiaries (foreign subsidiary crude oil),
oxygenates and by-products using the
first-in,
first-out (FIFO) cost method. We value merchandise
along with materials and supplies at average cost.
We use commodity derivatives to manage price volatility
associated with our foreign subsidiary crude oil inventories. In
the fourth quarter of 2010, we began designating certain
commodity derivatives as fair value hedges for accounting
purposes. Subsequent to the designation of those fair value
hedging relationships, changes in fair value of the designated
hedged inventory have been recorded in inventory on our
consolidated balance sheet and have been recorded in cost of
sales in our statements of consolidated operations.
Property,
Plant and Equipment
We capitalize the cost of additions, major improvements and
modifications to property, plant and equipment. We compute
depreciation of property, plant and equipment using the
straight-line method, based on the estimated useful life of each
asset. We record property under capital leases at the lower of
the present value of minimum lease payments using our
incremental borrowing rate or the fair value of the leased
property at the date of lease inception. We depreciate leasehold
improvements and property acquired under capital leases over the
lesser of the lease term or the economic life of the asset.
Depreciation expense totaled $266 million,
$276 million and $253 million for 2010, 2009 and 2008,
respectively.
We capitalize interest as part of the cost of major projects
during the construction period. Capitalized interest totaled
$19 million, $25 million and $27 million during
2010, 2009 and 2008, respectively, and is recorded as a
reduction to interest and financing costs.
Asset
Retirement Obligations
An asset retirement obligation (ARO) is an estimated
liability for the cost to retire a tangible asset. We record
AROs at fair value in the period in which we have a legal
obligation to incur these costs and can make a reasonable
estimate of the fair value of the liability. When the liability
is initially recorded, we capitalize the cost by increasing the
book value of the related long-lived tangible asset. The
liability is accreted to its estimated settlement value and the
related capitalized cost is depreciated over the assets
useful life. We recognize a gain or loss at settlement for any
difference between the settlement amount and the recorded
liability. We estimate settlement dates by considering our past
practice, industry practice, managements intent and
estimated economic lives.
62
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We cannot currently estimate the fair value for certain AROs
primarily because we cannot estimate settlement dates (or range
of dates) associated with these assets. These AROs include:
|
|
|
|
|
hazardous materials disposal (such as petroleum manufacturing
by-products, chemical catalysts, and sealed insulation material
containing asbestos), site restoration, and removal or
dismantlement requirements associated with the closure of our
refining facilities, terminal facilities or pipelines, including
the demolition or removal of certain major processing units,
buildings, tanks, pipelines or other equipment; and
|
|
|
|
removal of underground storage tanks at our owned retail
stations at or near the time of closure.
|
We have not historically incurred significant AROs for hazardous
materials disposal or other removal costs associated with asset
retirements or replacements during scheduled maintenance
projects. We believe that the majority of our tangible assets
have indeterminate useful lives. This precludes development of
assumptions about the potential timing of settlement dates based
on the following:
|
|
|
|
|
there are no plans or expectations of plans to retire or dispose
of these assets;
|
|
|
|
we plan on extending the assets estimated economic lives
through scheduled maintenance projects at our refineries and
other normal repair and maintenance and by continuing to make
improvements based on technological advances;
|
|
|
|
we have rarely retired similar assets in the past; and
|
|
|
|
industry practice for similar assets has historically been to
extend the economic lives through regular repair and maintenance
and implementation of technological advances.
|
Environmental
Matters
We capitalize environmental expenditures that extend the life or
increase the capacity of facilities as well as expenditures that
prevent environmental contamination. We expense costs that
relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation.
We record liabilities when environmental assessments
and/or
remedial efforts are probable and can be reasonably estimated.
Cost estimates are based on the expected timing and the extent
of remedial actions required by governing agencies, experience
gained from similar sites for which environmental assessments or
remediation have been completed, and the amount of our
anticipated liability considering the proportional liability and
financial abilities of other responsible parties. Generally, the
timing of these accruals coincides with the completion of a
feasibility study or our commitment to a formal plan of action.
Estimated liabilities are not discounted to present value, and
environmental expenses are recorded primarily in operating
expenses.
Legal
Liabilities
In the ordinary course of business, we become party to lawsuits,
administrative proceedings, and governmental investigations.
These matters may involve large or unspecified damages or
penalties that may be sought from us and may require years to
resolve. We record a liability related to a loss contingency
attributable to such legal matters in accrued liabilities or
other liabilities depending on the classification as current or
non-current if we determine the loss to be both probable and
estimable. The liability is recorded for an amount that is
managements best estimate of the loss, or when a best
estimate cannot be made, the minimum loss amount of a range of
possible outcomes.
Goodwill
and Acquired Intangibles
Goodwill represents the amount the purchase price exceeds the
fair value of net assets acquired in a business combination. We
do not amortize goodwill or indefinite-lived intangible assets.
We are required, however, to review goodwill and
indefinite-lived intangible assets for impairment annually or
more frequently if events or changes in business circumstances
indicate the book value of the assets may not be recoverable,
and we record the impairment in loss on asset disposals and
impairments.
Acquired intangibles are recorded at fair value as of the date
acquired and consist primarily of air emissions credits,
customer agreements and contracts and the USA Gasoline trade
name. We amortize acquired intangibles with finite lives on a
straight-line basis over estimated useful lives of 2 to
31 years, and we include the amortization in depreciation
and amortization.
63
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Assets
We defer turnaround costs and the costs of certain catalysts
used in the refinery processing units that have a benefit period
that exceeds one year and amortize these costs on a
straight-line basis over the expected periods of benefit,
generally ranging from 2 to 10 years. Turnaround
expenditures are amortized over the period of time until the
next planned turnaround of the processing unit. Amortization for
these deferred costs, which is included in depreciation and
amortization expense, amounted to $138 million,
$129 million and $127 million in 2010, 2009 and 2008,
respectively.
We defer debt issuance costs related to our Credit Agreement and
senior notes and amortize the costs over the terms of each
instrument. We include the amortization in interest and
financing costs. We reassess the carrying value of debt issuance
costs when modifications are made to the related debt
instruments.
Impairment
of Long-Lived Assets
We review property, plant and equipment and other long-lived
assets, including acquired intangible assets with finite lives
for impairment whenever events or changes in business
circumstances indicate the net book values of the assets may not
be recoverable. Impairment is indicated when the undiscounted
cash flows estimated to be generated by those assets are less
than the assets net book value. If this occurs, an
impairment loss is recognized for the difference between the
fair value and net book value. Factors that indicate potential
impairment include: a significant decrease in the market value
of the asset, operating or cash flow losses associated with the
use of the asset, and a significant change in the assets
physical condition or use.
Revenue
Recognition
We recognize revenues upon delivery of goods or services to a
customer. For goods, this is generally the point at which title
is transferred, and when payment has either been received or
collection is reasonably assured. Revenues for services are
recorded when the services have been provided. We record certain
transactions in cost of sales on a net basis. These transactions
include nonmonetary crude oil and refined product exchange
transactions used to optimize our refinery supply, and sale and
purchase transactions entered into with the same counterparty
that are deemed to be in contemplation with one another. We
include transportation fees charged to customers in revenues,
and we include the related costs in cost of sales or operating
expenses.
Federal excise and state motor fuel taxes, which are remitted to
governmental agencies through our refining segment and collected
from customers in our retail segment, are included in both
revenues and cost of sales. These taxes, primarily related to
sales of gasoline and diesel fuel, totaled $330 million,
$283 million and $278 million in 2010, 2009 and 2008,
respectively.
Income
Taxes
We record deferred tax assets and liabilities for future income
tax consequences that are attributable to differences between
the financial statement carrying amounts of assets and
liabilities and their income tax bases. We base the measurement
of deferred tax assets and liabilities on enacted tax rates that
we expect will apply to taxable income in the year we expect to
settle or recover those temporary differences. We recognize the
effect on deferred tax assets and liabilities of any change in
income tax rates in the period that includes the enactment date.
We provide a valuation allowance for deferred tax assets if it
is more likely than not that those items will either expire
before we are able to realize their benefit or their future
deductibility is uncertain. We recognize the financial statement
effects of a tax position when it is more likely than not that
the position will be sustained upon examination. Tax positions
taken, or expected to be taken, that are not recognized are
recorded as liabilities.
Pension
and Other Postretirement Benefits
We recognize an asset for a plans overfunded status or a
liability for a plans underfunded status. A change in the
funded status of our defined benefit retirement plan is
recognized in other comprehensive income in the period the
change occurs.
64
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based
Compensation
Our stock-based compensation includes stock options, restricted
common stock, restricted stock units,
stock-appreciation
rights, performance unit awards and phantom stock options. We
estimate the fair value of certain stock-based awards using the
Black-Scholes option-pricing model or a Monte Carlo simulation.
The fair value of our restricted common stock awards on the date
of grant is equal to the market price of our common stock. We
amortize the fair value of our stock options, restricted common
stock and restricted stock units using the straight-line method
over the vesting period. The fair values of our stock
appreciation rights, phantom stock options and performance unit
awards are estimated at the end of each reporting period and are
recorded as liabilities. Expenses related to stock-based
compensation are included in selling, general and administrative
expenses.
Derivative
Instruments and Hedging Activities
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 non-trading derivative instruments to manage price
risks associated with inventories above or below our target
levels. These derivative instruments typically include
exchange-traded futures and
over-the-counter
swaps and options, generally with durations of less than one
year. Our positions are monitored on a daily basis by our
trading controls group to ensure compliance with our risk
management policy.
When we acquire a derivative instrument, it is designated as a
mark-to-market
derivative or a fair value hedge derivative. Our derivative
instruments are matched against physical crude oil or finished
product barrels in our refining and marketing operations.
We
mark-to-market
our derivative instruments and recognize the changes in their
fair values, realized or unrealized, in either revenues or costs
of sales depending on the purpose for acquiring and holding the
derivatives. For instruments that are not designated as fair
value hedges, we do not record a change in the value of the
related underlying physical commodity. The gain or loss on
derivative instruments designated and qualifying as fair value
hedges, as well as the offsetting gain or loss on the hedged
item, are recognized in income in the same period. Fair value
hedges are only used for TPSA inventories.
All derivatives are recorded and carried at fair value on the
consolidated balance sheets in prepayments and other or accrued
liabilities. For our fair value hedges, the changes in fair
value of the designated hedged inventory have been recorded in
inventories. We net our asset and liability positions associated
with multiple derivative instruments that are executed with the
same counterparty under master netting arrangements.
We apply hedge accounting when transactions meet specified
criteria for such treatment and may designate a derivative as a
fair value hedging instrument for accounting purposes to hedge
certain foreign subsidiary crude inventories and at the
inception of firm commitments to purchase inventories. The
hedged inventory is valued at current spot market prices whereas
the financial derivative is valued using forward commodity
prices. Changes in the difference between forward and spot
prices are recorded as unrealized gains and losses until the
commodity is sold and the related financial derivative is
settled. A hedge is regarded as highly effective and qualifies
for hedge accounting if, at its inception and throughout the
term of the contract, it is expected that changes in the fair
value of the hedged item are almost fully offset by the changes
in the fair value of the hedging instrument.
We discontinue hedge accounting when it is determined that the
derivative has ceased to be highly effective as a hedge; when
the derivative expires, or is sold, terminated, or exercised;
when the hedged item is sold; or when a forecasted transaction
is no longer deemed probable. Any ineffectiveness is recorded in
the statements of consolidated operations during the period in
which the derivative instrument is deemed ineffective.
Foreign
Currency Exchange
The functional currency for our foreign subsidiaries is the
U.S. dollar. The translation of our foreign operations into
U.S. dollars is computed for balance sheet accounts using
exchange rates in effect as of the balance sheet date and for
revenue and expense accounts using weighted-average exchange
rates during the year. We are exposed to exchange rate
fluctuations on transactions related to our Canadian operations.
We use foreign currency exchange
65
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and purchase contracts to manage our exposure to these exchange
rate fluctuations. Amounts are recorded in foreign currency
exchange gain (loss).
New
Accounting Standards and Disclosures
Fair
Value Measurements
We adopted a standard on January 1, 2009, that expanded the
framework and disclosures for measuring the fair value of
nonfinancial assets and nonfinancial liabilities, including:
|
|
|
|
|
acquired or impaired goodwill;
|
|
|
|
the initial recognition of asset retirement obligations; and
|
|
|
|
impaired property, plant and equipment.
|
The adoption of this standard did not impact our financial
position or results of operations.
In January 2010, the FASB amended the standard covering fair
value measurements to require additional disclosures, including
transfers in and out of levels 1 and 2 fair value
measurements, the gross basis presentation of the reconciliation
of level 3 fair value measurements, and fair value
measurement disclosure at the class level, as opposed to
category level, as previously required. This guidance is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for disclosures related to
level 3 fair value measurements, which are effective for
fiscal years beginning after December 15, 2010 (including
interim periods). The adoption of the amendment did not impact
our financial position or results of operations.
Variable
Interest Entities
The FASB issued a standard in June 2009 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(s) give it a controlling
financial interest in a variable interest entity. This standard
became effective January 1, 2010, and did not impact our
financial position or results of operations.
|
|
NOTE B
|
EARNINGS
(LOSS) PER SHARE
|
We compute basic earnings (loss) per share by dividing net
earnings (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share
include the effects of potentially dilutive shares, principally
consisting of common stock options and unvested restricted
common stock outstanding during the period.
66
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Share and per share calculations are presented below (in
millions except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(29
|
)
|
|
$
|
(140
|
)
|
|
$
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
140.6
|
|
|
|
138.2
|
|
|
|
136.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share
|
|
$
|
(0.21
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(29
|
)
|
|
$
|
(140
|
)
|
|
$
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
140.6
|
|
|
|
138.2
|
|
|
|
136.8
|
|
Common stock equivalents
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Diluted Shares
|
|
|
140.6
|
|
|
|
138.2
|
|
|
|
139.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share
|
|
$
|
(0.21
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents were excluded from the calculation of
diluted earnings (loss) per share, as their inclusion would have
been anti-dilutive, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Common stock equivalents(a)
|
|
|
1.4
|
|
|
|
1.5
|
|
|
|
|
|
Stock options(b)
|
|
|
5.6
|
|
|
|
4.8
|
|
|
|
3.3
|
|
|
|
|
(a) |
|
For the years ended December 31, 2010 and 2009, common
stock equivalents, including stock options, were excluded as a
result of the net loss reported during the period. |
|
(b) |
|
Common stock options presented above were excluded as the
exercise prices were greater than the average market price of
the common stock during each respective reporting period. |
Receivables at December 31, 2010 and 2009, consisted of the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Trade receivables
|
|
$
|
875
|
|
|
$
|
966
|
|
Tax receivables
|
|
|
20
|
|
|
|
151
|
|
Other receivables
|
|
|
21
|
|
|
|
7
|
|
Allowance for doubtful accounts
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Total Receivables, Net
|
|
$
|
908
|
|
|
$
|
1,116
|
|
|
|
|
|
|
|
|
|
|
Concentrations of credit risk with respect to trade receivables
are influenced by the large number of customers comprising our
customer base and their dispersion across various industry
groups and geographic areas of operations. We perform ongoing
credit evaluations of our customers financial condition,
and in certain circumstances, require prepayments, letters of
credit or other collateral.
67
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of inventories at December 31, 2010 and 2009,
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Domestic crude oil and refined products
|
|
$
|
954
|
|
|
$
|
495
|
|
Foreign subsidiary crude oil
|
|
|
177
|
|
|
|
12
|
|
Oxygenates and by-products
|
|
|
30
|
|
|
|
22
|
|
Merchandise
|
|
|
14
|
|
|
|
13
|
|
Materials and supplies
|
|
|
82
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Total Inventories
|
|
$
|
1,257
|
|
|
$
|
622
|
|
|
|
|
|
|
|
|
|
|
Crude oil and refined products inventories valued primarily at
LIFO cost were less than replacement cost by approximately
$1.4 billion and $1.1 billion, at December 31,
2010 and 2009, respectively. During 2009, reductions in
inventory quantities resulted in liquidations of applicable LIFO
inventory quantities acquired at lower costs in prior years. The
2009 LIFO liquidation resulted in a decrease in cost of sales of
$69 million.
|
|
NOTE E
|
GOODWILL
AND ACQUIRED INTANGIBLES
|
Goodwill
Goodwill is not amortized but is tested for impairment at least
annually. We review the recorded value of goodwill for
impairment during the fourth quarter of each year, or sooner if
events or changes in circumstances indicate the carrying amount
may exceed fair value. Our annual evaluation of goodwill
impairment requires us to make significant estimates to
determine the fair value of our reporting units. Our estimates
may change from period to period because we must make
assumptions about future cash flows, profitability and other
matters. It is reasonably possible that future changes in our
estimates could significantly affect the carrying amount of
goodwill. Goodwill in our refining segment totaled
$31 million and $41 million at December 31, 2010
and 2009, respectively. In our retail segment, goodwill totaled
$5 million at both December 31, 2010 and 2009. The
changes in the carrying amount of goodwill during 2010 and 2009
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance as of beginning of year
|
|
$
|
46
|
|
|
$
|
89
|
|
Goodwill write-off
|
|
|
(10
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
36
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
The fair value of our refining and retail reporting units are
estimated based on an income approach using the present value of
expected future cash flows for each reporting unit. We also use
a market approach to value our refining reporting units using
recent refinery sales transactions and quoted common stock
prices of comparable companies within the refining industry.
The carrying value of our Hawaii refinery reporting unit
increased during the year as a result of increased turnaround
spending and a reduction in certain pension and other
postretirement obligations. However, the fair value of our
Hawaii reporting unit decreased below its carrying value as a
result of lower projected future cash flows driven primarily by
a revised margin outlook for this refinery. We determined that
all of the goodwill related to the Hawaii refinery reporting
unit was impaired and wrote-off $10 million during the
fourth quarter of 2010. Decreased forecasted cash flows and
quoted market prices reduced our estimated fair value below
carrying value for our Washington refinery reporting unit
resulting in a goodwill write-off of $43 million in 2009.
The impairment charges are included in loss on asset disposals
and impairments. We continue to carry goodwill for reporting
units where estimated fair values exceed carrying values.
68
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acquired
Intangibles
The following table provides the historical cost and accumulated
amortization for each major class of acquired intangible assets,
excluding goodwill (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Historical
|
|
|
Accumulated
|
|
|
Book
|
|
|
Historical
|
|
|
Accumulated
|
|
|
Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Air emissions credits
|
|
$
|
229
|
|
|
$
|
51
|
|
|
$
|
178
|
|
|
$
|
220
|
|
|
$
|
43
|
|
|
$
|
177
|
|
Customer agreements and contracts(a)
|
|
|
34
|
|
|
|
18
|
|
|
|
16
|
|
|
|
50
|
|
|
|
31
|
|
|
|
19
|
|
USA Gasoline tradename
|
|
|
35
|
|
|
|
6
|
|
|
|
29
|
|
|
|
35
|
|
|
|
5
|
|
|
|
30
|
|
Refinery permits and plans
|
|
|
17
|
|
|
|
6
|
|
|
|
11
|
|
|
|
17
|
|
|
|
5
|
|
|
|
12
|
|
Favorable leases
|
|
|
12
|
|
|
|
3
|
|
|
|
9
|
|
|
|
12
|
|
|
|
2
|
|
|
|
10
|
|
Other intangibles
|
|
|
27
|
|
|
|
24
|
|
|
|
3
|
|
|
|
26
|
|
|
|
19
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
354
|
|
|
$
|
108
|
|
|
$
|
246
|
|
|
$
|
360
|
|
|
$
|
105
|
|
|
$
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
$16 million decrease to the historical cost and related
accumulated amortization relates to the retirement of expired
customer contracts that were fully amortized. |
All of our acquired intangible assets are subject to
amortization with the exception of approximately $1 million
of indefinite-lived intangible assets included in other
intangibles. Amortization expense of acquired intangible assets
amounted to $18 million, $23 million and
$21 million for the years ended December 31, 2010,
2009 and 2008, respectively. Our estimated amortization expense
for each of the following five years is: 2011
$19 million; 2012 $13 million;
2013 $12 million; 2014
$12 million; and 2015 $12 million.
|
|
NOTE F
|
OTHER
NONCURRENT ASSETS
|
Other noncurrent assets at December 31, 2010 and 2009,
consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred maintenance costs, including refinery turnarounds, net
of amortization
|
|
$
|
301
|
|
|
$
|
299
|
|
Goodwill
|
|
|
36
|
|
|
|
46
|
|
Debt issuance costs, net of amortization
|
|
|
25
|
|
|
|
25
|
|
Other assets, net of amortization
|
|
|
26
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Total Other Noncurrent Assets
|
|
$
|
388
|
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE G
|
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 quoted prices for similar assets and
liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability; 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.
|
When available, we measure fair value using level 1 inputs
because they provide the most reliable evidence of fair value.
Derivative instruments are our only financial assets and
financial liabilities measured at fair value on a recurring
basis. See Note H for further information on the
Companys derivative instruments.
69
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our derivative instruments consist primarily of options,
exchange-traded futures (Futures Contracts),
over-the-counter
swaps and options (OTC Swap Contracts and OTC
Option Contracts, respectively), and physical commodity
forward purchase and sale contracts (Forward
Contracts). Options are valued using quoted prices from
the exchanges and are categorized in level 1 of the fair
value hierarchy. Futures Contracts are valued based on quoted
prices from exchanges and are categorized in level 1 or
level 2 of the fair value hierarchy based on the liquidity
of the instrument. OTC Swap Contracts, OTC Option Contracts and
Forward Contracts are valued using third-party broker quotes,
industry pricing services and exchange-traded price curves, with
consideration of counterparty credit risk. These quotes are
corroborated with market data and are categorized in
level 2 of the fair value hierarchy.
We did not have any derivative assets or liabilities classified
as level 3 at December 31, 2010 or 2009. The fair
values of our derivative assets and liabilities by level within
the fair value hierarchy were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
6
|
|
Commodity OTC Swap Contracts
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Commodity Forward Contracts
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
|
|
17
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
17
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets (Liabilities)
|
|
$
|
(9
|
)
|
|
$
|
(17
|
)
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
|
|
4
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
4
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets (Liabilities)
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain of our derivative contracts, under master netting
arrangements, include both asset and liability positions. We
have elected to offset both the fair value amounts and any
related cash collateral amounts recognized for multiple
derivative instruments executed with the same counterparty when
there is a legally enforceable right and an intention to settle
net or simultaneously.
The physical inventory associated with the futures contracts
included in the above table and selected for fair value hedge
accounting treatment is adjusted to fair value at the end of the
period. At December 31, 2010, the fair value adjustment
related to the physical inventory was $4 million.
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. The fair value of our debt was
estimated primarily using quoted market prices. Both the
carrying value and fair value of our debt at December 31,
2010 and 2009, were approximately $2.0 billion and
$1.8 billion, respectively.
70
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of certain impaired nonfinancial assets,
including acquired or impaired goodwill, initial recognition of
asset retirement obligations, indefinite-lived intangible assets
and impaired property, plant and equipment, measured on a
non-recurring basis as of and for the year ended
December 31, 2010, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Losses
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining equipment
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4
|
|
|
$
|
20
|
|
Goodwill
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
36
|
|
|
$
|
10
|
|
Due to the impact of the continuing weak economy on the refining
industry, we continue to evaluate the recoverability of certain
capital projects currently in progress. This evaluation resulted
in an impairment charge of $20 million related to the
deferral of a capital project at our Los Angeles refinery,
recognized during the three months ended March 31, 2010.
The impairment charge is included in loss on asset disposals and
impairments. Equipment specifically manufactured and uniquely
configured for this project was written down from a carrying
value of $20 million to a fair value of $4 million for
a loss of $16 million. The estimated recovery amounts were
based on direct equipment cost recoverable if sold to an end
user, in the principal or most advantageous market for the
asset, in an orderly transaction. An additional $4 million
loss was related to certain engineering costs that were
determined to not be recoverable. The amounts presented
represent our estimates on unobservable inputs that require
significant judgment, for which there is little or no market
data.
As part of our annual goodwill impairment test, we reviewed the
recorded value of goodwill for impairment during the fourth
quarter. The write-off is included in loss on asset disposals
and impairments. See information about the valuation techniques
used to develop fair value in Note E. There were no
material new asset retirement obligations or indefinite lived
intangible assets that were measured at fair value during 2010.
|
|
NOTE H
|
DERIVATIVE
INSTRUMENTS
|
The timing, direction and overall change in refined product
prices versus crude oil prices impacts profit margins and has a
significant impact on our earnings and cash flows. To manage
these commodity risks, we periodically use non-trading
derivative instruments to primarily manage exposure to commodity
price risks associated with the purchase or sale of physical
delivery of feedstocks, products and energy supplies to or from
the Companys refineries, terminals, retail operations and
customers in our normal market areas. We may also use
non-trading derivative instruments to manage price risks
associated with inventories above or below our target levels. To
achieve our objectives, we may use derivative instruments such
as Listed Options, Futures Contracts, OTC Swap Contracts, OTC
Option Contracts, and Forward Contracts, all generally with
maturity dates of less than one year. We believe that there is
minimal credit risk with respect to our counterparties.
We may use our excess storage capacity in Panama to take
advantage of contango markets when the price of crude oil is
higher in the future than the current spot price. We use
commodity derivatives to hedge crude oil held in connection with
these arbitrage opportunities.
Option contracts provide the right, but not the obligation to
buy or sell the commodity at a specified price in the future.
Futures Contracts include a requirement to buy or sell the
commodity at a fixed price in the future. OTC Swap Contracts,
OTC Option Contracts and Forward Contracts require cash
settlement for the commodity based on the difference between a
fixed or floating price and the market price on the settlement
date. We also have certain contracts that require cash
collateral if our liability position exceeds specified
thresholds. At December 31, 2010 we did not have any cash
collateral outstanding.
The following table presents the fair value (in millions) and
balance sheet classification of our derivative instruments as of
December 31, 2010, and December 31, 2009. 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 recognized fair value amounts for multiple
derivative instruments executed with the same counterparty in
our financial statements. As a result, the asset and liability
71
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amounts below will not agree with the amounts presented in our
consolidated balance sheet, nor will they agree with the fair
value information presented in Note G.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets included in
|
|
|
Derivative Liabilities included in
|
|
|
|
Prepayments and other
|
|
|
Accrued liabilities
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Derivatives Not Designated as Fair Value Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Future Contracts
|
|
$
|
88
|
|
|
$
|
68
|
|
|
$
|
(96
|
)
|
|
$
|
(66
|
)
|
Commodity OTC Swap Contracts
|
|
|
3
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Commodity Forward Contracts
|
|
|
2
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivative Instruments
|
|
$
|
93
|
|
|
$
|
68
|
|
|
$
|
(99
|
)
|
|
$
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets included in
|
|
|
Derivative Liabilities included in
|
|
|
|
Prepayments and other
|
|
|
Accrued liabilities
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Derivatives Designated as Fair Value Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Future Contracts
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivative Instruments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) for our non-hedging derivative instruments for
the years ended December 31, 2010, 2009 and 2008 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Derivatives Not Designated as Hedging Instruments(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Future Contracts
|
|
$
|
(36
|
)
|
|
$
|
(55
|
)
|
|
$
|
(121
|
)
|
Commodity OTC Swap Contracts
|
|
|
9
|
|
|
|
(13
|
)
|
|
|
11
|
|
Commodity Forward Contracts
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Commodity OTC Option Contracts
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Hedging Derivative Instruments
|
|
$
|
(26
|
)
|
|
$
|
(68
|
)
|
|
$
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Derivative gains (losses) are recognized in either revenues or
cost of sales depending on the purpose for acquiring and holding
the derivative. All derivative gains (losses) in 2009 and 2008
were recorded in cost of sales. Derivative losses recognized
during 2010 in revenues and cost of sales were $17 million
and $9 million, respectively. |
Gains (losses) on our fair value hedging derivative instruments
during the year ended 2010 were as follows (in millions). We did
not enter into any fair value hedging derivative instruments
during the year ended 2009 or 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
|
|
|
|
|
|
|
|
|
|
Recognized in
|
|
|
|
Amount of Loss
|
|
|
Amount of Gain
|
|
|
Income on
|
|
|
|
Recognized in
|
|
|
Recognized in
|
|
|
Ineffective Portion
|
|
|
|
Income on
|
|
|
Income on Hedged
|
|
|
of Derivative
|
|
|
|
Derivatives(b)
|
|
|
Item(b)
|
|
|
(b)(c)
|
|
|
Derivatives Designated as Fair Value Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity Futures Contracts
|
|
$
|
(3
|
)
|
|
$
|
4
|
|
|
$
|
1
|
|
|
|
|
(b) |
|
Gains (losses) recognized in income on derivatives and hedged
items are included in cost of sales in the statements of
consolidated operations. |
|
(c) |
|
For fair value hedges, no component of the derivative
instruments gains or losses was excluded from the
assessment of hedge effectiveness. No amounts were recognized in
income for hedged firm commitments that no longer qualify as
fair value hedges. |
72
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Open
Short Positions
All of our open positions are scheduled to mature within the
next twelve months. The information below presents the net
volume of outstanding contracts by type of instrument and year
of maturity as of December 31, 2010 (volumes in thousands
of barrels):
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges
|
|
Mark-to-Market Derivatives
|
Derivative Instrument and
|
|
Contract
|
|
Derivative Instrument and
|
|
Contract
|
Year of Maturity
|
|
Volumes
|
|
Year of Maturity
|
|
Volumes
|
|
|
|
|
Swaps
|
|
|
|
|
|
Swaps
|
|
|
|
|
2011
|
|
|
|
|
|
2011
|
|
|
(1,050
|
)
|
Futures
|
|
|
|
|
|
Futures
|
|
|
|
|
2011
|
|
|
(924
|
)
|
|
2011
|
|
|
(3,053
|
)
|
Forwards
|
|
|
|
|
|
Forwards
|
|
|
|
|
2011
|
|
|
|
|
|
2011
|
|
|
(280
|
)
|
Options
|
|
|
|
|
|
Options
|
|
|
|
|
2011
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
NOTE I
|
ACCRUED
LIABILITIES
|
Our current accrued liabilities and other noncurrent liabilities
at December 31, 2010 and 2009 included (in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Current Accrued Liabilities:
|
|
|
|
|
|
|
|
|
Taxes other than income taxes, primarily excise taxes
|
|
$
|
182
|
|
|
$
|
153
|
|
Employee costs
|
|
|
154
|
|
|
|
72
|
|
Environmental liabilities
|
|
|
23
|
|
|
|
50
|
|
Liability for unrecognized tax benefits, including interest and
penalties
|
|
|
2
|
|
|
|
28
|
|
Deferred income tax liability
|
|
|
|
|
|
|
15
|
|
Interest
|
|
|
16
|
|
|
|
16
|
|
Pension and other postretirement benefits
|
|
|
16
|
|
|
|
15
|
|
Other
|
|
|
99
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
Total Current Accrued Liabilities
|
|
$
|
492
|
|
|
$
|
444
|
|
|
|
|
|
|
|
|
|
|
Other Noncurrent Liabilities:
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefits
|
|
$
|
350
|
|
|
$
|
590
|
|
Environmental liabilities
|
|
|
85
|
|
|
|
56
|
|
Liability for unrecognized tax benefits, including interest and
penalties
|
|
|
31
|
|
|
|
29
|
|
Asset retirement obligations
|
|
|
23
|
|
|
|
28
|
|
Other
|
|
|
73
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
Total Other Noncurrent Liabilities
|
|
$
|
562
|
|
|
$
|
752
|
|
|
|
|
|
|
|
|
|
|
73
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2010 and 2009, debt consisted of (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Tesoro Corporation Revolving Credit Facility
|
|
$
|
|
|
|
$
|
|
|
TPSA Revolving Credit Facility
|
|
|
150
|
|
|
|
|
|
93/4% Senior
Notes Due 2019 (net of unamortized discount of $10 in 2010 and
$11 in 2009)
|
|
|
290
|
|
|
|
289
|
|
61/2% Senior
Notes Due 2017
|
|
|
500
|
|
|
|
500
|
|
65/8% Senior
Notes Due 2015
|
|
|
450
|
|
|
|
450
|
|
61/4% Senior
Notes Due 2012
|
|
|
450
|
|
|
|
450
|
|
Junior subordinated notes due 2012 (net of unamortized discount
of $16 in 2010 and $25 in 2009)
|
|
|
134
|
|
|
|
125
|
|
Capital lease obligations and other
|
|
|
21
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
|
1,995
|
|
|
|
1,841
|
|
Less current maturities
|
|
|
152
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Debt, less current maturities
|
|
$
|
1,843
|
|
|
$
|
1,837
|
|
|
|
|
|
|
|
|
|
|
The aggregate maturities of Tesoros debt for each of the
five years following December 31, 2010 were:
2011 $152 million; 2012
$602 million; 2013 $2 million;
2014 $2 million; and 2015
$452 million.
See Note O for information related to limits imposed by our
debt agreements on restricted payments (as defined in our debt
agreements) which include cash dividends, stock repurchases or
voluntary prepayments of subordinated debt.
Tesoro
Corporation Revolving Credit Facility (Revolving Credit
Facility)
We amended our Revolving Credit Facility in February 2010.
Modifications included: lowering the minimum required tangible
net worth, the purchase or sale of certain assets is no longer
subject to the fixed charge coverage ratio, the covenant
permitting additional unsecured indebtedness increased the
allowable amount of unsecured indebtedness, letters of credit
allowed under separate letter of credit agreements are no longer
subject to a cap, the applicable margin was adjusted and the
annual rate of commitment fees for the unused portion of the
Revolving Credit Facility was lowered.
Our Revolving Credit Facility and senior notes impose various
restrictions and covenants that could potentially limit our
ability to respond to market conditions, raise additional debt
or equity capital, pay cash dividends, or repurchase stock. The
indentures for our senior notes contain covenants and
restrictions which are customary for notes of this nature. These
covenants and restrictions limit, among other things, our
ability to:
|
|
|
|
|
pay dividends and make other distributions with respect to our
capital stock and purchase, redeem or retire our capital stock;
|
|
|
|
incur additional indebtedness and issue preferred stock;
|
|
|
|
sell assets unless the proceeds from those sales are used to
repay debt or are reinvested in our business;
|
|
|
|
incur liens on assets to secure certain debt;
|
|
|
|
engage in certain business activities;
|
|
|
|
make certain payments and distributions from our subsidiaries;
|
|
|
|
engage in certain mergers or consolidations and transfers of
assets; and
|
|
|
|
enter into transactions with affiliates.
|
74
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Borrowing availability under the Revolving Credit Facility is
based on a minimum fixed charge coverage ratio. We have a
default covenant, which requires us to maintain specified levels
of tangible net worth. We were in compliance with the tangible
net worth requirement for the year ended December 31, 2010.
The Revolving Credit Facility is guaranteed by substantially all
of Tesoros active domestic subsidiaries and allows up to
$100 million of restricted payments during any four-quarter
period subject to credit availability exceeding 20% of the
borrowing base.
At December 31, 2010, our Revolving Credit Facility
provided for borrowings (including letters of credit) up to the
lesser of the amount of a periodically adjusted borrowing base
of approximately $2.2 billion (based upon an Alaska North
Slope crude oil price of $84 per barrel), consisting of
Tesoros eligible cash and cash equivalents, receivables
and petroleum inventories, net of the standard reserve as
defined, or the Revolving Credit Facilitys total capacity
of $1.86 billion. The total capacity can be further
increased from $1.86 billion up to $2.0 billion. As of
December 31, 2010, we had no borrowings and
$755 million in letters of credit outstanding under the
Revolving Credit Facility, resulting in total unused credit
availability of approximately $1.1 billion or 59% of the
eligible borrowing base.
Borrowings under the Revolving Credit Facility bear interest at
either a base rate (3.25% at December 31, 2010), or a
Eurodollar rate (0.26% at December 31, 2010) plus an
applicable margin. The applicable margin at December 31,
2010, was 2.25% in the case of the Eurodollar rate, but varies
based upon our Revolving Credit Facilitys credit
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 (2.25% at
December 31, 2010). We also incur commitment fees for the
unused portion of the Revolving Credit Facility at an annual
rate of 0.50% as of December 31, 2010. Our Revolving Credit
Facility expires in May 2012.
Letter
of Credit Agreements
The Revolving Credit Facility allows us to obtain letters of
credit under separate letter of credit agreements for foreign
crude oil purchases. At December 31, 2010, we had three
separate letter of credit agreements with a total capacity of
$550 million, of which $324 million was outstanding.
Letters of credit outstanding under these agreements incur fees
and are secured by the petroleum inventories for which they are
issued. The letter of credit agreements may be terminated by
either party, at any time.
TPSA
Revolving Credit Facility
On October 18, 2010, TPSA, a directly and wholly owned
subsidiary of Tesoro, entered into a
364-day
uncommitted, secured revolving credit agreement. TPSA is an
excluded and unrestricted subsidiary from Tesoros Fourth
Amended and Restated Credit Agreement and outstanding
indentures. The TPSA Revolving Credit Facility is non-recourse
to Tesoro and is guaranteed by TPSAs assets. The TPSA
Revolving Credit Facility includes two uncommitted facilities,
which provide for revolving borrowings (Revolving
Borrowings), swing line loans and daylight overdraft loans
(TPSA Loans) and letters of credit. At closing, the
combined facility maximum was $350 million consisting of
$245 million under the first facility and $105 million
under the second facility. Our total capacity under the TPSA
facilities can be further increased up to $700 million
provided the facilities maximum amounts do not exceed
$550 million and $350 million, respectively. At
December 31, 2010, we had $150 million in borrowings
outstanding under this agreement.
Revolving Borrowings bear interest at a Eurodollar rate plus an
applicable margin (2.75% as of December 31, 2010), or an
alternative base rate (3.25% as of December 31,
2010) plus an applicable margin (1.75% as of
December 31, 2010). TPSA Loans bear interest at the
alternative base rate plus the applicable margin plus 0.50% per
annum.
At December 31, 2010, our TPSA Revolving Credit Facility
provided for borrowings (including letters of credit) up to the
lesser of the amount of a periodically adjusted borrowing base
consisting of TPSA eligible receivables and petroleum
inventories, net of reserves or the agreements capacity
based on the new worth of TPSA. As of December 31, 2010
TPSAs net worth limited the facility to a maximum capacity
of $350 million.
75
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The TPSA Revolving Credit Facility contains certain default
covenants and conditions relative to TPSAs financial
results that, among other things, limit TPSAs ability to
incur indebtedness or carry inventory levels above certain
thresholds. TPSA is also required to maintain specified levels
of adjusted tangible net worth (as defined) and adjusted net
working capital (as defined). We were in compliance with all of
the TPSA Revolving Credit Facilitys covenants and
conditions as of December 31, 2010.
93/4% Senior
Notes Due 2019
In June 2009, we issued $300 million aggregate principal
amount of
93/4% senior
notes due June 2019 for general corporate purposes. The notes
were issued at 96.172% of face value 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 109.75% of
face value 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
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.
61/2% Senior
Notes Due 2017
In May 2007, we issued $500 million aggregate principal
amount of
61/2% senior
notes due June 2017. The notes have a ten-year maturity with no
sinking fund requirements and are subject to optional redemption
by Tesoro beginning June 2012 at premiums of 3.25% through May
2013; 2.17% from June 2013 through May 2014; 1.08% from June
2014 through May 2015; and at par thereafter. We had the right
to redeem up to 35% of the aggregate principal amount at a
redemption price of 106.5% with proceeds from certain equity
issuances through June 1, 2010, but did not exercise this
right. 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 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 active
domestic subsidiaries.
65/8% Senior
Notes Due 2015
In November 2005, we issued $450 million aggregate
principal amount of
65/8% senior
notes due November 2015. The notes have a ten-year maturity with
no sinking fund requirements and are subject to optional
redemption by Tesoro beginning November 2010 at premiums of 3.3%
through October 2011; 2.2% from November 2011 to October 2012;
1.1% from November 2012 to October 2013; and at par thereafter.
The indenture for the notes contains covenants and restrictions
that are customary for notes of this nature and are identical to
the covenants in the indenture for Tesoros
61/4% senior
notes due 2012. Substantially all of these covenants will
terminate before the notes mature if one of two specified
ratings agencies 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 Tesoros active domestic subsidiaries.
61/4% Senior
Notes Due 2012
In November 2005, we issued $450 million aggregate
principal amount of
61/4% senior
notes due November 2012. The notes have a seven-year maturity
with no sinking fund requirements and are not callable. The
indenture for the notes contains covenants and restrictions that
are customary for notes of this nature and are identical to the
covenants in the indenture for Tesoros
65/8% senior
notes due 2015. Substantially all of these covenants will
terminate before the notes mature if one of two specified
ratings agencies assigns the notes an investment grade
76
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Tesoros active domestic subsidiaries.
Junior
Subordinated Notes Due 2012
In May 2002, we issued junior subordinated notes. The notes
consist of: (i) a $100 million junior subordinated
note, due July 2012, which carries a 7.5% interest rate (through
May 2007 the note was non-interest bearing), and (ii) a
$50 million junior subordinated note, due July 2012, which
incurs interest at 7.5%. We recorded these two notes at a
combined present value of $61 million, discounted at rates
of 15.625% and 14.375%, respectively. We are amortizing the
discount over the term of the notes.
Capital
Lease Obligations
Our capital lease obligations relate primarily to the lease of
30 retail stations with initial terms of 17 years, with
four 5-year
renewal options. At December 31, 2010 and 2009, the total
cost of assets under capital leases was $39 million and
$38 million, respectively, with accumulated amortization of
$25 million and $24 million for December 31, 2010
and 2009, respectively. We include amortization of the cost of
assets under capital leases in depreciation and amortization
expense. Future minimum annual lease payments, including
interest, as of December 31, 2010 for capital leases were
(in millions):
|
|
|
|
|
2011
|
|
$
|
4
|
|
2012
|
|
|
4
|
|
2013
|
|
|
4
|
|
2014
|
|
|
4
|
|
2015
|
|
|
3
|
|
Thereafter
|
|
|
14
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
33
|
|
Less amount representing interest
|
|
|
12
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
21
|
|
|
|
|
|
|
|
|
NOTE K
|
ASSET
RETIREMENT OBLIGATIONS
|
We have recorded asset retirement obligations for requirements
imposed by certain regulations pertaining to hazardous materials
disposal and other cleanup obligations. Our asset retirement
obligations primarily include obligations to clean or dispose of
hazardous waste related to replacing or disposing of equipment
or piping at our refineries. We have also recorded obligations
related to underground storage tank removal at our leased retail
stations. Changes in asset retirement obligations for the years
ended December 31, 2010 and 2009 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at beginning of year
|
|
$
|
34
|
|
|
$
|
35
|
|
Additions to accrual
|
|
|
2
|
|
|
|
5
|
|
Accretion expense
|
|
|
2
|
|
|
|
1
|
|
Settlements
|
|
|
(7
|
)
|
|
|
(10
|
)
|
Changes in timing and amount of estimated cash flows
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
30
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
77
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of income tax expense (benefit) from continuing
operations were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1
|
)
|
|
$
|
(148
|
)
|
|
$
|
52
|
|
State
|
|
|
(4
|
)
|
|
|
5
|
|
|
|
10
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
4
|
|
|
|
107
|
|
|
|
79
|
|
State
|
|
|
5
|
|
|
|
(12
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
4
|
|
|
$
|
(48
|
)
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We record deferred tax assets and liabilities for future income
tax consequences that are attributable to differences between
the financial statement carrying amounts of assets and
liabilities and their income tax bases. Temporary differences
and the resulting deferred tax assets and liabilities at
December 31, 2010 and 2009 were (in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Tax credit carryforwards
|
|
$
|
85
|
|
|
$
|
60
|
|
Net operating losses
|
|
|
149
|
|
|
|
6
|
|
Accrued pension and other postretirement benefits
|
|
|
139
|
|
|
|
238
|
|
Asset retirement obligations
|
|
|
12
|
|
|
|
13
|
|
Accrued environmental remediation liabilities
|
|
|
40
|
|
|
|
40
|
|
Other accrued liabilities
|
|
|
63
|
|
|
|
47
|
|
Stock-based compensation
|
|
|
58
|
|
|
|
41
|
|
Other
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
558
|
|
|
$
|
457
|
|
Less: valuation allowance
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
549
|
|
|
$
|
448
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accelerated depreciation and property related items
|
|
$
|
941
|
|
|
$
|
735
|
|
Deferred maintenance costs, including refinery turnarounds
|
|
|
93
|
|
|
|
88
|
|
Amortization of intangible assets
|
|
|
37
|
|
|
|
40
|
|
Inventory
|
|
|
67
|
|
|
|
71
|
|
Other
|
|
|
16
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
1,154
|
|
|
$
|
966
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, net
|
|
$
|
605
|
|
|
$
|
518
|
|
|
|
|
|
|
|
|
|
|
We have recorded a valuation allowance as of December 31,
2010 and 2009, due to uncertainties related to our ability to
use certain state tax credit carryforwards. The valuation
allowance reduces the benefit of those carryforwards to the
amount that will more likely than not be realized, and is based
on anticipated taxable income in the various jurisdictions. The
realization of our other deferred tax assets depends on
Tesoros ability to generate future taxable income.
Although realization is not assured, we believe it is more
likely than not that we will realize those deferred tax assets.
78
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The net deferred income tax liability is classified in the
consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Current Assets
|
|
$
|
11
|
|
|
$
|
2
|
|
Current Liabilities
|
|
$
|
|
|
|
$
|
15
|
|
Noncurrent Liabilities
|
|
$
|
616
|
|
|
$
|
505
|
|
The reconciliation of income tax expense (benefit) at the
U.S. statutory rate to the income tax expense (benefit) is
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income tax expense (benefit) at U.S. federal statutory rate
|
|
$
|
(9
|
)
|
|
$
|
(66
|
)
|
|
$
|
150
|
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax effect
|
|
|
|
|
|
|
(7
|
)
|
|
|
13
|
|
Manufacturing activities deduction
|
|
|
|
|
|
|
4
|
|
|
|
(7
|
)
|
Goodwill write-off
|
|
|
1
|
|
|
|
17
|
|
|
|
|
|
Income tax settlements
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Medicare Part D law change
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
5
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
4
|
|
|
$
|
(48
|
)
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, we have approximately
$64 million of federal and $17 million of state
alternative minimum tax credit carryforwards which never expire.
Additionally, we have approximately $12 million of other
state income tax credit carryforwards, most of which expire in
2026. We have approximately $380 million of federal regular
tax net operating loss carryforwards that expire in 2030, and
approximately $950 million of alternative minimum tax net
operating loss carryforwards that expire between 2028 and 2030.
At the state level we have net operating loss carryforwards that
expire between 2014 and 2030 that give rise to a
$25 million state deferred tax asset.
We are subject to income taxes in the U.S., multiple state
jurisdictions, and a few foreign jurisdictions. Our unrecognized
tax benefits totaled $34 million and $36 million as of
December 31, 2010 and 2009, respectively, of which
$22 million and $29 million are recognized as
liabilities. Included in those amounts as of December 31,
2010 and 2009, are $19 million and $23 million (net of
the tax benefit on state issues), respectively, that would
reduce the effective tax rate if recognized.
Within the next twelve months we believe it is reasonably
possible that we could settle or otherwise conclude as much as
$12 million of our uncertain tax positions,
$10 million of which is recognized as a liability,
primarily regarding state issues related to tax credits and to
apportionment of income. At December 31, 2010 and 2009, we
had accrued $11 million and $28 million, respectively,
for interest and penalties. During the years ended
December 31, 2010, 2009, and 2008, we recognized
$(4) million, $5 million and $3 million in
interest and penalties associated with unrecognized tax
benefits. For interest and penalties relating to income taxes we
recognize accrued interest in interest and financing costs, and
penalties in selling, general and administrative expenses in the
statements of consolidated operations. The federal tax years
2006 to 2009 remain open to adjustment, and in general
79
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the state tax years open to adjustment range from 1994 to 2009.
A reconciliation of the beginning and ending amounts of
unrecognized tax benefits is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance as of beginning of year
|
|
$
|
36
|
|
|
$
|
44
|
|
|
$
|
44
|
|
Increases related to prior year tax positions
|
|
|
2
|
|
|
|
1
|
|
|
|
5
|
|
Decreases related to prior year tax positions
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
(12
|
)
|
Increases related to current year tax positions
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Decreases related to lapse of applicable statute of limitations
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
|
|
Decreases related to settlements with taxing authorities
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
34
|
|
|
$
|
36
|
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and Other Postretirement Benefits
We sponsor four defined benefit pension plans, one qualified
plan and three nonqualified plans, which are described below.
Only the first three plans were effective as of
December 31, 2010.
|
|
|
|
|
The funded qualified employee retirement plan provides benefits
to all eligible employees based on years of service and
compensation. Although our funded employee retirement plan fully
meets all of the funding requirements under applicable laws and
regulations, during 2010 and 2009 we voluntarily contributed
$34 million and $35 million, respectively, to improve
the plans funded status.
|
|
|
|
The unfunded nonqualified executive security plan provides
certain executive officers and other key personnel with
supplemental pension benefits. These benefits are provided by a
nonqualified, noncontributory plan and are based on years of
service and compensation. During 2010 and 2009, we made payments
of $30 million and $1 million, respectively, for
current retiree obligations under the plan.
|
|
|
|
The unfunded nonqualified restoration retirement plan provides
for the restoration of retirement benefits to certain senior
level employees that are not provided under the qualified
retirement plan due to limits imposed by the Internal Revenue
Code.
|
|
|
|
The unfunded nonqualified supplemental executive retirement plan
provides eligible senior level executives a supplemental pension
benefit in excess of those earned under the qualified retirement
plan. This plan was approved and adopted by the Compensation
Committee on January 12, 2011. Currently there are no
employees eligible to participate in the Plan.
|
Tesoro provides health care benefits to retirees who met certain
service requirements and were participating in our group health
insurance program at retirement. In addition, Tesoro sponsors
two 401(k) plans, the thrift plan and the retail savings plan,
both of which provide for eligible employees to make
contributions, subject to certain limitations, into designated
investment funds with a matching contribution by Tesoro.
In June 2010, the Compensation Committee of the Board of
Directors approved changes to certain retirement and
postretirement benefits to be effective beginning
January 1, 2011. The majority of our employees and retirees
will be impacted by these changes subject to applicable
collective bargaining
and/or
purchase and sale agreements.
80
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes
to retirement plans
|
|
|
|
|
The funded qualified employee retirement plan changed from a
Final Average Pay (FAP) based formula to
a Cash Balance Account based formula. The FAP
benefit formula will incorporate benefit service through
December 31, 2010, and employees will begin to earn a Cash
Balance benefit for service on or after January 1, 2011.
This change will reduce our future pension costs and funding
obligations.
|
|
|
|
The unfunded nonqualified restoration retirement plan will also
be amended to reflect changes in the qualified employee
retirement plan.
|
Changes
to postretirement benefits
|
|
|
|
|
Postretirement medical insurance cost sharing for current and
future retirees was changed to reflect actual retiree claims
experience rather than a blended premium cost (combination of
active and retiree claim experience) effective January 1,
2011. The additional cost to retirees will be phased in over
three years. Beginning in 2014, the company contribution for
retirees hired before January 1, 2006, will be capped and
retirees will pay for any increases in costs.
|
|
|
|
Postretirement dental benefits for all current and future
retirees was eliminated effective January 1, 2011.
|
|
|
|
Postretirement medical coverage will be eliminated for retirees
over the age of 65 as of January 1, 2014.
|
|
|
|
Postretirement life insurance was eliminated for future retirees
effective January 1, 2011.
|
|
|
|
Postretirement life insurance for current retirees was reduced
to $10,000 effective January 1, 2011, and will be
eliminated entirely beginning January 1, 2016.
|
Changes
to the thrift plan
|
|
|
|
|
Our present $1 for $1 match on 7% of pay (base pay, overtime and
bonus) for our thrift plan will be reduced to a $1 for $1 match
on 6% of pay (base pay only), effective January 1, 2011.
|
Investment
Policies and Strategies
Our funded qualified retirement plan assets are invested using a
total return investment approach (including dividends, interest,
and realized and unrealized capital appreciation) whereby a mix
of equity securities, fixed income securities and other
investments are used to preserve asset values, diversify risk
and achieve our target investment return. Plan assets are
managed in a diversified portfolio comprised of two primary
components: an equity portion and a fixed income portion. The
expected role of the plans equity investments is to
maximize the long-term real growth of plan assets, while the
role of fixed income investments are to generate current income,
lower funded status volatility, provide for more stable periodic
returns and provide protection against a prolonged decline in
the equity markets. Investment strategies and asset allocation
decisions are based on careful consideration of risk tolerance,
plan liabilities, the plans funded status and our
financial condition.
In November 2009, we revised our investment policy to reduce
equity exposure and increase fixed income exposure while
extending the duration in order to better match the plans
liabilities. Our target allocation is as follows: 50% long
duration fixed income, 15% domestic equity, 15% international
equity and 20% other investments comprised primarily of assets
which provide protection in inflationary periods and investments
which target a return regardless of market conditions. We are
currently transitioning the existing plan assets to the target
allocation and anticipate to be fully transitioned by the end of
2011.
81
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Plan Assets
We classify our plan assets into three fair value
classifications or levels. Our level 1 investments include
U.S. equity and real return mutual funds which are based on
market quotations from national securities exchanges.
Level 2 investments include equity and bond securities
valued at the last reported sales price or closing price as
reported by an independent pricing service. When market prices
are not readily available, the determination of fair value may
rely on factors such as significant market activity or security
specific events, changes in interest rates and credit quality,
and developments in foreign markets. Level 3 investments,
which were held as of December 31, 2009, represent an
investment in a real estate fund with holdings that are based
upon property appraisal reports prepared by independent real
estate appraisers using the cost, income and market valuation
approaches. As of December 31, 2010 we did not hold any
level 3 assets in our investments. We do not believe that
there are any significant concentrations of risk within our plan
assets.
The tables below presents information about the retirement
plans major asset categories measured at fair value on a
recurring basis by the three levels described above as of
December 31, 2010 and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Asset Category
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Short Term Investment Fund(a)
|
|
$
|
18
|
|
|
$
|
|
|
|
$
|
18
|
|
|
$
|
|
|
U.S. equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap(b)
|
|
|
77
|
|
|
|
35
|
|
|
|
42
|
|
|
|
|
|
U.S. small/mid cap
|
|
|
17
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Real return(c)
|
|
|
15
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
International equities(d)
|
|
|
39
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
Fixed income(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long duration bonds
|
|
|
128
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
294
|
|
|
$
|
67
|
|
|
$
|
227
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Asset Category
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)(g)
|
|
|
Money Market Fund
|
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
|
|
|
$
|
|
|
U.S. equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap(b)
|
|
|
95
|
|
|
|
32
|
|
|
|
63
|
|
|
|
|
|
U.S. small/mid cap
|
|
|
13
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
International equities(d)
|
|
|
36
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
Fixed income(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long duration bonds
|
|
|
96
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
Real estate(f)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
262
|
|
|
$
|
56
|
|
|
$
|
195
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
This common collective trust fund is a short term investment
fund which seeks to provide safety of principal and daily
liquidity. The fair value of this investment has been estimated
using the net asset value per share. |
|
(b) |
|
These assets include level 2 common/collective trust funds
which are actively managed and designed to provide excess return
over a market cycle relative to market indexes, such as the
Wilshire 5000 Total Market Index and Russell 1000 Value Index,
while maintaining similar style characteristics in sector
weights. The fair value of these investments has been estimated
using the net asset value per share. |
|
(c) |
|
These assets represent mutual fund holdings that seek to
preserve and enhance purchasing power by focusing on a broad set
of asset classes that provide the potential for real returns in
excess of U.S. inflation. |
|
(d) |
|
These assets represent common/collective trust investments which
are designed to seek long-term growth of capital primarily
through investments in foreign securities of companies primarily
located in developed countries outside the United States,
including the Americas (other than the United States), Europe,
the Far East, and Pacific Basin. The fair value of these
investments has been estimated using the net asset value per
share. |
|
(e) |
|
This common/collective trust fund seeks to outperform the
Barclays Capital Long Term Government/Credit Bond Index by
investing in a full spectrum of investment grade securities,
with a focus on long duration issues. The fair value of these
investments has been estimated using the net asset value per
share. |
|
(f) |
|
This pooled separate account fund primarily invests in
completed, income-producing real estate properties with cash
flows that are expected to increase over time and provide the
potential for capital appreciation. The Plan received a full
distribution of its investment in the fund during 2010 so there
are no remaining assets as of December 31, 2010. The fair
value of these investments as of December 31, 2009 has been
estimated using the net asset value per share. |
|
(g) |
|
The following table sets forth the changes in fair value for our
real estate assets measured using significant unobservable
inputs (level 3) during 2010 (in millions): |
|
|
|
|
|
Balance at January 1, 2010
|
|
$
|
11
|
|
Investment income
|
|
|
|
|
Realized gain
|
|
|
1
|
|
Sales
|
|
|
(12
|
)
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
|
|
|
|
|
|
|
Pension
and Other Postretirement Financial Information
We recognize separately the overfunded or underfunded status of
our pension and other postretirement plans as an asset or
liability. The funded status represents the difference between
the projected benefit obligation and the fair value of the plan
assets. The projected benefit obligation is the present value of
benefits earned to date by plan participants, including the
effect of assumed future salary increases. Plan assets are
measured at fair value. We use a December 31 measurement date
for plan assets and obligations for all our retirement plans.
83
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in our projected benefit obligations and plan assets,
and the funded status for our pension plans and other
postretirement benefits as of December 31, 2010 and 2009
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations at beginning of year
|
|
$
|
511
|
|
|
$
|
437
|
|
|
$
|
356
|
|
|
$
|
353
|
|
Service cost
|
|
|
39
|
|
|
|
36
|
|
|
|
11
|
|
|
|
16
|
|
Interest cost
|
|
|
27
|
|
|
|
27
|
|
|
|
14
|
|
|
|
20
|
|
Actuarial (gain) loss
|
|
|
45
|
|
|
|
30
|
|
|
|
85
|
|
|
|
(29
|
)
|
Benefits paid
|
|
|
(62
|
)
|
|
|
(19
|
)
|
|
|
(6
|
)
|
|
|
(4
|
)
|
Plan amendments
|
|
|
|
|
|
|
|
|
|
|
(317
|
)
|
|
|
|
|
Curtailments
|
|
|
4
|
|
|
|
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
564
|
|
|
$
|
511
|
|
|
$
|
96
|
|
|
$
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
262
|
|
|
$
|
210
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
30
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
64
|
|
|
|
37
|
|
|
|
6
|
|
|
|
4
|
|
Benefits paid
|
|
|
(62
|
)
|
|
|
(19
|
)
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
294
|
|
|
$
|
262
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(270
|
)
|
|
$
|
(249
|
)
|
|
$
|
(96
|
)
|
|
$
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation is the present value of
benefits earned to date, assuming no future salary growth. The
accumulated benefit obligation for our pension plans at
December 31, 2010 and 2009 was $431 million and
$392 million, respectively. Liability amounts recognized in
our consolidated balance sheet related to our defined benefit
pension plans and other postretirement benefits as of
December 31, 2010 and 2009 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Accrued liabilities
|
|
$
|
8
|
|
|
$
|
6
|
|
|
$
|
8
|
|
|
$
|
8
|
|
Other Noncurrent Liabilities
|
|
|
262
|
|
|
|
243
|
|
|
|
88
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
$
|
270
|
|
|
$
|
249
|
|
|
$
|
96
|
|
|
$
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of pension and postretirement net periodic
benefit expense (income) included in the consolidated statements
of operations for the years ended December 31, 2010, 2009
and 2008 were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Components of net periodic benefit expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
39
|
|
|
$
|
36
|
|
|
$
|
33
|
|
|
$
|
11
|
|
|
$
|
16
|
|
|
$
|
17
|
|
Interest cost
|
|
|
27
|
|
|
|
27
|
|
|
|
22
|
|
|
|
14
|
|
|
|
20
|
|
|
|
20
|
|
Expected return on plan assets
|
|
|
(22
|
)
|
|
|
(21
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
|
|
(18
|
)
|
|
|
1
|
|
|
|
1
|
|
Recognized net actuarial loss
|
|
|
14
|
|
|
|
15
|
|
|
|
6
|
|
|
|
7
|
|
|
|
1
|
|
|
|
2
|
|
Special termination benefits
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized curtailment loss (gain)
|
|
|
4
|
|
|
|
|
|
|
|
2
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense (income)
|
|
$
|
65
|
|
|
$
|
61
|
|
|
$
|
42
|
|
|
$
|
(34
|
)
|
|
$
|
38
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss
before income taxes as of December 31, 2010 and 2009
consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
Total
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net loss
|
|
$
|
247
|
|
|
$
|
221
|
|
|
$
|
122
|
|
|
$
|
41
|
|
|
$
|
369
|
|
|
$
|
262
|
|
Prior service cost (credit)
|
|
|
7
|
|
|
|
12
|
|
|
|
(294
|
)
|
|
|
6
|
|
|
|
(287
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
254
|
|
|
$
|
233
|
|
|
$
|
(172
|
)
|
|
$
|
47
|
|
|
$
|
82
|
|
|
$
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes amounts recognized in other
comprehensive income (loss) before income taxes for the years
ended December 31, 2010, 2009 and 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net gain (loss) arising during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss)
|
|
$
|
(41
|
)
|
|
$
|
(17
|
)
|
|
$
|
(148
|
)
|
|
$
|
(39
|
)
|
|
$
|
29
|
|
|
$
|
(30
|
)
|
Prior service credit (cost)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
317
|
|
|
|
|
|
|
|
|
|
Net gain reclassified into income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
|
15
|
|
|
|
15
|
|
|
|
6
|
|
|
|
(42
|
)
|
|
|
1
|
|
|
|
3
|
|
Prior service cost (credit)
|
|
|
5
|
|
|
|
4
|
|
|
|
7
|
|
|
|
(17
|
)
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income (loss)
|
|
$
|
(21
|
)
|
|
$
|
2
|
|
|
$
|
(140
|
)
|
|
$
|
219
|
|
|
$
|
31
|
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in accumulated other comprehensive loss before
income taxes as of December 31, 2010 that are expected to
be recognized as components of net periodic benefit expense in
2011 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Total
|
|
|
Net loss
|
|
$
|
20
|
|
|
$
|
12
|
|
|
$
|
32
|
|
Prior service cost (credit)
|
|
|
1
|
|
|
|
(37
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21
|
|
|
$
|
(25
|
)
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assumptions
The following weighted-average assumptions were used to
determine benefit obligations and net periodic benefit expenses
for the years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate(a)
|
|
|
5.55
|
%
|
|
|
5.80
|
%
|
|
|
6.28
|
%
|
|
|
4.38
|
%
|
|
|
6.36
|
%
|
|
|
6.14
|
%
|
Rate of compensation increase
|
|
|
4.50
|
%
|
|
|
4.57
|
%
|
|
|
4.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate(a)(b)
|
|
|
5.80
|
%
|
|
|
6.28
|
%
|
|
|
6.10
|
%
|
|
|
5.50
|
%
|
|
|
6.14
|
%
|
|
|
6.40
|
%
|
Rate of compensation increase
|
|
|
4.57
|
%
|
|
|
4.59
|
%
|
|
|
4.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected long-term return on plan assets(c)
|
|
|
7.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We determine the discount rate primarily by reference to rates
of high-quality, long-term corporate bonds that mature in a
pattern similar to the expected payments to be made under the
plans. |
|
(b) |
|
As a result of the changes to other postretirement benefits
during the second quarter of 2010, we remeasured our
postretirement obligation as of June 30, 2010. The discount
rate used to determine the net periodic benefit expense was
6.36% for the six months ended June 30, 2010, and 4.64% for
the six months ended December 31, 2010. |
|
(c) |
|
The expected return on plan assets reflects the weighted-average
of the expected long-term rates of return for the broad
categories of investments held in the plans. The expected
long-term rate of return is adjusted when there are fundamental
changes in expected returns on the plans investments. |
The assumed health care cost trend rates used to determine the
projected postretirement benefit obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Health care cost trend rate assumed for next year
|
|
|
8.50
|
%
|
|
|
8.00
|
%
|
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
|
|
|
4.50
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2018
|
|
|
|
2015
|
|
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend
rates could have the following effects (in millions):
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-Point
|
|
1-Percentage-Point
|
|
|
Increase
|
|
Decrease
|
|
Effect on total of service and interest cost components
|
|
$
|
4
|
|
|
$
|
(3
|
)
|
Effect on postretirement benefit obligation
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
Future
Cash Flows
Tesoro has no minimum required contribution obligation to its
funded employee pension plan under applicable laws and
regulations in 2011 and we continue to evaluate our expected
2011 voluntary contributions.
86
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following estimated future benefit payments, which reflect
expected future service, as appropriate, are expected to be paid
for our defined benefit pension plans and other postretirement
benefits in the years indicated(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Pension
|
|
Postretirement
|
|
|
Benefits
|
|
Benefits
|
|
2011
|
|
$
|
48
|
|
|
$
|
8
|
|
2012
|
|
|
46
|
|
|
|
10
|
|
2013
|
|
|
47
|
|
|
|
12
|
|
2014
|
|
|
51
|
|
|
|
10
|
|
2015
|
|
|
55
|
|
|
|
10
|
|
2016-2020
|
|
|
314
|
|
|
|
54
|
|
Thrift
Plan
We sponsor an employee thrift 401(k) plan that provides for
contributions, subject to certain limitations, by eligible
employees into designated investment funds with a matching
contribution by Tesoro. Employees may elect tax-deferred
treatment in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. Throughout
2010, for most employees, we matched 100% of employee
contributions, up to 7% of the employees eligible
earnings, with at least 50% of the matching contribution
directed for initial investment in our common stock. As
mentioned above, our match for our thrift plan will be reduced
to a $1 for $1 match on 6% of pay (base pay only), effective
January 1, 2011. Our contributions to the thrift plan
amounted to $24 million for each of the years in 2010, 2009
and 2008, respectively, of which $13 million,
$8 million and $9 million consisted of treasury stock
reissuances in 2010, 2009 and 2008, respectively.
The unfunded executive deferred compensation plan provides the
ability to defer compensation and receive a matching
contribution by Tesoro to certain executives and other employees
that is not available under the employee thrift plan due to
limits imposed by the Internal Revenue Code.
Retail
Savings Plan
We sponsor a separate 401(k) savings plan for eligible retail
employees who have completed one year of service and have worked
at least 1,000 hours within that time. Eligible employees
automatically receive a non-elective employer contribution equal
to 3% of eligible earnings, regardless of participation. If
employees elect to make pretax contributions, we also contribute
an employer match equal to $0.50 for each $1.00 of employee
contributions, up to 6% of eligible earnings. At least 50% of
the matching employer contributions must be directed for initial
investment in Tesoro common stock. Our contributions amounted to
$0.1 million, $0.6 million and $0.6 million in
2010, 2009 and 2008, respectively, of which $0.1 million
consisted of treasury stock reissuances for each of the years in
2010, 2009 and 2008, respectively. Beginning with the 2010 plan
year, the non-elective 3% employer contribution will be made in
one payment after the end of the plan year. We anticipate
contributing the 2010 non-elective contribution to eligible
employees by March 31, 2011.
|
|
NOTE N
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases
We have various cancellable and noncancellable operating leases
related to land, office and retail facilities, ship charters,
tanks and equipment and other facilities used in the storage,
transportation, and sale of crude oil, feedstocks and refined
products. In general, these leases have remaining primary terms
up to 10 years and typically contain multiple renewal
options. Total rental expense for all operating leases,
including leases with a term of one month or less, amounted to
$347 million in 2010, $374 million in 2009 and
$469 million in 2008. See Note J for information
related to capital leases.
The majority of our future lease payments relate to marine
transportation, retail station and tank storage leases. As of
December 31, 2010, we had eight ships on time charter used
to transport crude oil and refined products. Four of the ships
are
U.S.-flag
ships, including two new tankers delivered during 2010, with
remaining time charters expiring
87
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
between 2012 and 2013 with options to renew. The other four
ships are foreign-flag ships with remaining time charters
expiring between 2011 and 2013. We also time charter tugs and
product barges over varying terms ending in 2011 through 2016,
most with options to renew and some with escalation clauses. Our
time charters generally contain terms of three to seven years.
We have operating leases for most of our retail stations with
primary remaining terms up to 42 years, and generally
containing renewal options and escalation clauses. Our storage
tank leases run primarily through 2017.
Our minimum annual lease payments, as of December 31, 2010,
for operating leases having initial or remaining noncancellable
lease terms in excess of one year were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ship
|
|
|
|
|
|
|
|
|
|
Charters(a)
|
|
|
Other
|
|
|
Total
|
|
|
2011
|
|
$
|
118
|
|
|
$
|
102
|
|
|
$
|
220
|
|
2012
|
|
|
90
|
|
|
|
97
|
|
|
|
187
|
|
2013
|
|
|
44
|
|
|
|
85
|
|
|
|
129
|
|
2014
|
|
|
18
|
|
|
|
79
|
|
|
|
97
|
|
2015
|
|
|
11
|
|
|
|
74
|
|
|
|
85
|
|
Thereafter
|
|
|
10
|
|
|
|
349
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
291
|
|
|
$
|
786
|
|
|
$
|
1,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes minimum annual lease payments for tugs and barges,
which range between $11 million and $25 million over
the next five years. |
Purchase
Obligations and Other Commitments
We have long-term
take-or-pay
commitments for the transportation of crude oil and refined
products as well as to purchase industrial gases, chemical
processing services and utilities associated with the operation
of our refineries. The minimum annual payments under these
take-or-pay
agreements are estimated to total $176 million in 2011,
$111 million in 2012, $93 million in 2013,
$97 million in 2014 and $96 million in 2015. The
remaining minimum commitments after 2015 total approximately
$435 million over 14 years. We paid approximately
$338 million, $300 million and $525 million in
2010, 2009 and 2008, respectively, under these
take-or-pay
contracts. We also have significant obligations to purchase
crude oil to operate our refineries. These crude oil commitments
have terms less than five years.
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. Although we cannot
predict the ultimate outcomes of these matters with certainty,
we have accrued for the estimated liabilities when appropriate.
We believe that the outcome of these matters will not 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.
Additionally, if applicable, we accrue receivables for probable
insurance or other third-party recoveries.
We are subject to extensive federal, state and local
environmental laws and regulations. These laws, which change
frequently, regulate the discharge of materials into the
environment and may require us to remove or mitigate the
environmental effects of the disposal or release of petroleum or
chemical substances at various sites, install additional
controls, or make other modifications to certain emission
sources.
We are subject to extensive federal, state and foreign tax laws
and regulations. Newly enacted tax laws and regulations, and
changes in existing tax laws and regulations, could result in
increased expenditures in the future. We are also subject to
audits by federal, state and foreign taxing authorities in the
normal course of business. It is possible that tax audits could
result in claims against us in excess of recorded liabilities.
We believe that resolution of any such claim(s) would 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
$12 million in the next twelve months through settlements
or other conclusions, primarily regarding state tax issues.
88
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Environmental
Liabilities
We are, and expect to continue, incurring expenses for
environmental liabilities at a number of currently and
previously owned or operated refining, pipeline, terminal and
retail station properties. We have accrued liabilities for these
expenses and believe these accruals are adequate. However, our
environmental accruals are based on estimates including
engineering assessments and it is possible that our estimates
will change and additional costs will be recorded as more
information becomes available. Changes in our environmental
liabilities for the years ended December 31, 2010 and 2009
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at beginning of year
|
|
$
|
106
|
|
|
$
|
123
|
|
Additions
|
|
|
37
|
|
|
|
28
|
|
Expenditures
|
|
|
(35
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
108
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
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.
These environmental liabilities totaled $62 million and
$73 million at December 31, 2010 and 2009,
respectively. We cannot reasonably determine the full extent of
remedial activities that may be required at the Golden Eagle
refinery. Therefore, it is possible that we will identify
additional remediation costs as more information becomes
available. We have filed insurance claims under environmental
insurance policies that provide coverage up to $190 million
for expenditures in excess of the $50 million in
self-insurance. 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 of the order, but we believe it will not
have a material adverse effect on our financial position or
results of operations.
Washington
Refinery Fire
On April 2, 2010, the naphtha hydrotreater unit at our
Washington refinery was involved in a fire, which fatally
injured seven employees and rendered the unit inoperable. The
Washington State Department of Labor & Industries
(L&I), the U.S. Chemical Safety and Hazard
Investigation Board (CSB) and the
U.S. Environmental Protection Agency (EPA)
initiated separate investigations of the fire. In October 2010,
L&I completed its investigation, issued citations and
assessed a $2.4 million fine. On October 22, 2010, we
filed an appeal of the citation, L&I reassumed jurisdiction
of the citation and affirmed the allegations on
December 29, 2010. We disagree with L&Is
characterizations of Tesoros operations at our Washington
refinery and believe, based on available evidence and scientific
reviews, that many of the agencys conclusions are
mistaken. On January 29, 2011 we filed an appeal of the
citation. The EPA and CSB investigations are ongoing. We have
incurred $27 million in charges related to the incident.
In February 2011, Tesoro Corporation, Tesoro Refining and
Marketing Company and other defendants were named in a lawsuit
brought by the estates and families of six of the seven fatally
injured employees arising from the April 2, 2010 Washington
refinery incident. In addition, a third-party propane truck
driver has alleged damages in the lawsuit. The lawsuit includes
allegations of negligence, premises liability, strict liability,
product liability and seeks unspecified compensatory and
punitive damages. The Company believes that it has defenses to
the allegations contained in the lawsuit. The case of Donald
and Peggy Zimmerman et al. v. Tesoro Corporation and Tesoro
Refining and Marketing et al. is proceeding in the Superior
Court of the State of Washington, Skagit County. We are still
evaluating the allegations contained in the lawsuit, however we
believe that the outcome will not materially impact our
liquidity and consolidated financial position.
89
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our business interruption insurance deductible is satisfied
after we have exceeded both 60 days of operational
disruption and $25 million in losses primarily based on the
operating plan that existed prior to the incident. Our property
damage insurance has a $10 million deductible. We have
filed business interruption insurance claims and property damage
claims related to this incident. During 2010, we collected
$55 million in business interruption insurance recoveries,
which were recorded as an offset to cost of sales in the
consolidated statement 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 accruals for
these matters. 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.
During 2009, Chevron filed a lawsuit against us claiming they
are entitled to a share of the refunds we received in 2008 from
the owners of the Trans Alaska Pipeline System
(TAPS). We received $50 million in 2008, net of
contingent legal fees, for excessive intrastate rates charged by
TAPS during 1997 though 2000, and the period of 2001 through
June 2003. Chevron is asserting that it is entitled to a share
of its portion of the refunds for retroactive price adjustments
under our previous crude oil contracts with them. In September
2010, the trial court judge granted Chevrons motion for
summary judgment and awarded them $16 million. We disagree
with the trial court and have appealed the decision to the
Alaska Supreme Court in which the proceeding is now pending. We
have established an accrual for this matter and believe that the
outcome will not materially impact our liquidity and
consolidated financial position.
On February 5, 2010, the EPA filed suit against us alleging
violations of the Clean Air Act and corresponding regulatory
requirements concerning the testing and reporting of
transportation fuels and fuel additives. In February 2009, we
received a Notice of Violation (NOV) from the EPA
for the alleged violations arising from a compliance review
conducted by the EPA in 2006 for the years 2003 through the time
of the review in 2006. We are discussing the alleged violations
contained in the suit with the EPA and the U.S. Department
of Justice and have not established an accrual for this matter.
On the basis of existing information, we believe that the
resolution of this matter will not have a material adverse
effect on our financial position or results of operations.
|
|
NOTE O
|
STOCKHOLDERS
EQUITY
|
Our Credit Agreement and senior notes each limit our ability to
pay cash dividends or repurchase stock. The limitation in each
of our debt agreements is based on limits on restricted payments
(as defined in our debt agreements), which include dividends,
stock repurchases or voluntary prepayments of subordinate debt.
The aggregate amount of restricted payments cannot exceed an
amount defined in each of the debt agreements. The indentures
for our senior notes also limit our subsidiaries ability to make
certain payments and distributions. We do not believe that the
limitations will restrict our ability to pay dividends or
repurchase stock under our current programs. See Note P for
information relating to stock-based compensation and common
stock reserved for exercise of options.
90
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
Dividends
We did not pay any cash dividends during 2010. During 2009 and
2008, we paid cash dividends on common stock totaling $0.35 per
share and $0.40 per share, respectively.
Treasury
Stock
We purchase shares of our common stock in open market
transactions to meet our obligations under employee benefit
plans. We also purchase shares of our common stock in connection
with the exercise of stock options, the vesting of restricted
stock and to fulfill other stock compensation requirements.
The Company entered into an employment agreement with our CEO
(the CEO Agreement) on March 30, 2010,
effective May 1, 2010. Inducement awards were granted based
on the terms of this agreement and were issued from treasury
stock subject to certain vesting and employment restrictions.
The annual award grant to our CEO, excluding performance unit
awards, was granted from treasury stock.
|
|
NOTE P
|
STOCK-BASED
COMPENSATION
|
Stock-based compensation expense for our stock-based awards for
2010, 2009 and 2008 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Restricted common stock
|
|
$
|
13
|
|
|
$
|
13
|
|
|
$
|
12
|
|
Stock options
|
|
|
6
|
|
|
|
15
|
|
|
|
19
|
|
Restricted stock units
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Stock appreciation rights
|
|
|
26
|
|
|
|
11
|
|
|
|
(14
|
)
|
Phantom stock options
|
|
|
11
|
|
|
|
7
|
|
|
|
(3
|
)
|
Performance unit awards
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
58
|
|
|
$
|
46
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit recognized in the income statement for
stock-based compensation arrangements was $23 million,
$17 million and $4 million for the years ended
December 31, 2010, 2009 and 2008, respectively. The income
tax benefit recognized from tax deductions resulting from
exercises and vestings under all of our stock-based compensation
arrangements totaled $6 million, $3 million and
$4 million during 2010, 2009 and 2008, respectively.
Stock-Based
Compensation Plans
We issue stock-based awards as described below to employees
under the 2006 Long-Term Incentive Plan. We also have
outstanding awards under our Amended and Restated Executive
Long-Term Incentive Plan, Non-Employee Director Stock Plan and
Key Employee Stock Option Plan. At December 31, 2010,
Tesoro had 549,635 shares available for future grants under
our plans. Our plans are described below.
|
|
|
|
|
The 2006 Long-Term Incentive Plan (2006 Plan)
permits the grant of options, restricted common stock, deferred
stock units, performance stock awards, other stock-based awards
and cash-based awards. The 2006 Plan became effective in May
2006 and no awards may be granted under the 2006 Plan on or
after May 2016. Stock options may be granted at exercise prices
not less than the fair market value on the date the options are
granted. Options granted become exercisable after one year in
33% annual increments and expire ten years from the date of
grant. Generally, when stock options are exercised or when
restricted common stock is granted we issue new shares rather
than issuing treasury shares.
|
|
|
|
The Amended and Restated Executive Long-Term Incentive Plan,
which expired in May 2006, allowed grants in a variety of forms,
including restricted stock, nonqualified stock options, stock
appreciation rights and performance share and performance unit
awards.
|
91
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
The 1995 Non-Employee Director Stock Option Plan provided for
the grant of nonqualified stock options over the life of the
plan to eligible non-employee directors of Tesoro. These
automatic, non-discretionary stock options were granted at an
exercise price equal to the fair market value per share of
Tesoros common stock at the date of grant. The term of
each option is ten years, and an option becomes exercisable six
months after it is granted. The plan expired in February 2010
and no further options may be granted under the plan.
|
|
|
|
The Key Employee Stock Option Plan provided stock option grants
to eligible employees who were not executive officers of Tesoro.
The options, which become exercisable one year after grant in
25% annual increments, expire ten years after the date of grant.
Our Board of Directors suspended future grants under this plan
in 2003.
|
Restricted
Common Stock
The fair value of each restricted share on the grant date is
equal to the market price of our common stock on that date. The
estimated fair value of our restricted common stock is amortized
over the vesting period using the straight-line method. These
awards generally vest in annual increments ratably over three
years. Restricted common stock granted in connection with the
inducement awards of the CEO Agreement will vest 100% on
May 1, 2011. The total fair value of restricted shares
vested in 2010, 2009 and 2008 was $7 million,
$6 million and $13 million, respectively. The weighted
average grant date fair value per share of restricted common
stock granted during 2010, 2009 and 2008 was $12.94, $14.13 and
$40.37, respectively. Unrecognized compensation cost related to
our non-vested restricted common stock totaled $15 million
as of December 31, 2010. This cost is expected to be
recognized over a weighted-average period of 2.0 years. The
fair value of non-vested restricted common stock as of
December 31, 2010 totaled $33 million.
A summary of our restricted common stock activity is set forth
below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Restricted Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2010
|
|
|
1,370
|
|
|
$
|
21.66
|
|
Granted
|
|
|
1,181
|
|
|
$
|
12.94
|
|
Vested
|
|
|
(595
|
)
|
|
$
|
24.59
|
|
Forfeited
|
|
|
(194
|
)
|
|
$
|
15.99
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2010
|
|
|
1,762
|
|
|
$
|
15.46
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
Under the terms of our stock option plans, the exercise price of
options granted is equal to the fair market value of our common
stock on the date of grant. The fair value of each option is
estimated on the grant date using the Black-Scholes
option-pricing model. The estimated fair value of these stock
options is amortized over the vesting period using the
straight-line method. The estimated weighted-average grant-date
fair value per share of options granted during 2010, 2009 and
2008 was $7.36, $6.45 and $17.60, respectively.
Our options generally become exercisable after one year in 33%
annual increments and expire ten years from the date of grant.
Stock options granted in connection with the inducement awards
of the CEO Agreement will vest 30% on each of the first two
anniversaries of the grant date and 40% on the third anniversary
of the grant date. The total intrinsic value for options
exercised during 2010, 2009 and 2008 was $7 million,
$5 million and $6 million, respectively. Total
unrecognized compensation cost related to non-vested stock
options totaled $4 million as of December 31, 2010,
which is expected to be recognized over a weighted-average
period of 2.1 years. The income tax benefit realized from
tax deductions associated with stock options exercised during
2010 totaled $3 million.
92
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock option activity for all plans is set forth
below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Outstanding at January 1, 2010
|
|
|
7,931
|
|
|
$
|
21.91
|
|
|
|
5.3 years
|
|
|
$
|
20
|
|
Granted
|
|
|
679
|
|
|
$
|
12.97
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(909
|
)
|
|
$
|
5.98
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(273
|
)
|
|
$
|
16.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
7,428
|
|
|
$
|
23.23
|
|
|
|
5.0 years
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2010
|
|
|
7,428
|
|
|
$
|
23.23
|
|
|
|
5.0 years
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
6,502
|
|
|
$
|
24.25
|
|
|
|
4.5 years
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected life of options granted is based on historical data
and represents the period of time that options granted are
expected to be outstanding. Expected volatilities are based on
the historical volatility of our stock. We use historical data
to estimate option exercise and employee termination within the
valuation model. Expected dividend yield is based on annualized
dividends at the date of grant. The risk-free rate for periods
within the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant.
Tesoros weighted average assumptions are presented below:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected life (years)
|
|
|
6
|
|
|
6
|
|
6
|
Expected volatility
|
|
|
59
|
%
|
|
58%
|
|
45%
|
Expected dividend yield
|
|
|
0
|
%
|
|
2.10%
|
|
0.78% - 0.85%
|
Risk-free interest rate
|
|
|
2.7
|
%
|
|
2.0%
|
|
3.1%
|
Restricted
Stock Units
In May 2010, we granted restricted stock units in connection
with the inducement awards of the CEO Agreement. The fair value
of each restricted stock unit on the grant date is equal to the
market price of our common stock on that date. The estimated
fair value of the restricted stock units is amortized over the
vesting period using the straight-line method. These restricted
stock units vest in annual increments ratably over two years.
Unrecognized compensation cost related to our non-vested units
totaled $2.3 million as of December 31, 2010. This
cost is expected to be recognized over a weighted-average period
of 1.3 years. The fair value of non-vested restricted stock
units as of December 31, 2010 totaled $4.8 million. A
summary of our restricted stock unit activity is set forth below
(units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Restricted Units
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2010
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
256
|
|
|
$
|
13.66
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2010
|
|
|
256
|
|
|
$
|
13.66
|
|
|
|
|
|
|
|
|
|
|
Stock
Appreciation Rights
The 2006 Long-Term Stock Appreciation Rights Plan (the SAR
Plan) permits the grant of stock appreciation rights
(SARs) to key managers and other employees of
Tesoro. A SAR granted under the SAR Plan entitles an employee to
receive cash in an amount equal to the excess of the fair market
value of one share of common stock on the date of exercise over
the grant price of the SAR. Unless otherwise specified, all SARs
under the SAR Plan vest ratably during a three-year period
following the date of grant and expire seven years from the date
of grant. The
93
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Black-Scholes option-pricing model weighted-average assumptions
used to calculate the fair value of SARs are similar to those
used to calculate the fair value of options as described above.
At December 31, 2010 and 2009, the liability associated
with our SARs recorded in accrued liabilities totaled
$39 million and $13 million, respectively. A summary
of our stock appreciation right activity for the SAR plan is set
forth below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
|
SARs
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Outstanding at January 1, 2010
|
|
|
7,486
|
|
|
$
|
22.65
|
|
|
|
5.5 years
|
|
Granted
|
|
|
483
|
|
|
$
|
12.93
|
|
|
|
|
|
Exercised
|
|
|
(118
|
)
|
|
$
|
14.13
|
|
|
|
|
|
Forfeited
|
|
|
(479
|
)
|
|
$
|
19.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
7,372
|
|
|
$
|
22.34
|
|
|
|
4.6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2010
|
|
|
7,367
|
|
|
$
|
22.34
|
|
|
|
4.6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
3,579
|
|
|
$
|
29.22
|
|
|
|
4.0 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Phantom Stock Options
We did not grant phantom stock options to our executive officers
during 2010. 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. At December 31,
2010 and 2009 the liability associated with these executive
phantom stock option awards totaled $15 million and
$6 million, respectively. A summary of our phantom stock
option activity is set forth below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Outstanding at January 1, 2010
|
|
|
1,593
|
|
|
$
|
14.13
|
|
Forfeited
|
|
|
(106
|
)
|
|
$
|
14.13
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
1,487
|
|
|
$
|
14.13
|
|
|
|
|
|
|
|
|
|
|
Performance
Unit Awards
During the year ended December 31, 2010, we granted
performance unit awards to certain officers and other key
employees. These performance unit awards represent the right to
receive a cash payment at the end of the performance period
depending on Tesoros achievement of pre-established
performance measures and will vest at the end of a
33-month
performance period. The value of the award ultimately paid will
be based on our relative total shareholder return against the
performance peer group and the S&P 500 index as well as the
absolute total shareholder return of Tesoros common stock
over the performance period. The performance unit awards are
settled in cash and can range from 0% to 200% of targeted award
value. The fair value of each performance unit award is
estimated at the end of each reporting period using a Monte
Carlo simulation. At December 31, 2010 the liability
associated with these performance unit awards totaled
$1 million. A summary of our performance unit award
activity is set forth below (units in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Fair Value at
|
|
|
|
Performance Units
|
|
|
End of Period
|
|
|
Nonvested at January 1, 2010
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
5,424
|
|
|
|
|
|
Forfeited
|
|
|
(440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2010
|
|
|
4,984
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
94
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Board
of Directors Deferred Compensation Plan
Effective May 1, 2009, our Non-Employee Director Phantom
Stock Plan was amended and restated as the Board of Directors
Deferred Compensation Plan. Under this plan, half of a
directors annual retainer will be paid in cash or deferred
(as elected) in a cash account or a stock account. The other
half of a directors annual retainer will be mandatorily
deferred into the stock account for three years. The annual
retainer is paid or deferred on the last business day of each
calendar quarter. New directors will receive sign-on awards that
will be mandatorily deferred into the stock account. The portion
of the annual retainer that is deferred into the stock account
will be converted into units, based on the closing market price
of Tesoros common stock on the date of credit. The value
of each stock account is a function of the changes in the market
value of Tesoros common stock, which is payable in cash
commencing at the separation of service, death, disability or in
the case of elective deferrals, an in-service lump sum. Payments
may be made as a total distribution or in annual installments,
not to exceed ten years.
|
|
NOTE Q
|
OPERATING
SEGMENTS
|
The Companys revenues are derived from two operating
segments, refining and retail. We own and operate seven
petroleum refineries located in California, Washington, Alaska,
Hawaii, North Dakota and Utah. These refineries manufacture
gasoline and gasoline blendstocks, jet fuel, diesel fuel,
residual fuel oils and other refined products. We sell these
refined products, together with refined products purchased from
third-parties, at wholesale through terminal facilities and
other locations. Our refining segment also sells refined
products to unbranded marketers and occasionally exports refined
products to foreign markets. Our retail segment sells gasoline,
diesel fuel and convenience store items through company-operated
retail stations and branded jobber/dealers in 15 states
from Minnesota to Alaska and Hawaii. We do not have significant
operations in foreign countries. Therefore, revenue in foreign
countries and long-lived assets located in foreign countries are
not material to our operations. No single customer accounted for
more than 10% of our consolidated operating revenues for the
years ended December 31, 2010, 2009, or 2008.
The operating segments adhere to the accounting policies used
for our consolidated financial statements, as described in
Note A. We evaluate the performance of our segments based
primarily on segment operating income. Segment operating income
includes those revenues and expenses that are directly
attributable to management of the respective segment.
Intersegment sales from refining to retail are made at
prevailing market rates. Income taxes, other income, foreign
currency exchange gain (loss), interest and financing costs,
interest income, corporate depreciation and corporate general
and administrative expenses are excluded from segment operating
income. Identifiable assets are those used by the segments,
whereas corporate assets are principally cash and other assets
that are not associated with a specific operating segment.
95
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Segment information for each of the three years ended is as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined products
|
|
$
|
19,038
|
|
|
$
|
15,674
|
|
|
$
|
26,759
|
|
Crude oil resales and other
|
|
|
1,039
|
|
|
|
691
|
|
|
|
1,126
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel(b)
|
|
|
3,583
|
|
|
|
3,000
|
|
|
|
4,184
|
|
Merchandise and other
|
|
|
227
|
|
|
|
235
|
|
|
|
248
|
|
Intersegment sales from Refining to Retail
|
|
|
(3,304
|
)
|
|
|
(2,728
|
)
|
|
|
(3,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
20,583
|
|
|
$
|
16,872
|
|
|
$
|
28,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining(c)(d)
|
|
$
|
255
|
|
|
$
|
55
|
|
|
$
|
627
|
|
Retail(e)
|
|
|
97
|
|
|
|
83
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Income
|
|
|
352
|
|
|
|
138
|
|
|
|
673
|
|
Corporate and unallocated costs
|
|
|
(212
|
)
|
|
|
(195
|
)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)(f)
|
|
|
140
|
|
|
|
(57
|
)
|
|
|
471
|
|
Interest and financing costs
|
|
|
(157
|
)
|
|
|
(130
|
)
|
|
|
(111
|
)
|
Interest income
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
Foreign currency exchange gain (loss)
|
|
|
2
|
|
|
|
(5
|
)
|
|
|
12
|
|
Other income (expense)(g)
|
|
|
(13
|
)
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Before Income Taxes
|
|
$
|
(25
|
)
|
|
$
|
(188
|
)
|
|
$
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$
|
365
|
|
|
$
|
359
|
|
|
$
|
326
|
|
Retail
|
|
|
39
|
|
|
|
39
|
|
|
|
49
|
|
Corporate
|
|
|
18
|
|
|
|
28
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation and Amortization Expense
|
|
$
|
422
|
|
|
$
|
426
|
|
|
$
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Refined products sales include intersegment sales to our retail
segment, at prices which approximate market of
$3.3 billion, $2.7 billion and $3.9 billion in
2010, 2009 and 2008, respectively. |
|
(b) |
|
Federal and state motor fuel taxes on sales by our retail
segment are included in both revenues and cost of sales in our
statements of consolidated operations. These taxes totaled
$330 million, $283 million and $278 million for
the years ended December 31, 2010, 2009 and 2008,
respectively. |
|
(c) |
|
Includes goodwill write-off related to two separate reporting
units for $10 million and $43 million for the years
ended December 31, 2010 and 2009, respectively, and
impairment charges related to refining equipment at our Los
Angeles refinery of $20 million and $12 million,
respectively. |
|
(d) |
|
Includes $55 million in business interruption insurance
recoveries related to the April 2, 2010 incident at our
Washington refinery for the year ended December 31, 2010. |
|
(e) |
|
Retail operating income for 2008 includes impairment charges of
$29 million primarily related to closing 42 Mirastar
retail stations and the potential sale of 20 retail stations. |
|
(f) |
|
Includes a $48 million gain for the year ended
December 31, 2010 from the elimination of postretirement
life insurance benefits for current and future retirees. |
|
(g) |
|
During 2008, we received net refunds totaling $50 million
from the Trans Alaska Pipeline System for previous years
refinery transportation and distribution costs associated with
our protest of intrastate tariffs charged between 1997 and 2003.
During 2010, we accrued $16 million for claims asserted
against us in connection with these refunds. See Note N for
further information. |
96
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Segment information as of and for each of the three years ended
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$
|
263
|
|
|
$
|
356
|
|
|
$
|
561
|
|
Retail
|
|
|
22
|
|
|
|
14
|
|
|
|
20
|
|
Corporate
|
|
|
2
|
|
|
|
31
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures
|
|
$
|
287
|
|
|
$
|
401
|
|
|
$
|
619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Identifiable Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$
|
7,303
|
|
|
$
|
6,690
|
|
|
$
|
6,542
|
|
Retail
|
|
|
619
|
|
|
|
656
|
|
|
|
649
|
|
Corporate
|
|
|
810
|
|
|
|
724
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,732
|
|
|
$
|
8,070
|
|
|
$
|
7,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE R
|
SUBSEQUENT
EVENTS
|
On January 4, 2011, Tesoro Logistics LP, a wholly owned
subsidiary of Tesoro Corporation, filed a registration statement
on
Form S-1
with the U.S. Securities and Exchange Commission in
connection with a proposed initial public offering of its common
units representing limited partner interests. On
February 9, 2011, Tesoro Logistics LP filed an amendment to
the initial
Form S-1
on
Form S-1/A.
The number of common units to be offered and the price range for
the offering have not yet been determined. Tesoro Logistics LP
was formed by Tesoro Corporation to own, operate, develop and
acquire crude oil and refined products logistics assets.
Headquartered in San Antonio, Texas, Tesoro Logistics
LPs initial assets will consist of a crude oil gathering
system in the Bakken Shale/Williston Basin area, eight refined
products terminals in the western United States, and a crude oil
and refined products storage facility and five related
short-haul pipelines in Utah. At the date of this report, the
registration statement is not effective. The completion of the
offering is subject to numerous conditions, including market
conditions, and we can provide no assurance that it will be
successfully completed.
|
|
NOTE S
|
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
61/4% senior
notes due 2012,
65/8% senior
notes due 2015,
61/2% senior
notes due 2017 and
93/4% 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 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.
97
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Balance Sheet as of December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
612
|
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
648
|
|
Receivables, less allowance for doubtful accounts
|
|
|
8
|
|
|
|
719
|
|
|
|
181
|
|
|
|
|
|
|
|
908
|
|
Inventories
|
|
|
|
|
|
|
1,080
|
|
|
|
177
|
|
|
|
|
|
|
|
1,257
|
|
Prepayments and other
|
|
|
29
|
|
|
|
78
|
|
|
|
8
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
37
|
|
|
|
2,489
|
|
|
|
402
|
|
|
|
|
|
|
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
|
|
|
|
5,008
|
|
|
|
162
|
|
|
|
|
|
|
|
5,170
|
|
Investment in Subsidiaries
|
|
|
4,011
|
|
|
|
(147
|
)
|
|
|
(5
|
)
|
|
|
(3,859
|
)
|
|
|
|
|
Long-Term Receivables from Affiliates
|
|
|
2,037
|
|
|
|
|
|
|
|
88
|
|
|
|
(2,125
|
)
|
|
|
|
|
Other Noncurrent Assets
|
|
|
34
|
|
|
|
597
|
|
|
|
3
|
|
|
|
|
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,119
|
|
|
$
|
7,947
|
|
|
$
|
650
|
|
|
$
|
(5,984
|
)
|
|
$
|
8,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
76
|
|
|
$
|
1,940
|
|
|
$
|
328
|
|
|
$
|
|
|
|
$
|
2,344
|
|
Current maturities of debt
|
|
|
|
|
|
|
2
|
|
|
|
150
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
76
|
|
|
|
1,942
|
|
|
|
478
|
|
|
|
|
|
|
|
2,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Payables to Affiliates
|
|
|
|
|
|
|
2,125
|
|
|
|
|
|
|
|
(2,125
|
)
|
|
|
|
|
Debt
|
|
|
1,823
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
1,843
|
|
Other Noncurrent Liabilities
|
|
|
1,005
|
|
|
|
174
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
1,178
|
|
Stockholders Equity
|
|
|
3,215
|
|
|
|
3,686
|
|
|
|
173
|
|
|
|
(3,859
|
)
|
|
|
3,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
6,119
|
|
|
$
|
7,947
|
|
|
$
|
650
|
|
|
$
|
(5,984
|
)
|
|
$
|
8,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Balance Sheet as of December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
411
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
413
|
|
Receivables, less allowance for doubtful accounts
|
|
|
114
|
|
|
|
760
|
|
|
|
242
|
|
|
|
|
|
|
|
1,116
|
|
Inventories
|
|
|
|
|
|
|
610
|
|
|
|
12
|
|
|
|
|
|
|
|
622
|
|
Prepayments and other
|
|
|
28
|
|
|
|
43
|
|
|
|
1
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
142
|
|
|
|
1,824
|
|
|
|
257
|
|
|
|
|
|
|
|
2,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
|
|
|
|
5,019
|
|
|
|
171
|
|
|
|
|
|
|
|
5,190
|
|
Investment in Subsidiaries
|
|
|
3,999
|
|
|
|
(102
|
)
|
|
|
(5
|
)
|
|
|
(3,892
|
)
|
|
|
|
|
Long-Term Receivables from Affiliates
|
|
|
1,878
|
|
|
|
|
|
|
|
83
|
|
|
|
(1,961
|
)
|
|
|
|
|
Other Noncurrent Assets
|
|
|
42
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
|
|
657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,061
|
|
|
$
|
7,356
|
|
|
$
|
506
|
|
|
$
|
(5,853
|
)
|
|
$
|
8,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
88
|
|
|
$
|
1,428
|
|
|
$
|
369
|
|
|
$
|
|
|
|
$
|
1,885
|
|
Current maturities of debt
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
88
|
|
|
|
1,432
|
|
|
|
369
|
|
|
|
|
|
|
|
1,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Payables to Affiliates
|
|
|
|
|
|
|
1,961
|
|
|
|
|
|
|
|
(1,961
|
)
|
|
|
|
|
Debt
|
|
|
1,814
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
1,837
|
|
Other Noncurrent Liabilities
|
|
|
1,072
|
|
|
|
183
|
|
|
|
2
|
|
|
|
|
|
|
|
1,257
|
|
Stockholders Equity
|
|
|
3,087
|
|
|
|
3,757
|
|
|
|
135
|
|
|
|
(3,892
|
)
|
|
|
3,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
6,061
|
|
|
$
|
7,356
|
|
|
$
|
506
|
|
|
$
|
(5,853
|
)
|
|
$
|
8,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Operations for the Year Ended
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
REVENUES
|
|
$
|
|
|
|
$
|
26,108
|
|
|
$
|
2,624
|
|
|
$
|
(8,149
|
)
|
|
$
|
20,583
|
|
Costs and expenses
|
|
|
9
|
|
|
|
25,966
|
|
|
|
2,617
|
|
|
|
(8,149
|
)
|
|
|
20,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(9
|
)
|
|
|
142
|
|
|
|
7
|
|
|
|
|
|
|
|
140
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
(23
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
68
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
(164
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES
|
|
|
(32
|
)
|
|
|
(67
|
)
|
|
|
6
|
|
|
|
68
|
|
|
|
(25
|
)
|
Income tax expense (benefit)(a)
|
|
|
(3
|
)
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS)
|
|
$
|
(29
|
)
|
|
$
|
(71
|
)
|
|
$
|
3
|
|
|
$
|
68
|
|
|
$
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax expense (benefit) reflected in each column does
not include any tax effect of the equity in earnings from
subsidiaries. |
Condensed
Consolidating Statement of Operations for the Year Ended
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
REVENUES
|
|
$
|
|
|
|
$
|
20,377
|
|
|
$
|
2,047
|
|
|
$
|
(5,552
|
)
|
|
$
|
16,872
|
|
Costs and expenses
|
|
|
7
|
|
|
|
20,428
|
|
|
|
2,046
|
|
|
|
(5,552
|
)
|
|
|
16,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(7
|
)
|
|
|
(51
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(57
|
)
|
Equity in earnings (loss) of subsidiaries
|
|
|
(135
|
)
|
|
|
(53
|
)
|
|
|
(3
|
)
|
|
|
191
|
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES
|
|
|
(142
|
)
|
|
|
(235
|
)
|
|
|
(2
|
)
|
|
|
191
|
|
|
|
(188
|
)
|
Income tax benefit(a)
|
|
|
(2
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS)
|
|
$
|
(140
|
)
|
|
$
|
(189
|
)
|
|
$
|
(2
|
)
|
|
$
|
191
|
|
|
$
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax benefit reflected in each column does not include
any tax effect of the equity in earnings from subsidiaries. |
Condensed
Consolidating Statement of Operations for the Year Ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
REVENUES
|
|
$
|
|
|
|
$
|
33,546
|
|
|
$
|
4,030
|
|
|
$
|
(9,160
|
)
|
|
$
|
28,416
|
|
Costs and expenses
|
|
|
4
|
|
|
|
33,111
|
|
|
|
3,990
|
|
|
|
(9,160
|
)
|
|
|
27,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(4
|
)
|
|
|
435
|
|
|
|
40
|
|
|
|
|
|
|
|
471
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
280
|
|
|
|
(48
|
)
|
|
|
(2
|
)
|
|
|
(230
|
)
|
|
|
|
|
Other expense
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES
|
|
|
276
|
|
|
|
345
|
|
|
|
38
|
|
|
|
(230
|
)
|
|
|
429
|
|
Income tax expense (benefit)(a)
|
|
|
(2
|
)
|
|
|
140
|
|
|
|
13
|
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS)
|
|
$
|
278
|
|
|
$
|
205
|
|
|
$
|
25
|
|
|
$
|
(230
|
)
|
|
$
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax expense (benefit) reflected in each column does
not include any tax effect of the equity in earnings from
subsidiaries. |
100
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Cash Flows for the Year Ended
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
4
|
|
|
$
|
517
|
|
|
$
|
(136
|
)
|
|
$
|
|
|
|
$
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(296
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(297
|
)
|
Intercompany notes, net
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Proceeds from asset sales
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities
|
|
|
(3
|
)
|
|
|
(294
|
)
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolver
|
|
|
66
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
216
|
|
Repayments on revolver
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
Repurchase of common stock
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Repayments of debt
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Proceeds from stock options exercised
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Net intercompany borrowings (repayments)
|
|
|
|
|
|
|
(22
|
)
|
|
|
25
|
|
|
|
(3
|
)
|
|
|
|
|
Financing costs and other
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
(1
|
)
|
|
|
(22
|
)
|
|
|
171
|
|
|
|
(3
|
)
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
201
|
|
|
|
34
|
|
|
|
|
|
|
|
235
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
|
|
|
|
411
|
|
|
|
2
|
|
|
|
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
|
|
|
$
|
612
|
|
|
$
|
36
|
|
|
$
|
|
|
|
$
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Cash Flows for the Year Ended
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
(11
|
)
|
|
$
|
598
|
|
|
$
|
76
|
|
|
$
|
|
|
|
$
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(399
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
(437
|
)
|
Intercompany notes, net
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
155
|
|
|
|
|
|
Proceeds from asset sales
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities
|
|
|
(155
|
)
|
|
|
(398
|
)
|
|
|
(38
|
)
|
|
|
155
|
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt borrowings
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
Borrowings under revolver
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418
|
|
Repayments on revolver
|
|
|
(484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(484
|
)
|
Repurchase of common stock
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Dividend payments
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
Repayments of debt
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Proceeds from stock options exercised
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Net intercompany borrowings (repayments)
|
|
|
|
|
|
|
191
|
|
|
|
(36
|
)
|
|
|
(155
|
)
|
|
|
|
|
Financing costs and other
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
166
|
|
|
|
191
|
|
|
|
(36
|
)
|
|
|
(155
|
)
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
391
|
|
|
|
2
|
|
|
|
|
|
|
|
393
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
|
|
|
$
|
411
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Consolidating Statement of Cash Flows for the Year Ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In millions)
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
(12
|
)
|
|
$
|
714
|
|
|
$
|
14
|
|
|
$
|
|
|
|
$
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(634
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
(650
|
)
|
Intercompany notes, net
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
(122
|
)
|
|
|
|
|
Proceeds from asset sales
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities
|
|
|
122
|
|
|
|
(594
|
)
|
|
|
(16
|
)
|
|
|
(122
|
)
|
|
|
(610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolver
|
|
|
5,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,658
|
|
Repayments under revolver
|
|
|
(5,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,712
|
)
|
Repurchase of common stock
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Dividend payments
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
Repayments of debt
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Proceeds from stock options exercised
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Net intercompany borrowings (repayments)
|
|
|
|
|
|
|
(124
|
)
|
|
|
2
|
|
|
|
122
|
|
|
|
|
|
Financing costs and other
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
(110
|
)
|
|
|
(123
|
)
|
|
|
2
|
|
|
|
122
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
|
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE T
|
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
Total
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
|
(In millions except per share amounts)
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,607
|
|
|
$
|
5,143
|
|
|
$
|
5,320
|
|
|
$
|
5,513
|
|
|
$
|
20,583
|
|
Cost of sales
|
|
$
|
4,247
|
|
|
$
|
4,492
|
|
|
$
|
4,647
|
|
|
$
|
4,865
|
|
|
$
|
18,251
|
|
Operating expenses
|
|
$
|
373
|
|
|
$
|
348
|
|
|
$
|
375
|
|
|
$
|
378
|
|
|
$
|
1,474
|
|
Operating Income (Loss)
|
|
$
|
(202
|
)
|
|
$
|
143
|
|
|
$
|
129
|
|
|
$
|
70
|
|
|
$
|
140
|
|
Net Earnings (Loss)(a)
|
|
$
|
(155
|
)
|
|
$
|
67
|
|
|
$
|
56
|
|
|
$
|
3
|
|
|
$
|
(29
|
)
|
Net Earnings (Loss) Per Share(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.11
|
)
|
|
$
|
0.48
|
|
|
$
|
0.40
|
|
|
$
|
0.02
|
|
|
$
|
(0.21
|
)
|
Diluted
|
|
$
|
(1.11
|
)
|
|
$
|
0.47
|
|
|
$
|
0.39
|
|
|
$
|
0.02
|
|
|
$
|
(0.21
|
)
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,280
|
|
|
$
|
4,181
|
|
|
$
|
4,742
|
|
|
$
|
4,669
|
|
|
$
|
16,872
|
|
Cost of sales(c)
|
|
$
|
2,642
|
|
|
$
|
3,668
|
|
|
$
|
4,125
|
|
|
$
|
4,304
|
|
|
$
|
14,739
|
|
Operating expenses
|
|
$
|
366
|
|
|
$
|
368
|
|
|
$
|
367
|
|
|
$
|
368
|
|
|
$
|
1,469
|
|
Operating Income (Loss)(d)
|
|
$
|
112
|
|
|
$
|
(36
|
)
|
|
$
|
89
|
|
|
$
|
(222
|
)
|
|
$
|
(57
|
)
|
Net Earnings (Loss)
|
|
$
|
51
|
|
|
$
|
(45
|
)
|
|
$
|
33
|
|
|
$
|
(179
|
)
|
|
$
|
(140
|
)
|
Net Earnings (Loss) Per Share(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.24
|
|
|
$
|
(1.30
|
)
|
|
$
|
(1.01
|
)
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
(0.33
|
)
|
|
$
|
0.24
|
|
|
$
|
(1.30
|
)
|
|
$
|
(1.01
|
)
|
|
|
|
(a) |
|
Includes $55 million in business interruption insurance
recoveries and $12 million in property damage insurance
recoveries related to the April 2, 2010 incident at our
Washington refinery for the three months and year ended
December 31, 2010. |
|
(b) |
|
The sum of four quarters may not equal annual results due to
rounding or quarterly number of shares outstanding. |
|
(c) |
|
Reductions in petroleum inventories in 2009 resulted in
decreases of
last-in-first-out
layers acquired at lower
per-barrel
costs. These inventory reductions resulted in decreases to cost
of sales of $57 million and $69 million during the
three months and year ended December 31, 2009, respectively. |
|
(d) |
|
During the 2009 fourth quarter, we incurred a $43 million
write-off for goodwill in our refining segment. |
104
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
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 year. Based upon
that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
are effective. Our disclosure controls and procedures are
designed to provide reasonable assurance that the information
that we are required to disclose in reports we file under the
Exchange Act is accumulated and communicated to management, as
appropriate.
During the quarter ended December 31, 2010, 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.
Management
Report on Internal Control over Financial Reporting
We, as management of Tesoro Corporation and its subsidiaries
(the Company), are responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in the Securities Exchange Act of 1934,
Rule 13a-15(f).
The Companys internal control system is designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles in the United States of America. Due to
its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement
preparation and presentation.
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2010, using the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control
Integrated Framework. Based on such assessment, we conclude
that as of December 31, 2010, the Companys internal
control over financial reporting is effective.
The independent registered public accounting firm of
Ernst & Young LLP, as auditors of the Companys
consolidated financial statements, has issued an attestation
report on the effectiveness of the Companys internal
control over financial reporting, included herein.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
105
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Tesoro Corporation
We have audited Tesoro Corporations internal control over
financial reporting as of December 31, 2010, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Tesoro
Corporations management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management
Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Tesoro Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Tesoro Corporation as of
December 31, 2010 and 2009, and the related consolidated
statements of operations, comprehensive income (loss) and
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2010 and our report
dated March 1, 2011 expressed an unqualified opinion
thereon.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
March 1, 2011
106
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information required under this Item will be contained in the
Companys 2011 Proxy Statement, incorporated herein by
reference. See also Executive Officers of the Registrant and
Board of Directors of the Registrant under Business in
Item 1 hereof.
You can access our code of business conduct and ethics for
senior financial executives on our website at
www.tsocorp.com, and you may receive a copy, free of
charge by writing to Tesoro Corporation, Attention: Investor
Relations, 19100 Ridgewood Pkwy, San Antonio, Texas
78259-1828.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information required under this Item will be contained in the
Companys 2011 Proxy Statement, incorporated herein by
reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Equity
Compensation Plan Information
The following table summarizes, as of December 31, 2010,
certain information regarding equity compensation to our
employees, officers, directors and other persons under our
equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
|
|
Future Issuance under
|
|
|
|
Number of Securities to be
|
|
|
Weighted-Average Exercise
|
|
|
Equity Compensation
|
|
|
|
Issued Upon Exercise of
|
|
|
Price of Outstanding
|
|
|
Plans (Excluding
|
|
|
|
Outstanding Options,
|
|
|
Options, Warrants
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
And Rights
|
|
|
the Second Column)
|
|
|
Equity compensation plans approved by security holders
|
|
|
7,226,097
|
|
|
$
|
23.58
|
|
|
|
549,635
|
|
Equity compensation plans not approved by security holders(a)(b)
|
|
|
201,513
|
|
|
$
|
10.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,427,610
|
|
|
$
|
23.23
|
|
|
|
549,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Key Employee Stock Option Plan was approved by our Board of
Directors in November 1999 and provided for stock option grants
to eligible employees who are not our executive officers. The
options expire ten years after the date of grant. Our Board of
Directors suspended any future grants under this plan in 2003. |
|
(b) |
|
Stock options granted in connection with the inducement awards
of the CEO Agreement were not granted under an equity
compensation plan. |
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information required under this Item will be contained in the
Companys 2011 Proxy Statement, incorporated herein by
reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information required under this Item will be contained in the
Companys 2011 Proxy Statement, incorporated herein by
reference.
107
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a)1. Financial Statements
The following consolidated financial statements of Tesoro
Corporation and its subsidiaries are included in Part II,
Item 8 of this
Form 10-K:
2. Financial Statement Schedules
No financial statement schedules are submitted because of the
absence of the conditions under which they are required, the
required information is insignificant or because the required
information is included in the consolidated financial statements.
3. Exhibits
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
2.1
|
|
|
|
Stock Sale Agreement, dated March 18, 1998, among the
Company, BHP Hawaii Inc. and BHP Petroleum Pacific Islands Inc.
(incorporated by reference herein to Exhibit 2.1 to
Registration Statement
No. 333-51789).
|
2.2
|
|
|
|
Stock Sale Agreement, dated May 1, 1998, among Shell
Refining Holding Company, Shell Anacortes Refining Company and
the Company (incorporated by reference herein to the
Companys Quarterly Report on
Form 10-Q
for the period ended March 31, 1998, File
No. 1-3473).
|
2.3
|
|
|
|
Asset Purchase Agreement, dated July 16, 2001, by and among
the Company, BP Corporation North America Inc. and Amoco
Oil Company (incorporated by reference herein to
Exhibit 2.1 to the Companys Current Report on
Form 8-K
filed on September 21, 2001, File
No. 1-3473).
|
2.4
|
|
|
|
Asset Purchase Agreement, dated July 16, 2001, by and among
the Company, BP Corporation North America Inc. and Amoco
Oil Company (incorporated by reference herein to
Exhibit 2.2 to the Companys Current Report on
Form 8-K
filed on September 21, 2001, File
No. 1-3473).
|
2.5
|
|
|
|
Asset Purchase Agreement, dated July 16, 2001, by and among
the Company, BP Corporation North America Inc. and BP
Pipelines (North America) Inc. (incorporated by reference herein
to Exhibit 2.1 to the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2001, File
No. 1-3473).
|
2.6
|
|
|
|
Asset Purchase Agreement by and between the Company and Shell
Oil Products U.S. dated as of January 29, 2007
(incorporated by reference herein to Exhibit 2.1 to the
Companys Current Report on
Form 8-K
filed on February 1, 2007, File
No. 1-3473).
|
2.7
|
|
|
|
Sale and Purchase Agreement for Golden Eagle Refining and
Marketing Assets, dated February 4, 2002, by and among
Ultramar Inc. and Tesoro Refining and Marketing Company,
including First Amendment dated February 20, 2002 and
related Purchaser Parent Guaranty dated February 4, 2002,
and Second Amendment dated May 3, 2002 (incorporated by
reference herein to Exhibit 2.12 to the Companys
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001,
File No. 1-3473,
and Exhibit 2.1 to the Companys Current Report on
Form 8-K
filed on May 9, 2002, File
No. 1-3473).
|
2.8
|
|
|
|
Asset Purchase and Sale Agreement by and between the Company and
Shell Oil Products U.S. dated as of January 29, 2007
(incorporated by reference herein to Exhibit 2.2 to the
Companys Current Report on
Form 8-K
filed on February 1, 2007, File
No. 1-3473).
|
108
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
2.9
|
|
|
|
Purchase and Sale Agreement and Joint Escrow Instructions by and
among the Company and USA Petroleum Corporation, USA Gasoline
Corporation, Palisades Gas and Wash, Inc. and USA San Diego
LLC dated as of January 26, 2007 (incorporated by reference
herein to Exhibit 2.3 to the Companys Current Report
on
Form 8-K
filed on February 1, 2007, File
No. 1-3473).
|
2.10
|
|
|
|
Letter Agreement to the Purchase and Sale Agreement and Joint
Escrow Instructions dated April 30, 2007 between the
Company and USA Petroleum Corporation, Palisades Gas and Wash,
Inc. and USA San Diego, LLC (incorporated by reference
herein to Exhibit 2.1 to the Companys Quarterly
Report on
Form 10-Q
for the quarterly period ended June 30, 2007, File
No. 1-3473).
|
3.1
|
|
|
|
Restated Certificate of Incorporation of the Company
(incorporated by reference herein to Exhibit 3 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1993,
File No. 1-3473).
|
3.2
|
|
|
|
Amendment to Restated Certificate of Incorporation of the
Company adding a new Article IX limiting Directors
Liability (incorporated by reference herein to Exhibit 3(b)
to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1993, File
No. 1-3473).
|
3.3
|
|
|
|
Certificate of Amendment, dated as of May 4, 2006, to
Certificate of Incorporation of the Company, amending
Article IV, increasing the number of authorized shares of
common stock from 100 million to 200 million
(incorporated by reference herein to Exhibit 3.1 to the
Companys Quarterly Report on
Form 10-Q
for the period ended March 31, 2006, File
No. 1-3473).
|
3.4
|
|
|
|
Certificate of Amendment, dated as of February 9, 1994, to
Restated Certificate of Incorporation of the Company amending
Article IV, Article V, Article VII and
Article VIII (incorporated by reference herein to
Exhibit 3(e) to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1993, File
No. 1-3473).
|
3.5
|
|
|
|
Certificate of Amendment, dated as of August 3, 1998, to
Certificate of Incorporation of the Company, amending
Article IV, increasing the number of authorized shares of
Common Stock from 50 million to 100 million
(incorporated by reference herein to Exhibit 3.1 to the
Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 1998, File
No. 1-3473).
|
3.6
|
|
|
|
Certificate of Ownership of Merger merging Tesoro Merger Corp.
into Tesoro Petroleum Corporation and changing the name of
Tesoro Petroleum Corporation to Tesoro Corporation, dated
November 8, 2004 (incorporated by reference herein to
Exhibit 3.1 to the Companys Current Report on
Form 8-K
filed on November 9, 2004).
|
3.7
|
|
|
|
Amended and Restated Bylaws of Tesoro Corporation effective
January 26, 2011 (incorporated by reference herein to
Exhibit 3.1 to the Companys Current Report on
Form 8-K
filed on January 28, 2011).
|
4.1
|
|
|
|
Form of Indenture relating to the
61/4% Senior
Notes due 2012, dated as of November 16, 2005, among Tesoro
Corporation, certain subsidiary guarantors and U.S. Bank
National Association, as Trustee (including form of note)
(incorporated by reference herein to Exhibit 4.1 to the
Companys Current Report on
Form 8-K
filed on November 17, 2005, File
No. 1-3473).
|
4.2
|
|
|
|
Form of Indenture relating to the
65/8% Senior
Notes due 2015, dated as of November 16, 2005, among Tesoro
Corporation, certain subsidiary guarantors and U.S. Bank
National Association, as Trustee (including form of note)
(incorporated by reference herein to Exhibit 4.2 to the
Companys Current Report on
Form 8-K
filed on November 17, 2005, File
No. 1-3473).
|
4.3
|
|
|
|
Form of Indenture relating to the
61/2% Senior
Notes due 2017, dated as of May 29, 2007, among Tesoro
Corporation, certain subsidiary guarantors and U.S. Bank
National Association, as Trustee (including form of note)
(incorporated by reference herein to Exhibit 4.1 to the
Companys Current Report on
Form 8-K
filed on June 4, 2007, File
No. 1-3473)
|
4.4
|
|
|
|
Form of Indenture relating to the
93/4% Senior
Notes due 2019, dated as of May 29, 2007, among Tesoro
Corporation, certain subsidiary guarantors and J.P. Morgan
Securities Inc., as Trustee (including form of note)
(incorporated by reference herein to Exhibit 4.1 to the
Companys Current Report on
Form 8-K
filed on June 5, 2009, File
No. 1-3473).
|
10.1
|
|
|
|
Fourth Amended and Restated Credit Agreement, dated as of
May 11, 2007, among the Company, JPMorgan Chase Bank, N.A
as administrative agent and a syndicate of banks, financial
institutions and other entities (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on May 15, 2007, File
No. 1-3473).
|
109
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
10.2
|
|
|
|
First Amendment to the Fourth Amended and Restated Credit
Agreement, dated as of February 22, 2008, among the
Company, JP Morgan Chase Bank, NA as administrative agent and a
syndicate of banks, financial institutions and other entities.
(incorporated by reference herein to Exhibit 10.2 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007,
File No. 1-3473).
|
10.3
|
|
|
|
Second Amendment to the Fourth Amended and Restated Credit
Agreement, dated as of May 28, 2009, among the Company, JP
Morgan Chase Bank, NA as administrative agent and a syndicate of
banks, financial institutions and other entities (incorporated
by reference herein to Exhibit 10.1 to the Companys
Current Report on
Form 8-K
filed on May 28, 2009, File
No. 1-3473).
|
10.4
|
|
|
|
Third Amendment to the Fourth Amended and Restated Credit
Agreement, dated as of February 23, 2010, among the
Company, JP Morgan Chase Bank, NA as administrative agent and a
syndicate of banks, financial institutions and other entities
(incorporated by reference herein to Exhibit 10.4 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2009, File
No. 1-3473).
|
10.5
|
|
|
|
Uncommitted Revolving Credit Agreement dated as of
October 18, 2010, among Tesoro Panama Company, S.A. as
Borrower, certain lenders listed on the signature pages, as
Lenders, and BNP Paribas, as Administrative Agent, Collateral
Agent, Letter of Credit Issuer, Swing Line Lender and Daylight
Overdraft Bank (incorporated by reference herein to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on October 22, 2010, File
No. 1-3473).
|
10.6
|
|
|
|
$100 million Promissory Note, dated as of May 17,
2002, payable by the Company to Ultramar Inc. (incorporated by
reference to Exhibit 10.1 to the Companys Current
Report on
Form 8-K
filed on May 24, 2002, File
No. 1-3473).
|
10.7
|
|
|
|
$50 million Promissory Note, dated as of May 17, 2002,
payable by the Company to Ultramar Inc. (incorporated by
reference to Exhibit 10.2 to the Companys Current
Report on
Form 8-K
filed on May 24, 2002, File
No. 1-3473).
|
10.8
|
|
|
|
Amended and Restated Executive Security Plan effective
January 1, 2009 (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed December 18, 2008,
File No. 1-3473).
|
10.9
|
|
|
|
Amendment No. 1 to the Amended and Restated Executive
Security Plan effective as of January 1, 2010 (incorporated
by reference herein to Exhibit 10.8 to the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2009, File
No. 1-3473).
|
10.10
|
|
|
|
Amended and Restated Executive Long-Term Incentive Plan
effective as of February 2, 2006 (incorporated by reference
herein to Exhibit 10.3 to the Companys Current Report
on
Form 8-K
filed on February 8, 2006, File
No. 1-3473).
|
10.11
|
|
|
|
2006 Long-Term Incentive Plan dated effective January 1,
2009 (incorporated by reference to Exhibit 10.4 to the
Companys Current Report on
Form 8-K
filed December 18, 2008,
File No. 1-3473).
|
10.12
|
|
|
|
Tesoro Corporation 2006 Executive Deferred Compensation Plan
effective January 1, 2009 (incorporated by reference to
Exhibit 10.6 to the Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
10.13
|
|
|
|
Tesoro Corporation Restoration Retirement Plan effective
January 1, 2009 (incorporated by reference to
Exhibit 10.5 to the Companys Current Report on
Form 8-K
filed December 18, 2008,
File No. 1-3473).
|
10.14
|
|
|
|
Amendment No. 1 to the Tesoro Corporation Restoration
Retirement Plan effective January 1, 2010 (incorporated by
reference herein to Exhibit 10.13 to the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2009, File
No. 1-3473).
|
10.15
|
|
|
|
Copy of the Companys Key Employee Stock Option Plan dated
November 12, 1999 (incorporated by reference herein to
Exhibit 10.3 to the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2002, File
No. 1-3473).
|
10.16
|
|
|
|
2006 Long-Term Stock Appreciation Rights Plan of Tesoro
Corporation (incorporated by reference herein to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on February 8, 2006,
File No. 1-3473).
|
10.17
|
|
|
|
Employment Agreement between Tesoro and Gregory J. Goff dated as
of March 30, 2010 (incorporated by reference herein to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on April 5, 2010, File
No. 1-3473).
|
10.18
|
|
|
|
Separation and Waiver of Liability Agreement between Tesoro
Corporation and William J. Finnerty dated March 18, 2010
(incorporated by reference herein to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed on March 23, 2010, File
No. 1-3473).
|
110
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
10.19
|
|
|
|
Employment Agreement between the Company and Charles S. Parrish
dated as of May 7, 2009 (incorporated by reference herein
to Exhibit 10.1 to the Companys Current Report on
Form 8-K/A
filed on May 8, 2009, File
No. 1-3473).
|
10.20
|
|
|
|
Management Stability Agreement between the Company and Arlen O.
Glenewinkel, Jr. dated August 2, 2005 (incorporated by
reference herein to Exhibit 10.28 to the Companys
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006, File
No. 1-3473).
|
*10.21
|
|
|
|
Management Stability Agreement between the Company and G. Scott
Spendlove, Jr. dated December 31, 2008.
|
10.22
|
|
|
|
Copy of the Companys Non-Employee Director Retirement Plan
dated December 8, 1994 (incorporated by reference herein to
Exhibit 10(t) to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1994, File
No. 1-3473).
|
10.23
|
|
|
|
Amended and Restated 1995 Non-Employee Director Stock Option
Plan, as amended through March 15, 2000 (incorporated by
reference herein to Exhibit 10.2 to the Companys
Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2002, File
No. 1-3473).
|
10.24
|
|
|
|
Amendment to the Companys Amended and Restated 1995
Non-Employee Director Stock Option Plan (incorporated by
reference herein to Exhibit 10.41 to the Companys
Registration Statement
No. 333-92468).
|
10.25
|
|
|
|
Amendment to the Companys 1995 Non-Employee Director Stock
Option Plan effective as of May 11, 2004 (incorporated by
reference herein to Exhibit 4.19 to the Companys
Registration Statement
No. 333-120716).
|
10.26
|
|
|
|
Amended and Restated Board of Directors Deferred Compensation
Plan effective May 1, 2009 (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2009, File
No. 1-3473).
|
10.27
|
|
|
|
Board of Directors Deferred Compensation Trust dated
February 23, 1995 (incorporated by reference herein to
Exhibit 10(v) to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1994, File
No. 1-3473).
|
10.28
|
|
|
|
Board of Directors Deferred Phantom Stock Plan effective
January 1, 2009, (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
10.29
|
|
|
|
2005 Director Compensation Plan (incorporated by reference
herein to Exhibit A to the Companys Proxy Statement
for the Annual Meeting of Stockholders held on May 4, 2005,
File
No. 1-3473).
|
10.30
|
|
|
|
Tesoro Corporation Executive Severance and Change in Control
Plan effective January 12, 2011 (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed January 18, 2011, File
No. 1-3473).
|
10.31
|
|
|
|
Tesoro Corporation Supplemental Executive Retirement Plan
effective January 12, 2011(incorporated by reference to
Exhibit 10.2 to the Companys Current Report on
Form 8-K
filed January 18, 2011, File
No. 1-3473).
|
10.32
|
|
|
|
Form of Indemnification Agreement between the Company and its
officers (incorporated by reference herein to Exhibit 10.2
to the Companys Current Report on
Form 8-K
filed on August 4, 2008, File
No. 1-3473).
|
10.33
|
|
|
|
Form of Indemnification Agreement between the Company and its
directors (incorporated by reference herein to Exhibit 10.3
to the Companys Current Report on
Form 8-K
filed on August 4, 2008, File
No. 1-3473).
|
14.1
|
|
|
|
Code of Business Conduct and Ethics for Senior Financial
Executives (incorporated by reference herein to
Exhibit 14.1 to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003, File
No. 1-3473).
|
*21.1
|
|
|
|
Subsidiaries of the Company.
|
*23.1
|
|
|
|
Consent of Independent Registered Public Accounting Firm
(Ernst & Young LLP).
|
*31.1
|
|
|
|
Certification by Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
*31.2
|
|
|
|
Certification by Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
*32.1
|
|
|
|
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.
|
*32.2
|
|
|
|
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.
|
111
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
** 101
|
|
|
|
The following materials from Tesoro Corporations
Form 10-K
for the fiscal year ended December 31, 2010, formatted in
XBRL (Extensible Business Reporting Language):
(i) Statements of Consolidated Operations,
(ii) Consolidated Balance Sheets, (iii) Statements of
Consolidated Comprehensive Income (Loss) and Stockholders
Equity, (iv) Statements of Consolidated Cash Flows, and
(v) Notes to Consolidated Financial Statements, tagged as
blocks of text.
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Submitted electronically herewith. |
|
|
|
Confidential treatment has been granted for certain portions of
this Exhibit pursuant to
Rule 24b-2
of the Securities Exchange Act of 1934, which portions have been
omitted and filed separately with the Securities and Exchange
Commission. |
|
|
|
Identifies management contracts or compensatory plans or
arrangements required to be filed as an exhibit hereto pursuant
to Item 14(a)(3) of
Form 10-K. |
In accordance with Rule 402 of
Regulation S-T,
the XBRL information in Exhibit 101 to this Annual Report
on
Form 10-K
shall not be deemed to be filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended (Exchange
Act), or otherwise subject to the liability of that section, and
shall not be incorporated by reference into any registration
statement or other document filed under the Securities Act of
1933, as amended, or the Exchange Act, except as shall be
expressly set forth by specific reference in such filing.
Copies of exhibits filed as part of this
Form 10-K
may be obtained by stockholders of record at a charge of $0.15
per page, minimum $5.00 each request. Direct inquiries to the
Corporate Secretary, Tesoro Corporation, 19100 Ridgewood Pkwy,
San Antonio, Texas,
78259-1828.
112
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TESORO CORPORATION
Gregory J. Goff
President and Chief Executive Officer
(Principal Executive Officer)
Dated: March 1, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
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|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ GREGORY
J. GOFF
Gregory
J. Goff
|
|
President and Chief Executive Officer (Principal Executive
Officer)
|
|
February 23, 2011
|
|
|
|
|
|
/s/ G.
SCOTT SPENDLOVE
G.
Scott Spendlove
|
|
Senior Vice President and Chief Financial Officer (Principal
Financial Officer)
|
|
February 23, 2011
|
|
|
|
|
|
/s/ ARLEN
O. GLENEWINKEL, JR.
Arlen
O. Glenewinkel, Jr.
|
|
Vice President and Controller (Principal Accounting Officer)
|
|
February 23, 2011
|
|
|
|
|
|
/s/ STEVEN
H. GRAPSTEIN
Steven
H. Grapstein
|
|
Chairman of the Board of Directors
|
|
February 23, 2011
|
|
|
|
|
|
/s/ RODNEY
F. CHASE
Rodney
F. Chase
|
|
Director
|
|
February 23, 2011
|
|
|
|
|
|
/s/ ROBERT
W. GOLDMAN
Robert
W. Goldman
|
|
Director
|
|
February 23, 2011
|
|
|
|
|
|
/s/ WILLIAM
J. JOHNSON
William
J. Johnson
|
|
Director
|
|
February 23, 2011
|
|
|
|
|
|
/s/ J.W.
NOKES
J.W.
Nokes
|
|
Director
|
|
February 23, 2011
|
|
|
|
|
|
/s/ DONALD
H. SCHMUDE
Donald
H. Schmude
|
|
Director
|
|
February 23, 2011
|
|
|
|
|
|
Susan
Tomasky
|
|
Director
|
|
|
|
|
|
|
|
/s/ MICHAEL
E. WILEY
Michael
E. Wiley
|
|
Director
|
|
February 23, 2011
|
|
|
|
|
|
/s/ PATRICK
Y. YANG
Patrick
Y. Yang
|
|
Director
|
|
February 23, 2011
|
113