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, 2005 |
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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 |
Commission File
Number 1-3473
TESORO CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware |
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95-0862768 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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300 Concord Plaza Drive
San Antonio, Texas
(Address of principal executive offices) |
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78216-6999
(Zip Code) |
Registrants telephone number, including area code:
210-828-8484
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,
$0.162/3 par
value |
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New York Stock Exchange
Pacific Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark 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, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
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, 2005, the aggregate market value of the voting
common stock held by non-affiliates of the registrant was
approximately $3,217,903,000 based upon the closing price of its
common stock on the New York Stock Exchange Composite tape. At
March 1, 2006, there were 69,006,300 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 2006 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
Forward-Looking Statements on page 46.
When used in this Annual Report on
Form 10-K, the
terms Tesoro, we, our and
us, except as otherwise indicated or as the context
otherwise indicates, refer to Tesoro Corporation and its
subsidiaries.
1
PART I
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ITEMS 1. AND 2. |
BUSINESS AND PROPERTIES |
We are one of the largest independent petroleum refiners and
marketers in the United States with two operating
segments (1) refining crude oil and other
feedstocks and selling petroleum products in bulk and wholesale
markets (refining) and (2) selling motor fuels
and convenience products in the retail market
(retail). Through our refining segment, we produce
refined products, primarily gasoline and gasoline blendstocks,
jet fuel, diesel fuel and heavy fuel oils for sale to a wide
variety of commercial customers in the western and
mid-continental United States. Our retail segment distributes
motor fuels through a network of gas stations, primarily under
the
Tesoro®
and
Mirastar®
brands. See Notes C, D and O in our consolidated financial
statements in Item 8 for additional information on our
operating segments and properties.
Tesoro is a Fortune 200 company based in San Antonio,
Texas. We were incorporated in Delaware in 1968 under the name
Tesoro Petroleum Corporation. On November 8, 2004, our name
was changed to Tesoro Corporation. Our principal executive
offices are located at 300 Concord Plaza Drive,
San Antonio, Texas 78216-6999 and our telephone number is
(210) 828-8484. Our website can be found at
www.tsocorp.com. Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K and any
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are made available through our website 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, 300 Concord
Plaza Drive, San Antonio, Texas 78216-6999. We
submitted to the New York Stock Exchange on June 14, 2005
our annual certification concerning corporate governance
pursuant to Section 303A.12(a) of the New York Stock
Exchange Listed Company Manual.
REFINING
We own and operate six petroleum refineries, located in
California (California region), Alaska and
Washington (Pacific Northwest region), Hawaii
(Mid-Pacific region) and North Dakota and Utah
(Mid-Continent region), and sell refined products to
a wide variety of customers in the western and mid-continental
United States. Our refineries produce a high proportion of our
refined product sales volumes, and we purchase the remainder
from other refiners and suppliers. Our six refineries have a
combined crude oil capacity of 563,000 barrels per day
(bpd). We operate the largest refineries in Hawaii
and Utah, the second largest refineries in northern California
and Alaska, and the only refinery in North Dakota. Capacity and
throughput rates of crude oil and other feedstocks by refinery
are as follows:
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Throughput (bpd) | |
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Crude Oil | |
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Refinery |
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Capacity (bpd) | |
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2005 | |
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2004 | |
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2003 | |
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California
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California
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166,000 |
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164,600 |
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152,800 |
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156,400 |
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Pacific Northwest
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|
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Washington
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115,000 |
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110,500 |
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117,200 |
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112,300 |
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Alaska
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72,000 |
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60,200 |
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57,200 |
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48,800 |
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Mid-Pacific
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Hawaii
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94,000 |
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82,700 |
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84,500 |
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79,700 |
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Mid-Continent
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North Dakota
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58,000 |
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58,100 |
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56,200 |
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47,500 |
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Utah
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58,000 |
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53,500 |
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52,500 |
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43,500 |
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Total Refinery
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563,000 |
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529,600 |
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520,400 |
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488,200 |
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|
We experienced reduced throughput during scheduled refinery
maintenance (turnarounds) at our California,
Washington and Hawaii refineries in 2005, our California
refinery in 2004 and our Alaska, North
2
Dakota and Utah refineries in 2003. We also reduced throughput
rates at some of our refineries in late 2003 in response to
regional and seasonal market conditions. Throughput exceeded our
Washington refinerys crude oil capacity in 2004 due to
processing other feedstocks in addition to crude oil.
Feedstock Supply. We purchase crude oil and other
feedstocks for our refineries from a diversified supply of
domestic and foreign sources through term agreements with
renewal provisions and in the spot market. Prices under the term
agreements generally fluctuate with market prices. We purchase
approximately 75% of our crude oil under term contracts, which
are primarily short-term agreements with market-related prices,
and we purchase the remainder in the spot market. In 2005, we
received 58% of our crude oil input from domestic sources
(including 23% from Alaskas North Slope) and 42% from
foreign sources (including 12% from Canada). Approximately 50%
of our total refining throughput was heavy crude oil in 2005 and
2004, compared with 58% in 2003. Heavy crude oil as a percent of
total refining throughput was impacted during 2005, primarily
due to scheduled turnarounds at our three largest refineries.
The decrease in the heavy crude oil that we processed in 2004,
as compared to 2003, was primarily due to scheduled and
unscheduled downtime at our California refinery. We define
heavy crude oil, which generally is sold at a
discount to lighter crudes, as Alaska North Slope or crude oil
with an American Petroleum Institute specific gravity of 32
degrees or less. Actual throughput volumes by feedstock type are
summarized below (in thousand bpd):
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|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
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| |
|
| |
|
| |
|
|
Volume | |
|
% | |
|
Volume | |
|
% | |
|
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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|
Heavy crude
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|
151 |
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|
91 |
% |
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|
128 |
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|
84 |
% |
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|
148 |
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|
|
95 |
% |
|
Light crude
|
|
|
6 |
|
|
|
4 |
|
|
|
14 |
|
|
|
9 |
|
|
|
2 |
|
|
|
1 |
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|
Other feedstocks
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|
|
8 |
|
|
|
5 |
|
|
|
11 |
|
|
|
7 |
|
|
|
6 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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|
165 |
|
|
|
100 |
% |
|
|
153 |
|
|
|
100 |
% |
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|
156 |
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|
|
100 |
% |
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|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
Pacific Northwest
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy crude
|
|
|
85 |
|
|
|
50 |
% |
|
|
89 |
|
|
|
51 |
% |
|
|
85 |
|
|
|
53 |
% |
|
Light crude
|
|
|
78 |
|
|
|
45 |
|
|
|
81 |
|
|
|
47 |
|
|
|
70 |
|
|
|
43 |
|
|
Other feedstocks
|
|
|
8 |
|
|
|
5 |
|
|
|
4 |
|
|
|
2 |
|
|
|
6 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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|
|
171 |
|
|
|
100 |
% |
|
|
174 |
|
|
|
100 |
% |
|
|
161 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Mid-Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy crude
|
|
|
29 |
|
|
|
35 |
% |
|
|
42 |
|
|
|
50 |
% |
|
|
51 |
|
|
|
64 |
% |
|
Light crude
|
|
|
54 |
|
|
|
65 |
|
|
|
42 |
|
|
|
50 |
|
|
|
29 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
83 |
|
|
|
100 |
% |
|
|
84 |
|
|
|
100 |
% |
|
|
80 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Continent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Light crude
|
|
|
107 |
|
|
|
96 |
% |
|
|
104 |
|
|
|
95 |
% |
|
|
87 |
|
|
|
96 |
% |
|
Other feedstocks
|
|
|
4 |
|
|
|
4 |
|
|
|
5 |
|
|
|
5 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
111 |
|
|
|
100 |
% |
|
|
109 |
|
|
|
100 |
% |
|
|
91 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Throughput
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy crude
|
|
|
265 |
|
|
|
50 |
% |
|
|
259 |
|
|
|
50 |
% |
|
|
284 |
|
|
|
58 |
% |
|
Light crude
|
|
|
245 |
|
|
|
46 |
|
|
|
241 |
|
|
|
46 |
|
|
|
188 |
|
|
|
39 |
|
|
Other feedstocks
|
|
|
20 |
|
|
|
4 |
|
|
|
20 |
|
|
|
4 |
|
|
|
16 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
530 |
|
|
|
100 |
% |
|
|
520 |
|
|
|
100 |
% |
|
|
488 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Refined Products. Refining yield represents production
volumes of refined products consisting primarily of gasoline and
gasoline blendstocks, jet fuel, diesel fuel and heavy fuel oils.
We also manufacture other
3
products, including liquefied petroleum gas, petroleum coke and
asphalt. Our refining yields, in volumes, are summarized below
(in thousand bpd):
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|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
Volume | |
|
% | |
|
Volume | |
|
% | |
|
Volume | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
93 |
|
|
|
54 |
% |
|
|
96 |
|
|
|
59 |
% |
|
|
99 |
|
|
|
60 |
% |
|
Diesel fuel
|
|
|
49 |
|
|
|
28 |
|
|
|
38 |
|
|
|
24 |
|
|
|
38 |
|
|
|
23 |
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
31 |
|
|
|
18 |
|
|
|
28 |
|
|
|
17 |
|
|
|
29 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
173 |
|
|
|
100 |
% |
|
|
162 |
|
|
|
100 |
% |
|
|
166 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pacific Northwest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
74 |
|
|
|
42 |
% |
|
|
74 |
|
|
|
42 |
% |
|
|
72 |
|
|
|
43 |
% |
|
Jet fuel
|
|
|
31 |
|
|
|
18 |
|
|
|
31 |
|
|
|
17 |
|
|
|
26 |
|
|
|
16 |
|
|
Diesel fuel
|
|
|
25 |
|
|
|
14 |
|
|
|
27 |
|
|
|
15 |
|
|
|
26 |
|
|
|
16 |
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
46 |
|
|
|
26 |
|
|
|
47 |
|
|
|
26 |
|
|
|
42 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
176 |
|
|
|
100 |
% |
|
|
179 |
|
|
|
100 |
% |
|
|
166 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
20 |
|
|
|
24 |
% |
|
|
21 |
|
|
|
25 |
% |
|
|
19 |
|
|
|
24 |
% |
|
Jet fuel
|
|
|
26 |
|
|
|
31 |
|
|
|
24 |
|
|
|
28 |
|
|
|
23 |
|
|
|
28 |
|
|
Diesel fuel
|
|
|
12 |
|
|
|
14 |
|
|
|
15 |
|
|
|
17 |
|
|
|
14 |
|
|
|
17 |
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
26 |
|
|
|
31 |
|
|
|
26 |
|
|
|
30 |
|
|
|
25 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
84 |
|
|
|
100 |
% |
|
|
86 |
|
|
|
100 |
% |
|
|
81 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Continent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
61 |
|
|
|
53 |
% |
|
|
60 |
|
|
|
53 |
% |
|
|
49 |
|
|
|
52 |
% |
|
Jet fuel
|
|
|
11 |
|
|
|
9 |
|
|
|
11 |
|
|
|
10 |
|
|
|
9 |
|
|
|
9 |
|
|
Diesel fuel
|
|
|
32 |
|
|
|
28 |
|
|
|
30 |
|
|
|
27 |
|
|
|
25 |
|
|
|
27 |
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
12 |
|
|
|
10 |
|
|
|
12 |
|
|
|
10 |
|
|
|
11 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
116 |
|
|
|
100 |
% |
|
|
113 |
|
|
|
100 |
% |
|
|
94 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
248 |
|
|
|
45 |
% |
|
|
251 |
|
|
|
47 |
% |
|
|
239 |
|
|
|
47 |
% |
|
Jet fuel
|
|
|
68 |
|
|
|
12 |
|
|
|
66 |
|
|
|
12 |
|
|
|
58 |
|
|
|
12 |
|
|
Diesel fuel
|
|
|
118 |
|
|
|
22 |
|
|
|
110 |
|
|
|
20 |
|
|
|
103 |
|
|
|
20 |
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
115 |
|
|
|
21 |
|
|
|
113 |
|
|
|
21 |
|
|
|
107 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
549 |
|
|
|
100 |
% |
|
|
540 |
|
|
|
100 |
% |
|
|
507 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and Terminals. To optimize the
transportation of crude oil and refined products within our
refinery system and secure shipping capacity, we term-charter
four U.S. flag tankers and four foreign-flag tankers, seven
of which are double-hulled and one of which is double-bottomed.
Two of our U.S. flag term charters expire in 2010 and the
remaining term charters expire between 2006 and 2009. We also
charter several tugs and product barges for our Hawaii and
Washington operations over varying terms ending in 2006 through
2010, with options to renew. Tesoro also has arrangements to
transport crude oil in double-hulled
4
tankers from certain regions. Other tankers and ocean-going
barges are also chartered on a short-term basis to transport
crude oil and refined products. We also receive crude oils and
ship refined products through Tesoro-owned and third-party
pipelines as further described below.
We operate refined product terminals at our refineries and at
several other locations in California, Hawaii, Alaska,
Washington and Idaho. We also distribute products through
third-party terminals, truck racks and rail cars, which are
supplied by our refineries and through purchases and exchange
agreements with other refining and marketing companies.
Refining. Our California refinery, located in Martinez on
2,206 acres about 30 miles east of San Francisco,
is a highly complex refinery with a crude oil capacity of
166,000 bpd. We source our California refinerys crude
oil primarily from California, Alaska and foreign locations.
Major product upgrading units at the refinery include fluid
catalytic cracking (FCC), fluid coking,
hydrocracking, naphtha reforming, vacuum distillation,
hydrotreating and alkylation units. These units enable the
refinery to produce a high proportion of motor fuels, including
at least 90,000 bpd of cleaner-burning California Air
Resources Board (CARB) gasoline and CARB diesel, as
well as conventional gasoline and diesel. The refinery also
produces heavy fuel oils, liquefied petroleum gas and petroleum
coke. We have commenced a project at the refinery to modify the
existing fluid coking unit into a delayed coking unit which is
designed to (i) lower emissions as required by the Bay Area
Quality Management District (see Government Regulation and
Legislation for additional information) and
(ii) increase overall efficiency by lowering operating
costs. We anticipate this project will be completed in the
fourth quarter of 2007.
Transportation. Our California refinery has waterborne
access through the San Francisco Bay that enables us to
receive crude oil and ship products through our marine
terminals. 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 pipeline systems.
Terminals. We operate a refined product terminal at
Stockton, California, and during the second quarter of 2005, we
completed construction of a trucking product terminal at our
California refinery. We also distribute products through
third-party terminals and truck racks, which are supplied by our
refinery and through purchases and exchange arrangements with
other refining and marketing companies. We also lease
approximately 500,000 barrels of storage capacity with
waterborne access in southern California.
|
|
|
Pacific Northwest Refineries |
Refining. Our Washington refinery, located in Anacortes
on the Puget Sound on 917 acres about 60 miles north
of Seattle, has a total crude oil capacity of 115,000 bpd.
We source our Washington refinerys crude oil primarily
from Alaska, Canada and other foreign locations. The Washington
refinery also processes intermediate feedstocks, primarily heavy
vacuum gas oil, provided by some of our other refineries and by
spot-market purchases from third-party refineries. Major product
upgrading units at the refinery include the FCC, alkylation,
hydrotreating, vacuum distillation, deasphalting and naphtha
reforming units, which enable our Washington refinery to produce
a high proportion of light products, such as gasoline (including
CARB gasoline and components for CARB gasoline), diesel and jet
fuel. The refinery also produces heavy fuel oils, liquefied
petroleum gas and asphalt. During the 2005 fourth quarter, we
completed construction of a wet gas scrubber to reduce air
emissions from the FCC unit. In the 2006 first quarter, we will
complete the installation of a 25,000 bpd diesel
desulfurizer unit. We also have commenced a project to install a
25,000 bpd delayed coking unit which will allow our
Washington refinery to process a larger proportion of lower-cost
heavy crude oils and manufacture a larger percentage of
higher-value products. We anticipate this project will be
completed in the fourth quarter of 2007.
Transportation. Our Washington refinery receives Canadian
crude oil through a third-party pipeline originating in
Edmonton, Alberta, Canada. We receive other crude oil through
our Washington refinerys
5
marine terminal. Our Washington refinery ships light products
(gasoline, jet fuel and diesel) through a third-party pipeline
system, which serves western Washington and Portland, Oregon. We
also deliver gasoline and diesel fuel through a neighboring
refinerys truck rack and distribute diesel fuel through a
truck rack at our refinery. We deliver refined products,
including CARB gasoline and components for CARB gasoline,
through our marine terminal to ships and barges and sell
liquefied petroleum gas and asphalt at our refinery.
Terminals. We operate refined product terminals at
Anacortes, Port Angeles and Vancouver, Washington, supplied
primarily by our Washington refinery. We also distribute
products through third-party terminals and truck racks in our
market areas, which are supplied by our refinery and through
purchases and exchange arrangements with other refining and
marketing companies.
Refining. Our Alaska refinery is located near Kenai on
the Cook Inlet on 488 acres approximately 70 miles
southwest of Anchorage. Our Alaska refinery processes crude oil
primarily from the Alaska Cook Inlet, Alaska North Slope and, to
a lesser extent, foreign locations. The refinery has a total
crude oil capacity of 72,000 bpd, and its product upgrading
units include vacuum distillation, distillate hydrocracking,
hydrotreating, naphtha reforming and light naphtha isomerization
units. Our Alaska refinery produces gasoline and gasoline
blendstocks, jet fuel, diesel fuel, heating oil, heavy fuel
oils, liquefied petroleum gas and asphalt. We have commenced a
project to install a 10,000 bpd diesel desulfurizer unit at
the refinery, which will allow our Alaska refinery to
manufacture additional quantities of low sulfur diesel to meet
the increasing demand for cleaner fuels in Alaska. We anticipate
this project will be completed in the second quarter of 2007.
Transportation. We receive crude oil by tanker to the
Alaska refinery through our marine terminal. Through our owned
and operated 24-mile
common-carrier crude pipeline, we also receive crude oil at our
marine terminal, which is connected with some of the Cook Inlet
oil fields. Our marine terminal is also used to load refined
products on tankers and barges. We also own and operate a
common-carrier petroleum products pipeline that runs from the
Alaska refinery to our terminal facilities in Anchorage and to
the Anchorage airport. This
71-mile pipeline has
the capacity to transport approximately 40,000 bpd of
products and allows us to transport gasoline, diesel and jet
fuel to the terminal facilities, regardless of weather
conditions. Both of our owned pipelines are subject to
regulation by various federal, state and local agencies,
including the Federal Energy Regulatory Commission
(FERC).
Terminals. We operate refined product terminals at Kenai
and Anchorage, which are supplied by our Alaska refinery. We
also distribute products through third-party terminals and truck
racks in our market areas, which are supplied by our refinery
and through purchases and exchange arrangements with other
refining and marketing companies.
Refining. Our 94,000 bpd Hawaii refinery is located
at Kapolei on 131 acres about 22 miles west of
Honolulu. We supply the Hawaii refinery with crude oil primarily
from Southeast Asia, the Middle East and other foreign sources.
Major product upgrading units include the vacuum distillation,
hydrocracking, hydrotreating, visbreaking and naphtha reforming
units. The Hawaii refinery produces gasoline and gasoline
blendstocks, jet fuel, diesel fuel, heavy fuel oils, liquefied
petroleum gas and asphalt.
Transportation. We transport crude oil to Hawaii by
tankers, which discharge through our single-point mooring
terminal, 1.5 miles offshore from our refinery. Three
underwater pipelines from the single-point mooring terminal
allow crude oil and products to be transferred to and from the
refinerys storage tanks. We distribute refined products to
customers on the island of Oahu through owned and third-party
pipeline systems. Our product pipelines also connect the Hawaii
refinery to Barbers Point Harbor, 2.5 miles away, where
refined products are transferred to ships and barges.
6
Terminals. We also distribute products from our refinery
to customers through third-party terminals at Honolulu
International Airport and Honolulu Harbor and by barge to
Tesoro-owned and third-party terminal facilities on the islands
of Oahu, Maui, Kauai and Hawaii.
Refining. Our 58,000 bpd North Dakota refinery is
located near Mandan on 960 acres. We supply our North
Dakota refinery primarily with Williston Basin sweet crude oil.
The refinery also can access other supplies, including Canadian
crude oil. Major product upgrading units at the refinery include
the FCC, naphtha reforming, hydrotreating and alkylation units.
The North Dakota refinery produces gasoline, diesel fuel and jet
fuel.
Transportation. We own a crude oil pipeline system,
consisting of over 700 miles of pipeline that delivers all
of the crude oil supply to our North Dakota refinery. Our crude
oil pipeline system receives crude oil from Canada and gathers
crude oil from the Williston Basin and adjacent production areas
in North Dakota and Montana and transports it to our refinery
and has the capability to transport crude oil to other regional
points where there is additional demand. Our crude oil pipeline
system is a common carrier subject to regulation by various
federal, state and local agencies, including the FERC. We
distribute approximately 85% of our refinerys production
through a third-party product pipeline system which serves
various areas from Bismarck, North Dakota to Minneapolis,
Minnesota. All gasoline and distillate products from our
refinery, with the exception of railroad-spec diesel fuel, can
be shipped through that pipeline to third-party terminals.
Terminals. We operate a refined products terminal at the
North Dakota refinery. We also distribute products through a
third-party product pipeline system which connects to
third-party terminals located in North Dakota and Minnesota. We
distribute products from our refinery to customers primarily
through these third-party terminals.
Refining. Our 58,000 bpd Utah refinery is located in
Salt Lake City on 145 acres. Our Utah refinery processes
crude oils primarily from Utah, Colorado, Wyoming and Canada.
Major product upgrading units include the FCC, naphtha
reforming, alkylation and hydrotreating units. The Utah refinery
produces gasoline, diesel fuel and jet fuel.
Transportation. Our Utah refinery receives crude oil
primarily by third-party pipelines originating from fields in
Utah, Colorado, Wyoming and Canada. We distribute the
refinerys production through a system of both owned and
third-party terminals and third-party pipeline connections,
primarily in Utah, Idaho and eastern Washington, with some
product delivered in Nevada and Wyoming.
Terminals. In addition to sales at the refinery, we
distribute products to customers through a third-party pipeline
to the two terminals we own at Boise and Burley, Idaho and to
third-party terminals in Pocatello, Idaho and Pasco, Washington.
|
|
|
Wholesale Marketing and Product Distribution |
We sell refined products including gasoline and gasoline
blendstocks, jet fuel, diesel fuel, heavy oil and residual
products in both the bulk and wholesale markets. The majority of
our wholesale volumes are sold in 9 states to unbranded
distributors, which are retail stations owned by third parties
that sell products purchased through Tesoro owned and
third-party terminals and truck racks. Our bulk volumes are
primarily sold to major oil companies, electric power producers,
railroads, airlines and marine and industrial end-users. In
addition, we sell products that we manufacture and products
purchased or received on exchange from third parties. Exchange
agreements provide for the delivery of Tesoros refined
products primarily to third-party terminals in exchange for the
delivery of refined products from the third parties at specific
locations. These arrangements
7
help to optimize our refinery supply requirements and lower
transportation costs. Our refined product sales, including
intersegment sales to our retail operations, consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Product Sales (thousand bpd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
294 |
|
|
|
300 |
|
|
|
280 |
|
|
Jet fuel
|
|
|
101 |
|
|
|
90 |
|
|
|
84 |
|
|
Diesel fuel
|
|
|
139 |
|
|
|
133 |
|
|
|
121 |
|
|
Heavy oils, residual products and other
|
|
|
75 |
|
|
|
81 |
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product Sales
|
|
|
609 |
|
|
|
604 |
|
|
|
557 |
|
|
|
|
|
|
|
|
|
|
|
Gasoline and Gasoline Blendstocks. We sell gasoline and
gasoline blendstocks in both the bulk and wholesale markets in
the western and mid-continental United States. The demand for
gasoline is seasonal in many of our markets, with lowest demand
during the winter months. We also sell gasoline to wholesale
customers and bulk end-users (including several major oil
companies) under various supply agreements. Gasoline also is
delivered to refiners and marketers in exchange for product
received at other locations in our markets. We sell, at
wholesale, to unbranded distributors and high-volume retailers,
and we distribute product through Tesoro-owned and third-party
terminals and truck racks.
Jet Fuel. We supply commercial 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 in certain of our markets.
Diesel Fuel. We sell our diesel fuel production primarily
on a wholesale basis for marine, transportation, industrial and
agricultural use, as well as for home heating. We sell lesser
amounts to end-users through marine terminals and for power
generation in Hawaii and Washington. Diesel fuel production by
refiners in our market areas is generally in balance with
demand. As a result of variations in seasonal demand, we ship
diesel fuel to or from our Alaska and Hawaii operations.
Heavy Fuel Oils and Residual Products. We sell heavy fuel
oils to other refineries, electric power producers and marine
and industrial end-users. Our refineries supply substantially
all of the marine fuels that we sell through leased facilities
at Port Angeles and Seattle, Washington, and Portland, Oregon,
and through owned and leased facilities in Alaska and Hawaii. We
sell our asphalt for paving materials in Hawaii, Alaska and
Washington. In Alaska and the Pacific Northwest, demand for
asphalt is seasonal because mild weather conditions are needed
for highway construction. Our California refinery produces
petroleum coke that we sell to industrial end-users.
Sales of Purchased Products. In the normal course of
business to meet local market demands, we purchase refined
products manufactured by others for resale to our customers. We
purchase these products, primarily gasoline, jet fuel, diesel
fuel and industrial and marine fuel blendstocks, mainly in the
spot market. We conduct our gasoline and diesel fuel purchase
and resale activity primarily on the U.S. West Coast. Our
jet fuel activity primarily consists of supplying markets in
Alaska, California and Hawaii. We also purchase a lesser amount
of gasoline and other products that are sold outside of our
refineries local markets.
RETAIL
Through our network of retail stations, we sell gasoline and
diesel fuel in the western and mid-continental United States.
The demand for gasoline is seasonal in a majority of our
markets, with highest demand for gasoline during the summer
driving season. We sell gasoline and diesel to retail customers
through company-operated sites and agreements with third-party
branded distributors (or jobber/dealers). As of
December 31, 2005, our retail segment included a network of
478 branded retail stations (under the
Tesoro®
and
Mirastar®
brands), comprising 210 company-operated retail gasoline
stations and 268 jobber/dealer stations. Our retail network
provides a committed outlet for a portion of the motor fuels
produced by our refineries.
8
Most of our company-operated
Tesoro®stations
include 2-Go
Tesoro®
brand convenience stores that sell a wide variety of merchandise
items. The following table summarizes our retail operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Number of Branded Retail Stations (end of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
Tesoro®
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
133 |
|
|
|
137 |
|
|
|
146 |
|
|
Jobber/dealer
|
|
|
268 |
|
|
|
292 |
|
|
|
331 |
|
Mirastar®
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
77 |
|
|
|
78 |
|
|
|
78 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Total Branded Retail Stations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated(a)
|
|
|
210 |
|
|
|
215 |
|
|
|
226 |
|
|
Jobber/dealer(b)
|
|
|
268 |
|
|
|
292 |
|
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
478 |
|
|
|
507 |
|
|
|
557 |
|
|
|
|
|
|
|
|
|
|
|
Average Number of Branded Stations (during year)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
213 |
|
|
|
222 |
|
|
|
229 |
|
|
Jobber/dealer
|
|
|
281 |
|
|
|
316 |
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Average Retail Stations
|
|
|
494 |
|
|
|
538 |
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
Total Fuel Volume (millions of gallons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
258 |
|
|
|
290 |
|
|
|
309 |
|
|
Jobber/dealer
|
|
|
191 |
|
|
|
220 |
|
|
|
259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fuel Volumes
|
|
|
449 |
|
|
|
510 |
|
|
|
568 |
|
|
|
|
|
|
|
|
|
|
|
Average Fuel Volume Per Month Per Station (thousands of
gallons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
101 |
|
|
|
109 |
|
|
|
112 |
|
|
Jobber/dealer
|
|
|
57 |
|
|
|
58 |
|
|
|
62 |
|
|
Total stations
|
|
|
76 |
|
|
|
79 |
|
|
|
82 |
|
Fuel Revenues (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
$ |
609 |
|
|
$ |
566 |
|
|
$ |
519 |
|
|
Jobber/dealer
|
|
|
335 |
|
|
|
297 |
|
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fuel Revenues
|
|
$ |
944 |
|
|
$ |
863 |
|
|
$ |
797 |
|
|
|
|
|
|
|
|
|
|
|
Merchandise and Other Revenues (in millions)
|
|
$ |
141 |
|
|
$ |
131 |
|
|
$ |
121 |
|
Merchandise Margin
|
|
|
26 |
% |
|
|
28 |
% |
|
|
27 |
% |
|
|
|
(a) |
|
Company-operated stations included 40 in Washington, 39 in Utah,
33 in Hawaii, 30 in Alaska and 68 in other western and
mid-continental states at December 31, 2005. |
|
(b) |
|
At December 31, 2005, the jobber/dealer stations included
68 in North Dakota, 67 in Alaska, 44 in Utah, 30 in Washington,
19 in Idaho, 17 in Minnesota, 14 in California and 9 in other
western states. |
COMPETITION AND OTHER
The petroleum industry is highly competitive in all phases,
including the purchase of crude oil and the marketing of refined
petroleum products. The industry also competes with other
industries that supply the
9
energy and fuel requirements of industrial, commercial and
individual consumers. In recent years, consolidation in the
refining and marketing industry has reduced the number of
competitors; however, it has not reduced overall competition. We
compete with a number of major integrated oil companies and
other companies that have greater financial and other resources.
These competitors have a greater ability to bear the economic
risks inherent in all phases of the industry. In addition,
unlike many of our competitors, we do not produce crude oil for
use in our refining operations, and we are not as large as many
of our competitors who may have a competitive advantage when
negotiating with crude oil producers.
Our California and Washington refineries compete with several
refineries on the U.S. West Coast, including refineries
that have greater economies of scale. Our Hawaii refinery
competes primarily with one other refinery in Hawaii, owned by a
major integrated oil company, that also is located at Kapolei
and has a crude oil capacity of 54,000 bpd. Historically,
the other refinery produces lower volumes of jet fuel than our
Hawaii refinery. The Alaska refinery competes primarily with
other refineries in Alaska and on the U.S. West Coast. Our
refining competition in Alaska includes two refineries near
Fairbanks and a refinery near Valdez. We estimate that the other
Alaska refineries have a combined capacity to process
approximately 270,000 bpd of crude oil. After processing
Alaska North Slope crude oil and removing the higher-value
products, these refiners are permitted, because of their direct
connection to the Trans Alaska Pipeline System, to return the
remainder of the processed crude oil into the pipeline system as
return oil in consideration for a fee, thereby
eliminating their need to transport and market lower-value
products that are not in demand in Alaska. Our Alaska refinery
is not connected to the Trans Alaska Pipeline System, and we,
therefore, cannot return our lower-value products to that
pipeline system. Our North Dakota refinery is the only refinery
in North Dakota. Refineries in Wyoming, Montana, the Midwest and
the United States Gulf Coast region are the primary competitors
with our North Dakota refinery. Our Utah refinery is the largest
of five refineries located in Utah. We estimate that these other
refineries have a combined capacity to process approximately
107,500 bpd 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 California, Washington, Hawaii and Alaska refineries
also compete with companies that import refined products from
other parts of the world, including the Far East.
Our jet fuel sales in Alaska are concentrated in Anchorage,
where we are one of the principal suppliers to the Anchorage
International Airport, a major hub for air cargo traffic between
manufacturing regions in the Far East and markets in the United
States and Europe. In Hawaii, jet fuel sales are concentrated in
Honolulu, where we are the principal supplier to the Honolulu
International Airport. We also serve four airports on other
islands in Hawaii. In Washington, jet fuel sales are
concentrated at the Seattle/ Tacoma International Airport. We
also supply jet fuel to customers in Portland, Oregon; Los
Angeles, San Francisco and San Diego, California; Las
Vegas and Reno, Nevada; and Phoenix, Arizona. Other refiners and
marketers compete for sales at all of these airports. In Utah,
our jet fuel sales are concentrated in Salt Lake City, and we
also supply jet fuel to customers in Boise, Burley and
Pocatello, Idaho. The North Dakota refinery supplies jet fuel to
customers in Minneapolis/ St. Paul and Moorhead, Minnesota and
in Bismarck and Jamestown, North Dakota. We compete with other
suppliers for U.S. military contracts in Alaska, Hawaii and
North Dakota. Both the Alaska and Hawaii markets periodically
require additional jet fuel supplies from outside the state to
meet demand.
We sell our diesel fuel production primarily on a wholesale
basis, competing with other refiners and marketers in all of our
market areas. Refined products from foreign sources, including
Canada, also compete for distillate customers in our market
areas.
We sell gasoline in Alaska, California, Hawaii, North Dakota,
Utah, Washington and other western and mid-continental states
through a network of company-operated retail stations and
branded and unbranded jobber/dealers. Competitive factors that
affect retail marketing include price, station appearance,
location and brand awareness. Our retail marketing operations
compete with other independent marketing companies, integrated
oil companies and high-volume retailers.
10
GOVERNMENT REGULATION AND LEGISLATION
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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 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, our facilities will continue during 2006 and over
the next several years to be engaged in meeting new requirements
promulgated by the U.S. Environmental Protection Agency
(EPA) and the states and local jurisdictions in
which we operate as described below.
Changes in fuel manufacturing standards, including those related
to gasoline and diesel fuel sulfur concentrations, also affect
our operations. EPA regulations related to the Clean Air Act
require reductions in the sulfur content in gasoline. To meet
the revised gasoline standard, we spent $28 million in
2005. Our California, Washington, Hawaii, Alaska and North
Dakota refineries will not require additional capital spending
to meet the low sulfur gasoline standards. We currently estimate
we will make additional capital improvements of approximately
$8 million at our Utah refinery from 2008 through 2009,
that will permit the Utah refinery to produce gasoline meeting
the sulfur limits imposed by the EPA.
EPA regulations related to the Clean Air Act also require
reductions in the sulfur content in diesel fuel manufactured for
on-road consumption. In general, the new on-road diesel fuel
standards will become effective on June 1, 2006. In May
2004, the EPA issued a rule regarding the sulfur content of
non-road diesel fuel. The requirements to reduce non-road diesel
sulfur content will become effective in phases between 2007 and
2010. We spent $46 million in 2005 to meet the revised
diesel fuel standards, and based on our latest engineering
estimates, we expect to spend approximately $71 million in
capital improvements through 2007. Included in the estimate are
capital projects to manufacture additional quantities of low
sulfur diesel at our Alaska refinery, for which we expect to
spend approximately $53 million through 2007. These cost
estimates are subject to further review and analysis. Our
California, Washington and North Dakota refineries will not
require additional capital spending to meet the new non-road
diesel fuel standards.
We expect to spend approximately $1 million in capital
improvements in 2006 at our Washington refinery to comply with
the Maximum Achievable Control Technologies standard for
petroleum refineries (Refinery MACT II). We
spent approximately $17 million during 2005.
In connection with our 2001 acquisition of our North Dakota and
Utah refineries, we assumed the sellers obligations and
liabilities under a consent decree among the United States, BP
Exploration and Oil Co. (BP), Amoco Oil Company and
Atlantic Richfield Company. BP entered into this consent decree
for both the North Dakota and Utah refineries for various
alleged violations. As the owner of these refineries, we are
required to address issues, that include leak detection and
repair, flaring protection and sulfur recovery unit
optimization. We currently estimate that we will spend
$5 million over the next three years to comply with this
consent decree. We also agreed to indemnify the sellers for all
losses of any kind incurred in connection with the consent
decree.
In connection with the 2002 acquisition of our California
refinery, subject to certain conditions, we assumed the
sellers obligations pursuant to settlement efforts with
the EPA concerning the Section 114 refinery enforcement
initiative under the Clean Air Act, except for any potential
monetary penalties, which the seller retains. In November 2005,
the Consent Decree was entered by the District Court for the
Western District of Texas in which we agreed to undertake
projects at our California refinery to reduce air emissions. We
spent $2 million in 2005, and we currently estimate we will
make additional capital improvements of approximately
$30 million through 2010 to satisfy the requirements of the
Consent Decree. This cost estimate is subject to further review
and analysis.
During the fourth quarter of 2005, we received approval by the
Hearing Board for the Bay Area Air Quality Management District
to modify our existing fluid coker unit to a delayed coker at
our California refinery which is designed to (i) lower
emissions and (ii) increase overall efficiency by lowering
operating
11
costs. We negotiated the terms and conditions of the Second
Conditional Abatement Order with the District in response to the
January 2005 mechanical failure of one of our boilers at the
California refinery. We spent $3 million during 2005 for
this project, and we currently estimate that we will spend
approximately $272 million through the fourth quarter of
2007. This cost estimate is subject to further review and
analysis.
We will spend additional capital at the California refinery for
reconfiguring and replacing above-ground storage tank systems
and upgrading piping within the refinery. We spent
$15 million in 2005 for these related projects at our
California refinery, and we currently estimate that we will make
additional capital improvements of approximately
$109 million through 2010. This cost estimate is subject to
further review and analysis.
Conditions may develop that cause increases or decreases in
future expenditures for our various sites, including, but not
limited to, our refineries, tank farms, retail gasoline stations
(operating and closed locations) and petroleum product
terminals, and for compliance with the Clean Air Act and other
federal, state and local requirements. We cannot currently
determine the amounts of such future expenditures.
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Oil Spill Prevention and Response |
We operate in environmentally sensitive coastal waters, where
tanker, pipeline and refined product transportation operations
are closely regulated by federal, state and local agencies and
monitored by environmental interest groups. The transportation
of crude oil and refined product over water involves risk and
subjects us to the provisions of the Federal Oil Pollution Act
of 1990 and related state regulations, 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. Our oil spill
prevention plans and procedures are frequently reviewed and
modified to prevent oil and product releases and to minimize
potential impacts should a release occur.
We currently charter tankers to ship crude oil from foreign and
domestic sources to our California, Mid-Pacific and Pacific
Northwest refineries. The Federal Oil Pollution Act of 1990
requires, as a condition of operation, that we demonstrate the
capability to respond to the worst case discharge to
the maximum extent practicable. As an example, the State of
Alaska requires us to provide spill-response capability to
contain or control and cleanup amounts equal to
50,000 barrels of crude oil for a tanker carrying fewer
than 500,000 barrels and 300,000 barrels for a tanker
carrying more than 500,000 barrels. To meet these
requirements, we have entered into contracts with various
parties to provide spill response services. We have entered into
spill-response agreements with (1) Cook Inlet Spill
Prevention and Response, Incorporated (for which we fund
approximately 79% of expenditures) and Alyeska Pipeline Service
Company for spill-response services in Alaska and (2) Clean
Islands Council for response services throughout the State of
Hawaii. In addition, for larger spill contingency capabilities,
we have entered into contracts with Marine Spill Response
Corporation for Hawaii, the San Francisco Bay and Puget
Sound. We believe these contracts, and those with other regional
spill-response organizations that are in place on a location by
location basis, provide the additional services necessary to
meet spill-response requirements established by state and
federal law.
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 of common carrier
petroleum pipelines must be just and reasonable and
not unduly discriminatory.
The intrastate operations of our 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 intrastate tariff increases
and they have 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
12
that have already become effective are permitted by complaint of
an interested person or by independent action of the appropriate
regulatory authority.
EMPLOYEES
At December 31, 2005, we had approximately
3,928 full-time employees. Approximately 1,225 of our
employees are covered by collective bargaining agreements with
terms expiring on January 31, 2009. During the 2005 first
quarter, we extended the collective bargaining agreements which
were previously set to expire on January 31, 2006. We
consider our relations with our employees to be satisfactory.
PROPERTIES
Our principal properties are described above under the captions
Refining and Retail. In addition, we own
feedstock and refined product storage facilities at our refinery
and terminal locations. We believe that our properties and
facilities are generally adequate for our operations and that
our facilities are maintained in a good state of repair. We are
the lessee under a number of cancelable and non-cancelable
leases for certain properties, including office facilities,
retail facilities, ship charters and equipment used in the
storage, transportation and production of feedstocks and refined
products. See Notes E and O in our consolidated financial
statements in Item 8.
We conduct our retail business under the
Tesoro®,
Tesoro
Alaska®,
Mirastar®,
and 2-Go
Tesoro®
brands. Our retail marketing system under these brands includes
478 branded retail stations, of which 210 are
company-operated.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the Companys executive
officers, their ages and their positions with the Company at
March 1, 2006.
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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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Bruce A. Smith
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62 |
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Chairman of the Board of Directors, President and Chief
Executive Officer |
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June 1996 |
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William J. Finnerty
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57 |
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Executive Vice President and Chief Operating Officer |
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February 2006 |
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Everett D. Lewis
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58 |
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Executive Vice President, Strategic Planning |
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January 2005 |
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Gregory A. Wright
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56 |
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Executive Vice President and Chief Financial Officer |
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December 2003 |
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W. Eugene Burden
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57 |
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Senior Vice President, Government Affairs |
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February 2006 |
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Claude A. Flagg
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52 |
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Senior Vice President, Supply & Optimization |
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February 2005 |
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J. William Haywood
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53 |
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Senior Vice President, Refining |
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March 2005 |
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Joseph M. Monroe
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51 |
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Senior Vice President, Corporate Development |
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February 2006 |
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Daniel J. Porter
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50 |
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Senior Vice President, Marketing |
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April 2005 |
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Susan A. Lerette
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47 |
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Vice President, Human Resources |
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May 2005 |
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Age | |
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Position |
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Position Held Since | |
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Charles S. Parrish
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48 |
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Vice President, General Counsel and Secretary |
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March 2005 |
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Otto C. Schwethelm
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51 |
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Vice President and Controller |
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February 2003 |
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Sarah S. Simpson
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37 |
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Vice President, Corporate Communications |
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June 2005 |
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G. Scott Spendlove
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42 |
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Vice President, Finance and Treasurer |
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May 2003 |
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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 at their first meeting
following 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.
Tesoros executive officers have been employed by Tesoro or
its subsidiaries in an executive capacity for at least the past
five years, except for those named below who have had the
business experience indicated during that period. Positions,
unless otherwise specified, are with Tesoro.
William J. Finnerty was named Executive Vice President
and Chief Operating Officer in February 2006. Prior to that, he
served as Executive Vice President, Operations beginning in
January 2005 and Senior Vice President, Supply and Distribution
of Tesoro Refining and Marketing Company beginning in February
2004. He joined Tesoro in December 2003 as Vice President, Crude
Oil and Logistics, of Tesoro Refining and Marketing Company.
Prior to joining Tesoro, Mr. Finnerty served as Vice
President, Trading North America Crude, for ChevronTexaco from
October 2001 to November 2003. From May 2001 to October 2001, he
served as Vice President, Texaco Oil Trading and Transport
Company. From June 2000 to May 2001, Mr. Finnerty was
Senior Vice President, Trading and Operations for Equiva Trading
Company.
Everett D. Lewis was named Executive Vice President,
Strategic Planning in January 2005. Prior to that, he served as
Senior Vice President, Corporate Strategic Planning beginning in
November 2004. Mr. Lewis served as Senior Vice President,
Planning and Optimization from February 2003 to November 2004
and Senior Vice President, Planning and Risk Management from
April 2001 to February 2003. He served as Senior Vice President
of Strategic Projects from March 1999 to April 2001.
W. Eugene Burden was named Senior Vice President,
Government Affairs in February 2006. Prior to that, he served as
Senior Vice President, External Affairs from November 2004 to
February 2006, Senior Vice President, Human Resources and
Government Relations from June 2002 to November 2004, President
of Tesoro Alaska Company from February 2001 to June 2002, and
Senior Vice President and President, Northwest Region of Tesoro
Refining and Marketing Company from September 2001 until June
2002. Mr. Burden served as Senior Vice President,
Government Relations of Tesoro Petroleum Companies, Inc. from
September 1999 to February 2001.
Claude A. Flagg was named Senior Vice President, Supply
and Optimization in February 2005. He joined Tesoro in January
2005 as Senior Vice President, Planning and Optimization. Prior
to joining Tesoro, he served as General Manager of Supply
Optimization at Shell Oil Products U.S. from January 2003
to December 2004. From May 2002 to January 2003, Mr. Flagg
was General Manager of Supply Optimization at Equilon
Enterprises, LLC. He was General Manager of Equilon Enterprises,
LLCs Bay/Valley Refining Complex from April 1999 to May
2002.
J. William Haywood was named Senior Vice President,
Refining in March 2005. He joined Tesoro in May 2002 as Senior
Vice President and also became President of the California
Region of Tesoro Refining and Marketing Company in September
2002. Prior to joining Tesoro, Mr. Haywood served as
Regional Vice President of Ultramar Diamond Shamrock
Corporation, responsible for California refineries from
September 2000 to May 2002.
14
Joseph M. Monroe was named Senior Vice President,
Corporate Development in February 2006. Prior to that, he served
as Senior Vice President, Business Integration and Analysis
beginning in February 2005. From November 2004 to February 2005,
he served as Senior Vice President, Organizational
Effectiveness. From February 2004 to November 2004, he served as
Senior Vice President, Strategic Planning and Business
Development of Tesoro Petroleum Companies, Inc. From May 2002 to
February 2004, Mr. Monroe served as Senior Vice President,
Supply and Distribution, of Tesoro Refining and Marketing
Company. Prior to joining Tesoro, he was Vice President,
Pipelines and Terminals of Unocal Corporation and President of
Unocal Pipeline Company from January 1999 through May 2002.
Daniel J. Porter was named Senior Vice President,
Marketing in April 2005. Prior to that, he served as President
of the Northwest Region of Tesoro Refining and Marketing Company
and Anacortes Refinery Manager from June 2002 to April 2005. He
was also President of the Northern Great Plains Region and
Mandan Refinery Manager from September 2001 to June 2002. Prior
to joining Tesoro, Mr. Porter served as Business Unit
Leader of BPs North Dakota refinery from January 1999 to
September 2001.
Susan A. Lerette was named Vice President, Human
Resources in May 2005. Prior to that, she served as Vice
President, Human Resources and Communications from May 2004 to
May 2005. From April 2001 to May 2004, she served as Vice
President, Communications. She was Director, Investor Relations
from April 1999 to April 2001.
Charles S. Parrish was named Vice President, General
Counsel and Secretary in March 2005. Prior to that, he served as
Vice President, Assistant General Counsel and Secretary
beginning in November 2004. Mr. Parrish served as Vice
President, Assistant General Counsel of Tesoro Petroleum
Companies, Inc. from March 2003 to November 2004. From 1995
through March 2003, he served numerous roles in the
Companys legal department, primarily focused on matters
related to the Companys capital structure and Securities
Act reporting.
Otto C. Schwethelm was named Vice President and
Controller in February 2003. From September 2002 to February
2003, Mr. Schwethelm served as Vice President and
Operations Controller. Prior to that, he served as Vice
President, Shared Services of Tesoro Petroleum Companies, Inc.
from December 2001 to September 2002. From November 1999 to
December 2001, Mr. Schwethelm was Vice President,
Development and Business Analysis.
Sarah S. Simpson was named Vice President of Corporate
Communications in June 2005. Prior to joining Tesoro, she served
as Director of Corporate Communications and Community Relations
at Cemex, Inc. from November 2004 to June 2005 From July 2000 to
November 2004, she served as Director of Corporate
Communications at Waste Management, Inc.
G. Scott Spendlove has served as Vice President,
Finance and Treasurer since May 2003 and as Vice President,
Finance from January 2002 to May 2003. Prior to joining Tesoro
in 2002, he served as Vice President, Corporate Planning and
Investor Relations of Ultramar Diamond Shamrock Corporation from
December 1999 to December 2001.
BOARD OF DIRECTORS OF THE REGISTRANT
The following is a list of the Companys Board of Directors:
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Bruce A. Smith |
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Chairman, President and Chief Executive Officer of Tesoro
Corporation |
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Steven H. Grapstein |
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Lead Director of Tesoro Corporation; Chief Executive Officer of
Kuo Investment Company |
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Robert W. Goldman |
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Vice President, Finance for World Petroleum Council; Retired
Chief Financial Officer of Conoco, Inc. |
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William J. Johnson. |
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Petroleum Consultant; President of JonLoc, Inc. |
15
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A. Maurice Myers |
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Retired Chairman, President and Chief Executive Officer of Waste
Management, Inc. |
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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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Patrick J. Ward |
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Retired Chairman, President and Chief Executive Officer of
Caltex Petroleum Corporation |
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Michael E. Wiley |
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Retired Chairman, President and Chief Executive Officer of Baker
Hughes, Inc. |
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 refinery
feedstocks) and the margin above 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 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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threatened or actual terrorist incidents, acts of war, and other
worldwide political conditions; |
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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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weather conditions, hurricanes or other natural disasters; |
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government regulations; and |
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local factors, including market conditions and the level of
operations of other refineries in our markets. |
Prices for refined products are influenced by the price of crude
oil. We do not produce crude oil and must purchase all of our
crude oil, the price of which 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 in different directions based on
worldwide market conditions. In addition, the timing of the
relative movement of the prices, as well as the overall change
in product prices, can reduce profit margins and could have a
significant impact on our refining and wholesale marketing
operations, earnings and cash flow. Also, crude oil supply
contracts are generally term contracts with market-responsive
pricing provisions. We purchase our refinery feedstocks 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 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 have affected 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.
Our business is impacted by risks inherent in petroleum
refining operations.
The operation of refineries, pipelines and product terminals is
inherently subject to spills, discharges or other releases of
petroleum or hazardous substances. If any of these events had
previously occurred or occurs
16
in the future in connection with any of our refineries,
pipelines or product terminals, or in connection with any
facilities to which we sent 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 spills, or the amounts that we
may have to pay to third parties for damage 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 environmentally sensitive coastal waters, where
tanker, pipeline and refined product transportation operations
are closely regulated by federal, state and local agencies and
monitored by environmental interest groups. Our California,
Mid-Pacific and Pacific Northwest refineries import crude oil
feedstocks by tanker. Transportation of crude oil and refined
products over 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 to demonstrate in some
situations our capacity to respond to a worst case
discharge to the maximum extent possible. We have
contracted with various spill response service companies in the
areas in which we transport crude oil and refined products to
meet the requirements of the Federal Oil Pollution Act of 1990
and state laws. However, there may be accidents involving
tankers transporting 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.
The dangers inherent in our operations and the potential
limits on insurance coverage could expose us to potentially
significant liability costs.
Our operations are subject to hazards and risks inherent in
refining operations and in transporting and storing crude oil
and refined products, such as fires, natural disasters,
explosions, pipeline ruptures and spills and mechanical failure
of equipment at our or third-party facilities, any of which can
result in personal injury claims and other damage to our
properties and the properties of others. In addition, we operate
six petroleum refineries, any of which could experience a major
accident, be damaged by severe weather or other natural
disaster, or otherwise be forced to shut down. Any such
unplanned shutdown could have a material adverse effect on our
business, financial condition and results of operations. While
we carry property, casualty and business interruption insurance,
we do not maintain insurance coverage against all potential
losses, and 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 could have a material adverse effect on our business,
financial condition and results of operations.
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 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 have in the past operated service stations with underground
storage tanks in various jurisdictions, and currently operate
service stations that have underground storage tanks in
18 states in the mid-continental and western United States.
Federal and state regulations and legislation govern the storage
tanks, and compliance with these requirements can be costly. The
operation of underground storage tanks also poses certain other
risks, including damages associated with soil and groundwater
contamination. Leaks from underground storage tanks which may
occur at one or more of our service stations, or which may have
occurred at our previously operated service stations, may impact
soil or groundwater and could result in fines or civil liability
for us.
17
Consistent with the experience of other U.S. refineries,
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,
potentially material expenditures could be required in the
future. For example, we may be required to comply with evolving
environmental, health and safety laws, regulations or
requirements that may be adopted or imposed in the future. We
also may be required to address information or conditions that
may be discovered in the future and that require a response.
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 and jet
fuel through third-party pipelines. Our Hawaii and Alaska
refineries receive most of their crude oil and transport a
substantial portion of refined products through ships and
barges. Our Utah refinery receives substantially all of its
crude oil and delivers substantially all of its products through
third-party pipelines. Our North Dakota refinery delivers
substantially all of its products through a third-party pipeline
system. Our California refinery receives approximately one-third
of its crude oil through pipelines and the balance through
marine vessels. Substantially all of our California
refinerys production is delivered through third-party
pipelines, 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 upset because of accidents, governmental
regulation or third-party action. A prolonged upset of the
ability of a pipeline or vessels to transport crude oil or
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 general 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 generally, 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 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,
disruption or 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.
Our operating results are seasonal and generally are lower in
the first and fourth quarters of the year.
Demand for gasoline is higher during the spring and summer
months than during the winter months in most of our markets due
to seasonal increases 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.
|
|
ITEM 1B. |
UNRESOLVED STAFF COMMENTS |
None.
18
|
|
ITEM 3. |
LEGAL PROCEEDINGS |
In the ordinary course of business, we become party to or
otherwise involved in lawsuits, administrative proceedings and
governmental investigations, including environmental, regulatory
and other matters. Large and sometimes unspecified damages or
penalties may be sought from us in some matters and some matters
may require years for us to resolve. We cannot provide assurance
that an adverse resolution of one or more of the matters
described below during a future reporting period will not have a
material adverse effect on our financial position or results of
operations in future periods. However, 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.
In November 2003, we filed suit in Contra Costa County Superior
Court against Tosco alleging that Tosco misrepresented,
concealed and failed to disclose certain additional
environmental conditions at our California refinery. The court
granted Toscos motion to compel arbitration of our claims
for these certain additional environmental conditions. In the
arbitration proceedings we initiated against Tosco in December
2003, we are also seeking a determination that Tosco is liable
for investigation and remediation of these certain additional
environmental conditions, the amount of which is currently
unknown and therefore a reserve has not been established, and
which may not be covered by the $50 million indemnity for
the defined environmental liabilities arising from
pre-acquisition operations. In response to our arbitration
claims, Tosco filed counterclaims in the Contra Costa County
Superior Court action alleging that we are contractually
responsible for additional environmental liabilities at our
California refinery, including the defined environmental
liabilities arising from pre-acquisition operations. In February
2005, the parties agreed to stay the arbitration proceedings to
pursue settlement discussions. In June 2005, the parties agreed
in principle to settle their claims, including the defined
environmental liabilities arising from pre-acquisition
operations and certain additional environmental conditions,
pending negotiation and execution of a final written settlement
agreement. In the event we are unable to finalize the
settlement, we intend to vigorously prosecute our claims against
Tosco and to oppose Toscos claims against us, although we
cannot provide assurance that we will prevail. For further
information related to the claims, see Note O in our
consolidated financial statements in Item 8.
During the fourth quarter of 2005, we received approval by the
Hearing Board for the Bay Area Air Quality Management District
to modify our existing fluid coker unit to a delayed coker at
our California refinery. We negotiated the terms and conditions
of the Second Conditional Abatement Order with the District in
response to the January 2005 mechanical failure of one of our
boilers at the California refinery. We also received two notices
of violation (NOV) from the Bay Area Air Quality
Management District as a result of the January 2005 mechanical
failure. On January 26, 2006, we entered into a Settlement
Agreement and Release with the District and the District
Attorney of Contra Costa County, California. In exchange for the
release of allegations based upon certain air quality emission
limits and provisions of the California Health and Safety Code,
we paid a civil penalty of $1.1 million.
As previously disclosed, we were a defendant, along with other
manufacturing, supply and marketing defendants, in ten pending
cases alleging MTBE contamination in groundwater. During the
2005 fourth quarter, we were named as a defendant in one
additional case. The defendants are being sued for having
manufactured MTBE and having manufactured, supplied and
distributed gasoline containing MTBE. The plaintiffs in each of
the 11 pending cases, all in California, are generally water
providers, governmental authorities and private well owners
alleging that, in part, the defendants are liable for
manufacturing or distributing a defective product. The suits
generally seek individual, unquantified compensatory and
punitive damages and attorneys fees, but we cannot
estimate the amount or likelihood of the ultimate resolution of
these matters at this time, and accordingly, we have not
established a reserve for these cases. We believe we have
defenses to these claims and intend to vigorously defend the
lawsuits.
On October 24, 2005, we received an NOV from the EPA. The
EPA alleges certain modifications made to the fluid catalytic
cracking unit at our Washington refinery prior to our
acquisition of the refinery were made without a permit in
violation of the Clean Air Act. We are investigating the
allegations and believe the
19
ultimate resolution of the NOV will not have a material adverse
effect on our financial position or results of operations.
During the first quarter of 2005, we negotiated a settlement of
70 NOVs from the Bay Area Air Quality Management District. The
NOVs alleged various violations of air quality requirements at
the California refinery between June 2002 and February 2004. We
paid a civil penalty of $575,000 to resolve the matter.
On February 28, 2006, we received an offer of settlement
from the Bay Area Air Quality Management District. The District
has offered to settle 28 NOVs issued to Tesoro from January 2004
to September 2004 for $275,000. The NOVs allege violations of
various air quality requirements at the California refinery.
As previously reported, during the first quarter of 2005 we
began settlement discussions with the California Air Resources
Board (CARB) concerning an NOV we received in
October 2004. The NOV, issued by CARB, alleges we offered for
sale eleven batches of gasoline in California that did not meet
CARBs gasoline exhaust emission limits. In January 2006,
we executed a Settlement Agreement and Release with CARB which
requires us to pay a civil penalty of $325,000 to resolve this
matter.
|
|
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
PART II
|
|
ITEM 5. |
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES |
Our common stock is listed under the symbol TSO on
the New York Stock Exchange and the Pacific Exchange. Summarized
below are high and low sales prices of and dividends declared on
our common stock on the New York Stock Exchange during 2005 and
2004. Quarterly cash dividends have been declared for each
quarter beginning in June 2005. Prior to June 2005, we had not
paid dividends on our common stock since 1986.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Prices per | |
|
|
|
|
Common Share | |
|
|
|
|
| |
|
Dividends Per | |
Quarters Ended |
|
High | |
|
Low | |
|
Common Share | |
|
|
| |
|
| |
|
| |
March 31, 2005
|
|
$ |
38.20 |
|
|
$ |
28.25 |
|
|
$ |
|
|
June 30, 2005
|
|
$ |
49.87 |
|
|
$ |
34.05 |
|
|
$ |
0.05 |
|
September 30, 2005
|
|
$ |
71.82 |
|
|
$ |
46.11 |
|
|
$ |
0.05 |
|
December 31, 2005
|
|
$ |
69.30 |
|
|
$ |
52.03 |
|
|
$ |
0.10 |
|
|
March 31, 2004
|
|
$ |
19.35 |
|
|
$ |
14.00 |
|
|
$ |
|
|
June 30, 2004
|
|
$ |
27.75 |
|
|
$ |
17.75 |
|
|
$ |
|
|
September 30, 2004
|
|
$ |
31.70 |
|
|
$ |
21.76 |
|
|
$ |
|
|
December 31, 2004
|
|
$ |
34.65 |
|
|
$ |
27.75 |
|
|
$ |
|
|
On February 2, 2006, our Board of Directors declared a
quarterly cash dividend on common stock of $0.10 per share,
payable on March 15, 2006 to shareholders of record on
March 1, 2006. At March 1, 2006, there were
approximately 1,978 holders of record of our 69,006,300
outstanding shares of common stock. For information regarding
restrictions on future dividend payments and stock repurchases,
see Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 and
Notes E and F in our consolidated financial statements in
Item 8.
20
The 2006 annual meeting of stockholders will be held at
8:00 A.M. Pacific Daylight Time on Wednesday, May 3,
2006, at The Four Seasons Hotel, 757 Market Street,
San Francisco, California. Holders of common stock of
record at the close of business on March 14, 2006 are
entitled to notice of and to vote at the annual meeting.
The following table summarizes, as of December 31, 2005,
certain information regarding equity compensation to our
employees, officers, directors and other persons under our
equity compensation plans.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
3,799,932 |
|
|
$ |
18.39 |
|
|
|
1,052,728 |
|
Equity compensation plans not approved by security holders(a)
|
|
|
236,719 |
|
|
$ |
10.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,036,651 |
|
|
$ |
17.90 |
|
|
|
1,052,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 has suspended any future grants under this plan. |
The table below provides a summary of all repurchases by Tesoro
of its common stock during the three-month period ended
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of | |
|
Approximate Dollar | |
|
|
|
|
|
|
Shares Purchased as | |
|
Value of Shares That | |
|
|
Total Number | |
|
Average Price | |
|
Part of Publicly | |
|
May yet Be Purchased | |
|
|
of Shares | |
|
Paid per | |
|
Announced Plans or | |
|
Under the Plans or | |
Period |
|
Purchased | |
|
Share | |
|
Programs* | |
|
Programs* | |
|
|
| |
|
| |
|
| |
|
| |
October 2005
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
November 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
200 million |
|
December 2005
|
|
|
240,000 |
|
|
|
58.83 |
|
|
|
240,000 |
|
|
$ |
186 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
240,000 |
|
|
$ |
58.83 |
|
|
|
240,000 |
|
|
$ |
186 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Tesoros existing stock repurchase program was publicly
announced on November 3, 2005. The program authorizes
Tesoro to purchase up to $200 million aggregate purchase
price of shares of Tesoros common stock. |
21
|
|
ITEM 6. |
SELECTED FINANCIAL DATA |
The following table sets forth certain selected consolidated
financial and operating data of Tesoro as of the end of and for
each of the five years in the period ended December 31,
2005. The selected consolidated financial information presented
below has been derived from our historical financial statements.
Our financial results include the post-acquisition results of
our California operations since mid-May 2002 and our
Mid-Continent operations since September 2001. 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, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions except per share amounts) | |
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$ |
16,581 |
|
|
$ |
12,262 |
|
|
$ |
8,846 |
|
|
$ |
7,119 |
|
|
$ |
5,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss)(a)
|
|
$ |
507 |
|
|
$ |
328 |
|
|
$ |
76 |
|
|
$ |
(117 |
) |
|
$ |
88 |
|
Preferred Dividend Requirements(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss) Applicable to Common Stock
|
|
$ |
507 |
|
|
$ |
328 |
|
|
$ |
76 |
|
|
$ |
(117 |
) |
|
$ |
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
7.44 |
|
|
$ |
5.01 |
|
|
$ |
1.18 |
|
|
$ |
(1.93 |
) |
|
$ |
2.26 |
|
|
Diluted
|
|
$ |
7.20 |
|
|
$ |
4.76 |
|
|
$ |
1.17 |
|
|
$ |
(1.93 |
) |
|
$ |
2.10 |
|
Weighted Shares Outstanding (millions):(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
68.1 |
|
|
|
65.5 |
|
|
|
64.6 |
|
|
|
60.5 |
|
|
|
36.2 |
|
|
Diluted
|
|
|
70.4 |
|
|
|
68.9 |
|
|
|
65.1 |
|
|
|
60.5 |
|
|
|
41.9 |
|
Dividends per share(c)
|
|
$ |
0.20 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$ |
2,215 |
|
|
$ |
1,393 |
|
|
$ |
1,024 |
|
|
$ |
1,054 |
|
|
$ |
878 |
|
Property, Plant and Equipment, Net
|
|
$ |
2,467 |
|
|
$ |
2,304 |
|
|
$ |
2,252 |
|
|
$ |
2,303 |
|
|
$ |
1,522 |
|
Total Assets
|
|
$ |
5,097 |
|
|
$ |
4,075 |
|
|
$ |
3,661 |
|
|
$ |
3,759 |
|
|
$ |
2,662 |
|
Current Liabilities
|
|
$ |
1,502 |
|
|
$ |
993 |
|
|
$ |
687 |
|
|
$ |
608 |
|
|
$ |
539 |
|
Total Debt(d)
|
|
$ |
1,047 |
|
|
$ |
1,218 |
|
|
$ |
1,609 |
|
|
$ |
1,977 |
|
|
$ |
1,147 |
|
Stockholders Equity(b)
|
|
$ |
1,887 |
|
|
$ |
1,327 |
|
|
$ |
965 |
|
|
$ |
888 |
|
|
$ |
757 |
|
Current Ratio
|
|
|
1.5:1 |
|
|
|
1.4:1 |
|
|
|
1.5:1 |
|
|
|
1.7:1 |
|
|
|
1.6:1 |
|
Working Capital
|
|
$ |
713 |
|
|
$ |
400 |
|
|
$ |
337 |
|
|
$ |
446 |
|
|
$ |
339 |
|
Total Debt to Capitalization(b)(d)
|
|
|
36 |
% |
|
|
48 |
% |
|
|
62 |
% |
|
|
69 |
% |
|
|
60 |
% |
Common Stock Outstanding (millions of shares)(b)
|
|
|
69.3 |
|
|
|
66.8 |
|
|
|
64.8 |
|
|
|
64.6 |
|
|
|
41.4 |
|
Book Value Per Common Share
|
|
$ |
27.23 |
|
|
$ |
19.87 |
|
|
$ |
14.89 |
|
|
$ |
13.74 |
|
|
$ |
18.28 |
|
Cash Flows From (Used In)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$ |
758 |
|
|
$ |
681 |
|
|
$ |
447 |
|
|
$ |
58 |
|
|
$ |
214 |
|
Investing Activities
|
|
|
(254 |
) |
|
|
(174 |
) |
|
|
(70 |
) |
|
|
(941 |
) |
|
|
(976 |
) |
Financing Activities(b)(d)
|
|
|
(249 |
) |
|
|
(399 |
) |
|
|
(410 |
) |
|
|
941 |
|
|
|
800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
$ |
255 |
|
|
$ |
108 |
|
|
$ |
(33 |
) |
|
$ |
58 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions except per share amounts) | |
Capital Expenditures(e)
|
|
$ |
262 |
|
|
$ |
179 |
|
|
$ |
101 |
|
|
$ |
204 |
|
|
$ |
210 |
|
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining Throughput (thousand barrels per day)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
165 |
|
|
|
153 |
|
|
|
156 |
|
|
|
95 |
|
|
|
|
|
|
Pacific Northwest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington
|
|
|
111 |
|
|
|
117 |
|
|
|
112 |
|
|
|
104 |
|
|
|
119 |
|
|
|
Alaska
|
|
|
60 |
|
|
|
57 |
|
|
|
49 |
|
|
|
53 |
|
|
|
50 |
|
|
Mid-Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hawaii
|
|
|
83 |
|
|
|
84 |
|
|
|
80 |
|
|
|
82 |
|
|
|
87 |
|
|
Mid-Continent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Dakota
|
|
|
58 |
|
|
|
56 |
|
|
|
48 |
|
|
|
51 |
|
|
|
17 |
|
|
|
Utah
|
|
|
53 |
|
|
|
53 |
|
|
|
43 |
|
|
|
50 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Throughput
|
|
|
530 |
|
|
|
520 |
|
|
|
488 |
|
|
|
435 |
|
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining Yield (thousand barrels per day)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
248 |
|
|
|
251 |
|
|
|
239 |
|
|
|
204 |
|
|
|
111 |
|
|
Jet fuel
|
|
|
68 |
|
|
|
66 |
|
|
|
58 |
|
|
|
64 |
|
|
|
59 |
|
|
Diesel fuel
|
|
|
118 |
|
|
|
110 |
|
|
|
103 |
|
|
|
87 |
|
|
|
53 |
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
115 |
|
|
|
113 |
|
|
|
107 |
|
|
|
95 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Yield
|
|
|
549 |
|
|
|
540 |
|
|
|
507 |
|
|
|
450 |
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Sales (thousand barrels per day)(f)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
294 |
|
|
|
300 |
|
|
|
280 |
|
|
|
264 |
|
|
|
161 |
|
|
Jet fuel
|
|
|
101 |
|
|
|
90 |
|
|
|
84 |
|
|
|
94 |
|
|
|
81 |
|
|
Diesel fuel
|
|
|
139 |
|
|
|
133 |
|
|
|
121 |
|
|
|
115 |
|
|
|
73 |
|
|
Heavy oils, residual products and other
|
|
|
75 |
|
|
|
81 |
|
|
|
72 |
|
|
|
72 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product Sales
|
|
|
609 |
|
|
|
604 |
|
|
|
557 |
|
|
|
545 |
|
|
|
376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Fuel Sales (millions of gallons)
|
|
|
449 |
|
|
|
510 |
|
|
|
568 |
|
|
|
790 |
|
|
|
396 |
|
Number of Branded Retail Stations (end of period)
|
|
|
478 |
|
|
|
507 |
|
|
|
557 |
|
|
|
593 |
|
|
|
677 |
|
|
|
|
(a) |
|
For the periods 2005, 2004 and 2003, we incurred various
charges, including debt prepayment and refinancing costs,
retirement benefits, and losses on asset disposals and
impairments, that affect the comparability for each of the five
years in the period ended December 31, 2005. For
information related to these charges, see Results of
Operations in Managements Discussion and Analysis of
Financial Condition and Results of Operations in Item 7. In
2002, we incurred charges for bridge financing fees associated
with the acquisition of the California refinery of
$8 million after-tax ($0.14 per share), losses on
asset sales and impairment of goodwill of $5 million
after-tax ($0.08 per share), and severance and integration
costs of $5 million after-tax ($0.08 per share). Our
2002 results also included income tax refund claims which
reduced previously recognized income tax credits by
$6 million ($0.10 per share) and a LIFO inventory
liquidation resulting in decreased costs of sales of
$3 million after-tax ($0.05 per share). In 2001, we
incurred charges of $7 million after-tax ($0.17 per
share) for financing fees and integration costs, primarily
associated with the acquisition of our Mid-Continent refineries. |
23
|
|
|
(b) |
|
Our mandatory convertible preferred stock automatically
converted into 10.35 million shares of common stock in July
2001, which eliminated our $12 million annual preferred
dividend requirement. During 2002, we completed a public
offering of 23 million common shares to partially fund the
acquisition of the California refinery. |
|
(c) |
|
In both June and September 2005, we paid a quarterly cash
dividend on common stock of $0.05 per share and in December
2005, we paid a quarterly cash dividend on common stock of
$0.10 per share. Prior to 2005, we had not paid dividends
since 1986. |
|
(d) |
|
During 2005, we voluntarily prepaid the remaining
$96 million outstanding principal balance of our senior
secured term loans. During 2005, we also refinanced nearly
$1 billion of our outstanding 8% senior secured notes
and
95/8% senior
subordinated notes through a $900 million notes offering
and a $92 million prepayment of debt. During 2004, we
voluntarily prepaid the remaining $297.5 million
outstanding principal balance of our 9% senior subordinated
notes and $100 million of our senior secured term loans.
During 2003, we reduced total debt by $377 million
primarily through voluntary prepayments. In 2002, we issued
$450 million in principal amount of
95/8% senior
subordinated notes and two
10-year junior
subordinated notes with face amounts totaling $150 million,
and borrowed $292 million under our term loans, net of
repayments, primarily to fund the acquisition of the California
refinery. |
|
(e) |
|
Capital expenditures exclude amounts for refinery turnaround
spending and other maintenance costs and for major acquisitions
in the refining and retail segments during 2002 and 2001. |
|
(f) |
|
Volumes for 2002 include amounts from the California refinery
since we acquired it on May 17, 2002, averaged over
365 days. Throughput and yield for the California refinery
averaged over the 229 days of operation that we owned it
were 151,000 bpd and 160,000 bpd, respectively.
Volumes for 2001 include amounts from the Mid-Continent
operations since we acquired them on September 6, 2001,
averaged over 365 days. Throughput and yield for these
refineries averaged over the 117 days that we owned them in
2001 were 105,000 bpd and 109,000 bpd, respectively. |
|
(g) |
|
Sources of total refined product sales include products
manufactured at the refineries and products purchased from third
parties. |
|
|
ITEM 7. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
Those statements in this section that are not historical in
nature should be deemed forward-looking statements that are
inherently uncertain. See Forward-Looking Statements
on page 46 and Risk Factors on page 16 for
a discussion of the factors that could cause actual results to
differ materially from those projected in these statements.
BUSINESS STRATEGY AND OVERVIEW
Our strategy is to create a value-added refining and marketing
business that has (i) economies of scale, (ii) a
low-cost structure, (iii) effective management information
systems and (iv) outstanding employees focused on business
excellence in a global market, that can provide stockholders
with competitive returns in any economic environment.
Our goals are focused on: (i) operating our facilities in a
safe, reliable, and environmentally responsible way;
(ii) improving profitability by achieving greater
operational and administrative efficiencies; and
(iii) using excess cash flows from operations in a balanced
way to create further shareholder value.
In November 2005, our Board of Directors approved the 2006
capital budget, which is currently estimated to be
$670 million (including refinery turnaround and other
maintenance costs of approximately $105 million). The 2006
capital budget includes the modification of our existing fluid
coker unit to a delayed coker unit at our California refinery
which is designed to (i) lower emissions as required by the
Bay Area Air Quality Management District (see
Environmental and Other) and (ii) increase
overall efficiency by lowering operating costs. We currently
expect to spend approximately $275 million through the
fourth quarter of 2007 for this project, of which
$3 million was spent in 2005. We anticipate spending
$133 million in 2006, $138 million in 2007 and the
remainder in 2008. This cost estimate is subject to further
review and analysis.
24
Our Board of Directors has approved certain high return and
strategic capital projects, including installing a
25,000 bpd delayed coker unit at our Washington refinery
and a 10,000 bpd diesel desulfurizer unit at our Alaska
refinery. The delayed coker unit will allow our Washington
refinery to process a larger proportion of lower-cost heavy
crude oils and manufacture a larger percentage of higher-value
products. We expect to spend approximately $250 million
through the fourth quarter of 2007 for this project, of which we
spent $2 million in 2005. We anticipate spending
$110 million in 2006 and the remainder in 2007. The diesel
desulfurizer unit, which will allow us to manufacture additional
quantities of low sulfur diesel at our Alaska refinery, will
require us to spend approximately $55 million through the
2007 second quarter, of which we spent $4 million in 2005.
We anticipate spending $39 million in 2006 and the
remainder in 2007. These cost estimates are subject to further
review and analysis.
In 2005, Tesoros incentive compensation program included
two financial goals focused on improving profitability by
achieving greater operational and administrative efficiencies:
(i) achieve earnings of at least $3.85 per diluted
share for executives and $3.50 per diluted share for all
other eligible employees and (ii) realize $62 million
of operating income improvements through business improvement
initiatives that are principally generated by intellectual
capital rather than capital investment. During 2005, we achieved
the following significant results relative to our goals, which
are further described below under Results of
Operations and Capital Resources &
Liquidity:
|
|
|
|
|
We had record net earnings of $507 million, or
$7.20 per diluted share, compared to 2004 net earnings
of $328 million, or $4.76 per diluted share. |
|
|
|
We achieved record throughput of 529,600 bpd and operating
income of $1 billion, which includes the realization of
approximately $80 million of operating income through
business improvement initiatives. The majority of the
improvements were the result of the diversification of our crude
oil purchases, together with yield improvements. |
|
|
|
We used cash flows from operations to prepay debt totaling
$191 million. Our debt to capitalization ratio was reduced
to 36% at year-end, compared to 48% at the end of 2004. |
|
|
|
In November we refinanced nearly $1 billion of debt. We
replaced $366 million of our secured debt with unsecured
debt, reduced our interest rates and extended the maturity
dates. The refinancing and prepayments of debt during 2005 will
result in annual pretax interest savings of approximately
$40 million. |
|
|
|
We initiated a quarterly cash dividend on common stock of
$0.05 per share which was paid in both June and September.
We then doubled the quarterly cash dividend paid in December to
$0.10 per share. |
|
|
|
In November, our Board of Directors authorized a
$200 million share repurchase program, which represented
approximately 5% of the shares then outstanding. In 2005, we
repurchased 240,000 shares of common stock for
$14 million under the program. |
|
|
|
Our capital and turnaround spending totaled $327 million of
which $96 million was for Clean Air projects and
$45 million was for reliability and safety projects. |
Industry refining margins remained strong during 2005 and
improved as compared to 2004. Factors positively impacting
industry refining margins during 2005 included:
|
|
|
|
|
continued increased demand due to improved economic fundamentals
worldwide; |
|
|
|
tight finished product inventories and inadequate refining
capacity to meet demand growth; |
|
|
|
third quarter production and supply disruptions on the
U.S. Gulf Coast caused by hurricanes Katrina and Rita; |
|
|
|
heavy refining industry turnaround activity in the western
U.S. primarily during the first quarter; |
|
|
|
unplanned refining industry downtime on the U.S. West Coast
during the third quarter; and |
25
|
|
|
|
|
the 2005 and 2004 changes in product specifications related to
sulfur reductions in gasoline and the elimination of MTBE. |
RESULTS OF OPERATIONS
Our net earnings for 2005 were $507 million ($7.44 per
basic share and $7.20 per diluted share), compared with net
earnings of $328 million ($5.01 per basic share and
$4.76 per diluted share) for 2004. The significant increase
in net earnings during 2005 was primarily due to (i) higher
refined product margins, (ii) record high throughput
levels, and (iii) realizing our operating income
improvement initiatives. Net earnings for 2005 included charges
for debt refinancing and prepayment costs of $58 million
after-tax or $0.82 per share, and executive termination and
retirement costs of $6 million after-tax, or $0.09 per
share. Net earnings for 2004 included debt prepayment and
financing costs of $14 million after-tax, or $0.20 per
share, and charges for executive retirement costs of
$1 million after-tax, or $0.01 per share.
Our net earnings for 2004 were $328 million ($5.01 per
basic share and $4.76 per diluted share), compared with net
earnings of $76 million ($1.18 per basic share and
$1.17 per diluted share) for 2003. The significant increase
in net earnings during 2004 was primarily due to (i) higher
refined product margins, (ii) increased throughput levels,
(iii) lower interest expense as a result of debt reduction
and refinancing in 2003 and additional debt prepayments during
2004, and (iv) our continued focus on capturing business
improvement initiatives. Net earnings for 2003 included the
write-off of unamortized debt issuance costs of $23 million
after-tax, or $0.35 per share. Our 2003 results also included
losses on the sale of our marine services assets and certain
retail asset impairments of $6 million after-tax, or $0.09
per share, voluntary early retirement benefits and severance
costs of $6 million after-tax, or $0.09 per share, and
a charge related to the termination of our funded executive
security plan of $6 million after-tax, or $0.08 per
share.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in millions except per | |
|
|
barrel amounts) | |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined products(a)
|
|
$ |
15,587 |
|
|
$ |
11,633 |
|
|
$ |
8,098 |
|
|
Crude oil resales and other
|
|
|
782 |
|
|
|
419 |
|
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$ |
16,369 |
|
|
$ |
12,052 |
|
|
$ |
8,468 |
|
|
|
|
|
|
|
|
|
|
|
Refining Throughput (thousand barrels per day)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
165 |
|
|
|
153 |
|
|
|
156 |
|
|
Pacific Northwest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington
|
|
|
111 |
|
|
|
117 |
|
|
|
112 |
|
|
|
Alaska
|
|
|
60 |
|
|
|
57 |
|
|
|
49 |
|
|
Mid-Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hawaii
|
|
|
83 |
|
|
|
84 |
|
|
|
80 |
|
|
Mid-Continent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Dakota
|
|
|
58 |
|
|
|
56 |
|
|
|
48 |
|
|
|
Utah
|
|
|
53 |
|
|
|
53 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Throughput
|
|
|
530 |
|
|
|
520 |
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
% Heavy Crude Oil of Total Refining Throughput(c)
|
|
|
50 |
% |
|
|
50 |
% |
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in millions except per | |
|
|
barrel amounts) | |
Yield (thousand barrels per day)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
248 |
|
|
|
251 |
|
|
|
239 |
|
|
Jet Fuel
|
|
|
68 |
|
|
|
66 |
|
|
|
58 |
|
|
Diesel Fuel
|
|
|
118 |
|
|
|
110 |
|
|
|
103 |
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
115 |
|
|
|
113 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Yield
|
|
|
549 |
|
|
|
540 |
|
|
|
507 |
|
|
|
|
|
|
|
|
|
|
|
Refining Margin ($/throughput barrel)(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin
|
|
$ |
17.88 |
|
|
$ |
13.98 |
|
|
$ |
9.63 |
|
|
|
Manufacturing cost before depreciation and amortization
|
|
$ |
5.56 |
|
|
$ |
5.07 |
|
|
$ |
4.41 |
|
|
Pacific Northwest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin
|
|
$ |
9.68 |
|
|
$ |
7.99 |
|
|
$ |
6.19 |
|
|
|
Manufacturing cost before depreciation and amortization
|
|
$ |
2.74 |
|
|
$ |
2.38 |
|
|
$ |
2.26 |
|
|
Mid-Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin
|
|
$ |
6.25 |
|
|
$ |
5.30 |
|
|
$ |
3.30 |
|
|
|
Manufacturing cost before depreciation and amortization
|
|
$ |
1.85 |
|
|
$ |
1.51 |
|
|
$ |
1.39 |
|
|
Mid-Continent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin
|
|
$ |
10.10 |
|
|
$ |
7.02 |
|
|
$ |
5.68 |
|
|
|
Manufacturing cost before depreciation and amortization
|
|
$ |
2.73 |
|
|
$ |
2.28 |
|
|
$ |
2.52 |
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin
|
|
$ |
11.81 |
|
|
$ |
9.12 |
|
|
$ |
6.73 |
|
|
|
Manufacturing cost before depreciation and amortization
|
|
$ |
3.48 |
|
|
$ |
3.01 |
|
|
$ |
2.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income |
|
|
|
|
|
|
|
|
Gross refining margin (after inventory changes)(e)
|
|
$ |
2,246 |
|
|
$ |
1,706 |
|
|
$ |
1,196 |
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing costs
|
|
|
673 |
|
|
|
573 |
|
|
|
509 |
|
|
|
|
Other operating expenses
|
|
|
182 |
|
|
|
141 |
|
|
|
129 |
|
|
|
|
Selling, general and administrative
|
|
|
27 |
|
|
|
22 |
|
|
|
27 |
|
|
|
|
Depreciation and amortization(f)
|
|
|
160 |
|
|
|
130 |
|
|
|
120 |
|
|
|
|
Loss on asset disposals and impairments
|
|
|
10 |
|
|
|
10 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
$ |
1,194 |
|
|
$ |
830 |
|
|
$ |
405 |
|
|
|
|
|
|
|
|
|
|
|
Product Sales (thousand barrels per day)(a)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
294 |
|
|
|
300 |
|
|
|
280 |
|
|
Jet fuel
|
|
|
101 |
|
|
|
90 |
|
|
|
84 |
|
|
Diesel fuel
|
|
|
139 |
|
|
|
133 |
|
|
|
121 |
|
|
Heavy oils, residual products and other
|
|
|
75 |
|
|
|
81 |
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product Sales
|
|
|
609 |
|
|
|
604 |
|
|
|
557 |
|
|
|
|
|
|
|
|
|
|
|
Product Sales Margin ($/barrel)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price
|
|
$ |
70.20 |
|
|
$ |
52.65 |
|
|
$ |
39.81 |
|
|
Average costs of sales
|
|
|
60.28 |
|
|
|
44.74 |
|
|
|
33.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Sales Margin
|
|
$ |
9.92 |
|
|
$ |
7.91 |
|
|
$ |
5.82 |
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
(a) |
|
Includes intersegment sales to our retail segment, at prices
which approximate market of $873 million, $784 million
and $696 million in 2005, 2004 and 2003, respectively.
Intersegment product sales volumes totaled 16,900 bpd,
19,000 bpd and 20,200 bpd in 2005, 2004 and 2003,
respectively. |
|
(b) |
|
We experienced reduced throughput during scheduled maintenance
turnarounds for the following refineries: the California,
Washington and Hawaii refineries during 2005; the California
refinery during 2004; and the Alaska, North Dakota and Utah
refineries during 2003. |
|
(c) |
|
We define heavy crude oil as Alaska North Slope or
crude oil with an American Petroleum Institute specific gravity
of 32 degrees or less. |
|
(d) |
|
Management uses gross refining margin per barrel to evaluate
performance, allocate resources and compare profitability to
other companies in the industry. Gross refining margin per
barrel is calculated by dividing gross refining margin before
inventory changes by total refining throughput and may not be
calculated similarly by other companies. Management uses
manufacturing costs per barrel to evaluate the efficiency of
refinery operations and allocate resources. Manufacturing costs
per barrel may not be comparable to similarly titled measures
used by other companies. Investors and analysts use these
financial measures to help analyze and compare companies in the
industry on the basis of operating performance. These financial
measures should not be considered as alternatives to segment
operating income, revenues, costs of sales and operating
expenses or any other measure of financial performance presented
in accordance with accounting principles generally accepted in
the United States of America. |
|
(e) |
|
Gross refining margin is calculated as revenues less costs of
feedstocks, purchased products, transportation and distribution.
Gross refining margin approximates total refining segment
throughput times gross refining margin per barrel, adjusted for
changes in refined product inventory due to selling a volume and
mix of product that is different than actual volumes
manufactured. Gross refining margin also includes the effect of
intersegment sales to the retail segment at prices which
approximate market. |
|
(f) |
|
Includes manufacturing depreciation and amortization per
throughput barrel of approximately $0.75, $0.61 and $0.59 for
2005, 2004 and 2003, respectively. |
|
(g) |
|
Sources of total product sales include products manufactured at
the refineries and products purchased from third parties. Total
product sales margin includes margins on sales of manufactured
and purchased products and the effects of inventory changes. |
2005 Compared to 2004 Operating income from
our refining segment was $1.2 billion in 2005 compared to
$830 million in 2004. The increase in operating income of
$364 million was primarily due to higher gross refining
margins, combined with higher throughput levels, partially
offset by higher operating expenses. Total gross refining
margins increased 29% to $11.81 per barrel in 2005 compared
to $9.12 per barrel in 2004, reflecting higher per-barrel
gross refining margins in all our regions. Industry margins on a
national basis improved during 2005 compared to 2004, primarily
due to the continued increased demand for finished products due
to improved economic fundamentals worldwide, an active hurricane
season and higher than normal industry maintenance particularly
in the western United States during the first half of 2005.
Industry margins were also impacted by unplanned industry
downtime on the U.S. West Coast during the 2005 third
quarter.
On an aggregate basis, our total gross refining margins
increased to $2.2 billion in 2005 from $1.7 billion in
2004, reflecting higher per-barrel gross refining margins and
increased total refining throughput. Total refining throughput
averaged 530,000 bpd in 2005 compared to 520,000 bpd
during 2004, reflecting record high throughput during the 2005
third and fourth quarters. Our record high throughput during the
last half of 2005 reflects improved operational efficiencies
resulting from scheduled maintenance turnarounds at our three
largest refineries during the first half of 2005. We estimate
that our refining operating income was reduced by approximately
$75 million as a result of both scheduled and unscheduled
downtime at our California and Washington refineries during the
2005 first quarter. During the 2004 third and fourth quarters,
our California refinery experienced reduced throughput during a
scheduled maintenance turnaround, in which we estimate that our
refining operating income was reduced by approximately
$99 million. In addition, our gross refining margins in our
Pacific Northwest region during the first half of 2005 and the
2004 third and fourth quarters
28
were negatively impacted as the increased differential between
light and heavy crude oil depressed the margins for heavy fuel
oils.
Revenues from sales of refined products increased 34% to
$15.6 billion in 2005 from $11.6 billion in 2004,
primarily due to significantly higher average product sales
prices combined with slightly higher product sales volumes. Our
average product prices increased 33% to $70.20 per barrel
reflecting the continued strength in market fundamentals and the
active hurricane season. Total product sales averaged
609,000 bpd in 2005, compared to 604,000 bpd in 2004.
Our average costs of sales increased 35% to $60.28 per
barrel during 2005, reflecting significantly higher average
feedstock prices and increased purchases of refined products due
to scheduled and unscheduled downtime at certain refineries.
Expenses, excluding depreciation and amortization, increased to
$892 million in 2005, compared with $746 million in
2004, primarily due to higher utilities of $48 million,
higher employee costs of $13 million, increased maintenance
costs of $12 million and increased insurance costs of
$8 million primarily due to property insurance premium
surcharges resulting from hurricanes Katrina and Rita. Expenses
included the allocation of certain information technology costs
totaling $24 million that were previously classified as
corporate and unallocated costs. Depreciation and amortization
increased to $160 million in 2005, compared to
$130 million in 2004, primarily reflecting increasing
capital expenditures. In addition, during the fourth quarter of
2005, we shortened the estimated lives of the fluid coker unit
and certain tanks at our California refinery and recorded asset
retirement obligations (see Note A in our consolidated
financial statements in Item 8), resulting in additional
depreciation of $12 million. The existing fluid coker unit
will be modified to a delayed coker unit, which is scheduled to
be completed during the fourth quarter of 2007. The tanks will
be retired between 2006 and 2019 to comply with applicable
regulations. The shortened asset lives and recorded asset
retirement obligations will increase depreciation in 2006 by
approximately $45 million.
Refining throughput and yields in 2006 will be affected by
scheduled maintenance turnarounds at our California, Washington,
Alaska and North Dakota refineries. We currently expect total
refining throughput to average approximately 525,000 to
535,000 bpd in 2006.
2004 Compared to 2003 Operating income from
our refining segment increased to $830 million in 2004
compared to $405 million in 2003. The $425 million
increase in our operating income primarily resulted from
significantly higher refined product margins, combined with
higher throughput levels and product sales volumes. Our total
gross refining margin per barrel increased 36% to $9.12 per
barrel in 2004 compared to $6.73 per barrel in 2003,
reflecting higher per-barrel refining margins in all of our
regions. Industry margins on a national basis improved primarily
due to increased demand and below average inventory levels for
finished products. Improved economic fundamentals in the U.S.
and Far East resulted in increased demand and margins for
finished products and reduced finished product inventory levels.
Heavy refining industry turnaround activity in the PADD V region
during the first quarter of 2004 reduced finished product
inventory levels on the U.S. West Coast. Furthermore,
U.S. West Coast gasoline supplies tightened in part due to
the elimination of the oxygenate MTBE. Margins were lower in all
of our refining regions excluding California for the fourth
quarter of 2004, compared to the third quarter, primarily due to
lower seasonal demand for refined products and higher average
crude oil prices. While refining margins in the California
region increased during the fourth quarter as compared to the
third quarter, we were unable to fully capture these margins due
to scheduled downtime at the California refinery as discussed
below.
On an aggregate basis, our total gross refining margins
increased from $1.2 billion in 2003 to $1.7 billion in
2004, reflecting higher per-barrel gross refining margins in all
of our regions and higher total refining throughput volumes.
Total refining throughput averaged 520,000 bpd in 2004, an
increase of 32,000 bpd or 7% from 2003, despite scheduled
turnarounds at our California refinery, which were completed
during the 2004 fourth quarter, and unscheduled downtime in the
2004 first quarter due to a short-term power outage and
accelerated maintenance of the hydrogen plant. Primarily due to
the scheduled and unscheduled downtime at the California
refinery, the percentage of lower cost heavy crude oil that we
processed of total refining throughput decreased from 58% in
2003 to 50% in 2004. In 2003, our Alaska, North Dakota and Utah
refineries experienced reduced throughput during scheduled
maintenance turnarounds.
29
Revenues from sales of refined products increased 43% to
$11.6 billion in 2004 from $8.1 billion in 2003,
primarily due to significantly higher average product sales
prices and slightly higher product sales volumes. Our average
product prices increased 32% to $52.65 per barrel and total
product sales increased by 8% to average 604,000 bpd
in 2004 from 2003. Costs of sales also increased primarily due
to higher average feedstock prices and slightly higher product
sales volumes as compared with 2003. Expenses, excluding
depreciation and amortization, increased to $746 million in
2004 from $671 million in 2003, primarily due to increased
maintenance, utilities and employee costs of approximately
$57 million and the write-off of certain refinery assets
that were replaced in connection with the California refinery
turnaround of $8 million. We estimate that the scheduled
turnarounds at our California refinery during 2004 resulted in
additional operating expenses of approximately $10 million
in 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in millions except | |
|
|
per gallon amounts) | |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
|
|
$ |
944 |
|
|
$ |
863 |
|
|
$ |
797 |
|
|
Merchandise and other
|
|
|
141 |
|
|
|
131 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$ |
1,085 |
|
|
$ |
994 |
|
|
$ |
918 |
|
|
|
|
|
|
|
|
|
|
|
Fuel Sales (millions of gallons)
|
|
|
449 |
|
|
|
510 |
|
|
|
568 |
|
Fuel Margin ($/gallon)(a)
|
|
$ |
0.16 |
|
|
$ |
0.16 |
|
|
$ |
0.18 |
|
Merchandise Margin (in millions)
|
|
$ |
36 |
|
|
$ |
35 |
|
|
$ |
31 |
|
Merchandise Margin (percent of sales)
|
|
|
26 |
% |
|
|
28 |
% |
|
|
27 |
% |
Average Number of Stations (during the period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
213 |
|
|
|
222 |
|
|
|
229 |
|
|
Branded jobber/dealer
|
|
|
281 |
|
|
|
316 |
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Average Retail Stations
|
|
|
494 |
|
|
|
538 |
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margins
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel(b)
|
|
$ |
71 |
|
|
$ |
79 |
|
|
$ |
101 |
|
|
|
Merchandise and other non-fuel margin
|
|
|
39 |
|
|
|
39 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margins
|
|
|
110 |
|
|
|
118 |
|
|
|
136 |
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
90 |
|
|
|
76 |
|
|
|
71 |
|
|
|
Selling, general and administrative
|
|
|
25 |
|
|
|
26 |
|
|
|
30 |
|
|
|
Depreciation and amortization
|
|
|
17 |
|
|
|
18 |
|
|
|
19 |
|
|
|
Loss on asset disposals and impairments
|
|
|
9 |
|
|
|
4 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
$ |
(31 |
) |
|
$ |
(6 |
) |
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Management uses fuel margin per gallon to compare profitability
to other companies in the industry. Fuel margin per gallon is
calculated by dividing fuel gross margin by fuel sales volumes
and may not be calculated similarly by other companies.
Investors and analysts use fuel margin per gallon to help
analyze and compare companies in the industry on the basis of
operating performance. This financial measure should not be
considered as an alternative to segment operating income and
revenues or any other financial measure of financial performance
presented in accordance with accounting principles generally
accepted in the United States of America. |
|
(b) |
|
Includes the effect of intersegment purchases from our refining
segment at prices which approximate market. |
30
2005 Compared to 2004 The operating loss for
our retail segment was $31 million in 2005, compared to an
operating loss of $6 million in 2004. Total gross margins
decreased to $110 million during 2005 from
$118 million in 2004 due to lower sales volumes. Fuel
margin remained flat at $0.16 per gallon in both 2005 and
2004. Total gallons sold decreased to 449 million from
510 million, reflecting the decrease in average station
count to 494 in 2005 from 538 in 2004. The decrease in average
station count reflects our continued rationalization of retail
assets.
Revenues on fuel sales increased to $944 million in 2005,
from $863 million in 2004, reflecting increased sales
prices, partly offset by lower sales volumes. Costs of sales
increased in 2005 due to higher average prices of purchased
fuel, partly offset by lower sales volumes. Operating expenses
for 2005 included the allocation of certain information
technology costs of $5 million that were previously
classified as corporate and unallocated costs and higher
insurance costs of $2 million. The increase in loss on
asset disposals and impairments to $9 million in 2005 from
$4 million in 2004 primarily reflects charges for the
impairment of certain retail sites.
2004 Compared to 2003 The operating loss for
our retail segment was $6 million in 2004 compared to
operating income of $13 million in 2003. Total gross
margins decreased to $118 million during 2004 from
$136 million in 2003, reflecting lower fuel margins per
gallon and lower sales volumes. Fuel margin decreased to
$0.16 per gallon in 2004 from $0.18 per gallon in
2003, reflecting higher average prices of purchased fuel. Total
gallons sold decreased to 510 million from
568 million, reflecting the decrease in average station
count to 538 in 2004 from 575 in 2003 due to our continued
rationalization of retail assets.
Revenues on fuel sales increased to $863 million in 2004
from $797 million in 2003, reflecting increased sales
prices, primarily offset by lower sales volumes. Costs of sales
increased in 2004 due to higher average prices of purchased
fuel, partly offset by lower sales volumes. Operating, selling,
general and administrative expenses remained flat in 2004, as
compared to 2003.
|
|
|
Selling, General and Administrative Expenses |
Selling, general and administrative expenses of
$179 million in 2005 increased from $152 million in
2004. During 2005, we allocated certain information technology
costs previously reported as selling, general and administrative
expenses to costs of sales and operating expenses totaling
$29 million (see Notes A and D of the condensed
consolidated financial statements in Item 8). The increase
during 2005 was primarily due to increased employee and contract
labor expenses of $28 million, charges for the termination
and retirement of certain executive officers of $11 million
and additional stock-based compensation expenses of
$8 million. The increase in employee and contract labor
expenses during 2005 primarily reflects costs associated with
implementing and supporting systems and process improvements.
Selling, general and administrative expenses of
$152 million in 2004 increased from $138 million in
2003. During 2004, we incurred an additional $20 million
for stock-based and other incentive-based compensation, higher
professional fees of approximately $11 million for projects
related to driving business excellence and charges associated
with the retirement of certain executive officers totaling
$2 million. During 2003, we incurred charges totaling
$17 million for voluntary early retirement benefits,
severance costs and the termination of our funded executive
security plan.
|
|
|
Interest and Financing Costs |
Interest and financing costs were $211 million in 2005
compared to $171 million in 2004. The increase was due to
debt refinancing and prepayment costs totaling $92 million
associated with the refinancing of our 8% senior secured
notes and
95/8% senior
subordinated notes, and charges of $3 million in connection
with the voluntary prepayment of our senior secured term loans
during 2005. During 2004, debt prepayment and financing costs
totaled $23 million, primarily associated with voluntary
debt prepayments. Excluding these refinancing and prepayment
costs, interest and financing costs decreased by
$32 million during 2005, primarily due to lower interest
expense associated with debt reduction totaling
$401 million during 2004 and $191 million during 2005.
31
Interest and financing costs were $171 million in 2004
compared to $213 million in 2003. The $42 million
decrease in 2004 was due primarily to lower interest expense
associated with debt reduction during 2004 and 2003 totaling
$778 million. The decrease was also due to the write-off of
$36 million of unamortized debt issuance costs in 2003 in
connection with the replacement of our previous credit facility
and voluntary prepayments of other debt. The decrease during
2004 was partly offset by debt prepayment and financing costs
totaling $23 million as discussed above.
The income tax provision amounted to $324 million in 2005
compared to $219 million in 2004 and $47 million in
2003. The increases reflect significantly higher earnings before
income taxes. The combined federal and state effective income
tax rates were approximately 39%, 40% and 38% in 2005, 2004 and
2003, respectively. The decrease in our federal and state
effective income tax rate during 2005 was primarily a result of
a new tax deduction for domestic manufacturing activities, which
became available in 2005. The increase in our federal and state
effective income tax rate during 2004 was primarily due to a
change in California state tax law, which eliminated an
investment tax credit that had been available in previous years.
CAPITAL RESOURCES AND LIQUIDITY
We operate in an environment where our capital resources and
liquidity are impacted by changes in the price of crude oil and
refined petroleum products, availability of trade credit, market
uncertainty and a variety of additional factors beyond our
control. These risks include, among others, the level of
consumer product demand, weather conditions, fluctuations in
seasonal demand, governmental regulations, worldwide
geo-political conditions and overall market and economic
conditions. See Forward-Looking Statements on
page 46 and Risk Factors on page 16 for
further information related to risks and other factors. Future
capital expenditures, as well as borrowings under our credit
agreement and other sources of capital, may be affected by these
conditions.
Our primary sources of liquidity have been cash flows from
operations and borrowing availability under revolving lines of
credit. We ended 2005 with $440 million of cash and cash
equivalents, no borrowings under our revolving credit facility,
and $482 million in available borrowing capacity under our
credit agreement after $268 million in outstanding letters
of credit. We also have a separate letters of credit agreement
of which we had $77 million available after
$88 million in outstanding letters of credit as of
December 31, 2005. As further described below, in November
2005 we refinanced nearly $1 billion principal amount of
our outstanding 8% senior secured notes and
95/8% senior
subordinated notes through a $900 million notes offering
and prepaid an additional $92 million with cash on-hand. In
April 2005, we voluntarily prepaid the remaining
$96 million outstanding principal balance of our senior
secured term loans. The refinancing and debt prepayments will
result in annual pretax interest savings of approximately
$40 million. Since May 2002, including the debt prepayments
during 2005, we have reduced debt by approximately
$1.1 billion, decreasing our debt to capitalization ratio
from 69% at June 30, 2002 to 36% at December 31, 2005.
We believe available capital resources will be adequate to meet
our capital expenditures, working capital and debt service
requirements.
On November 16, 2005, Tesoro issued $450 million
principal amount of
61/4% senior
notes due 2012 and $450 million principal amount of
65/8% senior
notes due 2015 (the notes offering). The proceeds
from the notes offering, including cash on-hand, were used to
repurchase through cash tender offers the following principal
amounts of our existing notes: (i) $189 million of our
outstanding $211 million
95/8% senior
subordinated notes due 2008; (ii) $415 million of our
outstanding $429 million
95/8% senior
subordinated notes due 2012; and (iii) $366 million
principal amount of our $375 million 8% senior secured
notes due 2008. We redeemed the remaining $22 million
principal amount of the
95/8% senior
subordinated notes due 2008 at a redemption price of 104.8% on
December 16, 2005. The refinancing of nearly
$1 billion and prepayments
32
totaling $92 million resulted in a pretax charge of
$92 million, consisting of tender and redemption premiums
of $74 million and the write-off of unamortized debt
issuance costs and discount of $18 million. The remaining
$9 million outstanding balance of the 8% senior
secured notes are callable beginning April 15, 2006 at a
redemption price of 104%. The remaining $14 million
outstanding balance of the
95/8% senior
subordinated notes are callable beginning April 1, 2007 at
a redemption price of 104.8%.
Our capital structure at December 31, 2005 was comprised of
(in millions):
|
|
|
|
|
|
|
Debt, including current maturities:
|
|
|
|
|
|
Credit Agreement Revolving Credit Facility
|
|
$ |
|
|
|
61/4% Senior
Notes Due 2012
|
|
|
450 |
|
|
65/8% Senior
Notes Due 2015
|
|
|
450 |
|
|
8% Senior Secured Notes Due 2008
|
|
|
9 |
|
|
95/8% Senior
Subordinated Notes Due 2012
|
|
|
14 |
|
|
Junior subordinated notes due 2012
|
|
|
93 |
|
|
Capital lease obligations
|
|
|
31 |
|
|
|
|
|
|
|
Total debt
|
|
|
1,047 |
|
Stockholders equity
|
|
|
1,887 |
|
|
|
|
|
|
|
Total Capitalization
|
|
$ |
2,934 |
|
|
|
|
|
At December 31, 2005, our debt to capitalization ratio was
36%, compared to 48% at year-end 2004, reflecting net earnings
of $507 million during 2005, voluntary prepayments of debt
and scheduled capital lease payments totaling $191 million
and an increase in additional paid-in capital of
$76 million during 2005 primarily due to stock options
exercised.
Our credit agreement and senior notes impose various
restrictions and covenants as described below that could
potentially limit our ability to respond to market conditions,
raise additional debt or equity capital, or take advantage of
business opportunities.
In May 2005, we amended our credit agreement to extend the term
by one year to June 2008 and reduce letter of credit fees and
revolver borrowing interest. The credit agreement currently
provides for borrowings (including letters of credit) up to the
lesser of the agreements total capacity, $750 million
as amended, or the amount of a periodically adjusted borrowing
base ($1.5 billion as of December 31, 2005),
consisting of Tesoros eligible cash and cash equivalents,
receivables and petroleum inventories, as defined. As of
December 31, 2005, we had no borrowings and
$268 million in letters of credit outstanding under the
revolving credit facility, resulting in total unused credit
availability of $482 million or 64% of the eligible
borrowing base. Borrowings under the revolving credit facility
bear interest at either a base rate (7.25% at December 31,
2005) or a eurodollar rate (4.39% at December 31, 2005),
plus an applicable margin. The applicable margin at
December 31, 2005 was 1.50% in the case of the eurodollar
rate, but varies based on credit facility availability. Letters
of credit outstanding under the revolving credit facility incur
fees at an annual rate tied to the eurodollar rate applicable
margin (1.50% at December 31, 2005).
The credit agreement allows up to $250 million in letters
of credit outside the credit agreement for crude oil purchases
from
non-U.S. vendors.
In September 2005, we entered into a separate letters of credit
agreement that provides up to $165 million in letters of
credit for the purchase of foreign crude oil. The agreement is
secured by our petroleum inventories supported by letters of
credit issued under the agreement and will remain in effect
until terminated by either party. Letters of credit outstanding
under this agreement incur fees at an annual rate of 1.25% while
secured or 1.38% while unsecured. As of December 31, 2005,
we had $88 million in letters of credit outstanding under
this agreement.
The credit agreement contains covenants and conditions that,
among other things, limit our ability to pay cash dividends,
incur indebtedness, create liens and make investments. Tesoro is
also required to maintain
33
specified levels of fixed charge coverage and tangible net
worth. We are not required to maintain the fixed charge coverage
ratio if unused credit availability exceeds 15% of the eligible
borrowing base. The credit agreement is guaranteed by
substantially all of Tesoros active subsidiaries and is
secured by substantially all of Tesoros cash and cash
equivalents, petroleum inventories and receivables.
|
|
|
61/4% Senior
Notes Due 2012 |
On November 16, 2005, Tesoro issued $450 million
aggregate principal amount of
61/4% senior
notes due November 1, 2012. The notes have a seven-year
maturity with no sinking fund requirements and are not callable.
We have the right to redeem up to 35% of the aggregate principal
amount at a redemption price of 106% with proceeds from certain
equity issuances through November 1, 2008. 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 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 subsidiaries.
|
|
|
65/8% Senior
Notes Due 2015 |
On November 16, 2005, Tesoro issued $450 million
aggregate principal amount of
65/8% senior
notes due November 1, 2015. The notes have a ten-year
maturity with no sinking fund requirements and are subject to
optional redemption by Tesoro beginning November 1, 2010 at
premiums of 3.3% through October 31, 2011, 2.2% from
November 1, 2011 to October 31, 2012, 1.1% from
November 1, 2012 to October 31, 2013, and at par
thereafter. We have the right to redeem up to 35% of the
aggregate principal amount at a redemption price of 106% with
proceeds from certain equity issuances through November 1,
2008. 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 subsidiaries.
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 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; |
|
|
|
engage in certain merger or consolidations and transfers of
assets; and |
|
|
|
enter into transactions with affiliates. |
The indentures also limit our subsidiaries ability to
create restrictions on making certain payments and
distributions. The senior notes are guaranteed by substantially
all of our active domestic subsidiaries.
|
|
|
Senior Secured Term Loans |
In April 2005, we voluntarily prepaid the remaining
$96 million outstanding principal balance of our senior
secured term loans at a prepayment premium of 1%. The prepayment
resulted in a pretax charge during
34
the 2005 second quarter of $3 million, consisting of the
write-off of unamortized debt issuance costs and the 1%
prepayment premium.
|
|
|
8% Senior Secured Notes Due 2008 |
In April 2003, Tesoro issued $375 million aggregate
principal amount of 8% senior secured notes due
April 15, 2008. On November 16, 2005, Tesoro
repurchased $366 million of the notes in connection with
the notes offering described above. In addition, the indenture
for the notes was amended to remove substantially all of the
covenants. The remaining $9 million outstanding balance of
the notes has no sinking fund requirements and is subject to
optional redemption by Tesoro, beginning April 15, 2006, at
a premium of 4% through April 14, 2007, and at par
thereafter. The notes are secured by substantially all of
Tesoros refining property, plant and equipment and are
guaranteed by substantially all of Tesoros active
subsidiaries. The notes were issued at 98.994% of par, resulting
in net proceeds of $371.2 million before debt issuance
costs. The effective interest rate on the notes is 8.25%, after
giving effect to the discount.
|
|
|
95/8% Senior
Subordinated Notes Due 2012 |
In April 2002, Tesoro issued $450 million principal amount
of
95/8% senior
subordinated notes due April 1, 2012. On November 16,
2005, Tesoro repurchased $415 million of the outstanding
$429 million notes, in connection with the notes offering
described above. In addition, the indenture for the notes was
amended to remove substantially all of the covenants. The
remaining $14 million outstanding balance of the notes
matures in April 2012, has no sinking fund requirements and is
subject to optional redemption by Tesoro, beginning
April 1, 2007 at premiums of 4.8% through March 31,
2008. The notes are guaranteed by substantially all of
Tesoros active domestic subsidiaries.
|
|
|
Junior Subordinated Notes Due 2012 |
In connection with our acquisition of the California refinery,
we issued to the seller two ten-year junior subordinated notes
with face amounts aggregating $150 million. The notes
consist of: (i) a $100 million junior subordinated
note, due July 2012, which is non-interest bearing through
May 16, 2007 and carries a 7.5% interest rate thereafter,
and (ii) a $50 million junior subordinated note, due
July 2012, which bears interest at 7.47% from May 17, 2003
through May 16, 2007 and 7.5% thereafter. The junior
subordinated notes were recorded initially at a combined present
value of approximately $61 million, discounted at a rate of
15.625% and 14.375%, respectively. The discount is being
amortized over the term of the notes.
|
|
|
Common Stock Repurchase Program |
In November 2005, our Board of Directors authorized a
$200 million share repurchase program, which represented
approximately 5% of our common stock then outstanding. Under the
program, we will repurchase our common stock from time to time
in the open market. Purchases will depend on price, market
conditions and other factors. During 2005, we repurchased
240,000 shares of common stock under the program for
$14 million, or an average cost per share of $58.83. During
January and February 2006, we repurchased an additional
421,800 shares of common stock under the program at a cost
of $26 million.
Components of our cash flows are set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash Flows From (Used In):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$ |
758 |
|
|
$ |
681 |
|
|
$ |
447 |
|
|
Investing Activities
|
|
|
(254 |
) |
|
|
(174 |
) |
|
|
(70 |
) |
|
Financing Activities
|
|
|
(249 |
) |
|
|
(399 |
) |
|
|
(410 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
$ |
255 |
|
|
$ |
108 |
|
|
$ |
(33 |
) |
|
|
|
|
|
|
|
|
|
|
35
Net cash from operating activities during 2005 totaled
$758 million, compared to $681 million from operating
activities in 2004. The increase was primarily due to
significantly improved earnings, partly offset by increased
working capital requirements. Net cash used in investing
activities of $254 million in 2005 was primarily for
capital expenditures. Net cash used in financing activities
primarily reflects our voluntary prepayment of the senior
secured term loans, prepayments of our outstanding
8% senior secured notes and
95/8% senior
subordinated notes in connection with the refinancing, and
associated debt refinancing and prepayment costs. We also
repurchased $15 million of common stock (including
$14 million associated with the common stock repurchase
program) and paid $14 million of dividends to stockholders.
Gross borrowings and repayments under the revolving credit
facility each amounted to $463 million during 2005. Working
capital totaled $713 million at December 31, 2005
compared to $400 million at December 31, 2004,
primarily as a result of the $255 million increase in cash
and cash equivalents.
Net cash from operating activities during 2004 totaled
$681 million, compared to $447 million from operating
activities in 2003. The increase was primarily due to
significantly improved earnings. Net cash used in investing
activities of $174 million in 2004 was primarily for
capital expenditures. Net cash used in financing activities of
$399 million in 2004 primarily reflects the debt
prepayments made during the year. Gross borrowings and
repayments under the revolving credit facility each amounted to
$112 million during 2004, all of which occurred during the
2004 first quarter. Working capital totaled $400 million at
December 31, 2004 compared to $337 million at
December 31, 2003, as a result of increases in cash and
cash equivalents, receivables and inventories, partially offset
by increases in payables, attributable to increases in sales
volumes and crude and product prices.
Net cash from operating activities during 2003 totaled
$447 million. Net cash used in investing activities of
$70 million in 2003 was primarily for capital expenditures
partially offset by proceeds from the sale of marine services
assets. Net cash used in financing activities of
$410 million in 2003 was primarily for voluntary debt
prepayments under a previous term loan, other debt repayments,
and financing costs related to the credit agreement. Gross
borrowings and repayments under revolving credit lines each
amounted to $1.0 billion during 2003.
EBITDA represents earnings before interest and financing costs,
interest income and other, income taxes, and depreciation and
amortization. We present EBITDA because we believe some
investors and analysts use EBITDA to help analyze our liquidity
including our ability to satisfy principal and interest
obligations with respect to our indebtedness and to use cash for
other purposes, including capital expenditures. EBITDA is also
used by some investors and analysts to analyze and compare
companies on the basis of operating performance. EBITDA is also
used by management for internal analysis and as a component of
the fixed charge coverage financial covenant in our credit
agreement. EBITDA should not be considered as an alternative to
net earnings, earnings before income taxes, cash flows from
operating activities or any other measure of financial
performance presented in accordance with accounting principles
generally accepted in the United States of
36
America. EBITDA may not be comparable to similarly titled
measures used by other entities. Our annual historical EBITDA
reconciled to net cash from operating activities was (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net Cash from Operating Activities
|
|
$ |
758 |
|
|
$ |
681 |
|
|
$ |
447 |
|
Changes in Assets and Liabilities
|
|
|
67 |
|
|
|
(45 |
) |
|
|
(96 |
) |
Excess Tax Benefits from Stock-based Compensation Arrangements
|
|
|
27 |
|
|
|
4 |
|
|
|
|
|
Deferred Income Taxes
|
|
|
(77 |
) |
|
|
(103 |
) |
|
|
(55 |
) |
Stock-based Compensation
|
|
|
(26 |
) |
|
|
(14 |
) |
|
|
|
|
Loss on Asset Disposals and Impairments
|
|
|
(19 |
) |
|
|
(14 |
) |
|
|
(17 |
) |
Amortization and Write-off of Debt Issuance Costs and Discounts
|
|
|
(37 |
) |
|
|
(27 |
) |
|
|
(55 |
) |
Depreciation and Amortization
|
|
|
(186 |
) |
|
|
(154 |
) |
|
|
(148 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$ |
507 |
|
|
$ |
328 |
|
|
$ |
76 |
|
|
Add Income Tax Provision
|
|
|
324 |
|
|
|
219 |
|
|
|
47 |
|
|
Less Interest Income and Other
|
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
Add Interest and Financing Costs
|
|
|
211 |
|
|
|
171 |
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
1,027 |
|
|
|
713 |
|
|
|
335 |
|
|
Add Depreciation and Amortization
|
|
|
186 |
|
|
|
154 |
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
1,213 |
|
|
$ |
867 |
|
|
$ |
483 |
|
|
|
|
|
|
|
|
|
|
|
Historical EBITDA as presented above differs from EBITDA as
defined under our credit agreement. The primary differences are
non-cash postretirement benefit costs and loss on asset
disposals and impairments, which are added to net earnings under
the credit agreement EBITDA calculations.
|
|
|
Capital Expenditures and Refinery Turnaround
Spending |
Our capital expenditures and refinery turnaround spending
totaled $327 million during 2005, compared to
$229 million in 2004 as discussed below.
During 2005, our capital expenditures, including accruals,
totaled $262 million (excluding refinery turnaround and
other maintenance costs of $65 million) and included clean
air, clean fuels and other environmental projects of
$126 million, refinery improvements at our California
refinery of $54 million (excluding environmental projects),
corporate capital expenditures of $42 million and retail
projects totaling $6 million. See Environmental and
Other below for additional information regarding capital
spending for our clean air, clean fuels and other environmental
projects.
In May 2005, our Board of Directors approved an incremental
capital spending program for 2005 of approximately
$42 million designed to capture strategic profit
improvement opportunities in crude flexibility, yield
improvements and cost reductions and $13 million to study
environmental projects at our California and Alaska refineries.
The capital projects include the installation of a delayed coker
unit at our Washington refinery and a diesel desulfurizer unit
at our Alaska refinery, both projected to be completed during
2007 (see Business Strategy and Environment). During
2005, we spent $2 million for the delayed coker unit and
$4 million for the diesel desulfurizer unit.
Our 2006 capital budget is currently estimated to be
approximately $565 million (excluding refinery turnaround
and other maintenance costs of approximately $105 million).
The capital budget includes $133 million for the delayed
coker modification at our California refinery, $110 million
for the delayed coker unit at our Washington refinery,
$39 million for the diesel desulfurizer unit at our Alaska
refinery, $160 million for sustaining and environmental,
health and safety projects and $13 million for retail
projects (see Business Strategy and Environment).
Our preliminary capital expenditure estimates for 2007 and 2008
are $490 million and $190 million, respectively
(excluding refinery turnaround and other maintenance costs of
37
approximately $50 million in 2007 and $60 million in
2008). We continue to evaluate additional projects for 2007 and
2008. As a result, these capital expenditure estimates are
preliminary and subject to change.
|
|
|
Refinery Turnaround and Other Maintenance |
During 2005, we spent $50 million for refinery turnarounds,
primarily at our California, Washington and Hawaii refineries,
and an additional $15 million for other maintenance. In
2006, we expect to spend approximately $81 million for
refinery turnarounds, primarily at our California, Washington,
Alaska and North Dakota refineries, and an additional
$24 million for other maintenance. Based on our latest
estimates, we expect our annual spending for refinery
turnarounds to be as follows (excludes other maintenance) (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
|
|
|
|
|
|
|
|
|
Turnaround Spending by Refinery |
|
Actual | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
California
|
|
$ |
18 |
|
|
$ |
54 |
|
|
$ |
31 |
|
|
$ |
14 |
|
|
$ |
26 |
|
|
$ |
10 |
|
Washington
|
|
|
20 |
|
|
|
15 |
|
|
|
1 |
|
|
|
14 |
|
|
|
2 |
|
|
|
20 |
|
Alaska
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
1 |
|
|
|
7 |
|
|
|
|
|
Hawaii
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
North Dakota
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
2 |
|
|
|
17 |
|
|
|
|
|
Utah
|
|
|
|
|
|
|
2 |
|
|
|
11 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
50 |
|
|
$ |
81 |
|
|
$ |
43 |
|
|
$ |
43 |
|
|
$ |
60 |
|
|
$ |
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have numerous contractual commitments for purchases of crude
oil feedstocks, services associated with the operation of our
refineries, debt service and leases (see Notes E and O in
our consolidated financial statements in Item 8). We also
have contractual commitments for capital spending requirements
related primarily to refinery improvements and environmental
projects.
The following table summarizes our annual contractual
commitments as of December 31, 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligation |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term debt obligations(1)
|
|
$ |
64 |
|
|
$ |
68 |
|
|
$ |
80 |
|
|
$ |
71 |
|
|
$ |
71 |
|
|
$ |
1,289 |
|
Capital lease obligations
|
|
|
6 |
|
|
|
5 |
|
|
|
5 |
|
|
|
4 |
|
|
|
5 |
|
|
|
30 |
|
Operating lease obligations(2)
|
|
|
154 |
|
|
|
111 |
|
|
|
81 |
|
|
|
56 |
|
|
|
34 |
|
|
|
134 |
|
Purchase obligations(3)
|
|
|
4,203 |
|
|
|
389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations(4)
|
|
|
106 |
|
|
|
58 |
|
|
|
30 |
|
|
|
29 |
|
|
|
28 |
|
|
|
89 |
|
Capital expenditure obligations
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected pension contributions(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$ |
4,596 |
|
|
$ |
631 |
|
|
$ |
196 |
|
|
$ |
160 |
|
|
$ |
138 |
|
|
$ |
1,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
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. |
|
(2) |
Represents our future minimum lease commitments for operating
leases. Lease commitments for 2006 include lease arrangements
with initial terms of less than one year. |
|
(3) |
Represents an estimate of our contractual purchase commitments
for the supply of crude oil feedstocks, with remaining terms
ranging from two months to 18 months. Prices under these
term agreements generally fluctuate with market-responsive
pricing provisions. To estimate our annual commitments under
these contracts, we estimated crude oil prices using actual
market prices, ranging from $54 per |
38
|
|
|
barrel to $64 per barrel, as of December 31, 2005, and
volumes based on the contracts minimum purchase
requirements. We also purchase additional crude oil feedstocks
under short-term renewable contracts and in the spot market,
which are not included in the table above. |
|
|
(4) |
Represents primarily long-term commitments to purchase services,
including chemical supplies and power. These purchase
obligations are based on the contracts minimum volume
requirements. We estimated our commitments to purchase power at
our California refinery, which has variable pricing provisions,
using estimated future market prices. Actual purchases of
electricity at our California refinery typically exceed the
required minimum volumes. Our commitments also include a final
payment of $30 million in 2006 related to terminating the
deactivated MTBE plant lease at our California refinery and
annual payments of $5 million for a lease beginning in the
fourth quarter of 2006 with an initial term through 2014. |
|
(5) |
Although we have no minimum required contribution obligation to
our pension plan under applicable laws and regulations, we
currently project to voluntarily contribute approximately
$25 million in 2006, of which we contributed
$6 million in February. Amounts are subject to change based
on the performance of the assets in the plan, the discount rate
used to determine the obligation, and other actuarial
assumptions. See Critical Accounting Policies for
further information related to our pension plan. We are unable
to project benefit contributions beyond 2010. |
As of December 31, 2005, we leased our corporate
headquarters from a limited partnership in which we owned a 50%
limited interest. In February 2006, the limited partnership sold
the building to a third-party resulting in a gain to Tesoro of
$5 million. We continue to lease our corporate headquarters
from the third-party with an initial term through 2014 with two
five-year renewal options. Our lease payments and operating
costs paid to the partnership totaled $4 million,
$3 million and $3 million in 2005, 2004, and 2003,
respectively, and our future lease commitments are included in
operating leases in the table above. We accounted for our
interest in the partnership using the equity method of
accounting. As such, we did not include the partnerships
assets, primarily land and buildings, totaling approximately
$16 million and debt of approximately $13 million, in
our consolidated financial statements.
Tesoro is subject to extensive federal, state and local
environmental laws and regulations. These laws, which change
frequently, regulate the discharge of materials into the
environment and may require us to remove or mitigate the
environmental effects of the disposal or release of petroleum or
chemical substances at various sites, install additional
controls, or make other modifications or changes in use for
certain emission sources.
|
|
|
Environmental Liabilities |
We are currently involved in remedial responses and have
incurred and expect to continue to incur cleanup expenditures
associated with environmental matters at a number of sites,
including certain of our previously owned properties. At
December 31, 2005, our accruals for environmental expenses
totaled $32 million. Our accruals for environmental
expenses include retained liabilities for previously owned or
operated properties, refining, pipeline and terminal operations
and retail service stations. We believe these accruals are
adequate, based on currently available information, including
the participation of other parties or former owners in
remediation action.
During 2005, we continued settlement discussions with the
California Air Resources Board (CARB) concerning a
notice of violation (NOV) we received in October
2004. The NOV, issued by CARB, alleges that Tesoro offered
eleven batches of gasoline for sale in California that did not
meet CARBs gasoline exhaust emission limits. In January
2006, we executed a Settlement Agreement and Release with CARB
which requires us to pay a civil penalty of $325,000 to resolve
this matter. A reserve for the settlement of the NOV is included
in the $32 million of environmental accruals referenced
above.
In 2005, we received two NOVs from the Bay Area Air Quality
Management District. The Bay Area Air Quality Management
District alleged we violated certain air quality emission limits
as a result of a mechanical
39
failure of one of our boilers at our California refinery in
January 2005. On January 26, 2006, we entered into a
Settlement Agreement and Release with the District and the
District Attorney of Contra Costa County, California. In
exchange for the release of allegations based upon certain air
quality emission limits and provisions of the California Health
and Safety Code, we paid a civil penalty of $1.1 million. A
reserve for the settlement of the NOVs is included in the
$32 million of environmental accruals referenced above.
We have undertaken an investigation of environmental conditions
at certain active wastewater treatment units at our California
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 California
refinery. Based on our spending in 2005, the remaining cost
estimate for the active wastewater units investigation is
approximately $300,000. A reserve for this matter is included in
the $32 million of environmental accruals referenced above.
On October 24, 2005, we received an NOV from the EPA. The
EPA alleges certain modifications made to the fluid catalytic
cracking unit at our Washington refinery prior to our
acquisition of the refinery were made without a permit in
violation of the Clean Air Act. We are investigating the
allegations and believe the ultimate resolution of the NOV will
not have a material adverse effect on our financial position or
results of operations. A reserve for the settlement of the NOV
is included in the $32 million of environmental accruals
referenced above.
On February 28, 2006, we received an offer of settlement
from the Bay Area Air Quality Management District. The District
has offered to settle 28 NOVs issued to Tesoro from January 2004
to September 2004 for $275,000. The NOVs allege violations of
various air quality requirements at the California refinery. A
reserve for the settlement of the NOVs is included in the
$32 million of environmental accruals referenced above.
|
|
|
Other Environmental Matters |
In the ordinary course of business, we become party to or
otherwise involved in 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, and some matters may require
years for us to resolve. As a result, we have not established
reserves 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. However, we cannot provide assurance that an adverse
resolution of one or more of the matters described below during
a future reporting period will not have a material adverse
effect on our financial position or results of operations in
future periods.
We are a defendant, along with other manufacturing, supply and
marketing defendants, in eleven pending cases alleging MTBE
contamination in groundwater. The defendants are being sued for
having manufactured MTBE and having manufactured, supplied and
distributed gasoline containing MTBE. The plaintiffs, all in
California, are generally water providers, governmental
authorities and private well owners alleging, in part, the
defendants are liable for manufacturing or distributing a
defective product. The suits generally seek individual,
unquantified compensatory and punitive damages and
attorneys fees, but we cannot estimate the amount or the
likelihood of the ultimate resolution of these matters at this
time, and accordingly have not established a reserve for these
cases. We believe we have defenses to these claims and intend to
vigorously defend the lawsuits.
Soil and groundwater conditions at our California refinery may
require substantial expenditures over time. In connection with
our acquisition of the California refinery from Ultramar, Inc.
in May 2002, Ultramar assigned certain of its rights and
obligations that Ultramar had acquired from Tosco Corporation in
August of 2000. Tosco assumed responsibility and contractually
indemnified us for up to $50 million for certain
environmental liabilities arising from operations at the
refinery prior to August of 2000, which are identified prior to
August 31, 2010 (Pre-Acquisition Operations).
Based on existing information, we currently estimate that the
known environmental liabilities arising from Pre-Acquisition
Operations are approximately
40
$41 million, including soil and groundwater conditions at
the refinery in connection with various projects and including
those required by the California Regional Water Quality Control
Board and other government agencies. If we incur remediation
liabilities in excess of the defined environmental liabilities
for Pre-Acquisition Operations indemnified by Tosco, we expect
to be reimbursed for such excess liabilities under certain
environmental insurance policies. The policies provide
$140 million of coverage in excess of the $50 million
indemnity covering the defined environmental liabilities arising
from Pre-Acquisition Operations. Because of Toscos
indemnification and the environmental insurance policies, we
have not established a reserve for these defined environmental
liabilities arising out of the Pre-Acquisition Operations. In
December 2003, we initiated arbitration proceedings against
Tosco seeking damages, indemnity and a declaration that Tosco is
responsible for the defined environmental liabilities arising
from Pre-Acquisition Operations at our California refinery.
In November 2003, we filed suit in Contra Costa County Superior
Court against Tosco alleging that Tosco misrepresented,
concealed and failed to disclose certain additional
environmental conditions at our California refinery. The court
granted Toscos motion to compel arbitration of our claims
for these certain additional environmental conditions. In the
arbitration proceedings we initiated against Tosco in December
2003, we are also seeking a determination that Tosco is liable
for investigation and remediation of these certain additional
environmental conditions, the amount of which is currently
unknown and therefore a reserve has not been established, and
which may not be covered by the $50 million indemnity for
the defined environmental liabilities arising from
Pre-Acquisition Operations. In response to our arbitration
claims, Tosco filed counterclaims in the Contra Costa County
Superior Court action alleging that we are contractually
responsible for additional environmental liabilities at our
California refinery, including the defined environmental
liabilities arising from Pre-Acquisition Operations. In February
2005, the parties agreed to stay the arbitration proceedings to
pursue settlement discussions. In June 2005, the parties agreed
in principle to settle their claims, including the defined
environmental liabilities arising from Pre-Acquisition
Operations and certain additional environmental conditions, both
discussed above, pending negotiation and execution of a final
written settlement agreement. In the event we are unable to
finalize the settlement, we intend to vigorously prosecute our
claims against Tosco and to oppose Toscos claims against
us, although we cannot provide assurance that we will prevail.
|
|
|
Environmental Capital Expenditures |
EPA regulations related to the Clean Air Act require reductions
in the sulfur content in gasoline. To meet the revised gasoline
standard, we spent $28 million in 2005. Our California,
Washington, Hawaii, Alaska and North Dakota refineries will not
require additional capital spending to meet the low sulfur
gasoline standards. We currently estimate we will make
additional capital improvements of approximately $8 million
at our Utah refinery from 2008 through 2009, that will permit
the Utah refinery to produce gasoline meeting the sulfur limits
imposed by the EPA.
EPA regulations related to the Clean Air Act also require
reductions in the sulfur content in diesel fuel manufactured for
on-road consumption. In general, the new on-road diesel fuel
standards will become effective on June 1, 2006. In May
2004, the EPA issued a rule regarding the sulfur content of
non-road diesel fuel. The requirements to reduce non-road diesel
sulfur content will become effective in phases between 2007 and
2010. We spent $46 million in 2005 to meet the revised
diesel fuel standards, and based on our latest engineering
estimates, we expect to spend approximately $71 million in
additional capital improvements through 2007. Included in the
estimate are capital projects to manufacture additional
quantities of low sulfur diesel at our Alaska refinery, for
which we expect to spend approximately $53 million through
2007. These cost estimates are subject to further review and
analysis. Our California, Washington and North Dakota refineries
will not require additional capital spending to meet the new
non-road diesel fuel standards.
We expect to spend approximately $1 million in capital
improvements in 2006 at our Washington refinery to comply with
the Maximum Achievable Control Technologies standard for
petroleum refineries (Refinery MACT II). We
spent approximately $17 million during 2005.
41
In connection with the 2002 acquisition of our California
refinery, subject to certain conditions, we assumed the
sellers obligations pursuant to settlement efforts with
the EPA concerning the Section 114 refinery enforcement
initiative under the Clean Air Act, except for any potential
monetary penalties, which the seller retains. In November 2005,
the Consent Decree was entered by the District Court for the
Western District of Texas in which we agreed to undertake
projects at our California refinery to reduce air emissions. We
spent $2 million in 2005, and we currently estimate we will
make additional capital improvements of approximately
$30 million through 2010 to satisfy the requirements of the
Consent Decree. This cost estimate is subject to further review
and analysis.
During the fourth quarter of 2005, we received approval by the
Hearing Board for the Bay Area Air Quality Management District
to modify our existing fluid coker unit to a delayed coker at
our California refinery which is designed to (i) lower
emissions and (ii) increase overall efficiency by lowering
operating costs. We negotiated the terms and conditions of the
Second Conditional Abatement Order with the District in response
to the January 2005 mechanical failure of one of our boilers at
the California refinery. We spent $3 million during 2005
for this project, and we currently estimate that we will spend
approximately $272 million through the fourth quarter of
2007. This cost estimate is subject to further review and
analysis.
Actual and estimated capital expenditures described above to
comply with the Clean Air Act and California air regulations are
summarized in the table below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
|
|
|
|
|
|
|
|
|
|
|
Actual | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Lower Sulfur Gasoline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Hawaii
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Dakota
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utah
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
1 |
|
|
|
|
|
|
California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total For Lower Sulfur Gasoline
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lower Sulfur Diesel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
|
|
|
5 |
|
|
|
41 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hawaii
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington
|
|
|
19 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Dakota
|
|
|
10 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utah
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
7 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total For Lower Sulfur Diesel
|
|
|
46 |
|
|
|
59 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery MACT II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alaska
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hawaii
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington
|
|
|
16 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Dakota
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utah
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total For Refinery MACT II
|
|
|
17 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Section 114 EPA Consent Decree
|
|
|
2 |
|
|
|
5 |
|
|
|
6 |
|
|
|
5 |
|
|
|
7 |
|
|
|
7 |
|
California Coker Modification
|
|
|
3 |
|
|
|
133 |
|
|
|
138 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
96 |
|
|
$ |
198 |
|
|
$ |
156 |
|
|
$ |
13 |
|
|
$ |
8 |
|
|
$ |
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
In connection with our 2001 acquisition of our North Dakota and
Utah refineries, Tesoro assumed the sellers obligations
and liabilities under a consent decree among the United States,
BP Exploration and Oil Co. (BP), Amoco Oil Company
and Atlantic Richfield Company. BP entered into this consent
decree for both the North Dakota and Utah refineries for various
alleged violations. As the owner of these refineries, Tesoro is
required to address issues that include leak detection and
repair, flaring protection, and sulfur recovery unit
optimization. We currently estimate we will spend
$5 million over the next three years to comply with this
consent decree. We also agreed to indemnify the sellers for all
losses of any kind incurred in connection with the consent
decree.
We will spend additional capital at the California refinery for
reconfiguring and replacing above-ground storage tank systems
and upgrading piping within the refinery. We spent
$15 million in 2005 for these related projects at our
California refinery, and we currently estimate that we will make
additional capital improvements of approximately
$109 million through 2010. This cost estimate is subject to
further review and analysis.
Conditions may develop that cause increases or decreases in
future expenditures for our various sites, including, but not
limited to, our refineries, tank farms, retail gasoline stations
(operating and closed locations) and petroleum product
terminals, and for compliance with the Clean Air Act and other
federal, state and local requirements. We cannot currently
determine the amounts of such future expenditures.
For further information on environmental matters and other
contingencies, see Note O in our consolidated financial
statements in Item 8.
For all eligible employees, we provide a qualified defined
benefit retirement plan with benefits based on years of service
and compensation. Our long-term expected return on plan assets
is 8.5%, and our funded employee pension plan assets experienced
a return of $13 million in 2005 and $12 million in
2004. Based on a 5.5% discount rate and fair values of plan
assets as of December 31, 2005, the fair value of the
assets in our funded employee pension plan were equal to
approximately 98% of the projected benefit obligation as of the
end of 2005. However, the funded employee pension plan was 112%
funded based on its current liability, which is a
funding measure defined under applicable pension regulations.
Although Tesoro had no minimum required contribution obligation
to its funded employee pension plan under applicable laws and
regulations in 2005, we voluntarily contributed $95 million
to improve the funded status of the plan. We have no minimum
required contribution obligation to our funded employee pension
plan under applicable laws and regulations in 2006, however, we
currently project to contribute approximately $25 million
in 2006, including $6 million contributed in February.
Future contributions are affected by returns on plan assets,
employee demographics and other factors. See Note M in our
consolidated financial statements in Item 8 for further
discussion.
|
|
|
Claims Against Third-Parties |
Beginning in the early 1980s, Tesoro Hawaii Corporation, Tesoro
Alaska Company and other fuel suppliers entered into a series of
long-term, fixed-price fuel supply contracts with the
U.S. Defense Energy Support Center (DESC). Each
of the contracts contained a provision for price adjustments by
the DESC. The federal acquisition regulations control how prices
may be adjusted, and we and many other suppliers have filed in
separate suits in the Court of Federal Claims contesting the
DESCs price adjustments prior to 1999. We and the other
suppliers seek recovery of approximately $3 billion in
underpayment for fuel. Our share of that underpayment totals
approximately $165 million, plus interest. We alleged that
the DESCs price adjustments violated federal regulations
by not adjusting the sales price of fuel based on changes to
each suppliers established prices or costs, as the Court
of Federal Claims had held in prior rulings on similar
contracts. The Court of Federal Claims granted partial summary
judgment in our favor on that issue, but the Court of Appeals
for the Federal Circuit has reversed and ruled that DESCs
prices did not need to be tied to changes in a specific
suppliers prices or costs. We have also asserted other
grounds to challenge the DESC contract pricing formulas, and we
are evaluating our position with respect to further litigation
on those additional grounds. We cannot predict the outcome of
these further actions.
43
In 1996, Tesoro Alaska Company filed a protest of the intrastate
rates charged for the transportation of its crude oil through
the Trans Alaska Pipeline System (TAPS). Our protest
asserted that the TAPS intrastate rates were excessive and
should be reduced. The Regulatory Commission of Alaska
(RCA) considered our protest of the intrastate rates
for the years 1997 through 2000. The RCA set just and reasonable
final rates for the years 1997 through 2000, and held that we
are entitled to receive approximately $52 million in
refunds, including interest through the expected conclusion of
appeals in December 2007. The RCAs ruling is currently on
appeal in the Alaska courts, and we cannot give any assurances
of when or whether we will prevail in the appeal.
In 2002, the RCA rejected the TAPS Carriers proposed
intrastate rate increases for 2001-2003 and maintained the
permanent rate of $1.96 to the Valdez Marine Terminal. That
ruling is currently on appeal to the Alaska Superior Court, and
the TAPS Carriers did not move to prevent the rate decrease. The
rate decrease has been in effect since June 2003. If the
RCAs decision is upheld on appeal, we could be entitled to
refunds resulting from our shipments from January 2001 through
mid-June 2003. If the RCAs decision is not upheld on
appeal, we could have to pay additional shipping charges
resulting from our shipments from mid-June 2003 through December
2005. We cannot give any assurances of when or whether we will
prevail in the appeal. We also believe that, should we not
prevail on appeal, the amount of additional shipping charges
cannot reasonably be estimated since it is not possible to
estimate the permanent rate which the RCA could set, and the
appellate courts approve, for each year. In addition, depending
upon the level of such rates, there is a reasonable possibility
that any refunds for the period January 2001 through mid-June
2003 could offset some or all of any repayments due for the
period mid-June 2003 through December 2005.
In July 2005, the TAPS Carriers filed a proceeding at the
Federal Energy Regulatory Commission (FERC), seeking
to have the FERC assume jurisdiction over future rates for
intrastate transportation on TAPS. We have filed a protest in
that proceeding, which has now been consolidated with another
FERC proceeding seeking to set just and reasonable rates for
future interstate transportation on TAPS. If the TAPS carriers
should prevail, then the rates charged for all shipments of
Alaska North Slope crude oil on TAPS could be revised by the
FERC, but any FERC changes to rates for intrastate
transportation of crude oil supplies for our Alaska refinery
should be prospective only and should not affect prior
intrastate rates, refunds or repayments.
ACCOUNTING STANDARDS
|
|
|
Critical Accounting Policies |
Our accounting policies are described in Note A in our
consolidated financial statements in Item 8. We prepare our
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America,
which require us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the year. Actual results could differ from those
estimates. 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. Although
actual losses have not been significant to our results of
operations, economic conditions and the related credit
environment could change, and actual losses could vary from
estimates.
Inventory Our inventories are stated at the
lower of cost or market. We use the LIFO method to determine the
cost of our crude oil and refined product inventories. The LIFO
cost of these inventories is usually much less than current
market value, however a significant decline in market values of
petroleum products could impair the carrying values of these
inventories. We had 28 million barrels of crude oil and
refined product inventories at December 31, 2005 with an
average cost of approximately $36 per barrel on a
44
LIFO basis. If refined product prices decline below the average
cost, then we would be required to write down the value of our
inventories in future periods.
Property, Plant and Equipment 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
regulation or environmental matters could cause us to change our
estimates, thus impacting the future calculation of depreciation
and amortization. We evaluate property, plant and equipment for
potential impairment by identifying whether indicators of
impairment exist and, if so, assessing whether the assets are
recoverable from estimated future undiscounted cash flows. The
actual amount of impairment loss, if any, to be recorded is
equal to the amount by which the assets carrying value
exceeds its fair value. Estimates of future undiscounted cash
flows and fair value of assets require subjective assumptions
with regard to several factors, including an assessment of
market conditions and future operating results. Actual results
could differ from those estimates.
Goodwill and Acquired Intangibles As of
December 31, 2005, we had $89 million of goodwill
included in Other Noncurrent Assets. Goodwill is not amortized,
but is tested for impairment annually or more frequently when
indicators of impairment exist. 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 the present value of expected net
cash flows to determine the estimated fair value of our
reporting units. In 2003, we wrote off the Marine Services
goodwill of $2 million in connection with the sale of that
operation. The impairment test is susceptible to change from
period to period as it requires us to make cash flow assumptions
including, among other things, future margins, volumes,
operating costs, capital expenditures 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. For
the impairment test performed during the fourth quarter of 2005,
we assumed that future margins in our geographic areas will
approximate average levels during the period from July 2003
through June 2005 adjusted for other industry factors. Changes
in market conditions could result in impairment charges in the
future.
As of December 31, 2005, we included $119 million of
acquired intangible assets in Other Noncurrent Assets. The
valuation of these intangible assets required us to use our
judgment, including estimates with respect to their useful
lives. We review acquired intangible assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. The
assessment of impairment is based on the estimated undiscounted
future cash flows from operating activities, compared with the
carrying value of the assets. The actual amount of impairment
loss, if any, to be recorded is equal to the amount by which the
assets carrying value exceeds its fair value. Estimates of
future undiscounted cash flows and fair values of assets require
subjective assumptions with regard to several factors, including
an assessment of market conditions, discount rates and future
operating results. Actual results could differ from those
estimates.
Deferred Maintenance Costs We record the cost
of major scheduled refinery turnarounds, long-lived catalysts
used in refinery process units, and periodic maintenance on
ships, tugs and barges (drydocking) as deferred
charges in Other Noncurrent Assets which totaled
$113 million at December 31, 2005. We amortize these
deferred charges over the expected periods of benefit, generally
ranging from two to six years.
Contingencies We record an estimated loss
from a contingency when information available before issuing our
financial statements indicates that (a) it is probable that
an asset has been impaired or a liability has been incurred at
the date of the financial statements and (b) the amount of
the loss can be reasonably estimated. We are required to use our
judgment to account for contingencies such as environmental,
legal and income tax matters. While we believe that our accruals
for these matters are adequate, the actual loss may differ from
our estimated loss, and we would record the necessary
adjustments in future periods. We do not record the benefits of
contingent recoveries or gains until the amount is determinable
and recovery is assured.
45
Income Taxes As part of the process of
preparing consolidated financial statements, we must assess the
likelihood that our deferred income tax assets will be recovered
through future taxable income. To the extent we believe that
recovery is not likely, a valuation allowance must be
established. Significant management judgment is required in
determining any valuation allowance recorded against net
deferred income tax assets. 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
have not recorded a valuation allowance as of December 31,
2005. In the event that actual results differ from these
estimates or we make adjustments to these estimates in future
periods, we may need to establish a valuation allowance.
Asset Retirement Obligations 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 to
estimate fair value. The calculation of fair value is based on
several estimates and assumptions, including, among other
things, projected cash flows, a credit-adjusted risk-free rate,
the settlement dates or a range of potential settlement dates
and the probabilities associated with the potential settlement
dates. Actual results could differ from those estimates. During
the fourth quarter of 2005, we recorded asset retirement
obligations totaling $44 million associated with our
decision to retire certain tanks and modify our existing coker
to comply with certain state regulations. Our asset retirement
obligations totaled $46 million and $1 million at
December 31, 2005 and 2004, respectively. We cannot
currently make reasonable estimates of the fair values of some
retirement obligations, principally those associated with our
refineries, pipeline
rights-of-way and
certain terminals and retail sites, 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, health care cost trends, inflation, retirement rates and
mortality rates. We must also 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 the
determination of these estimates and the calculation of certain
employee benefit expenses. We record a liability for the cost of
the plans based on the actuarially determined amounts, less any
plan assets. While we believe that the assumptions used are
appropriate, significant differences in the actual experience or
significant changes in assumptions would affect pension and
other postretirement benefits costs and obligations. 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 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
1-Percentage- | |
|
1-Percentage- | |
|
|
Point Increase | |
|
Point Decrease | |
|
|
| |
|
| |
Expected Rate of Return
|
|
|
|
|
|
|
|
|
|
Effect on net periodic pension expense
|
|
$ |
(2.2 |
) |
|
$ |
2.2 |
|
Discount Rate
|
|
|
|
|
|
|
|
|
|
Effect on net periodic pension expense
|
|
$ |
(2.6 |
) |
|
$ |
2.9 |
|
|
Effect on projected benefit obligation
|
|
$ |
(21.5 |
) |
|
$ |
24.9 |
|
See Note M in our consolidated financial statements in
Item 8 for more information regarding costs and assumptions.
|
|
|
New Accounting Standards and Disclosures |
See Note A in our consolidated financial statements in
Item 8.
FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K includes
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are
included throughout this
Form 10-K and
relate to, among other things, expectations regarding refining
margins, revenues, cash flows, capital
46
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 and similar terms and
phrases to identify forward-looking statements in this Annual
Report on Form 10-K.
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. Our operations involve risks and uncertainties, many
of which are outside our control, and any one of which, or a
combination of which, could materially affect our results of
operations and whether the forward-looking statements ultimately
prove to be correct.
Actual results and trends in the future may differ materially
from those suggested or implied by the forward-looking
statements depending on a variety of factors including, but not
limited to:
|
|
|
|
|
changes in general economic conditions; |
|
|
|
the timing and extent of changes in commodity prices and
underlying demand for our products; |
|
|
|
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 feedstocks and
products; |
|
|
|
disruptions due to equipment interruption or failure at our
facilities or third-party facilities; |
|
|
|
actions of customers and competitors; |
|
|
|
changes in capital requirements or in execution of planned
capital projects; |
|
|
|
direct or indirect effects on our business resulting from actual
or threatened terrorist incidents or acts of war; |
|
|
|
political developments in foreign countries; |
|
|
|
changes in our inventory levels and carrying costs; |
|
|
|
seasonal variations in demand for refined products; |
|
|
|
changes in fuel and utility costs for our facilities; |
|
|
|
state and federal environmental, economic, safety and other
policies and regulations, any changes therein, and any legal or
regulatory delays or other factors beyond our control; |
|
|
|
adverse rulings, judgments, or settlements in litigation or
other legal or tax matters, including unexpected environmental
remediation costs in excess of any reserves; |
|
|
|
weather conditions affecting our operations or the areas in
which our products are marketed; and |
|
|
|
earthquakes or other natural disasters affecting operations. |
Many of these factors are described in greater detail in
Competition and Other on page 9 and Risk
Factors on page 16. All future written and oral
forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the
previous statements. We undertake no obligation to update any
information contained herein or to publicly release the results
of any revisions to any forward-looking statements that may be
made to reflect events or circumstances that occur, or that we
become aware of, after the date of this Annual Report on
Form 10-K.
47
|
|
ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
Changes in commodity prices and interest rates are our primary
sources of market risk. We have a risk management committee
responsible for reviewing risks arising from transactions and
commitments related to the sale and purchase of energy
commodities and making recommendations to executive management.
Commodity Price Risks
Our earnings and cash flows from operations depend on the margin
above fixed and variable expenses (including the costs of crude
oil and other feedstocks) at which we are able to sell refined
products. The prices of crude oil and refined products have
fluctuated substantially in recent years. These prices depend on
many factors, including the demand for crude oil, gasoline and
other refined products, which in turn depend on, among other
factors, changes in the economy, the level of foreign and
domestic production of crude oil and refined products, worldwide
geo-political conditions, the availability of imports of crude
oil and refined products, the marketing of alternative and
competing fuels and the impact of government regulations. The
prices we receive for refined products are also affected by
local factors such as local market conditions and the level of
operations of other refineries in our markets.
The prices at which we sell our refined products are influenced
by the commodity price of crude oil. Generally, an increase or
decrease in the price of crude oil results in a corresponding
increase or decrease in the price of gasoline and other refined
products. The timing of the relative movement of the prices,
however, can impact profit margins which could significantly
affect our earnings and cash flows. In addition, the majority of
our crude oil supply contracts are short-term in nature with
market-responsive pricing provisions. Our financial results can
be affected significantly by price level changes during the
period between purchasing refinery feedstocks and selling the
manufactured refined products from such feedstocks. We also
purchase refined products manufactured by others for resale to
our customers. Our financial results can be affected
significantly by price level changes during the periods between
purchasing and selling such products. Assuming all other factors
remained constant, a $1.00 per barrel change in average
gross refining margins, based on our 2005 average throughput of
530 Mbpd, would change annualized pretax operating income by
approximately $193 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 28 million barrels
and 22 million barrels at December 31, 2005 and 2004,
respectively. The average cost of our refinery feedstocks and
refined products at December 31, 2005 was approximately
$36 per barrel on a LIFO basis, compared to market prices
of approximately $65 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.
Tesoro periodically enters into non-trading derivative
arrangements primarily to manage exposure to commodity price
risks associated with the purchase of crude oil and the purchase
and sale of manufactured and purchased refined products. To
manage these risks, we typically enter into exchange-traded
futures and
over-the-counter swaps,
generally with durations of one year or less. We mark to market
our non-hedging derivative instruments and recognize the changes
in their fair values in earnings. We include the carrying
amounts of our derivatives in other current assets or accrued
liabilities in the consolidated balance sheets. We did not
designate or account for any derivative instruments as hedges
during 2005. Accordingly, no change in the value of the related
underlying physical asset is recorded. During 2005, we settled
futures and swaps positions of approximately 71 million
barrels of crude oil and refined products, which due to
significant price volatility resulted in losses of
$23 million. At December 31, 2005, we had open net
futures contracts of 2 million barrels and swap positions
of 5 million barrels, which will expire at various times
during 2006. We recorded the fair value of our open positions,
which resulted in an unrealized
mark-to-market gain of
$2 million at December 31, 2005.
We prepared a sensitivity analysis to estimate our exposure to
market risk associated with our derivative instruments. This
analysis may differ from actual results. The fair value of each
derivative instrument was based on quoted market prices. Based
on our open net short positions of 7 million barrels as of
December 31,
48
2005, a $1.00 per-barrel change in quoted market prices of our
derivative instruments, assuming all other factors remain
constant, would change the fair value of our derivative
instruments and pretax operating income by $7 million. As
of December 31, 2004, a $1.00 per-barrel change in quoted
market prices for our derivative instruments, assuming all other
factors remain constant, would have changed the fair value of
our derivative instruments and pretax operating income by
$1 million.
Interest Rate Risk
At December 31, 2005 all of our outstanding debt was at
fixed rates and we had no borrowings under our revolving credit
facility, which bears interest at variable rates. The fair
market value of our senior notes, senior secured notes and
senior subordinated notes, which is based on transactions and
bid quotes, was approximately $5 million more than its
carrying value at December 31, 2005. The fair market values
of our junior subordinated notes and capital lease obligations
approximate their carrying values.
49
|
|
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 and subsidiaries (the Company) as
of December 31, 2005 and 2004, and the related consolidated
statements of operations, comprehensive income and
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2005. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the 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, such consolidated financial statements present
fairly, in all material respects, the financial position of
Tesoro Corporation and subsidiaries as of December 31, 2005
and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note A to the consolidated financial
statements, as of January 1, 2004, the Company changed its
method of accounting for stock options.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2005, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 6, 2006, expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
|
|
|
/s/ Deloitte &
Touche LLP
|
San Antonio, Texas
March 6, 2006
50
TESORO CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions except per share | |
|
|
amounts) | |
REVENUES
|
|
$ |
16,581 |
|
|
$ |
12,262 |
|
|
$ |
8,846 |
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of sales and operating expenses
|
|
|
15,170 |
|
|
|
11,229 |
|
|
|
8,208 |
|
|
Selling, general and administrative expenses
|
|
|
179 |
|
|
|
152 |
|
|
|
138 |
|
|
Depreciation and amortization
|
|
|
186 |
|
|
|
154 |
|
|
|
148 |
|
|
Loss on asset disposals and impairments
|
|
|
19 |
|
|
|
14 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
1,027 |
|
|
|
713 |
|
|
|
335 |
|
Interest and financing costs
|
|
|
(211 |
) |
|
|
(171 |
) |
|
|
(213 |
) |
Interest income and other
|
|
|
15 |
|
|
|
5 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES
|
|
|
831 |
|
|
|
547 |
|
|
|
123 |
|
Income tax provision
|
|
|
324 |
|
|
|
219 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$ |
507 |
|
|
$ |
328 |
|
|
$ |
76 |
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
7.44 |
|
|
$ |
5.01 |
|
|
$ |
1.18 |
|
|
Diluted
|
|
$ |
7.20 |
|
|
$ |
4.76 |
|
|
$ |
1.17 |
|
WEIGHTED AVERAGE COMMON SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
68.1 |
|
|
|
65.5 |
|
|
|
64.6 |
|
|
Diluted
|
|
|
70.4 |
|
|
|
68.9 |
|
|
|
65.1 |
|
DIVIDENDS PER SHARE
|
|
$ |
0.20 |
|
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
51
TESORO CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Dollars in millions | |
|
|
except per share | |
|
|
amounts) | |
ASSETS |
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
440 |
|
|
$ |
185 |
|
|
Receivables, less allowance for doubtful accounts
|
|
|
718 |
|
|
|
528 |
|
|
Inventories
|
|
|
953 |
|
|
|
616 |
|
|
Prepayments and other
|
|
|
104 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
2,215 |
|
|
|
1,393 |
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
Refining
|
|
|
2,850 |
|
|
|
2,603 |
|
|
Retail
|
|
|
223 |
|
|
|
225 |
|
|
Corporate and other
|
|
|
107 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
3,180 |
|
|
|
2,894 |
|
|
Less accumulated depreciation and amortization
|
|
|
(713 |
) |
|
|
(590 |
) |
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
2,467 |
|
|
|
2,304 |
|
|
|
|
|
|
|
|
OTHER NONCURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
89 |
|
|
|
89 |
|
|
Acquired intangibles, net
|
|
|
119 |
|
|
|
127 |
|
|
Other, net
|
|
|
207 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
Total Other Noncurrent Assets
|
|
|
415 |
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
5,097 |
|
|
$ |
4,075 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
1,171 |
|
|
$ |
687 |
|
|
Accrued liabilities
|
|
|
328 |
|
|
|
303 |
|
|
Current maturities of debt
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,502 |
|
|
|
993 |
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES
|
|
|
389 |
|
|
|
293 |
|
OTHER LIABILITIES
|
|
|
275 |
|
|
|
247 |
|
DEBT
|
|
|
1,044 |
|
|
|
1,215 |
|
COMMITMENTS AND CONTINGENCIES (Note O)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.162/3; authorized
100,000,000 shares; 70,850,681 shares issued
(68,261,949 in 2004)
|
|
|
12 |
|
|
|
11 |
|
|
Additional paid-in capital
|
|
|
794 |
|
|
|
718 |
|
|
Retained earnings
|
|
|
1,102 |
|
|
|
609 |
|
|
Treasury stock, 1,548,568 common shares (1,438,524 in 2004), at
cost
|
|
|
(19 |
) |
|
|
(11 |
) |
|
Accumulated other comprehensive loss
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
1,887 |
|
|
|
1,327 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$ |
5,097 |
|
|
$ |
4,075 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
52
TESORO CORPORATION
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity | |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Common Stock | |
|
Additional | |
|
|
|
Treasury Stock | |
|
Other | |
|
|
Comprehensive | |
|
| |
|
Paid-In | |
|
Retained | |
|
| |
|
Comprehensive | |
|
|
Income | |
|
Shares | |
|
Amount | |
|
Capital | |
|
Earnings | |
|
Shares | |
|
Amount | |
|
Loss | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
AT JANUARY 1, 2003
|
|
|
|
|
|
|
66.4 |
|
|
$ |
11 |
|
|
$ |
690 |
|
|
$ |
205 |
|
|
|
(1.8 |
) |
|
$ |
(18 |
) |
|
$ |
|
|
|
Net earnings
|
|
$ |
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2003
|
|
|
|
|
|
|
66.5 |
|
|
$ |
11 |
|
|
$ |
691 |
|
|
$ |
281 |
|
|
|
(1.7 |
) |
|
$ |
(17 |
) |
|
$ |
|
|
|
Net earnings
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
0.3 |
|
|
|
6 |
|
|
|
|
|
|
Tax benefits on stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants and amortization
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2004
|
|
|
|
|
|
|
68.3 |
|
|
$ |
11 |
|
|
$ |
718 |
|
|
$ |
609 |
|
|
|
(1.4 |
) |
|
$ |
(11 |
) |
|
$ |
|
|
|
Net earnings
|
|
|
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(15 |
) |
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
2.5 |
|
|
|
1 |
|
|
|
47 |
|
|
|
|
|
|
|
0.2 |
|
|
|
7 |
|
|
|
|
|
|
Tax benefits on stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment (net of related tax benefit
of $1)
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2005
|
|
|
|
|
|
|
70.8 |
|
|
$ |
12 |
|
|
$ |
794 |
|
|
$ |
1,102 |
|
|
|
(1.5 |
) |
|
$ |
(19 |
) |
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
53
TESORO CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
507 |
|
|
$ |
328 |
|
|
$ |
76 |
|
|
Adjustments to reconcile net earnings to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
186 |
|
|
|
154 |
|
|
|
148 |
|
|
Amortization of debt issuance costs and discounts
|
|
|
17 |
|
|
|
18 |
|
|
|
19 |
|
|
Write-off of unamortized debt issuance costs and discount
|
|
|
20 |
|
|
|
9 |
|
|
|
36 |
|
|
Loss on asset disposals and impairments
|
|
|
19 |
|
|
|
14 |
|
|
|
17 |
|
|
Stock-based compensation
|
|
|
26 |
|
|
|
14 |
|
|
|
|
|
|
Deferred income taxes
|
|
|
77 |
|
|
|
103 |
|
|
|
55 |
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
(27 |
) |
|
|
(4 |
) |
|
|
|
|
|
Other changes in non-current assets and liabilities
|
|
|
(29 |
) |
|
|
(14 |
) |
|
|
(42 |
) |
|
Changes in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(190 |
) |
|
|
(116 |
) |
|
|
1 |
|
|
|
Income taxes receivable
|
|
|
|
|
|
|
2 |
|
|
|
38 |
|
|
|
Inventories
|
|
|
(338 |
) |
|
|
(129 |
) |
|
|
(26 |
) |
|
|
Prepayments and other
|
|
|
(20 |
) |
|
|
(16 |
) |
|
|
(16 |
) |
|
|
Accounts payable and accrued liabilities
|
|
|
510 |
|
|
|
318 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
758 |
|
|
|
681 |
|
|
|
447 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(258 |
) |
|
|
(179 |
) |
|
|
(101 |
) |
|
Proceeds from asset sales
|
|
|
4 |
|
|
|
5 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(254 |
) |
|
|
(174 |
) |
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt refinanced
|
|
|
(900 |
) |
|
|
|
|
|
|
(721 |
) |
|
Repayments of debt
|
|
|
(191 |
) |
|
|
(401 |
) |
|
|
(377 |
) |
|
Proceeds from debt offerings, net of issuance costs of $10 in
2005 and $11 in 2003
|
|
|
890 |
|
|
|
|
|
|
|
360 |
|
|
Borrowings under term loans
|
|
|
|
|
|
|
|
|
|
|
350 |
|
|
Proceeds from stock options exercised
|
|
|
30 |
|
|
|
13 |
|
|
|
1 |
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
27 |
|
|
|
4 |
|
|
|
|
|
|
Financing costs and other
|
|
|
(76 |
) |
|
|
(15 |
) |
|
|
(23 |
) |
|
Repurchase of common stock
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
Dividend payments
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(249 |
) |
|
|
(399 |
) |
|
|
(410 |
) |
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
255 |
|
|
|
108 |
|
|
|
(33 |
) |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
185 |
|
|
|
77 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$ |
440 |
|
|
$ |
185 |
|
|
$ |
77 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of capitalized interest
|
|
$ |
101 |
|
|
$ |
142 |
|
|
$ |
157 |
|
|
Income taxes paid (refunded)
|
|
$ |
289 |
|
|
$ |
53 |
|
|
$ |
(51 |
) |
The accompanying notes are an integral part of these
consolidated financial statements.
54
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
|
|
Description and Nature of Business |
Tesoro Corporation (Tesoro) was incorporated in
Delaware in 1968 and is an independent refiner and marketer of
petroleum products. We own and operate six petroleum refineries
in the western and mid-continental United States with a combined
crude oil throughput capacity of 563,000 barrels per day
(bpd), and we sell refined products to a wide
variety of customers. We market products to wholesale and retail
customers, as well as commercial end-users. Our retail business
includes a network of 478 branded retail stations operated by
Tesoro or independent dealers.
Tesoros 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 operating results have been
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 demand for crude oil,
gasoline and other refined products, which is subject to, among
other things, changes in the economy and the level of foreign
and domestic production of crude oil and refined products,
worldwide geo-political conditions, threatened or actual
terrorist incidents or acts of war, 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 and local factors, including market conditions and
the level of operations of other refineries 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. Investments in
entities in which we have the ability to exercise significant
influence, but not control, are accounted for using the equity
method, while other 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. See Note O for information
related to a 50% limited partnership interest, which we
accounted for using the equity method.
Separate financial statements of Tesoros subsidiary
guarantors are not included because these subsidiary guarantors
are jointly and severally liable for Tesoros outstanding
senior notes, senior secured notes and senior subordinated
notes. Further, net assets, results of operations and equity of
the subsidiary guarantors are substantially equivalent to
Tesoros consolidated net assets, results of operations and
equity.
We have reclassified certain previously reported amounts to
conform to the 2005 presentation. In addition, during 2005 we
began to allocate certain information technology costs,
previously reported as selling, general and administrative
expenses, to costs of sales and operating expenses in order to
better reflect costs directly attributable to our segment
operations (see Note D).
We prepare Tesoros consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America (U.S. GAAP), which
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the 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.
55
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Cash and Cash Equivalents |
We consider all highly-liquid instruments, such as temporary
cash investments, with a maturity of three months or less at the
time of purchase to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
The carrying amounts of 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 carrying amounts of
Tesoros debt and other obligations may vary from our
estimates of the fair value of such items. We estimate that the
fair market value of our senior notes, senior secured notes, and
senior subordinated notes at December 31, 2005, was
approximately $5 million more than its total book value of
$923 million.
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 and refined product inventories in our refining and
retail segments. We determine the carrying value of inventories
of oxygenates and by-products using the
first-in, first-out
(FIFO) cost method. We value merchandise and
materials and supplies at average cost.
|
|
|
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 on the
straight-line method, based on the estimated useful life of each
asset. The weighted average lives range from 24 to 27 years
for refineries, 7 to 16 years for terminals, 12 to
16 years for retail stations, 5 to 28 years for
transportation assets and 4 to 17 years for corporate
assets. We record property under capital leases at the present
value of minimum lease payments using Tesoros incremental
borrowing rate. We amortize property under capital leases over
the term of each lease.
We capitalize interest as part of the cost of major projects
during extended construction periods. Capitalized interest,
which is a reduction to interest and financing costs in the
statements of consolidated operations, totaled $8 million,
$4 million and $2 million during 2005, 2004 and 2003,
respectively.
|
|
|
Asset Retirement Obligations |
We accrue for asset retirement obligations in the period in
which the obligations are incurred and a reasonable estimate of
fair value can be made. We accrue these costs at estimated fair
value. When the related liability is initially recorded, we
capitalize the cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted
to its settlement value and the capitalized cost is depreciated
over the useful life of the related asset. Upon settlement of
the liability, we recognize a gain or loss for any difference
between the settlement amount and the liability recorded. We
have recorded asset retirement obligations for requirements
imposed by certain regulations pertaining primarily to hazardous
materials disposal and other cleanup obligations associated with
projects at our California refinery to retire certain
above-ground storage tanks between 2006 and 2019 and modify our
existing coker unit to a delayed coker (see Note O). Our
asset retirement obligations also include contractual removal
obligations as required by certain lease agreements associated
with our retail and terminal operations.
We cannot currently make reasonable estimates of the fair values
of some retirement obligations. These retirement obligations
primarily include (i) hazardous materials disposal (such as
petroleum manufacturing by-products, chemical catalysts and
sealed insulation material containing asbestos), site
restoration, removal
56
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
or dismantlement requirements associated with the closure of our
refining and terminal facilities or pipelines,
(ii) hazardous materials disposal and other removal
requirements associated with the demolition of certain major
processing units, buildings, tanks or other equipment and
(iii) removal of tanks at our owned retail sites at or near
the time of closure. We cannot estimate the fair value for these
obligations primarily because we cannot reasonably estimate
settlement dates or a range of settlement dates associated with
these assets. Such obligations will be recognized in the period
in which sufficient information exists to determine a reasonable
estimate. We believe that these assets have indeterminate useful
lives which preclude development of assumptions about the
potential timing of settlement dates based on the following:
(i) there are no plans or expectations of plans to retire
or dispose of these core assets; (ii) we plan on extending
these core 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; (iii) we have
rarely or never retired similar assets in the past; and
(iv) industry practice for similar assets has historically
been to extend the economic lives through regular repair and
maintenance and technological advances. Also, we have not
historically incurred significant retirement obligations for
hazardous materials disposal or other removal costs associated
with our scheduled maintenance projects.
During the fourth quarter of 2005, we recorded asset retirement
obligations totaling $44 million associated with our
decision to retire certain tanks and modify our existing coker
to comply with certain regulations. Changes in asset retirement
obligations for the years ended December 31, 2005 and 2004
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Balance at beginning of year
|
|
$ |
1 |
|
|
$ |
1 |
|
Additions to accrual
|
|
|
44 |
|
|
|
|
|
Accretion expense
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$ |
46 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
In March 2005, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations (FIN 47) which is an
interpretation of Statement of Financial Accounting Standards
(SFAS) No. 143, Accounting for Asset
Retirement Obligations. FIN 47 requires recognition
of a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be
reasonably estimated, even though uncertainty exists about the
timing and/or method of settlement. FIN 47 also clarifies
when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation under
SFAS No. 143. We adopted the provisions of FIN 47
as of December 31, 2005, which had no impact on our
financial position or results of operations.
|
|
|
Environmental Expenditures |
We capitalize environmental expenditures that extend the life or
increase the capacity of facilities, as well as expenditures
that mitigate or prevent environmental contamination that is yet
to occur. We charge to 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 applicable governing agencies, experience gained
from similar sites on 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
57
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
|
Goodwill and Acquired Intangibles |
Goodwill represents the excess of cost (purchase price) over the
fair value of net assets acquired. Under SFAS No. 142,
Goodwill and Other Intangible Assets, we ceased
amortizing goodwill on January 1, 2002. Acquired
intangibles consist primarily of air emissions credits, permits
and plans, and customer agreements and contracts, which we
recorded at fair value as of the date acquired. We compute
amortization on a straight-line basis over estimated useful
lives of 2 to 28 years, and we include amortization of
acquired intangibles in depreciation and amortization expense.
We periodically shut down refinery processing units for
scheduled maintenance, or turnarounds. Certain catalysts are
used in refinery process units for periods exceeding one year.
Also, we drydock ships, tugs and barges for periodic
maintenance. We defer turnaround, catalyst and drydocking costs
and amortize the costs on a straight-line basis over the
expected periods of benefit, generally ranging from 2 to
6 years. Amortization of such deferred costs, which is
included in depreciation and amortization expense, amounted to
$50 million, $34 million and $31 million in 2005,
2004 and 2003, respectively.
We defer debt issuance costs related to our credit agreement and
senior notes and amortize the costs over the estimated terms of
each instrument. We include the amortization in interest and
financing costs in our statements of consolidated operations. We
evaluate the carrying value of debt issuance costs when
modifications are made to the related debt instruments (see
Note E).
|
|
|
Impairment of Long-Lived Assets |
We review property, plant and equipment and other long-lived
assets, including acquired intangible assets for impairment
whenever events or changes in business circumstances indicate
the carrying values of the assets may not be recoverable. We
would record impairment losses if the undiscounted cash flows
estimated to be generated by those assets were less than the
carrying amount of those assets. Factors that would indicate
potential impairment include, but are not limited to,
significant decreases in the market value of a long-lived asset,
a significant change in the long-lived assets physical
condition, and operating or cash flow losses associated with the
use of the long-lived asset. We review goodwill balances for
impairment annually or more frequently, if events or changes in
business circumstances indicate the carrying values of the
assets may not be recoverable.
We recognize revenues from product sales upon delivery to
customers, which is the point at which title to the products is
transferred, and when payment has either been received or
collection is reasonably assured. We include certain crude oil
and product purchases and resales used for trading purposes in
revenues on a net basis. Nonmonetary product and crude oil
exchange transactions, which are entered into primarily to
optimize our refinery supply requirements, are included in costs
of sales and operating expenses on a net basis. We include
transportation fees charged to customers in revenues, and we
include the related costs in costs of sales in our statements of
consolidated operations. We have also entered into a limited
number of refined product sales and purchases transactions with
the same counterparty that have been entered into in
contemplation with one another. These sales and purchases have
been recorded on a gross basis in revenues and costs of sales.
Beginning January 1, 2006, we will record these
transactions on a net basis in connection with the adoption of
the Emerging Issues Task Force (EITF) Issue
No. 04-13, Accounting for Purchases and Sales of
Inventory with the Same Counterparty, (see New
Accounting Standards and Disclosures for further
58
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
information). In our retail segment, revenues and costs of sales
include federal excise and state motor fuel taxes collected from
customers and remitted to governmental agencies. These taxes,
primarily related to sales of gasoline and diesel fuel, totaled
$108 million, $123 million and $128 million in
2005, 2004 and 2003, respectively. In our refining segment,
excise taxes on sales are not included in revenues and costs of
sales.
We record deferred tax assets and liabilities for future income
tax consequences that are attributable to differences between
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 when 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.
Effective January 1, 2004, we adopted the preferable fair
value method of accounting for our stock options, as prescribed
in SFAS No. 123, Accounting for Stock-Based
Compensation. We selected the modified prospective
method of adoption described in SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure. On January 1, 2005 we
adopted SFAS No. 123 (Revised 2004), Share-Based
Payment, which is a revision of SFAS No. 123,
and supersedes Accounting Principles Board (APB)
Opinion No. 25. Among other items, SFAS No. 123
(Revised 2004) eliminates the use of APB Opinion No. 25 and
the intrinsic value method of accounting, and requires companies
to recognize the cost of employee services received in exchange
for awards of equity instruments, based on the grant date fair
value of those awards, in the financial statements. On
January 1, 2005, we adopted the fair value method for our
outstanding phantom stock options resulting in an after-tax
charge of $0.2 million. These awards were previously valued
using the intrinsic value method prescribed in APB Opinion
No. 25.
Prior to January 1, 2004, we accounted for stock options
using the intrinsic value method prescribed in APB Opinion
No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Under the
intrinsic value method, we did not recognize compensation costs
for our stock options as all options granted had an exercise
price equal to the market value of the underlying common stock
on the date of grant. The following table represents the effect
on net earnings and earnings per share as if we had applied the
fair value method and recognition provisions of
SFAS No. 123 to our stock options during 2003 (in
millions except per share amounts):
|
|
|
|
|
Reported net earnings
|
|
$ |
76 |
|
Deduct total stock-based employee compensation expense
determined under fair value based methods for all awards, net of
related tax effects
|
|
|
(3 |
) |
|
|
|
|
Pro forma net earnings
|
|
$ |
73 |
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
Basic, as reported
|
|
$ |
1.18 |
|
Basic, pro forma
|
|
$ |
1.13 |
|
Diluted, as reported
|
|
$ |
1.17 |
|
Diluted, pro forma
|
|
$ |
1.12 |
|
See Note N for further information on Tesoros
stock-based employee compensation plans.
59
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We account for derivative instruments in accordance with
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and
interpreted. Tesoro periodically enters into non-trading
derivative arrangements primarily to manage exposure to
commodity price risks associated with the purchase of crude oil
and the purchase and sale of manufactured and purchased refined
products. To manage these risks, we typically enter into
exchange-traded futures and
over-the-counter swaps,
generally with durations of one year or less.
We mark to market our non-hedging derivative instruments and
recognize the changes in their fair values in earnings. We
include the carrying amounts of our derivatives in other current
assets or accrued liabilities in the consolidated balance
sheets. We did not designate or account for any derivative
instruments as hedges during 2005, 2004 or 2003. Accordingly, no
change in the value of the related underlying physical asset is
recorded. During 2005, we settled futures and swaps positions of
approximately 71 million barrels of crude oil and refined
products, which due to significant price volatility resulted in
losses of $23 million. At December 31, 2005, we had
open net futures contracts of 2 million barrels and swap
positions of 5 million barrels, which will expire at
various times during 2006. We recorded the fair value of our
open positions, which resulted in an unrealized
mark-to-market gain of
$2 million at December 31, 2005.
|
|
|
New Accounting Standards and Disclosures |
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets An Amendment
of APB Opinion No. 29, Accounting for Nonmonetary
Transactions. SFAS No. 153 eliminates the
exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for
exchanges that do not have commercial substance.
SFAS No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. We
adopted the provisions of SFAS No. 153 on July 1,
2005, which had no impact on our financial position or results
of operations.
In September 2005, the EITF reached a consensus on EITF Issue
No. 04-13, Accounting for Purchases and Sales of
Inventory with the Same Counterparty. EITF Issue
No. 04-13 requires that two or more exchange transactions
involving inventory with the same counterparty entered into in
contemplation of one another should be reported net in the
statement of operations. The inventory could be raw materials,
work-in-process or
finished goods. We have entered into a limited number of refined
product purchases and sales transactions with the same
counterparty as described in EITF Issue No. 04-13 which
have been reported on a gross basis in revenues and costs of
sales and operating expenses in the statements of consolidated
operations. Refined product sales associated with these
arrangements totaled $670 million and $623 million in
2005 and 2004, respectively. Related purchases of refined
products totaled $637 million and $619 million for
2005 and 2004, respectively. Sales and purchases information was
unavailable for 2003. The provisions of this EITF issue also
require the exchange of finished goods for raw materials or
work-in-process
inventories within the same line of business to be accounted for
at fair value if the fair value is determinable within
reasonable limits and the transaction has commercial substance
as described in SFAS No. 153. Tesoro has historically
not exchanged finished goods for raw materials. We adopted the
provisions of EITF Issue No. 04-13 on January 1, 2006
for new arrangements entered into, and modifications or renewals
of existing arrangements, which did not have a material impact
on our financial position or results of operations.
60
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections which
replaces APB Opinion No. 20, Accounting Changes
and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements. SFAS No. 154
requires retrospective application of a voluntary change in
accounting principle, unless it is impracticable to do so. This
statement carries forward without change the guidance in APB
Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in
accounting estimate. SFAS No. 154 is effective for
changes in accounting principle made in fiscal years beginning
after December 15, 2005. We adopted the provisions of
SFAS No. 154 as of January 1, 2006, which had no
impact on our financial position or results of operations.
NOTE B EARNINGS PER SHARE
We compute basic earnings per share by dividing net earnings by
the weighted average number of common shares outstanding during
the period. Diluted earnings per share include the effects of
potentially dilutive shares, principally common stock options
and unvested restricted stock outstanding during the period.
Earnings per share calculations are presented below (in
millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
507 |
|
|
$ |
328 |
|
|
$ |
76 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
68.1 |
|
|
|
65.5 |
|
|
|
64.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$ |
7.44 |
|
|
$ |
5.01 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
507 |
|
|
$ |
328 |
|
|
$ |
76 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
68.1 |
|
|
|
65.5 |
|
|
|
64.6 |
|
|
Dilutive effect of stock options and unvested restricted stock
|
|
|
2.3 |
|
|
|
3.4 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted shares
|
|
|
70.4 |
|
|
|
68.9 |
|
|
|
65.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
$ |
7.20 |
|
|
$ |
4.76 |
|
|
$ |
1.17 |
|
|
|
|
|
|
|
|
|
|
|
NOTE C DIVESTITURES
On December 23, 2003, we sold substantially all of the
physical assets, including inventories, of our marine services
operations for $32 million in cash. Tesoro recognized a
pretax loss on the sale of $8 million. We included this
charge in loss on asset disposals and impairments in our
statements of consolidated operations due to the immateriality
of marine services operations as compared to our historical and
ongoing refining and retail operations.
NOTE D OPERATING SEGMENTS
The Companys revenues are derived from two operating
segments: (i) refining and (ii) retail. Our refining
segment owns and operates six 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 products, together with products
purchased from third parties, at wholesale through terminal
facilities and other locations, primarily in Alaska, California,
Nevada, Hawaii, Idaho, Minnesota, North Dakota, Utah, Oregon and
Washington. Our refining segment also sells petroleum products
to unbranded marketers and occasionally exports products to other
61
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
markets in the Asia/ Pacific area. Our retail segment sells
gasoline, diesel fuel and convenience store items through
company-operated retail stations and branded jobber/dealers in
18 western states from Minnesota to Alaska and Hawaii. Retail
operates under the
Tesoro®,
Mirastar®
and 2-Go
Tesoro®
brands. We developed our
Mirastar®
brand exclusively for use at Wal-Mart stores in an agreement
covering 14 western states. Prior to 2004, we also had revenues
from our marine services operations, which marketed and
distributed petroleum products, supplies and services to the
marine and offshore exploration and production industries
operating in the Gulf of Mexico. We sold substantially all of
the marine services physical assets in December 2003 (see
Note C).
The operating segments adhere to the accounting policies used
for Tesoros consolidated financial statements, as
described in the summary of significant accounting policies in
Note A. We evaluate the performance of our segments and
allocate resources 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 are primarily from refining to
retail made at prevailing market rates. Income taxes, interest
and financing costs, interest income and other, and corporate
and general and administrative expenses are not included in
determining segment operating income. Beginning in 2005, we
allocated certain information technology costs, previously
reported as corporate and unallocated costs, to segment
operating income in order to better reflect costs directly
attributable to our segment operations. Identifiable assets are
those utilized by the segment. Corporate assets are principally
cash and other assets that are not associated with a specific
operating segment. Segment information as of and for each of the
three years ended December 31, 2005 is as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined products
|
|
$ |
15,587 |
|
|
$ |
11,633 |
|
|
$ |
8,098 |
|
|
|
Crude oil resales and other(a)
|
|
|
782 |
|
|
|
419 |
|
|
|
370 |
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
|
|
|
944 |
|
|
|
863 |
|
|
|
797 |
|
|
|
Merchandise and other
|
|
|
141 |
|
|
|
131 |
|
|
|
121 |
|
|
Marine Services
|
|
|
|
|
|
|
|
|
|
|
156 |
|
|
Intersegment sales from Refining to Retail
|
|
|
(873 |
) |
|
|
(784 |
) |
|
|
(696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$ |
16,581 |
|
|
$ |
12,262 |
|
|
$ |
8,846 |
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining(b)
|
|
$ |
1,194 |
|
|
$ |
830 |
|
|
$ |
405 |
|
|
Retail(b)
|
|
|
(31 |
) |
|
|
(6 |
) |
|
|
13 |
|
|
Marine Services
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Income
|
|
|
1,163 |
|
|
|
824 |
|
|
|
416 |
|
|
Corporate and Unallocated Costs(b)
|
|
|
(136 |
) |
|
|
(111 |
) |
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income(c)
|
|
|
1,027 |
|
|
|
713 |
|
|
|
335 |
|
|
Interest and Financing Costs
|
|
|
(211 |
) |
|
|
(171 |
) |
|
|
(213 |
) |
|
Interest Income and Other
|
|
|
15 |
|
|
|
5 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
$ |
831 |
|
|
$ |
547 |
|
|
$ |
123 |
|
|
|
|
|
|
|
|
|
|
|
62
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$ |
160 |
|
|
$ |
130 |
|
|
$ |
120 |
|
|
Retail
|
|
|
17 |
|
|
|
18 |
|
|
|
19 |
|
|
Marine Services
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
Corporate
|
|
|
9 |
|
|
|
6 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation and Amortization
|
|
$ |
186 |
|
|
$ |
154 |
|
|
$ |
148 |
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$ |
214 |
|
|
$ |
167 |
|
|
$ |
97 |
|
|
Retail
|
|
|
6 |
|
|
|
3 |
|
|
|
1 |
|
|
Marine Services
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
Corporate
|
|
|
42 |
|
|
|
9 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures
|
|
$ |
262 |
|
|
$ |
179 |
|
|
$ |
101 |
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$ |
4,204 |
|
|
$ |
3,544 |
|
|
$ |
3,183 |
|
|
Retail
|
|
|
222 |
|
|
|
241 |
|
|
|
261 |
|
|
Marine Services
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
Corporate
|
|
|
671 |
|
|
|
290 |
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
5,097 |
|
|
$ |
4,075 |
|
|
$ |
3,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
To balance or optimize our refinery supply requirements, we sell
certain crude oil that we purchase under our supply contracts. |
|
(b) |
During 2005, we allocated certain information technology costs
totaling $29 million from corporate and unallocated costs
to segment operating income. The costs allocated to the refining
segment and retail segment totaled $24 million and
$5 million, respectively. |
|
(c) |
Operating income in 2003 included charges of $8 million,
included in corporate and unallocated costs, for the termination
of Tesoros funded executive security plan (see
Note M) and $9 million in voluntary early retirement
benefits and severance costs. The $9 million charge
included $3 million in refining, $1 million in retail
and $5 million in corporate. |
|
(d) |
Capital expenditures do not include refinery turnaround and
other maintenance costs of $65 million, $50 million
and $51 million in 2005, 2004 and 2003, respectively. |
NOTE E DEBT
On November 16, 2005, Tesoro issued $450 million
principal amount of
61/4% senior
notes due 2012 and $450 million principal amount of
65/8% senior
notes due 2015 (the notes offering). The proceeds
from the notes offering and cash on-hand were used to repurchase
through cash tender offers the following principal amounts of
our existing notes: (i) $189 million of our
outstanding $211 million
95/8% senior
subordinated notes due 2008; (ii) $415 million of our
outstanding $429 million
95/8% senior
subordinated notes due 2012; and (iii) $366 million
principal amount of our $375 million 8% senior secured
notes due 2008. We redeemed the remaining $22 million
principal amount of the
95/8% senior
subordinated notes due 2008 at a redemption price
63
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of 104.8% on December 16, 2005. The refinancing of
$900 million and prepayments totaling $92 million
resulted in a pretax charge of $92 million, consisting of
tender and redemption premiums of $74 million and the
write-off of unamortized debt issuance costs and discount of
$18 million. The remaining $9 million outstanding
balance of the 8% senior secured notes are callable
beginning April 15, 2006 at a redemption price of 104%. The
remaining $14 million outstanding balance of the
95/8% senior
subordinated notes are callable beginning April 1, 2007 at
a redemption price of 104.8%.
At December 31, 2005 and 2004, debt consisted of (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Credit Agreement Revolving Credit Facility
|
|
$ |
|
|
|
$ |
|
|
61/4% Senior
Notes Due 2012
|
|
|
450 |
|
|
|
|
|
65/8% Senior
Notes Due 2015
|
|
|
450 |
|
|
|
|
|
Senior Secured Term Loans
|
|
|
|
|
|
|
97 |
|
8% Senior Secured Notes Due 2008 (net of unamortized
discount of $3 in 2004)
|
|
|
9 |
|
|
|
372 |
|
95/8% Senior
Subordinated Notes Due 2012
|
|
|
14 |
|
|
|
429 |
|
95/8% Senior
Subordinated Notes Due 2008
|
|
|
|
|
|
|
211 |
|
Junior subordinated notes due 2012 (net of unamortized discount
of $57 in 2005 and $67 in 2004)
|
|
|
93 |
|
|
|
83 |
|
Capital lease obligations
|
|
|
31 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,047 |
|
|
|
1,218 |
|
Less current maturities
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Debt, less current maturities
|
|
$ |
1,044 |
|
|
$ |
1,215 |
|
|
|
|
|
|
|
|
The aggregate maturities of Tesoros debt for each of the
five years following December 31, 2005 were:
2006 $3 million; 2007
$2 million; 2008 $11 million;
2009 $2 million; and 2010
$2 million.
In May 2005, we amended our credit agreement to extend the term
by one year to June 2008 and reduce letter of credit fees and
revolver borrowing interest. The credit agreement currently
provides for borrowings (including letters of credit) up to the
lesser of the agreements total capacity, $750 million
as amended, or the amount of a periodically adjusted borrowing
base ($1.5 billion as of December 31, 2005),
consisting of Tesoros eligible cash and cash equivalents,
receivables and petroleum inventories, as defined. As of
December 31, 2005, we had no borrowings and
$268 million in letters of credit outstanding under the
revolving credit facility, resulting in total unused credit
availability of $482 million or 64% of the eligible
borrowing base. Borrowings under the revolving credit facility
bear interest at either a base rate (7.25% at December 31,
2005) or a eurodollar rate (4.39% at December 31, 2005),
plus an applicable margin. The applicable margin at
December 31, 2005 was 1.50% in the case of the eurodollar
rate, but varies based on credit facility availability. Letters
of credit outstanding under the revolving credit facility incur
fees at an annual rate tied to the eurodollar rate applicable
margin (1.50% at December 31, 2005).
The credit agreement allows up to $250 million in letters
of credit outside the credit agreement for crude oil purchases
from
non-U.S. vendors.
In September 2005, we entered into a separate letters of credit
agreement that provides up to $165 million in letters of
credit for the purchase of foreign crude oil. The agreement is
secured by our petroleum inventories supported by letters of
credit issued under the agreement and will remain in effect
until terminated by either party. Letters of credit outstanding
under this agreement
64
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
incur fees at an annual rate of 1.25% while secured or 1.38%
while unsecured. As of December 31, 2005, we had
$88 million in letters of credit outstanding under this
agreement.
The credit agreement contains covenants and conditions that,
among other things, limit our ability to pay cash dividends,
incur indebtedness, create liens and make investments. Tesoro is
also required to maintain specified levels of fixed charge
coverage and tangible net worth. We are not required to maintain
the fixed charge coverage ratio if unused credit availability
exceeds 15% of the eligible borrowing base. The credit agreement
is guaranteed by substantially all of Tesoros active
subsidiaries and is secured by substantially all of
Tesoros cash and cash equivalents, petroleum inventories
and receivables.
|
|
|
61/4% Senior
Notes Due 2012 |
On November 16, 2005, Tesoro issued $450 million
aggregate principal amount of
61/4% senior
notes due November 1, 2012. The notes have a seven-year
maturity with no sinking fund requirements and are not callable.
We have the right to redeem up to 35% of the aggregate principal
amount at a redemption price of 106% with proceeds from certain
equity issuances through November 1, 2008. 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 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 subsidiaries.
|
|
|
65/8% Senior
Notes Due 2015 |
On November 16, 2005, Tesoro issued $450 million
aggregate principal amount of
65/8% senior
notes due November 1, 2015. The notes have a ten-year
maturity with no sinking fund requirements and are subject to
optional redemption by Tesoro beginning November 1, 2010 at
premiums of 3.3% through October 31, 2011, 2.2% from
November 1, 2011 to October 31, 2012, 1.1% from
November 1, 2012 to October 31, 2013, and at par
thereafter. We have the right to redeem up to 35% of the
aggregate principal amount at a redemption price of 106% with
proceeds from certain equity issuances through November 1,
2008. 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 subsidiaries.
|
|
|
Senior Secured Term Loans |
In April 2005, we voluntarily prepaid the remaining
$96 million outstanding principal balance of our senior
secured term loans at a prepayment premium of 1%. The prepayment
resulted in a pretax charge during the 2005 second quarter of
approximately $3 million, consisting of the write-off of
unamortized debt issuance costs and the 1% prepayment premium.
|
|
|
8% Senior Secured Notes Due 2008 |
In April 2003, Tesoro issued $375 million aggregate
principal amount of 8% senior secured notes due
April 15, 2008. On November 16, 2005, Tesoro
repurchased $366 million of the notes, in connection with
the notes offering described above. In addition, the indenture
for the notes was amended to remove substantially all of the
covenants. The remaining $9 million outstanding balance of
the notes has no sinking fund requirements and is subject to
optional redemption by Tesoro, beginning April 15, 2006, at
a premium of 4%
65
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
through April 14, 2007, and at par thereafter. The notes
are secured by substantially all of Tesoros refining
property, plant and equipment and are guaranteed by
substantially all of Tesoros active subsidiaries. The
notes were issued at 98.994% of par, resulting in net proceeds
of $371.2 million before debt issuance costs. The effective
interest rate on the notes is 8.25%, after giving effect to the
discount.
|
|
|
95/8% Senior
Subordinated Notes Due 2012 |
In April 2002, Tesoro issued $450 million principal amount
of
95/8% senior
subordinated notes due April 1, 2012. On November 16,
2005, Tesoro repurchased $415 million of the outstanding
$429 million notes, in connection with the notes offering
described above. In addition, the indenture for the notes was
amended to remove substantially all of the covenants. The
remaining $14 million outstanding balance of the notes
matures in April 2012, has no sinking fund requirements and is
subject to optional redemption by Tesoro, beginning
April 1, 2007 at premiums of 4.8% through March 31,
2008. The notes are guaranteed by substantially all of
Tesoros active domestic subsidiaries.
|
|
|
Junior Subordinated Notes Due 2012 |
In connection with our acquisition of the California refinery,
Tesoro issued to the seller two ten-year junior subordinated
notes with face amounts totaling $150 million. The notes
consist of: (i) a $100 million junior subordinated
note, due July 2012, which is non-interest bearing through
May 16, 2007, and carries a 7.5% interest rate thereafter,
and (ii) a $50 million junior subordinated note, due
July 2012, which bears interest at 7.47% from May 17, 2003
through May 16, 2007 and 7.5% thereafter. We initially
recorded these two notes at a combined present value of
approximately $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 are comprised primarily of 30
retail stations that we sold and leased-back in 2002 with
initial terms of 17 years, with four
5-year renewal options.
The portions of the leases attributable to land are classified
as operating leases, and the portions attributable to
depreciable buildings and equipment are classified as capital
leases. The combined present value of minimum lease payments
related to the leased buildings and equipment totaled
$22 million at December 31, 2005. Tesoro also has
other capital leases for tugs and barges used to transport
petroleum products, over varying terms ending in 2006 through
2010, in which the combined present value of minimum lease
payments totaled $8 million at December 31, 2005.
Capital lease obligations included in debt totaled
$31 million and $26 million at December 31, 2005
and 2004, respectively.
At December 31, 2005 and 2004, the total cost of assets
under capital leases was $41 million gross (accumulated
amortization of $14 million) and $35 million gross
(accumulated amortization of $12 million), respectively. We
include amortization of the cost of assets under capital leases
in depreciation and amortization.
66
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum annual lease payments, including interest, as of
December 31, 2005 for capital leases were (in millions):
|
|
|
|
|
|
2006
|
|
$ |
6 |
|
2007
|
|
|
5 |
|
2008
|
|
|
5 |
|
2009
|
|
|
4 |
|
2010
|
|
|
5 |
|
Thereafter
|
|
|
30 |
|
|
|
|
|
|
Total minimum lease payments
|
|
|
55 |
|
Less amount representing interest
|
|
|
24 |
|
|
|
|
|
|
Capital lease obligations
|
|
$ |
31 |
|
|
|
|
|
NOTE F 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. We do not believe
that the limitations will restrict our ability to pay dividends
or repurchase stock under our current programs.
|
|
|
Common Stock Repurchase Program |
In November 2005, our Board of Directors authorized a
$200 million share repurchase program, which represented
approximately 5% of our common stock then outstanding. Under the
program, we will repurchase our common stock from time to time
in the open market. Purchases will depend on price, market
conditions and other factors. During 2005, we repurchased
240,000 shares of common stock for $14 million under
the program, or an average cost per share of $58.83.
On February 2, 2006, our Board of Directors declared a
quarterly cash dividend on common stock of $0.10 per share,
payable on March 15, 2006 to shareholders of record on
March 1, 2006. In both June and September 2005, we paid a
quarterly cash dividend on common stock of $0.05 per share
and in December 2005, we paid a quarterly cash dividend on
common stock of $0.10 per share.
See Note N for information relating to stock-based
compensation and common stock reserved for exercise of options.
67
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE G INCOME TAXES
The income tax provision was comprised of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
195 |
|
|
$ |
104 |
|
|
$ |
(8 |
) |
|
State
|
|
|
52 |
|
|
|
12 |
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
71 |
|
|
|
78 |
|
|
|
53 |
|
|
State
|
|
|
6 |
|
|
|
25 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Provision
|
|
$ |
324 |
|
|
$ |
219 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
We provide deferred income taxes and benefits for differences
between financial statement carrying amounts of assets and
liabilities and their respective tax bases. Temporary
differences and the resulting deferred tax assets and
liabilities at December 31, 2005 and 2004 were (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
Alternative minimum tax credits
|
|
$ |
56 |
|
|
$ |
96 |
|
|
Accrued pension and other postretirement benefits
|
|
|
61 |
|
|
|
68 |
|
|
Other accrued employee costs
|
|
|
5 |
|
|
|
7 |
|
|
Accrued environmental remediation liabilities
|
|
|
11 |
|
|
|
10 |
|
|
Other accrued liabilities
|
|
|
33 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets
|
|
$ |
166 |
|
|
$ |
209 |
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
Accelerated depreciation and property related items
|
|
$ |
427 |
|
|
$ |
388 |
|
|
Deferred maintenance costs, including refinery turnarounds
|
|
|
36 |
|
|
|
34 |
|
|
Amortization of intangible assets
|
|
|
27 |
|
|
|
29 |
|
|
LIFO inventory
|
|
|
38 |
|
|
|
48 |
|
|
Other
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities
|
|
$ |
533 |
|
|
$ |
499 |
|
|
|
|
|
|
|
|
The net deferred income tax liability is classified in the
consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Current Assets
|
|
$ |
22 |
|
|
$ |
3 |
|
Noncurrent Liabilities
|
|
$ |
389 |
|
|
$ |
293 |
|
The realization of 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 the deferred tax assets, and therefore, we did not
record a valuation allowance as of December 31, 2005 or
2004.
68
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The reconciliation of income tax expense at the
U.S. statutory rate to the income tax expense follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Income Taxes at U.S. Federal Statutory Rate
|
|
$ |
291 |
|
|
$ |
191 |
|
|
$ |
43 |
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax effect
|
|
|
35 |
|
|
|
24 |
|
|
|
6 |
|
|
Manufacturing activities deduction
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
State tax credits, net
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
Other
|
|
|
5 |
|
|
|
4 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Income Tax Provision
|
|
$ |
324 |
|
|
$ |
219 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, Tesoro had approximately
$56 million of alternative minimum tax credits that we
carry forward indefinitely and no Federal net operating loss
carry-forwards. Our filing of the 2002 tax return and the
carryback of the net operating loss resulted in the receipt of
refunds of $51 million during 2003.
NOTE H RECEIVABLES
Concentrations of credit risk with respect to accounts
receivable are influenced by the large number of customers
comprising Tesoros 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 arrangements. We include an allowance for doubtful
accounts as a reduction in our trade receivables, which amounted
to $5 million at both December 31, 2005 and 2004,
respectively.
NOTE I INVENTORIES
Components of inventories at December 31, 2005 and 2004
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Crude oil and refined products, at LIFO cost
|
|
$ |
882 |
|
|
$ |
560 |
|
Oxygenates and by-products, at the lower of FIFO cost or market
|
|
|
14 |
|
|
|
6 |
|
Merchandise
|
|
|
9 |
|
|
|
9 |
|
Materials and supplies
|
|
|
48 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
Total Inventories
|
|
$ |
953 |
|
|
$ |
616 |
|
|
|
|
|
|
|
|
Inventories valued at LIFO cost were less than replacement cost
by approximately $687 million and $385 million, at
December 31, 2005 and 2004, respectively.
NOTE J GOODWILL AND ACQUIRED INTANGIBLES
SFAS No. 142 requires that goodwill and other
intangibles determined to have an indefinite life are no longer
to be amortized but are to be 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 have a material effect on the
69
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
carrying amount of goodwill. Goodwill included $84 million
in refining and $5 million in retail at both
December 31, 2005 and 2004.
The following table provides the gross carrying amount and
accumulated amortization for each major class of acquired
intangible assets, excluding goodwill (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Net | |
|
Gross | |
|
|
|
Net | |
|
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
|
Amount | |
|
Amortization | |
|
Value | |
|
Amount | |
|
Amortization | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Air emissions credits
|
|
$ |
99 |
|
|
$ |
13 |
|
|
$ |
86 |
|
|
$ |
99 |
|
|
$ |
10 |
|
|
$ |
89 |
|
Refinery permits and plans
|
|
|
11 |
|
|
|
2 |
|
|
|
9 |
|
|
|
11 |
|
|
|
2 |
|
|
|
9 |
|
Customer agreements and contracts
|
|
|
39 |
|
|
|
21 |
|
|
|
18 |
|
|
|
39 |
|
|
|
17 |
|
|
|
22 |
|
Other intangibles
|
|
|
9 |
|
|
|
3 |
|
|
|
6 |
|
|
|
9 |
|
|
|
2 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
158 |
|
|
$ |
39 |
|
|
$ |
119 |
|
|
$ |
158 |
|
|
$ |
31 |
|
|
$ |
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average estimated lives of acquired intangible
assets are: air emission credits 28 years;
refinery permits and plans 22 years; customer
agreements and contracts 14 years; and other
intangible assets 20 years. Amortization
expense of acquired intangible assets amounted to
$8 million, $11 million and $10 million for the
years ended December 31, 2005, 2004 and 2003, respectively.
Our estimated amortization expense for each of the following
five years is: 2006 $7 million;
2007 $6 million; 2008
$6 million; 2009 $6 million; and
2010 $6 million.
NOTE K OTHER NONCURRENT ASSETS
Other noncurrent assets at December 31, 2005 and 2004
consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred maintenance costs, including refinery turnarounds, net
of amortization
|
|
$ |
113 |
|
|
$ |
99 |
|
Debt issuance costs, net of amortization
|
|
|
17 |
|
|
|
31 |
|
Prepaid pension costs
|
|
|
47 |
|
|
|
|
|
Intangible pension asset
|
|
|
5 |
|
|
|
6 |
|
Notes receivable from employees
|
|
|
2 |
|
|
|
2 |
|
Other assets, net of amortization
|
|
|
23 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
$ |
207 |
|
|
$ |
162 |
|
|
|
|
|
|
|
|
Prepaid pension costs as of December 31, 2005 reflect our
contributions made to our pension plan that exceeded amounts
that were recognized as pension expense during 2005 (see
Note M). Notes receivable from employees includes two
non-interest bearing notes due from an employee who subsequently
became an executive officer with remaining terms of 3 and
5 years. These two notes, which totaled approximately
$1 million at both December 31, 2005 and 2004, were
assumed in connection with the acquisition of our California
refinery in May 2002.
70
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE L ACCRUED LIABILITIES
The Companys current accrued liabilities and noncurrent
other liabilities at December 31, 2005 and 2004 included
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accrued Liabilities Current:
|
|
|
|
|
|
|
|
|
|
Taxes other than income taxes, primarily excise taxes
|
|
$ |
139 |
|
|
$ |
103 |
|
|
|
Income taxes payable
|
|
|
7 |
|
|
|
61 |
|
|
|
Employee costs
|
|
|
70 |
|
|
|
54 |
|
|
|
Interest
|
|
|
16 |
|
|
|
28 |
|
|
|
MTBE facility lease termination obligation
|
|
|
30 |
|
|
|
6 |
|
|
|
Environmental liabilities
|
|
|
9 |
|
|
|
11 |
|
|
|
Other
|
|
|
57 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Liabilities Current
|
|
$ |
328 |
|
|
$ |
303 |
|
|
|
|
|
|
|
|
Other Liabilities Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefits
|
|
$ |
174 |
|
|
$ |
175 |
|
|
|
MTBE facility lease termination obligation
|
|
|
|
|
|
|
22 |
|
|
|
Asset retirement obligations
|
|
|
43 |
|
|
|
1 |
|
|
|
Environmental liabilities
|
|
|
23 |
|
|
|
23 |
|
|
|
Other
|
|
|
35 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Liabilities Noncurrent
|
|
$ |
275 |
|
|
$ |
247 |
|
|
|
|
|
|
|
|
As part of our California refinery acquisition in 2002, we
acquired an operating lease for an MTBE production facility. We
accrued the termination obligation because California state
regulations required the phase-out of MTBE on December 31,
2003. During the 2005 fourth quarter, we made the determination
to terminate the MTBE facility lease during the first quarter of
2006. Under the terms of the lease agreement, we will make a
final payment of approximately $30 million upon
termination, which is included in current accrued liabilities
above.
NOTE M BENEFIT PLANS
|
|
|
Pension and Other Postretirement Benefits |
Tesoro sponsors defined benefit pension plans, including a
funded employee retirement plan, an unfunded executive security
plan and an unfunded non-employee director retirement plan. We
provide a qualified noncontributory retirement plan for all
eligible employees. Benefits are based on years of service and
compensation. Although Tesoro has no minimum required
contribution obligation to its funded employee retirement plan
under applicable laws and regulations in 2006, we expect to
contribute approximately $25 million to the plan in 2006.
We also had no minimum required obligation in 2005, however, we
voluntarily contributed $95 million in 2005. Plan assets
are primarily comprised of common stock and bond funds.
Tesoros unfunded executive security plan provides certain
executive officers and other key personnel with supplemental
death or retirement benefits. These benefits are provided by a
nonqualified, noncontributory plan and are based on years of
service and compensation. During December 2003, we terminated
our funded executive security plan, resulting in a write-off of
unamortized prepaid pension costs of $7 million and a plan
curtailment contribution of $1 million. We made additional
contributions of $3 million to the funded plan in 2003.
71
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Tesoro had previously established an unfunded non-employee
director retirement plan that provided eligible directors
retirement payments upon meeting certain age and other
requirements. In 1997, that plan was frozen with accrued
benefits of current directors transferred to the board of
directors phantom stock plan (see Note N). After the
amendment and transfer, only those retired directors or
beneficiaries who had begun to receive benefits remained
participants in the previous plan.
Tesoro provides to retirees who met certain service requirements
and were participating in our group insurance program at
retirement, health care benefits and, to those who qualify, life
insurance benefits. Health care is available to qualified
dependents of participating retirees. These benefits are
provided through unfunded, defined benefit plans or through
contracts with area health-providers on a premium basis. The
health care plans are contributory, with retiree contributions
adjusted periodically, and contain other cost-sharing features
such as deductibles and coinsurance. The life insurance plan is
noncontributory. We fund Tesoros share of the cost of
postretirement health care and life insurance benefits on a
pay-as-you go basis.
Our retiree medical plan provides prescription drug benefits,
which were affected by the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act),
signed in to law in December 2003. The Act introduced a
prescription drug benefit under Medicare (Medicare Part D),
as well as a federal subsidy to sponsors of retiree health care
benefit plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. The effect of
the subsidy resulted in a $10 million reduction in our
benefit obligation as of December 31, 2004 and is included
as an actuarial gain in other postretirement benefits in the
table below. We expect to receive approximately $200,000
annually in federal subsidy receipts for the years 2006 through
2010 and an aggregate $2 million for the years 2011 through
2015.
We use December 31 as the measurement date for all of our
defined benefit pension and post retirement plans. Changes in
benefit obligations, plan assets and the funded status of the
pension plans and other postretirement benefits, reconciled to
amounts in the consolidated balance sheets as of
December 31, 2005 and 2004, were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
Pension | |
|
Postretirement | |
|
|
Benefits | |
|
Benefits | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Change in benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations at beginning of year
|
|
$ |
218 |
|
|
$ |
181 |
|
|
$ |
149 |
|
|
$ |
137 |
|
|
|
Service cost
|
|
|
19 |
|
|
|
16 |
|
|
|
9 |
|
|
|
8 |
|
|
|
Interest cost
|
|
|
13 |
|
|
|
12 |
|
|
|
9 |
|
|
|
8 |
|
|
|
Actuarial (gain) loss
|
|
|
22 |
|
|
|
19 |
|
|
|
30 |
|
|
|
(1 |
) |
|
|
Benefits paid
|
|
|
(13 |
) |
|
|
(10 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
Curtailments and settlements
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan amendments
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special termination benefits
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations at end of year
|
|
|
259 |
|
|
|
218 |
|
|
|
194 |
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
130 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
13 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
95 |
|
|
|
53 |
|
|
|
3 |
|
|
|
3 |
|
|
|
Benefits paid
|
|
|
(13 |
) |
|
|
(10 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
225 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
Pension | |
|
Postretirement | |
|
|
Benefits | |
|
Benefits | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Funded status
|
|
|
(34 |
) |
|
|
(88 |
) |
|
|
(194 |
) |
|
|
(149 |
) |
Unrecognized prior service cost
|
|
|
12 |
|
|
|
11 |
|
|
|
2 |
|
|
|
2 |
|
Unrecognized net actuarial loss
|
|
|
56 |
|
|
|
44 |
|
|
|
40 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued benefit) cost
|
|
$ |
34 |
|
|
$ |
(33 |
) |
|
$ |
(152 |
) |
|
$ |
(136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$ |
48 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Intangible asset
|
|
|
5 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
Accrued and other liabilities
|
|
|
(21 |
) |
|
|
(39 |
) |
|
|
(152 |
) |
|
|
(136 |
) |
|
Accumulated other comprehensive loss
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability) amount recognized
|
|
$ |
34 |
|
|
$ |
(33 |
) |
|
$ |
(152 |
) |
|
$ |
(136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The combined accumulated benefit obligations for our retirement
plans was $209 million and $169 million at
December 31, 2005 and 2004, respectively. At
December 31, 2005, our contributions to the funded employee
retirement plan exceeded the plans associated net periodic
benefit expense resulting in a prepaid pension cost asset of
$47 million. Further, the accumulated benefit obligation of
the executive security plan exceeded the fair value of plan
assets resulting in the recognition of an additional minimum
liability of $8 million, an intangible asset of
$5 million and accumulated other comprehensive loss, net of
tax benefit of $2 million. At December 31, 2004 the
accumulated benefit obligation of the funded employee retirement
plan and executive security plan exceeded the fair value of plan
assets, and we recognized an additional minimum liability and an
intangible asset of $6 million.
The components of pension and postretirement benefit expense
included in the consolidated statements of operations for the
years ended December 31, 2005, 2004 and 2003 were (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement | |
|
|
Pension Benefits | |
|
Benefits | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Components of net periodic benefit expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
19 |
|
|
$ |
16 |
|
|
$ |
15 |
|
|
$ |
9 |
|
|
$ |
8 |
|
|
$ |
8 |
|
|
Interest cost
|
|
|
13 |
|
|
|
12 |
|
|
|
11 |
|
|
|
9 |
|
|
|
8 |
|
|
|
8 |
|
|
Expected return on plan assets
|
|
|
(11 |
) |
|
|
(7 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss
|
|
|
4 |
|
|
|
2 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailments and settlements
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special termination benefits
|
|
|
2 |
|
|
|
(1 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$ |
29 |
|
|
$ |
24 |
|
|
$ |
40 |
|
|
$ |
18 |
|
|
$ |
16 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant assumptions included in estimating Tesoros
pension and other postretirement benefits obligations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement | |
|
|
Pension Benefits | |
|
Benefits | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed weighted average % as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.50 |
|
|
|
5.75 |
|
|
|
6.25 |
|
|
|
5.50 |
|
|
|
5.75 |
|
|
|
6.25 |
|
|
Rate of compensation increase
|
|
|
3.23 |
|
|
|
3.43 |
|
|
|
3.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Pension Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed weighted average % as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75 |
|
|
|
6.25 |
|
|
|
6.05 |
|
|
|
5.75 |
|
|
|
6.25 |
|
|
|
6.50 |
|
|
Rate of compensation increase
|
|
|
3.70 |
|
|
|
3.89 |
|
|
|
4.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
|
8.50 |
|
|
|
8.50 |
|
|
|
8.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Health care cost trend rate assumed for next year
|
|
|
10.00 |
% |
|
|
7.86 |
% |
Rate to which the cost trend rate is assumed to decline
|
|
|
5.00 |
% |
|
|
5.00 |
% |
Year that the rate reaches the ultimate trend rate
|
|
|
2011 |
|
|
|
2010 |
|
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care and life insurance
plans. A one-percentage-point change in assumed health care cost
trend rates could have the following effects (in millions):
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-Point | |
|
1-Percentage-Point | |
|
|
Increase | |
|
Decrease | |
|
|
| |
|
| |
Effect on total of service and interest cost components
|
|
$ |
4 |
|
|
$ |
(3 |
) |
Effect on postretirement benefit obligations
|
|
$ |
36 |
|
|
$ |
(28 |
) |
Our pension plans follow an investment return approach in which
investments are allocated to broad investment categories,
including equities, debt and real estate, to maximize the
long-term return of the plan assets at a prudent level of risk.
The target allocations for the pension plans assets were
70% equity securities (with sub-category allocation targets),
24% debt securities and 6% real estate. The weighted-average
asset allocations in our pension plans at December 31, 2005
and 2004, were:
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets | |
|
|
at | |
|
|
December 31, | |
|
|
| |
Asset Category |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Equity Securities
|
|
|
71 |
% |
|
|
72 |
% |
Debt Securities
|
|
|
25 |
|
|
|
23 |
|
Real Estate
|
|
|
4 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
74
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our other postretirement benefit plans contained no assets at
December 31, 2005 and 2004.
The following estimated future benefit payments, which reflect
expected future service, as appropriate, are expected to be paid
in the years indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
Pension | |
|
Postretirement | |
|
|
Benefits | |
|
Benefits | |
|
|
| |
|
| |
2006
|
|
$ |
16 |
|
|
$ |
4 |
|
2007
|
|
|
19 |
|
|
|
5 |
|
2008
|
|
|
22 |
|
|
|
5 |
|
2009
|
|
|
25 |
|
|
|
6 |
|
2010
|
|
|
27 |
|
|
|
7 |
|
2011-2015
|
|
|
165 |
|
|
|
53 |
|
|
|
|
Thrift Plan and Retail Savings Plan |
Tesoro sponsors an employee thrift 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. Tesoro matches
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 Tesoros
common stock. The maximum matching contribution is 6% for
employees covered by the collective bargaining agreement at the
California refinery. Participants are eligible to transfer out
of Tesoros common stock at any time, on an unlimited
basis. Tesoros contributions to the thrift plan amounted
to $15 million, $13 million and $11 million
during 2005, 2004 and 2003, respectively, of which
$8 million, $6 million and $1 million consisted
of treasury stock reissuances in 2005, 2004 and 2003,
respectively.
Tesoro sponsors a savings plan, in lieu of the thrift plan, for
eligible retail employees who have completed one year of service
and have worked at least 1,000 hours within that time.
Eligible employees receive a mandatory employer contribution
equal to 3% of eligible earnings. If employees elect to make
pretax contributions, Tesoro also contributes an employer match
contribution equal to $0.50 for each $1.00 of employee
contributions, up to 6% of eligible earnings. At least 50% of
the matching employer contributions must be directed for initial
investment in Tesoro common stock. Participants are eligible to
transfer out of Tesoros common stock at any time, on an
unlimited basis. Tesoros contributions amounted to
$0.4 million during 2005, 2004 and 2003, of which
$0.1 million consisted of treasury stock reissuances in
2005 and 2004.
NOTE N STOCK-BASED COMPENSATION
Effective January 1, 2004, we adopted the preferable fair
value method of accounting for stock-based compensation, as
prescribed in SFAS No. 123. We selected the
modified prospective method of adoption described in
SFAS No. 148 recognizing compensation cost as if the
fair value method of SFAS No. 123 had been applied
from its original effective date. Prior to January 1, 2004,
we accounted for stock options using the intrinsic value method
prescribed in APB Opinion No. 25. Under the intrinsic value
method, we did not recognize compensation cost for our stock
options. See Note A for additional information, including
the pro forma effects, had compensation cost been determined
based on fair values at the grant dates of awards during 2003 in
accordance with SFAS No. 123. On January 1, 2005,
we adopted the provisions of SFAS No. 123 (Revised
2004), which requires companies to recognize the cost of
employee services received in exchange for awards of equity
instruments, based on the grant date fair value of those awards,
in the financial statements. In connection with this standard,
we adopted the fair value method for our outstanding phantom
stock options resulting in an after-tax charge of
$0.2 million during 2005. Total compensation expense for
all stock-based
75
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
awards for 2005 and 2004 totaled $26 million and
$14 million, respectively. Stock-based compensation
included charges totaling $5 million and $2 million
during 2005 and 2004, respectively, associated with the
termination and retirement of certain executive officers. The
income tax benefit realized from tax deductions associated with
option exercises totaled $27 million and $4 million
during 2005 and 2004, respectively.
We have two employee incentive stock plans, the Amended and
Restated Executive Long-Term Incentive Plan and the Key Employee
Stock Option Plan, as amended. We also have the 1995
Non-Employee Director Stock Option Plan, as amended. At
December 31, 2005, Tesoro had 5,041,010 shares of
unissued common stock reserved for these plans.
Under the Amended and Restated Executive Long-Term Incentive
Plan, shares of common stock may be granted in a variety of
forms, including restricted stock, nonqualified stock options,
stock appreciation rights and performance share and performance
unit awards. Tesoro may grant up to 9,250,000 shares under
this plan, of which up to 1,500,000 shares in the aggregate
may be granted as restricted stock, performance shares and
performance units. Stock options may be granted at exercise
prices not less than the fair market value on the date the
options are granted. The options granted generally become
exercisable after one year in 25% or 33% annual increments and
expire ten years from the date of grant. Options granted under
the plan may not be repriced without stockholder approval. The
plan will expire, unless earlier terminated, as to the issuance
of awards in September 2008. At December 31, 2005, Tesoro
had 762,359 shares available for future grants under this
plan.
The Key Employee Stock Option Plan provided stock option grants
to eligible employees who were not executive officers of Tesoro.
We granted stock options to purchase 797,000 shares of
common stock, of which 236,719 shares were outstanding at
December 31, 2005, which become exercisable one year after
grant in 25% annual increments. The options expire ten years
after the date of grant. The board of directors has suspended
any future grants under this plan.
The 1995 Non-Employee Director Stock Option Plan provides for
the grant of up to 450,000 nonqualified stock options over the
life of the plan to eligible non-employee directors of Tesoro.
These automatic, non-discretionary stock options are 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. This plan will expire, unless
earlier terminated, as to the issuance of awards in February
2010. At December 31, 2005, Tesoro had 136,000 options
outstanding and 242,000 shares available for future grants
under this plan.
A summary of stock option activity for all plans is set forth
below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average | |
|
Aggregate | |
|
|
Number of | |
|
Weighted-Average | |
|
Remaining | |
|
Intrinsic Value | |
|
|
Options | |
|
Exercise Price | |
|
Contractual Term | |
|
(In Millions) | |
|
|
| |
|
| |
|
| |
|
| |
Outstanding at January 1, 2005
|
|
|
5,887 |
|
|
|
13.35 |
|
|
|
6.0 years |
|
|
$ |
109 |
|
|
Granted
|
|
|
814 |
|
|
|
34.33 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,503 |
) |
|
|
12.23 |
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(161 |
) |
|
|
22.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
4,037 |
|
|
$ |
17.90 |
|
|
|
6.3 years |
|
|
$ |
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2005
|
|
|
2,648 |
|
|
$ |
12.68 |
|
|
|
5.1 years |
|
|
$ |
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total compensation cost recognized for all outstanding stock
options totaled $15 million and $8 million during 2005
and 2004, respectively. Prior to 2004 we accounted for stock
options using the intrinsic value method and therefore did not
record compensation costs for our stock options. Total
unrecognized compensation cost related to non-vested stock
options totaled $15 million as of December 31, 2005,
which is expected to be recognized over a weighted-average
period of 1.9 years.
We amortize the estimated fair value of stock options granted
over the vesting period using the straight-line method. The
estimated weighted-average grant-date fair value per share of
options granted during 2005, 2004 and 2003 was $18.52, $13.01
and $6.73, respectively. The total intrinsic value for options
exercised during 2005, 2004 and 2003 was $70 million,
$15 million and $0.3 million, respectively. We
estimated the fair value of each option on the date of grant
using the Black-Scholes option-pricing model. 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. 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. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
|
|
|
| |
|
|
|
|
2005 | |
|
2004 | |
|
Pro forma 2003 | |
|
|
| |
|
| |
|
| |
Expected life (years)
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
Expected volatility
|
|
|
45% 49% |
|
|
|
42% 43% |
|
|
|
57% 121% |
|
Weighted average volatility
|
|
|
48% |
|
|
|
43% |
|
|
|
118% |
|
Risk-free interest rate
|
|
|
4.0% |
|
|
|
4.3% |
|
|
|
3.4% |
|
In June 2005, we began paying a quarterly cash dividend on
common stock of $0.05 per share which was increased to
$0.10 per share in December 2005. The expected dividend
yield from June 2005 through December 2005 ranged from 0.16% to
0.24%.
Pursuant to our Amended and Restated Executive Long-Term
Incentive Plan, we may grant up to 1,500,000 restricted shares
of our common stock to eligible employees subject to certain
terms and conditions. We amortize the estimated fair value of
our restricted stock granted over the vesting period using the
straight-line method. The fair value of each restricted share on
the date of grant is equal to its fair market price. Our
restricted shares vest in three and five year increments
assuming continued employment at the vesting dates. Effective
January 1, 2005 in connection with the requirements of
SFAS No. 123, we eliminated unearned compensation of
$11 million against additional paid-in capital and common
stock in the December 31, 2004 consolidated balance sheet
and statements of consolidated stockholders equity. A
summary of our restricted stock activity is set forth below
(shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average | |
|
|
Number of | |
|
Grant-Date Fair | |
|
|
Restricted Shares | |
|
Value | |
|
|
| |
|
| |
Nonvested at January 1, 2005
|
|
|
658 |
|
|
$ |
19.32 |
|
|
Granted
|
|
|
104 |
|
|
|
33.23 |
|
|
Vested
|
|
|
(109 |
) |
|
|
21.92 |
|
|
Forfeited
|
|
|
(26 |
) |
|
|
29.35 |
|
|
|
|
|
|
|
|
Nonvested at December 31, 2005
|
|
|
627 |
|
|
$ |
20.75 |
|
|
|
|
|
|
|
|
77
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total compensation cost recognized for our outstanding
restricted stock totaled $4 million and $2 million
during 2005 and 2004, respectively. Total unrecognized
compensation cost related to non-vested restricted stock totaled
$9 million as of December 31, 2005, which is expected
to be recognized over a weighted-average period of
1.9 years. The total fair value of restricted shares vested
during 2005 was $4 million.
|
|
|
Director Compensation Plan |
The 2005 Director Compensation Plan was approved at
Tesoros annual meeting of stockholders held in May 2005.
The plan provides for the grant of up to 50,000 shares of
common stock to eligible non-employee directors of Tesoro. We
granted 1,631 shares of common stock during 2005 at a
weighted-average grant-date price per share of $53.94.
|
|
|
Non-Employee Director Phantom Stock Plan |
Under the Non-Employee Director Phantom Stock Plan, a yearly
credit of $7,250 is made in units to an account of each
non-employee director, based upon the closing market price of
Tesoros common stock on the date of credit, which vests
with three years of service. A director also may elect to have
the value of his cash retainer fee deposited quarterly into the
account as units that are immediately vested. Retiring directors
who are committee chairpersons receive an additional $5,000
credit to their accounts. Certain non-employee directors also
received a credit in their accounts in 1997, arising from the
transfer of their lump-sum accrued benefit under the frozen
Director Retirement Plan. The value of each vested account
balance, which is a function of changes in market value of
Tesoros common stock, is payable in cash commencing at
termination or at retirement, death or disability. Payments may
be made as a total distribution or in annual installments, not
to exceed ten years. The Non-Employee Director Phantom Stock
Plan resulted in expenses of $2 million, $1 million,
0.5 million for the years 2005, 2004 and 2003, respectively.
Pursuant to our Amended and Restated Executive Long-Term
Incentive Plan, Tesoros chief executive officer also holds
175,000 phantom stock options, which were granted in 1997 with a
term of ten years at 100% of the fair value of Tesoros
common stock on the grant date, or $16.9844 per share. At
December 31, 2005, all of the phantom stock options were
exercisable. Upon exercise, the chief executive officer would be
entitled to receive, in cash, the difference between the fair
market value of the common stock on the date of the phantom
stock option grant and the fair market value of common stock on
the date of exercise. At the discretion of the Compensation
Committee of the Board of Directors, these phantom stock options
may be converted to traditional stock options under the Amended
and Restated Executive Long-Term Incentive Plan. Total
compensation expense recognized for this award during 2005 and
2004 amounted to $5 million and $3 million,
respectively. No compensation expense had been recorded for this
award prior to 2004, as our stock price had not exceeded the
grant date price for this award.
|
|
|
2006 Long-Term Stock Appreciation Rights Plan |
In February 2006, our Board of Directors approved the 2006
Long-Term Stock Appreciation Rights Plan (the SAR
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. The term of a SAR
granted under the SAR Plan shall be determined by the
Compensation Committee provided that no SAR shall be exercisable
on or after the tenth anniversary date of its grant. In February
2006, we granted 314,110 SARs at 100% of the fair value of
Tesoros common stock on the grant date of $66.61 per
share.
78
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE O |
COMMITMENTS AND CONTINGENCIES |
Tesoro has various cancellable and noncancellable operating
leases related to land, office and retail facilities, ship
charters and equipment and other facilities used in the storage,
transportation, production and sale of feedstocks and refined
products. These leases have remaining primary terms up to
38 years, with terms of certain
rights-of-way extending
up to 25 years, and generally contain multiple renewal
options.
We have long-term charters with remaining terms up through May
2010 for three U.S. flagged ships and two foreign-flagged
ships, used to transport crude oil and products. The aggregate
annual commitments on these charters range from $29 million
to $61 million over the remaining terms.
Tesoro has operating leases for most of its retail gas station
sites with primary remaining terms up to 38 years, and
generally containing renewal options. Our aggregate annual lease
commitments for the sites total approximately $8 million to
$10 million over the next five years. These leases include
the 30 retail stations that we sold and leased back in 2002 with
initial terms of 17 years and four
five-year renewal
options. We classified the portion of each lease attributable to
land as an operating lease, and the portion attributable to
depreciable buildings and equipment as a capital lease (See
Note E). Tesoro also has an agreement with Wal-Mart to
build and operate retail gas stations at selected existing and
future Wal-Mart stores in the western United States. Under the
agreement, each site is subject to a lease with a ten-year
primary term and an option, exercisable at our discretion, to
extend a sites lease for two additional five-year options.
As of December 31, 2005, we leased Tesoros corporate
headquarters from a limited partnership, in which we owned a 50%
limited interest. In February 2006, the limited partnership sold
the building to a third-party resulting in a gain to Tesoro of
$5 million. We continue to lease our corporate headquarters
from the third-party with an initial lease term through 2014 and
two five-year renewal options. Our total rent expense includes
lease payments and operating costs paid to the partnership
totaling $4 million, $3 million and $3 million in
2005, 2004 and 2003, respectively. We accounted for
Tesoros interest in the partnership using the equity
method of accounting, and our consolidated balance sheets did
not include the partnerships assets, primarily land and
buildings, totaling approximately $16 million and debt of
approximately $13 million.
Tesoros minimum annual lease payments as of
December 31, 2005, for operating leases having initial or
remaining noncancellable lease terms in excess of one year were
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ship | |
|
|
|
|
|
|
Charters | |
|
Other | |
|
Total | |
|
|
| |
|
| |
|
| |
2006
|
|
$ |
61 |
|
|
$ |
61 |
|
|
$ |
122 |
|
2007
|
|
|
59 |
|
|
|
52 |
|
|
|
111 |
|
2008
|
|
|
42 |
|
|
|
39 |
|
|
|
81 |
|
2009
|
|
|
29 |
|
|
|
27 |
|
|
|
56 |
|
2010
|
|
|
12 |
|
|
|
22 |
|
|
|
34 |
|
Thereafter
|
|
|
|
|
|
|
134 |
|
|
|
134 |
|
Total rental expense for short-term and long-term operating
leases, excluding marine charters, amounted to approximately
$52 million in 2005, $44 million in 2004, and
$49 million in 2003. We also enter into various short-term
charters for vessels to transport refined products to and from
our refineries and terminals and to deliver products to
customers. Total marine charter expense was $117 million in
2005, $68 million in 2004 and $61 million in 2003. See
Note E for information related to capital leases.
79
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Purchase Obligations and Other Commitments |
Tesoros contractual purchase commitments consist primarily
of crude oil supply contracts for our refineries from several
suppliers with noncancellable remaining terms ranging up to
18 months with renewal provisions. Prices under the term
agreements generally fluctuate with market prices. Assuming
actual market crude oil prices as of December 31, 2005,
ranging from $54 per barrel to $64 per barrel, our
minimum crude supply commitments, for the next two years would
approximate $4.2 billion in 2006 and $389 million in
2007. We also purchase crude oil at market prices under
short-term renewable agreements and in the spot market. In
addition to these purchase commitments, we also have contractual
capital spending commitments, primarily for refinery
improvements and environmental projects totaling approximately
$63 million in 2006.
We also have long-term take-or-pay commitments to purchase
services associated with the operation of our refineries,
primarily for chemical supplies. We also will make a final
payment of $30 million in 2006 related to terminating a
deactivated MTBE plant lease located at our California refinery
(see Note L). In addition, we have a power supply agreement
through 2012 at the California refinery, which requires minimum
payments through July 2007 that vary based on market prices for
electricity. Assuming estimated future market prices of
electricity, minimum payments for the next two years would
approximate $50 million in 2006 and $28 million in
2007. The minimum annual payments under our service contracts,
including the termination payment for the deactivated MTBE plant
and the power supply agreement are estimated to total
$106 million in 2006, $58 million in 2007,
$30 million in 2008, $29 million in 2009, and
$28 million in 2010. The remaining minimum commitment
totals approximately $89 million over 15 years. Tesoro
paid approximately $90 million, $92 million and
$92 million in 2005, 2004 and 2003, respectively, under
these take-or-pay contracts.
|
|
|
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. Where required, we
have made accruals in accordance with SFAS No. 5,
Accounting for Contingencies, in order to provide
for these matters. We cannot predict the ultimate effects of
these matters with certainty, and we have made related accruals
based on our best estimates, subject to future developments. We
believe that the outcome of these matters will not result in a
material adverse effect on our liquidity and consolidated
financial position, although the resolution of certain of these
matters could have a material adverse impact on interim or
annual results of operations.
Tesoro is subject to audits by federal, state and local taxing
authorities in the normal course of business. It is possible
that tax audits could result in claims against Tesoro in excess
of recorded liabilities. We believe, however, that when these
matters are resolved, they will not materially affect
Tesoros consolidated financial position or results of
operations.
Tesoro is subject to extensive federal, state and local
environmental laws and regulations. These laws, which change
frequently, regulate the discharge of materials into the
environment and may require us to remove or mitigate the
environmental effects of the disposal or release of petroleum or
chemical substances at various sites, install additional
controls, or make other modifications or changes in use for
certain emission sources.
|
|
|
Environmental Liabilities |
We are currently involved in remedial responses and have
incurred and expect to continue to incur cleanup expenditures
associated with environmental matters at a number of sites,
including certain of our previously owned properties. At
December 31, 2005, our accruals for environmental expenses
totaled $32 million. Our accruals for environmental
expenses include retained liabilities for previously owned or
operated properties, refining, pipeline and terminal operations
and retail service stations. We believe these
80
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accruals are adequate, based on currently available information,
including the participation of other parties or former owners in
remediation action.
During 2005, we continued settlement discussions with the
California Air Resources Board (CARB) concerning a
notice of violation (NOV) we received in October
2004. The NOV, issued by CARB, alleges that Tesoro offered
eleven batches of gasoline for sale in California that did not
meet CARBs gasoline exhaust emission limits. In January
2006, we executed a Settlement Agreement and Release with CARB
which requires us to pay a civil penalty of $325,000 to resolve
this matter. A reserve for the settlement of the NOV is included
in the $32 million of environmental accruals referenced
above.
In 2005, we received two NOVs from the Bay Area Air Quality
Management District. The Bay Area Air Quality Management
District alleged we violated certain air quality emission limits
as a result of a mechanical failure of one of our boilers at our
California refinery in January 2005. On January 26, 2006,
we entered into a Settlement Agreement and Release with the
District and the District Attorney of Contra Costa County,
California. In exchange for the release of allegations based
upon certain air quality emission limits and provisions of the
California Health and Safety Code, we paid a civil penalty of
$1.1 million. A reserve for the settlement of the NOVs is
included in the $32 million of environmental accruals
referenced above.
We have undertaken an investigation of environmental conditions
at certain active wastewater treatment units at our California
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 California
refinery. Based on our spending in 2005, the remaining cost
estimate for the active wastewater units investigation is
approximately $300,000. A reserve for this matter is included in
the $32 million of environmental accruals referenced above.
On October 24, 2005, we received an NOV from the EPA. The
EPA alleges certain modifications made to the fluid catalytic
cracking unit at our Washington refinery prior to our
acquisition of the refinery were made without a permit in
violation of the Clean Air Act. We are investigating the
allegations and believe the ultimate resolution of the NOV will
not have a material adverse effect on our financial position or
results of operations. A reserve for the settlement of the NOV
is included in the $32 million of environmental accruals
referenced above.
On February 28, 2006, we received an offer of settlement
from the Bay Area Air Quality Management District. The District
has offered to settle 28 NOVs issued to Tesoro from January 2004
to September 2004 for $275,000. The NOVs allege violations of
various air quality requirements at the California refinery. A
reserve for the settlement of the NOVs is included in the
$32 million of environmental accruals referenced above.
|
|
|
Other Environmental Matters |
In the ordinary course of business, we become party to or
otherwise involved in 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, and some matters may require
years for us to resolve. As a result, we have not established
reserves 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. However, we cannot provide assurance that an adverse
resolution of one or more of the matters described below during
a future reporting period will not have a material adverse
effect on our financial position or results of operations in
future periods.
We are a defendant, along with other manufacturing, supply and
marketing defendants, in eleven pending cases alleging MTBE
contamination in groundwater. The defendants are being sued for
having manufactured
81
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
MTBE and having manufactured, supplied and distributed gasoline
containing MTBE. The plaintiffs, all in California, are
generally water providers, governmental authorities and private
well owners alleging, in part, the defendants are liable for
manufacturing or distributing a defective product. The suits
generally seek individual, unquantified compensatory and
punitive damages and attorneys fees, but we cannot
estimate the amount or the likelihood of the ultimate resolution
of these matters at this time, and accordingly have not
established a reserve for these cases. We believe we have
defenses to these claims and intend to vigorously defend the
lawsuits.
Soil and groundwater conditions at our California refinery may
require substantial expenditures over time. In connection with
our acquisition of the California refinery from Ultramar, Inc.
in May 2002, Ultramar assigned certain of its rights and
obligations that Ultramar had acquired from Tosco Corporation in
August of 2000. Tosco assumed responsibility and contractually
indemnified us for up to $50 million for certain
environmental liabilities arising from operations at the
refinery prior to August of 2000, which are identified prior to
August 31, 2010 (Pre-Acquisition Operations).
Based on existing information, we currently estimate that the
known environmental liabilities arising from Pre-Acquisition
Operations are approximately $41 million, including soil
and groundwater conditions at the refinery in connection with
various projects and including those required by the California
Regional Water Quality Control Board and other government
agencies. If we incur remediation liabilities in excess of the
defined environmental liabilities for Pre-Acquisition Operations
indemnified by Tosco, we expect to be reimbursed for such excess
liabilities under certain environmental insurance policies. The
policies provide $140 million of coverage in excess of the
$50 million indemnity covering the defined environmental
liabilities arising from Pre-Acquisition Operations. Because of
Toscos indemnification and the environmental insurance
policies, we have not established a reserve for these defined
environmental liabilities arising out of the Pre-Acquisition
Operations. In December 2003, we initiated arbitration
proceedings against Tosco seeking damages, indemnity and a
declaration that Tosco is responsible for the defined
environmental liabilities arising from Pre-Acquisition
Operations at our California refinery.
In November 2003, we filed suit in Contra Costa County Superior
Court against Tosco alleging that Tosco misrepresented,
concealed and failed to disclose certain additional
environmental conditions at our California refinery. The court
granted Toscos motion to compel arbitration of our claims
for these certain additional environmental conditions. In the
arbitration proceedings we initiated against Tosco in December
2003, we are also seeking a determination that Tosco is liable
for investigation and remediation of these certain additional
environmental conditions, the amount of which is currently
unknown and therefore a reserve has not been established, and
which may not be covered by the $50 million indemnity for
the defined environmental liabilities arising from
Pre-Acquisition Operations. In response to our arbitration
claims, Tosco filed counterclaims in the Contra Costa County
Superior Court action alleging that we are contractually
responsible for additional environmental liabilities at our
California refinery, including the defined environmental
liabilities arising from Pre-Acquisition Operations. In February
2005, the parties agreed to stay the arbitration proceedings to
pursue settlement discussions.
In June 2005, the parties agreed in principle to settle their
claims, including the defined environmental liabilities arising
from Pre-Acquisition Operations and certain additional
environmental conditions, both discussed above, pending
negotiation and execution of a final written settlement
agreement. In the event we are unable to finalize the
settlement, we intend to vigorously prosecute our claims against
Tosco and to oppose Toscos claims against us, although we
cannot provide assurance that we will prevail.
|
|
|
Environmental Capital Expenditures |
EPA regulations related to the Clean Air Act require reductions
in the sulfur content in gasoline. To meet the revised gasoline
standard, we spent $28 million in 2005. Our California,
Washington, Hawaii, Alaska and North Dakota refineries will not
require additional capital spending to meet the low sulfur
gasoline standards.
82
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We currently estimate we will make additional capital
improvements of approximately $8 million at our Utah
refinery from 2008 through 2009, that will permit the Utah
refinery to produce gasoline meeting the sulfur limits imposed
by the EPA.
EPA regulations related to the Clean Air Act also require
reductions in the sulfur content in diesel fuel manufactured for
on-road consumption. In general, the new on-road diesel fuel
standards will become effective on June 1, 2006. In May
2004, the EPA issued a rule regarding the sulfur content of
non-road diesel fuel. The requirements to reduce non-road diesel
sulfur content will become effective in phases between 2007 and
2010. We spent $46 million in 2005 to meet the revised
diesel fuel standards, and based on our latest engineering
estimates, we expect to spend approximately $71 million in
additional capital improvements through 2007. Included in the
estimate are capital projects to manufacture additional
quantities of low sulfur diesel at our Alaska refinery, for
which we expect to spend approximately $53 million through
2007. These cost estimates are subject to further review and
analysis. Our California, Washington and North Dakota refineries
will not require additional capital spending to meet the new
non-road diesel fuel standards.
We expect to spend approximately $1 million in capital
improvements in 2006 at our Washington refinery to comply with
the Maximum Achievable Control Technologies standard for
petroleum refineries (Refinery MACT II). We
spent approximately $17 million during 2005.
In connection with our 2001 acquisition of our North Dakota and
Utah refineries, Tesoro assumed the sellers obligations
and liabilities under a consent decree among the United States,
BP Exploration and Oil Co. (BP), Amoco Oil Company
and Atlantic Richfield Company. BP entered into this consent
decree for both the North Dakota and Utah refineries for various
alleged violations. As the owner of these refineries, Tesoro is
required to address issues that include leak detection and
repair, flaring protection, and sulfur recovery unit
optimization. We currently estimate we will spend
$5 million over the next three years to comply with this
consent decree. We also agreed to indemnify the sellers for all
losses of any kind incurred in connection with the consent
decree.
In connection with the 2002 acquisition of our California
refinery, subject to certain conditions, we assumed the
sellers obligations pursuant to settlement efforts with
the EPA concerning the Section 114 refinery enforcement
initiative under the Clean Air Act, except for any potential
monetary penalties, which the seller retains. In November 2005,
the Consent Decree was entered by the District Court for the
Western District of Texas in which we agreed to undertake
projects at our California refinery to reduce air emissions. We
spent $2 million in 2005 and currently estimate we will
make additional capital improvements of approximately
$30 million through 2010 to satisfy the requirements of the
Consent Decree. This cost estimate is subject to further review
and analysis.
During the fourth quarter of 2005, we received approval by the
Hearing Board for the Bay Area Air Quality Management District
to modify our existing fluid coker unit to a delayed coker at
our California refinery which is designed to (i) lower
emissions and (ii) increase overall efficiency by lowering
operating costs. We negotiated the terms and conditions of the
Second Conditional Abatement Order with the District in response
to the January 2005 mechanical failure of one of our boilers at
the California refinery. We spent $3 million during 2005
for this project, and we currently estimate that we will spend
approximately $272 million through the fourth quarter of
2007. This cost estimate is subject to further review and
analysis.
We will spend additional capital at the California refinery for
reconfiguring and replacing above-ground storage tank systems
and upgrading piping within the refinery. We spent
$15 million in 2005 for these related projects at our
California refinery, and we currently estimate that we will make
additional capital improvements of approximately
$109 million through 2010. This cost estimate is subject to
further review and analysis.
Conditions may develop that cause increases or decreases in
future expenditures for our various sites, including, but not
limited to, our refineries, tank farms, retail gasoline stations
(operating and closed
83
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
locations) and petroleum product terminals, and for compliance
with the Clean Air Act and other federal, state and local
requirements. We cannot currently determine the amounts of such
future expenditures.
|
|
|
Claims Against Third-Parties |
Beginning in the early 1980s, Tesoro Hawaii Corporation, Tesoro
Alaska Company and other fuel suppliers entered into a series of
long-term, fixed-price fuel supply contracts with the
U.S. Defense Energy Support Center (DESC). Each
of the contracts contained a provision for price adjustments by
the DESC. The federal acquisition regulations control how prices
may be adjusted, and we and many other suppliers have filed in
separate suits in the Court of Federal Claims contesting the
DESCs price adjustments prior to 1999. We and the other
suppliers seek recovery of approximately $3 billion in
underpayment for fuel. Our share of that underpayment totals
approximately $165 million, plus interest. We alleged that
the DESCs price adjustments violated federal regulations
by not adjusting the sales price of fuel based on changes to
each suppliers established prices or costs, as the Court
of Federal Claims had held in prior rulings on similar
contracts. The Court of Federal Claims granted partial summary
judgment in our favor on that issue, but the Court of Appeals
for the Federal Circuit has reversed and ruled that DESCs
prices did not need to be tied to changes in a specific
suppliers prices or costs. We have also asserted other
grounds to challenge the DESC contract pricing formulas, and we
are evaluating our position with respect to further litigation
on those additional grounds. We cannot predict the outcome of
these further actions.
In 1996, Tesoro Alaska Company filed a protest of the intrastate
rates charged for the transportation of its crude oil through
the Trans Alaska Pipeline System (TAPS). Our protest
asserted that the TAPS intrastate rates were excessive and
should be reduced. The Regulatory Commission of Alaska
(RCA) considered our protest of the intrastate rates
for the years 1997 through 2000. The RCA set just and reasonable
final rates for the years 1997 through 2000, and held that we
are entitled to receive approximately $52 million in
refunds, including interest through the expected conclusion of
appeals in December 2007. The RCAs ruling is currently on
appeal in the Alaska courts, and we cannot give any assurances
of when or whether we will prevail in the appeal.
In 2002, the RCA rejected the TAPS Carriers proposed
intrastate rate increases for 2001-2003 and maintained the
permanent rate of $1.96 to the Valdez Marine Terminal. That
ruling is currently on appeal to the Alaska Superior Court, and
the TAPS Carriers did not move to prevent the rate decrease. The
rate decrease has been in effect since June 2003. If the
RCAs decision is upheld on appeal, we could be entitled to
refunds resulting from our shipments from January 2001 through
mid-June 2003. If the RCAs decision is not upheld on
appeal, we could have to pay additional shipping charges
resulting from our shipments from mid-June 2003 through December
2005. We cannot give any assurances of when or whether we will
prevail in the appeal. We also believe that, should we not
prevail on appeal, the amount of additional shipping charges
cannot reasonably be estimated since it is not possible to
estimate the permanent rate which the RCA could set, and the
appellate courts approve, for each year. In addition, depending
upon the level of such rates, there is a reasonable possibility
that any refunds for the period January 2001 through mid-June
2003 could offset some or all of any repayments due for the
period mid-June 2003 through December 2005.
In July 2005, the TAPS Carriers filed a proceeding at the
Federal Energy Regulatory Commission (FERC), seeking
to have the FERC assume jurisdiction over future rates for
intrastate transportation on TAPS. We have filed a protest in
that proceeding, which has now been consolidated with another
FERC proceeding seeking to set just and reasonable rates for
future interstate transportation on TAPS. If the TAPS carriers
should prevail, then the rates charged for all shipments of
Alaska North Slope crude oil on TAPS could be revised by the
FERC, but any FERC changes to rates for intrastate
transportation of crude oil supplies for our Alaska refinery
should be prospective only and should not affect prior
intrastate rates, refunds or repayments.
84
TESORO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE P |
QUARTERLY FINANCIAL DATA (UNAUDITED) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters | |
|
|
|
|
| |
|
Total | |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions except per share amounts) | |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
3,171 |
|
|
$ |
4,033 |
|
|
$ |
5,017 |
|
|
$ |
4,360 |
|
|
$ |
16,581 |
|
|
Operating Income
|
|
$ |
78 |
|
|
$ |
337 |
|
|
$ |
392 |
|
|
$ |
220 |
|
|
$ |
1,027 |
|
|
Net Earnings
|
|
$ |
28 |
|
|
$ |
184 |
|
|
$ |
226 |
|
|
$ |
69 |
|
|
$ |
507 |
|
|
Net Earnings Per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.41 |
|
|
$ |
2.69 |
|
|
$ |
3.29 |
|
|
$ |
1.00 |
|
|
$ |
7.44 |
|
|
|
Diluted
|
|
$ |
0.40 |
|
|
$ |
2.62 |
|
|
$ |
3.20 |
|
|
$ |
0.97 |
|
|
$ |
7.20 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
2,430 |
|
|
$ |
3,155 |
|
|
$ |
3,288 |
|
|
$ |
3,389 |
|
|
$ |
12,262 |
|
|
Operating Income
|
|
$ |
126 |
|
|
$ |
396 |
|
|
$ |
161 |
|
|
$ |
30 |
|
|
$ |
713 |
|
|
Net Earnings
|
|
$ |
50 |
|
|
$ |
213 |
|
|
$ |
65 |
|
|
$ |
|
|
|
$ |
328 |
|
|
Net Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.78 |
|
|
$ |
3.26 |
|
|
$ |
0.98 |
|
|
$ |
|
|
|
$ |
5.01 |
|
|
|
Diluted
|
|
$ |
0.75 |
|
|
$ |
3.11 |
|
|
$ |
0.93 |
|
|
$ |
|
|
|
$ |
4.76 |
|
During the fourth quarter of 2005, we incurred pretax charges of
$92 million consisting of tender and redemption premiums
and the write-off of unamortized debt issuance costs and
discount in connection with the refinancing of our
95/8% senior
subordinated notes and 8% senior secured notes (see
Note E). During the fourth quarter of 2004, we incurred
stock-based compensation expenses related to the announced
retirement of certain executive officers totaling
$2 million.
85
|
|
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 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 in alerting them on a timely basis to material
information relating to the Company and required to be included
in our periodic filings under the Exchange Act. During the
fourth quarter of 2005, 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 internal controls over
financial reporting as of December 31, 2005, 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 believe
that as of December 31, 2005, the Companys internal
control over financial reporting is effective. The independent
registered public accounting firm of Deloitte & Touche
LLP, as auditors of the Companys consolidated financial
statements, has issued an attestation report on
managements assessment of the effectiveness of the
Companys internal control over financial reporting,
included herein.
86
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Tesoro Corporation
We have audited managements assessment, included in the
accompanying Management Report on Internal Control over
Financial Reporting, that Tesoro Corporation and subsidiaries
(the Company) maintained effective internal control
over financial reporting as of December 31, 2005, based on
the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of 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, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel 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 the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the 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, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2005 of the Company and our report dated
March 6, 2006, expressed an unqualified opinion on those
financial statements.
|
|
|
/s/ Deloitte &
Touche LLP
|
San Antonio, Texas
March 6, 2006
87
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ITEM 9B. |
OTHER INFORMATION |
None.
PART III
|
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ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Information required under this Item will be contained in the
Companys 2006 Proxy Statement, incorporated herein by
reference. See also Executive Officers 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, 300 Concord Plaza Drive, San Antonio, Texas
78216-6999.
|
|
ITEM 11. |
EXECUTIVE COMPENSATION |
Information required under this Item will be contained in the
Companys 2006 Proxy Statement, incorporated herein by
reference.
|
|
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information required under this Item will be contained in the
Companys 2006 Proxy Statement, incorporated herein by
reference.
|
|
ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
Information required under this Item will be contained in the
Companys 2006 Proxy Statement, incorporated herein by
reference.
|
|
ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES |
Information required under this Item will be contained in the
Companys 2006 Proxy Statement, incorporated herein by
reference.
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:
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Page | |
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| |
Report of Independent Registered Public Accounting Firm
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50 |
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Statements of Consolidated Operations Years Ended
December 31, 2005, 2004 and 2003
|
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51 |
|
Consolidated Balance Sheets December 31, 2005
and 2004
|
|
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52 |
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Statements of Consolidated Comprehensive Income and
Stockholders Equity Years
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Ended December 31, 2005, 2004 and 2003
|
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53 |
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Statements of Consolidated Cash Flows Years Ended
December 31, 2005, 2004 and 2003
|
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54 |
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Notes to Consolidated Financial Statements
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55 |
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88
2. Financial Statement Schedules
No financial statement schedules are submitted because of the
absence of the conditions under which they are required or
because the required information is included in the consolidated
financial statements.
3. Exhibits
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Exhibit |
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Number |
|
|
|
Description of Exhibit |
|
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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 |
|
|
|
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). |
|
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 |
|
|
|
By-Laws of the Company, as amended through February 2, 2005
(incorporated by reference herein to Exhibit 3.1 to the
Companys Current Report on Form 8-K filed on
February 8, 2005, File No. 1-3473). |
|
*3 |
.3 |
|
|
|
Amendment to the By-Laws of the Company, effective March 6,
2006. |
|
3 |
.4 |
|
|
|
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 |
.5 |
|
|
|
Certificate of Designation Establishing a Series A
Participating Preferred Stock, dated as of December 16,
1985 (incorporated by reference herein to Exhibit 3(d) to
the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, File No. 1-3473). |
|
3 |
.6 |
|
|
|
Certificate of Amendment, dated as of February 9, 1994, to
Restated Certificate of Incorporation of the Company amending
Article IV, Article V, Article VII and
Article VIII (incorporated by reference herein to
Exhibit 3(e) to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 1993,
File No. 1-3473). |
|
3 |
.7 |
|
|
|
Certificate of Amendment, dated as of August 3, 1998, to
Certificate of Incorporation of the Company, amending
Article IV, increasing the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000 (incorporated by
reference herein to Exhibit 3.1 to the Companys
Quarterly Report on Form 10-Q for the period ended
September 30, 1998, File No. 1-3473). |
89
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Exhibit |
|
|
|
|
|
|
3 |
.8 |
|
|
|
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 Current Report on Form 8-K filed on
November 9, 2004). |
|
4 |
.1 |
|
|
|
Form of Coastwide Energy Services, Inc. 8% Convertible
Subordinated Debenture (incorporated by reference herein to
Exhibit 4.3 to Post-Effective Amendment No. 1 to
Registration No. 333-00229). |
|
4 |
.2 |
|
|
|
Debenture Assumption and Conversion Agreement dated as of
February 20, 1996, between the Company, Coastwide Energy
Services, Inc. and CNRG Acquisition Corp. (incorporated by
reference herein to Exhibit 4.4 to Post-Effective Amendment
No. 1 to Registration No. 333-00229). |
|
4 |
.3 |
|
|
|
Credit and Guaranty Agreement related to Senior Secured Term
Loans Due 2008, dated as of April 17, 2003, among Tesoro
Petroleum Corporation, certain subsidiary guarantors, Goldman
Sachs Credit Partners L.P., as Administrative Agent, and Goldman
Sachs Credit Partners L.P., as Sole Lead Arranger, Sole
Bookrunner and Syndication Agent (incorporated by reference
herein to Exhibit 4.11 to Registration Statement
No. 333-105783). |
|
4 |
.4 |
|
|
|
First Amendment, dated as of March 15, 2004, to the Credit
and Guaranty Agreement of the Senior Secured Term Loans Due
2008, among Tesoro Petroleum Corporation, certain subsidiary
guarantors, Goldman Sachs Credit Partners L.P., as
Administrative Agent, Sole Lead Arranger, Sole Bookrunner and
Syndication Agent (incorporated by reference herein to
Exhibit 4.1 to the Companys Quarterly Report on
Form 10-Q for the quarterly period ended June 30,
2004, File No. 1-3473). |
|
4 |
.5 |
|
|
|
Pledge and Security Agreement related to Senior Secured Term
Loans Due 2008 and 8% Senior Secured Notes due 2008, dated
as of April 17, 2003, among Tesoro Petroleum Corporation,
certain subsidiary guarantors and Wilmington Trust Company, as
Collateral Agent (incorporated by reference herein to
Exhibit 4.12 to Registration Statement No. 333-105783). |
|
4 |
.6 |
|
|
|
Collateral Agency Agreement related to Senior Secured Term Loans
Due 2008 and 8% Senior Secured Notes due 2008, dated as of
April 17, 2003, among Tesoro Petroleum Corporation, certain
subsidiary guarantors, Goldman Sachs Credit Partners L.P., The
Bank of New York Trust Company and Wilmington Trust Company
(incorporated by reference herein to Exhibit 4.13 to
Registration Statement No. 333-105783). |
|
4 |
.7 |
|
|
|
Control Agreement related to Senior Secured Tem Loans due 2008
and 8% Senior Secured Notes due 2008, dated as of
May 16, 2003, among Tesoro Petroleum Corporation,
Wilmington Trust Company, as Collateral Agent, and Frost Bank,
as Depositary Agent (incorporated by reference herein to
Exhibit 4.14 to Registration Statement No. 333-105783). |
|
4 |
.8 |
|
|
|
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 |
.9 |
|
|
|
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 |
.10 |
|
|
|
Form of Registration Rights Agreement relating to the
61/4% Senior
Notes due 2012, dated as of November 16, 2005, among Tesoro
Corporation, certain subsidiary guarantors and Lehman Brothers
Inc., Goldman, Sachs & Co. and J.P. Morgan
Securities, Inc. (incorporated by reference herein to
Exhibit 4.3 to the Companys Current Report on
Form 8-K filed on November 17, 2005, File
No. 1-3473). |
|
4 |
.11 |
|
|
|
Form of Registration Rights Agreement relating to the
65/8% Senior
Notes due 2015, dated as of November 16, 2005, among Tesoro
Corporation, certain subsidiary guarantors and Lehman Brothers,
Inc., Goldman, Sachs & Co. and J.P. Morgan
Securities, Inc. (incorporated by reference herein to
Exhibit 4.4 to the Companys Current Report on
Form 8-K filed on November 17, 2005, File
No. 1-3473). |
90
|
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|
|
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Exhibit |
|
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|
|
Number |
|
|
|
Description of Exhibit |
|
|
|
|
|
|
10 |
.1 |
|
|
|
Security Agreement dated as of April 17, 2003, by and
between the Company, certain of its subsidiary parties thereto
and Bank One NA as Agent (incorporated by reference herein to
Exhibit 10.44 to Amendment No. 1 to Registration
Statement No. 333-105783). |
|
10 |
.2 |
|
|
|
Third Amended and Restated Credit Agreement, dated as of
May 25, 2004, among the Company, Bank of America, N.A. (the
syndication agent), Wells Fargo Foothill, LLC (the documentation
agent), Bank One, NA (the administrative agent) and a syndicate
of banks, financial institutions and other entities
(incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 2004, File No. 1-3473). |
|
10 |
.3 |
|
|
|
Amendment No. 1 to the Third Amended and Restated Credit
Agreement, dated as of September 29, 2004 among the
Company, Bank One N.A. (the administrative agent) and a
syndicate of banks, financial institutions and other entities
(incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed on September 30, 2004, File
No. 1-3473). |
|
10 |
.4 |
|
|
|
Affirmation of Loan Documents dated as of September 29,
2004, by and between the Company, certain of its subsidiary
parties thereto and Bank One N.A. as administrative agent
(incorporated by reference herein to Exhibit 10.2 to the
Current Report on Form 8-K filed on September 30,
2004, File No. 1-3473). |
|
10 |
.5 |
|
|
|
Amendment No. 2 to the Third Amended and Restated Credit
Agreement, dated as of May 17, 2005 among Tesoro,
J.P. Morgan 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 Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, File No. 1-3473). |
|
10 |
.6 |
|
|
|
Affirmation of Loan Documents dated as of May 17, 2005, by
and between Tesoro, certain of its subsidiary parties thereto
and J.P. Morgan Chase Bank N.A. as administrative agent
(incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, File No. 1-3473). |
|
10 |
.7 |
|
|
|
$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 |
.8 |
|
|
|
$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 |
.9 |
|
|
|
Amended and Restated Executive Security Plan effective as
January 1, 2005 (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on
Form 8-K filed February 8, 2006, 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 |
|
|
|
Amended and Restated Employment Agreement between the Company
and Bruce A. Smith dated December 3, 2003 (incorporated by
reference herein to Exhibit 10.14 to the Companys
Annual Report on Form 10-K for the fiscal year ended
December 31, 2003, File No. 1-3473). |
|
10 |
.12 |
|
|
|
Form of First Amendment to Amended and Restated Employment
Agreement between the Company and Bruce A. Smith dated as of
February 2, 2006 (incorporated by reference herein to
Exhibit 10.4 to the Companys Current Report on
Form 8-K filed on February 8, 2006, File
No. 1-3473). |
|
10 |
.13 |
|
|
|
Employment Agreement between the Company and William J. Finnerty
dated as of February 2, 2005 (incorporated by reference
herein to Exhibit 10.1 to the Companys Current Report
on Form 8-K/A filed on February 8, 2005, File
No. 1-3473). |
|
10 |
.14 |
|
|
|
Form of First Amendment to Employment Agreement between the
Company and William J. Finnerty dated as of February 2,
2006 (incorporated by reference herein to Exhibit 10.5 to
the Companys Current Report on Form 8-K filed on
February 8, 2006, File No. 1-3473). |
91
|
|
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|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Exhibit |
|
|
|
|
|
|
10 |
.15 |
|
|
|
Employment Agreement between the Company and Everett D. Lewis
dated as of February 2, 2005 (incorporated by reference
herein to Exhibit 10.2 to the Companys Current Report
on Form 8-K/A filed on February 8, 2005, File
No. 1-3473). |
|
10 |
.16 |
|
|
|
Form of First Amendment to Employment Agreement between the
Company and Everett D. Lewis dated as of February 2, 2006
(incorporated by reference herein to Exhibit 10.6 to the
Companys Current Report on Form 8-K filed on
February 8, 2006, File No. 1-3473). |
|
10 |
.17 |
|
|
|
Employment Agreement between the Company and Gregory A. Wright
dated as of August 26, 2004 (incorporated by reference
herein to Exhibit 10.4 to the Companys Current Report
on Form 8-K filed on August 31, 2004, File
No. 1-3473). |
|
10 |
.18 |
|
|
|
Form of First Amendment to Employment Agreement between the
Company and Gregory A. Wright dated as of February 2, 2006
(incorporated by reference herein to Exhibit 10.7 to the
Companys Current Report on Form 8-K filed on
February 8, 2006, File No. 1-3473). |
|
10 |
.19 |
|
|
|
Management Stability Agreement between the Company and W. Eugene
Burden dated November 8, 2002 (incorporated by reference
herein to Exhibit 10.23 to the Companys Annual Report
on Form 10-K for the fiscal year ended December 31,
2002, File No. 1-3473). |
|
10 |
.20 |
|
|
|
Management Stability Agreement between the Company and Claude A.
Flagg dated February 2, 2005 (incorporated by reference
herein to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on February 8, 2005, File
No. 1-3473). |
|
10 |
.21 |
|
|
|
Amended and Restated Management Stability Agreement between the
Company and J. William Haywood dated August 2, 2005
(incorporated by reference herein to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on
August 8, 2005, File No. 1-3473). |
|
10 |
.22 |
|
|
|
Management Stability Agreement between the Company and Joseph M.
Monroe dated November 6, 2002 (incorporated by reference
herein to Exhibit 10.30 to the Companys Annual Report
on Form 10-K for the fiscal year ended December 31,
2002, File No. 1-3473). |
|
10 |
.23 |
|
|
|
Amended and Restated Management Stability Agreement between the
Company and Daniel J. Porter dated August 2, 2005
(incorporated by reference herein to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed on
August 8, 2005, File No. 1-3473). |
|
10 |
.24 |
|
|
|
Amended and Restated Management Stability Agreement between the
Company and Susan A. Lerette dated February 2, 2005
(incorporated by reference herein to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed on
February 8, 2005, File No. 1-3473). |
|
10 |
.25 |
|
|
|
Management Stability Agreement between the Company and Charles
S. Parrish dated February 2, 2005 (incorporated by
reference herein to Exhibit 10.3 to the Companys
Current Report on Form 8-K filed on February 8, 2005,
File No. 1-3473). |
|
10 |
.26 |
|
|
|
Amended and Restated Management Stability Agreement between the
Company and Otto C. Schwethelm dated February 2, 2005
(incorporated by reference herein to Exhibit 10.4 to the
Companys Current Report on Form 8-K filed on
February 8, 2005, File No. 1-3473). |
|
10 |
.27 |
|
|
|
Management Stability Agreement between the Company and G. Scott
Spendlove dated January 24, 2002 (incorporated by reference
herein to Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 2002, File No. 1-3473). |
|
10 |
.28 |
|
|
|
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 |
.29 |
|
|
|
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 2, 2006, File
No. 1-3473). |
|
10 |
.30 |
|
|
|
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 |
.31 |
|
|
|
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). |
92
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Exhibit |
|
|
|
|
|
|
10 |
.32 |
|
|
|
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 |
.33 |
|
|
|
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 |
.34 |
|
|
|
Copy of the Companys Board of Directors Deferred
Compensation Plan dated February 23, 1995 (incorporated by
reference herein to Exhibit 10(u) to the Companys
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-3473). |
|
10 |
.35 |
|
|
|
Copy of the Companys 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 |
.36 |
|
|
|
Copy of the Companys Board of Directors Deferred Phantom
Stock Plan (incorporated by reference herein to Exhibit 10
to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997, File
No. 1-3473). |
|
10 |
.37 |
|
|
|
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 |
.38 |
|
|
|
First Amendment to the 2005 Director Compensation Plan. |
|
10 |
.39 |
|
|
|
Phantom Stock Option Agreement between the Company and Bruce A.
Smith dated effective October 29, 1997 (incorporated by
reference herein to Exhibit 10.20 to the Companys
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-3473). |
|
10 |
.40 |
|
|
|
Form of Indemnification Agreement between the Company and its
officers and directors (incorporated by reference herein to
Exhibit B to the Companys Proxy Statement for the
Annual Meeting of Stockholders held on February 25, 1987,
File No. 1-3473). |
|
10 |
.41 |
|
|
|
Letter dated May 5, 2002 from the Company to the State of
California Department of Justice, Office of Attorney General
(incorporated by reference herein to Exhibit 10.3 to the
Companys Current Report on For 8-K filed on
May 24, 2002, File No. 1-3473; portions of this
document have been omitted pursuant to a request for
confidential treatment). |
|
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. |
|
*31 |
.1 |
|
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
*31 |
.2 |
|
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
*32 |
.1 |
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
|
*32 |
.2 |
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
Identifies management contracts or compensatory plans or
arrangements required to be filed as an exhibit hereto pursuant
to Item 15(a)(3) of
Form 10-K.
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Schedules not listed above are omitted because of the absence of
the conditions under which they are required or because the
information required by such omitted schedules is set forth in
the financial statements or the notes thereto.
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, 300 Concord Plaza
Drive, San Antonio, Texas, 78216-6999.
93
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
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Bruce A. Smith |
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Chairman of the Board of Directors, |
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President and Chief Executive Officer |
Dated: March 7, 2006
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 |
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Title |
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Date |
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/s/ BRUCE A. SMITH
Bruce A. Smith |
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Chairman of the Board of Directors, President and Chief
Executive Officer
(Principal Executive Officer) |
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March 7, 2006 |
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/s/ GREGORY A. WRIGHT
Gregory A. Wright |
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Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
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March 7, 2006 |
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/s/ OTTO C. SCHWETHELM
Otto C. Schwethelm |
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Vice President and Controller (Principal Accounting Officer) |
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March 7, 2006 |
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/s/ STEVEN H. GRAPSTEIN
Steven H. Grapstein |
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Lead Director |
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March 7, 2006 |
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/s/ ROBERT W. GOLDMAN
Robert W. Goldman |
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Director |
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March 7, 2006 |
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/s/ WILLIAM J. JOHNSON
William J. Johnson |
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Director |
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March 7, 2006 |
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/s/ A. MAURICE MYERS
A. Maurice Myers |
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Director |
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March 7, 2006 |
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/s/ DONALD H. SCHMUDE
Donald H. Schmude |
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Director |
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March 7, 2006 |
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/s/ PATRICK J. WARD
Patrick J. Ward |
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Director |
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March 7, 2006 |
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/s/ MICHAEL E. WILEY
Michael E. Wiley |
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Director |
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March 7, 2006 |
94