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, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 1-3473
TESORO CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization)
300 Concord Plaza Drive San Antonio, Texas (Address of principal executive offices)
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95-0862768 (I.R.S. Employer Identification No.)
78216-6999 (Zip Code)
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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
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act.
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined by
Rule 12b-2
of the
Act). Yes o No þ
At June 30, 2008, the aggregate market value of the voting
common stock held by non-affiliates of the registrant was
approximately $2.7 billion based upon the closing price of
its common stock on the New York Stock Exchange Composite tape.
At February 19, 2009, there were 138,372,788 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 2009 Annual
Meeting of Stockholders are incorporated by reference into
Part III hereof. The Company intends to file such Proxy
Statement no later than 120 days after the end of the
fiscal year covered by this
Form 10-K.
TESORO
CORPORATION
ANNUAL REPORT ON
FORM 10-K
TABLE OF CONTENTS
This Annual Report on
Form 10-K
(including documents incorporated by reference herein) contains
statements with respect to our expectations or beliefs as to
future events. These types of statements are
forward-looking and subject to uncertainties. See
Important Information Regarding Forward-Looking
Statements on page 53.
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.
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BUSINESS
AND PROPERTIES
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Statements in this Annual Report on
Form 10-K,
that are not historical in nature should be deemed
forward-looking statements that are inherently uncertain. See
Important Information Regarding Forward-Looking
Statements in Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Item 7 for a discussion of forward-looking statements
and of factors that could cause actual outcomes and results to
differ materially from those projected.
Tesoro Corporation (Tesoro) is based in
San Antonio, Texas. We were incorporated in Delaware in
1968 under the name Tesoro Petroleum Corporation, which was
subsequently changed in 2004 to Tesoro Corporation. 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 at our seven
refineries in the western and mid-continental United States and
selling refined products in bulk and wholesale markets
(refining) and (2) selling motor fuels and
convenience products in the retail market (retail)
through our 879 branded retail stations in 15 states.
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 retail stations, primarily under the
Tesoro®
Mirastar®,
Shell®
and USA
Gasolinetm
brands. See Notes M and P in our consolidated financial
statements in Item 8 for additional information on our
operating segments and properties.
Our principal executive offices are located at 300 Concord Plaza
Drive, San Antonio, Texas
78216-6999
and our telephone number is
(210) 828-8484.
We file reports with the SEC, including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and other reports from time to time. The public may read and
copy any materials that we file with the SEC at the SECs
Public Reference Room at 100 F Street, N.E.,
Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Our SEC filings are also available to the public on the
SECs Internet site at
http://www.sec.gov
and our website at
http://www.tsocorp.com
as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. You may
receive a copy of our Annual Report on
Form 10-K,
including the financial statements, free of charge by writing to
Tesoro Corporation, Attention: Investor Relations, 300 Concord
Plaza Drive, San Antonio, Texas
78216-6999.
We also post our corporate governance guidelines, code of
business conduct, code of ethics for senior financial officers
and our Board of Director committee charters on our website. Our
governance documents are available in print by writing to the
address above. We submitted to the New York Stock Exchange on
June 2, 2008 our annual certification concerning corporate
governance pursuant to Section 303A.12 (a) of the New
York Stock Exchange Listed Company Manual.
2
REFINING
Overview
We currently own and operate seven petroleum refineries located
in the western and mid-continental United States and sell
refined products to a wide variety of customers. Our refineries
produce a high proportion of our refined product sales volumes,
and we purchase the remainder from other refiners and suppliers.
Our seven refineries have a combined crude oil capacity of 665
thousand barrels per day (Mbpd). Crude oil capacity
and throughput rates of crude oil and other feedstocks by
refinery are as follows:
Tesoro
Refinery Locations
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Crude Oil
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Capacity
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Throughput (bpd)
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Refinery
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(bpd)(a)
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2008
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2007
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2006
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California
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Golden Eagle
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166,000
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153,300
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152,700
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164,900
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Los Angeles(b)
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97,000
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105,100
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68,200
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Pacific Northwest
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Washington
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120,000
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103,100
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121,000
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111,300
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Alaska
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72,000
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55,600
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61,800
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55,800
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Mid-Pacific
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Hawaii
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93,500
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69,100
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81,400
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84,600
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Mid-Continent
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North Dakota
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58,000
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56,000
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57,900
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56,300
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Utah
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58,000
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52,900
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51,700
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56,100
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|
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|
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Total
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664,500
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595,100
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594,700
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529,000
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(a) |
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Crude oil capacity by refinery as reported by the Energy
Information Administration (2008). Throughput can exceed
crude oil capacity due to the processing of other feedstocks in
addition to crude oil. |
|
(b) |
|
We acquired the Los Angeles refinery in May 2007. Throughput for
2007 of 68,200 bpd includes amounts for the Los Angeles
refinery since acquisition averaged over 365 days.
Throughput for the refinery averaged over the 235 days of
operation in 2007 was 106,000 bpd. |
Feedstock Supply. We purchase crude oil and
other feedstocks from many 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 over 34% of our crude oil under term
agreements, which are primarily short-term agreements priced at
market. We purchase the remainder of our crude oil and feedstock
3
supplies in the spot market. Historically, our largest domestic
and foreign crude oil sources have been Alaska North Slope and
Canada, respectively. Sources of our crude oil purchases are as
follows:
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Source
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2008
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2007
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2006
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Domestic
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56
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%
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52
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%
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53
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%
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Foreign
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44
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48
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47
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|
|
|
|
|
|
|
|
|
|
|
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Total
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|
100
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%
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|
|
100
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%
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|
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100
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%
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We process both heavy and light crude oils. Throughput volumes
by feedstock type and region are summarized below (in Mbpd):
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2008
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2007
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2006
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Volume
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%
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Volume
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%
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Volume
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%
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|
|
California(a)
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|
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|
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|
|
|
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|
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|
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|
|
|
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Heavy crude(b)
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164
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|
|
|
64
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%
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|
133
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|
|
|
60
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%
|
|
|
89
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|
|
|
54
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%
|
Light crude
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|
73
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|
|
|
28
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|
|
|
72
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|
|
|
32
|
|
|
|
67
|
|
|
|
41
|
|
Other feedstocks
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|
|
21
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|
|
|
8
|
|
|
|
17
|
|
|
|
8
|
|
|
|
9
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
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|
|
258
|
|
|
|
100
|
%
|
|
|
222
|
|
|
|
100
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%
|
|
|
165
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|
100
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%
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|
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|
Pacific Northwest
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Heavy crude(b)
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|
7
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|
|
|
4
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%
|
|
|
11
|
|
|
|
6
|
%
|
|
|
8
|
|
|
|
5
|
%
|
Light crude
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|
|
143
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|
|
|
90
|
|
|
|
163
|
|
|
|
90
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|
|
|
154
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|
|
|
92
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|
Other feedstocks
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|
|
9
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|
|
|
6
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|
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|
8
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|
|
|
4
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|
|
|
5
|
|
|
|
3
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|
|
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|
|
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|
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|
|
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|
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Total
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|
159
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|
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|
100
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%
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|
|
182
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|
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|
100
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%
|
|
|
167
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|
|
|
100
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%
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Mid-Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy crude(b)
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|
|
21
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|
|
|
30
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%
|
|
|
15
|
|
|
|
19
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%
|
|
|
17
|
|
|
|
20
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%
|
Light crude
|
|
|
48
|
|
|
|
70
|
|
|
|
66
|
|
|
|
81
|
|
|
|
68
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
69
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|
|
|
100
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%
|
|
|
81
|
|
|
|
100
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%
|
|
|
85
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|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Mid-Continent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Light crude
|
|
|
105
|
|
|
|
96
|
%
|
|
|
106
|
|
|
|
96
|
%
|
|
|
108
|
|
|
|
96
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%
|
Other feedstocks
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|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
109
|
|
|
|
100
|
%
|
|
|
110
|
|
|
|
100
|
%
|
|
|
112
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Throughput
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy crude(b)
|
|
|
192
|
|
|
|
32
|
%
|
|
|
159
|
|
|
|
27
|
%
|
|
|
114
|
|
|
|
22
|
%
|
Light crude
|
|
|
369
|
|
|
|
62
|
|
|
|
407
|
|
|
|
68
|
|
|
|
397
|
|
|
|
75
|
|
Other feedstocks
|
|
|
34
|
|
|
|
6
|
|
|
|
29
|
|
|
|
5
|
|
|
|
18
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
595
|
|
|
|
100
|
%
|
|
|
595
|
|
|
|
100
|
%
|
|
|
529
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We acquired the Los Angeles refinery in May 2007. Throughput for
2007 of 68 Mbpd includes amounts for the Los Angeles refinery
since acquisition averaged over 365 days. Throughput for
the refinery averaged over the 235 days of operation in
2007 was 106 Mbpd. |
|
(b) |
|
We define heavy crude oil as crude oil with an American
Petroleum Institute gravity of 24 degrees or less. Amounts in
prior years have been reclassified to conform to the 2008
presentation. |
4
Refined Products. Refining yield represents
produced volumes of refined products consisting primarily of
gasoline and gasoline blendstocks, jet fuel, diesel fuel and
heavy fuel oils. We also manufacture other refined products,
including liquefied petroleum gas, petroleum coke and asphalt.
Our refining yield volumes by region are summarized below (in
Mbpd):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Volume
|
|
|
%
|
|
|
Volume
|
|
|
%
|
|
|
Volume
|
|
|
%
|
|
|
California(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
133
|
|
|
|
48
|
%
|
|
|
121
|
|
|
|
52
|
%
|
|
|
96
|
|
|
|
55
|
%
|
Jet fuel
|
|
|
18
|
|
|
|
6
|
|
|
|
11
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Diesel fuel
|
|
|
72
|
|
|
|
26
|
|
|
|
53
|
|
|
|
23
|
|
|
|
49
|
|
|
|
28
|
|
Heavy oils, residual products, internally
produced fuel and other
|
|
|
54
|
|
|
|
20
|
|
|
|
49
|
|
|
|
21
|
|
|
|
30
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
277
|
|
|
|
100
|
%
|
|
|
234
|
|
|
|
100
|
%
|
|
|
175
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pacific Northwest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
63
|
|
|
|
38
|
%
|
|
|
77
|
|
|
|
40
|
%
|
|
|
67
|
|
|
|
39
|
%
|
Jet fuel
|
|
|
32
|
|
|
|
20
|
|
|
|
33
|
|
|
|
18
|
|
|
|
31
|
|
|
|
18
|
|
Diesel fuel
|
|
|
30
|
|
|
|
18
|
|
|
|
33
|
|
|
|
18
|
|
|
|
27
|
|
|
|
16
|
|
Heavy oils, residual products, internally
produced fuel and other
|
|
|
39
|
|
|
|
24
|
|
|
|
46
|
|
|
|
24
|
|
|
|
47
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
164
|
|
|
|
100
|
%
|
|
|
189
|
|
|
|
100
|
%
|
|
|
172
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
16
|
|
|
|
23
|
%
|
|
|
19
|
|
|
|
23
|
%
|
|
|
20
|
|
|
|
23
|
%
|
Jet fuel
|
|
|
18
|
|
|
|
25
|
|
|
|
23
|
|
|
|
28
|
|
|
|
26
|
|
|
|
30
|
|
Diesel fuel
|
|
|
11
|
|
|
|
15
|
|
|
|
14
|
|
|
|
17
|
|
|
|
13
|
|
|
|
15
|
|
Heavy oils, residual products, internally
produced fuel and other
|
|
|
26
|
|
|
|
37
|
|
|
|
27
|
|
|
|
32
|
|
|
|
27
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
71
|
|
|
|
100
|
%
|
|
|
83
|
|
|
|
100
|
%
|
|
|
86
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Continent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
63
|
|
|
|
56
|
%
|
|
|
63
|
|
|
|
56
|
%
|
|
|
62
|
|
|
|
53
|
%
|
Jet fuel
|
|
|
10
|
|
|
|
9
|
|
|
|
10
|
|
|
|
9
|
|
|
|
11
|
|
|
|
10
|
|
Diesel fuel
|
|
|
30
|
|
|
|
26
|
|
|
|
29
|
|
|
|
25
|
|
|
|
32
|
|
|
|
27
|
|
Heavy oils, residual products, internally
produced fuel and other
|
|
|
10
|
|
|
|
9
|
|
|
|
11
|
|
|
|
10
|
|
|
|
11
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
113
|
|
|
|
100
|
%
|
|
|
113
|
|
|
|
100
|
%
|
|
|
116
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refining Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
275
|
|
|
|
44
|
%
|
|
|
280
|
|
|
|
45
|
%
|
|
|
245
|
|
|
|
45
|
%
|
Jet fuel
|
|
|
78
|
|
|
|
12
|
|
|
|
77
|
|
|
|
12
|
|
|
|
68
|
|
|
|
12
|
|
Diesel fuel
|
|
|
143
|
|
|
|
23
|
|
|
|
129
|
|
|
|
21
|
|
|
|
121
|
|
|
|
22
|
|
Heavy oils, residual products, internally
produced fuel and other
|
|
|
129
|
|
|
|
21
|
|
|
|
133
|
|
|
|
22
|
|
|
|
115
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
625
|
|
|
|
100
|
%
|
|
|
619
|
|
|
|
100
|
%
|
|
|
549
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We acquired the Los Angeles refinery in May 2007. Yield for 2007
of 73 Mbpd includes amounts for the Los Angeles refinery since
acquisition averaged over 365 days. Yield for the refinery
averaged over the 235 days of operation in 2007 was 114
Mbpd. |
5
Transportation. We term-charter four
U.S.-flag
tankers and seven foreign-flag tankers to optimize the
transportation of crude oil and refined products within our
refinery system and secure shipping capacity. Ten of the tankers
are double-hulled and one is double-bottomed. Our term charters
expire between 2009 and 2013. We have also entered into
term-charters for four new-build
U.S.-flag
tankers that will replace our expiring charters in 2009 and
2010, with three-year terms and options to renew. To transport
product in our Hawaii and Washington markets, we term-charter
tug-boats and product barges over varying terms ending in 2009
through 2015, with options to renew. We also charter
double-hulled vessels globally on a voyage charter basis to
transport crude oil and refined products.
We receive crude oils and ship refined products through owned
and third-party pipelines. We own and operate over
900 miles of crude and product pipelines, located primarily
in North Dakota, Montana, Alaska and Hawaii, transporting more
than 380 Mbpd within our refining system. We also operate
proprietary trucking businesses at three of our refineries
transporting crude oil to the refinery and refined products to
our customers.
We have entered into a seven-year agreement to transport 107
Mbpd of crude oil through an 81 mile pipeline in the
Isthmus of Panama. The agreement is expected to commence during
the third quarter of 2009 after completion of a project to allow
throughput to flow from east to west. We also will lease storage
capacity on both ends of the pipeline. The agreement will allow
us to economically deliver crude oils produced in Africa, the
Atlantic region of South America and the North Sea to our five
waterborne refineries.
Terminals. We operate refined products
terminals at our refineries and 11 other locations in
California, Washington, Alaska, Hawaii, North Dakota, Utah and
Idaho. We also distribute products through third-party
terminals, truck racks and via rail cars, in our market areas
and through purchases and exchange arrangements with other
refining and marketing companies.
California
Refineries
Golden
Eagle
Refining. Our Golden Eagle refinery, located
in Martinez, California on 2,206 acres about 30 miles
east of San Francisco, has a total crude oil capacity of
166 Mbpd. We source Golden Eagle refinerys crude oil from
California, Alaska and foreign locations. Major refined product
upgrading units at the refinery include fluid catalytic
cracking, delayed coking, hydrocracking, naphtha reforming,
vacuum distillation, hydrotreating and alkylation units. These
units enable the refinery to produce a high proportion of motor
fuels, including cleaner-burning California Air Resources Board
(CARB) gasoline and CARB diesel fuel, as well as
conventional gasoline and diesel fuel. The refinery also
produces heavy fuel oils, liquefied petroleum gas and petroleum
coke. During 2008, we completed a project at the refinery to
modify a fluid coking unit into a delayed coking unit which
enabled us to comply with the terms of an abatement order to
lower emissions while also enhancing the refinerys
capabilities in terms of crude oil flexibility, reliability,
lengthening turnaround cycles and lowering maintenance costs.
Transportation. Our Golden Eagle refinery has
waterborne access through the San Francisco Bay that
enables us to receive crude oil and ship refined 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 refined products
terminals at Stockton, California and at the refinery. We also
distribute refined products through third-party terminals in our
market areas and through purchases and exchange arrangements
with other refining and marketing companies. We also lease
third-party clean product storage capacity with waterborne
access in the San Francisco Bay area.
Los
Angeles
Refining. Our Los Angeles refinery, located in
Wilmington, California on 311 acres approximately
10 miles south of Los Angeles, has a total crude oil
capacity of 97 Mbpd. We source our Los Angeles refinerys
crude oil from California as well as foreign locations. Major
refined product upgrading units at the refinery include fluid
catalytic cracking, delayed coking, hydrocracking, vacuum
distillation, hydrotreating, reforming, butane
6
isomerization and alkylation units. These units enable the
refinery to produce a high proportion of motor fuels, including
CARB gasoline and CARB diesel fuel, as well as conventional
gasoline and diesel fuel, and jet fuel. The refinery also
produces heavy fuel oils, liquefied petroleum gas and petroleum
coke.
Transportation. Our Los Angeles refinery
leases a marine terminal at the Port of Long Beach that enables
us to receive crude oil and ship refined products. The refinery
can also receive crude oil from the San Joaquin Valley and
the Los Angeles Basin through third-party pipelines.
Terminals. We operate a refined products
terminal at the Los Angeles refinery and distribute refined
products through third-party terminals in our market areas and
through purchases and exchange arrangements with other refining
and marketing companies. We also lease refined product storage
tanks at third-party terminals in Southern California, the
majority of which have waterborne access.
Pacific
Northwest Refineries
Washington
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 120 Mbpd. We source our Washington refinerys crude oil
from Alaska, Canada and other foreign locations. The Washington
refinery also processes intermediate feedstocks, primarily heavy
vacuum gas oil, provided by some of our other refineries and by
spot-market purchases from third-parties. Major refined product
upgrading units at the refinery include the fluid catalytic
cracking, 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 fuel and jet fuel. The
refinery also produces heavy fuel oils, liquefied petroleum gas
and asphalt. During 2008, we completed the selective
hydrogenation unit at the refinery, which reduces sulfur content
in gasoline and allows a higher percentage of sour crude oils to
be processed at the refinery while maintaining compliance with
gasoline sulfur regulations.
Transportation. Our Washington refinery
receives Canadian crude oil through a third-party pipeline
originating in Edmonton, Alberta, Canada. We receive other crude
oils through our Washington refinerys marine terminal. Our
Washington refinery ships products (gasoline, jet fuel and
diesel fuel) through a third-party pipeline system, which serves
western Washington and Portland, Oregon. We also deliver refined
products through our marine terminal to ships and barges.
Terminals. We operate refined products
terminals at Anacortes, Port Angeles and Vancouver, Washington,
supplied primarily by our refineries. We also distribute refined
products through third-party terminals in our market areas, and
through purchases and exchange arrangements with other refining
and marketing companies.
Alaska
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 from Alaska and, to a lesser extent, foreign
locations. The refinery has a total crude oil capacity of 72
Mbpd, and its refined product upgrading units include vacuum
distillation, distillate hydrocracking, hydrotreating, naphtha
reforming, diesel desulfurizing 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.
Transportation. We receive crude oil by tanker
and through our owned and operated crude oil pipeline into our
marine terminal. Our crude oil pipeline is a
24-mile
common-carrier pipeline, which is connected to the Eastside Cook
Inlet oil field. We also own and operate a common-carrier
refined products pipeline that runs from the Alaska refinery to
our terminal facilities in Anchorage and to the Anchorage
International Airport. This
71-mile
pipeline has the capacity to transport approximately 40 Mbpd of
refined products and allows us to transport gasoline, diesel
fuel and jet fuel to the terminal facilities. Both of our owned
pipelines are subject to regulation by various federal, state
and local agencies, including the Federal Energy Regulatory
Commission (FERC). Refined products are also
distributed by tankers and barges from our marine terminal.
7
Terminals. We operate refined products
terminals at Nikiski and Anchorage, which are supplied by our
Alaska refinery. We also distribute refined products through a
third-party terminal in our market, which is supplied through an
exchange arrangement with another refining company.
Mid-Pacific
Refinery
Hawaii
Refining. Our 93.5 Mbpd Hawaii refinery is
located in Kapolei on 131 acres about 22 miles west of
Honolulu. We supply the refinery with crude oil from Southeast
Asia, the Middle East and other foreign sources. Major refined
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 in tankers, which discharge through our single-point
mooring terminal, 1.5 miles offshore from our refinery. Our
three underwater pipelines from the single-point mooring
terminal allow crude oil and refined products to be transferred
to and from the refinery. We distribute refined products to
customers on the island of Oahu through owned and third-party
pipeline systems. Our refined products pipelines also connect
the Hawaii refinery to Barbers Point Harbor, 2.5 miles
away, where refined products are transferred to ships and barges.
Terminals. We distribute refined products from
our refinery to customers through third-party terminals in our
market areas.
Mid-Continent
Refineries
North
Dakota
Refining. Our 58 Mbpd North Dakota refinery is
located on the Missouri River near Mandan on 960 acres. Our
crude oil pipeline supplies our North Dakota refinery primarily
with Williston Basin sweet crude oil. The refinery also has the
ability to access other supplies, including Canadian crude oil.
Major refined product upgrading units at the refinery include
fluid catalytic cracking, naphtha reforming, hydrotreating and
alkylation units. The North Dakota refinery produces gasoline,
diesel fuel, jet fuel, heavy fuel oils and liquefied petroleum
gas.
Transportation. We own a crude oil pipeline
system, consisting of over 700 miles of pipeline that
delivers all of the crude oil to our North Dakota refinery. This
system gathers crude oil from the Williston Basin and adjacent
production areas in North Dakota and Montana and transports it
to our refinery. Our pipeline system is also able to transport
crude oil to other regional points where there is additional
demand. This pipeline system is a common carrier line subject to
regulation by various federal, state and local agencies,
including the FERC. We distribute approximately 85% of our
refinerys production through a third-party refined
products pipeline system which serves various areas from Mandan,
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
system to third-party terminals.
Terminals. We operate a refined products
terminal at the North Dakota refinery. We also distribute
refined products through a third-party refined products pipeline
system which connects to third-party terminals in our market
areas.
Utah
Refining. Our 58 Mbpd Utah refinery is located
in Salt Lake City on 145 acres. Our Utah refinery processes
crude oils primarily from Utah, Colorado, Wyoming and Canada.
Major refined product upgrading units include fluid catalytic
cracking, naphtha reforming, alkylation and hydrotreating units.
The Utah refinery produces gasoline, diesel fuel, jet fuel,
heavy fuel oils and liquefied petroleum gas.
Transportation. Our Utah refinery receives
crude oil primarily through third-party pipelines from oil
fields in Utah, Colorado, Wyoming and Canada. We distribute the
refinerys production through a system of both owned and
8
third-party terminals and third-party pipeline systems,
primarily in Utah, Idaho and eastern Washington, with some
refined products delivered in Nevada and Wyoming.
Terminals. We operate a refined products
terminal adjacent to our refinery. We also distribute refined
products to customers through a third-party pipeline to our
owned and third-party terminals in our market areas.
Wholesale
Marketing and Refined Product Distribution
We sell refined products including gasoline and gasoline
blendstocks, jet fuel, diesel fuel, heavy fuel oils and residual
products in both the bulk and wholesale markets. The majority of
our wholesale volumes are sold in 10 states to independent
unbranded distributors that sell refined products purchased
through our owned and third-party terminals. Our bulk sales are
primarily to independent unbranded distributors, independent and
other refining and marketing companies, utilities, railroads,
airlines and marine and industrial end-users. These products are
distributed by pipelines, ships, barges, railcars and trucks.
Our sales include refined products that we manufacture, purchase
or receive through exchange arrangements. Our refined product
sales, including intersegment sales to our retail operations,
consisted of (in Mbpd):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Refined Product Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
326
|
|
|
|
319
|
|
|
|
280
|
|
Jet fuel
|
|
|
92
|
|
|
|
96
|
|
|
|
91
|
|
Diesel fuel
|
|
|
144
|
|
|
|
131
|
|
|
|
128
|
|
Heavy oils, residual products and other
|
|
|
94
|
|
|
|
97
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refined Product Sales
|
|
|
656
|
|
|
|
643
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 these markets, with
lowest demand during the winter months. We sell gasoline to
wholesale customers and several major independent and other
refining and marketing companies under various supply agreements
and exchange arrangements. We sell, at wholesale, to unbranded
distributors and high-volume retailers, and we distribute
refined product through owned and third-party terminals.
Jet Fuel. We supply jet fuel to passenger and
cargo airlines at airports in Alaska, Hawaii, California,
Washington, Utah and other western states. We also supply jet
fuel to the U.S. military from our refineries in Alaska,
Hawaii, Washington, Utah, and North Dakota.
Diesel Fuel. We sell diesel fuel primarily on
a wholesale basis for marine, transportation, industrial and
agricultural use. We sell lesser amounts to end-users through
marine terminals and for power generation in Hawaii and
Washington. We are able to manufacture Ultra-Low Sulfur Diesel
(ULSD) at all of our refineries and we are the sole
producer of ULSD in both Alaska and Hawaii.
Heavy Fuel Oils and Residual Products. We sell
heavy fuel oils to other refiners, third-party resellers,
electric power producers and marine and industrial end-users.
Our refineries supply substantially all of the marine fuels that
we sell through facilities at Port Angeles, Seattle, and Tacoma,
Washington, and Portland, Oregon, and through our refinery
terminals at Washington, Alaska and Hawaii. Our Golden Eagle and
Los Angeles refineries produce petroleum coke that we sell to
industrial end-users. Tesoro is also a key supplier of liquid
asphalt for paving and construction companies in Washington and
Alaska and the sole supplier in Hawaii.
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 refined 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, Washington, Hawaii
and Utah. We also purchase for resale a lesser amount of
gasoline and other refined products for sales outside of our
refineries local markets.
9
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 fuel to retail
customers through company-operated retail stations and
agreements with third-party branded distributors (or
jobber/dealers). Our retail network provides
Tesoros
Branded Retail Network
a committed outlet for a portion of the motor fuels produced by
our refineries. Many of our company-operated retail stations
include convenience stores that sell a wide variety of
merchandise items. As of December 31, 2008, our retail
segment included a network of 879 branded retail stations (under
the
Tesoro®,
Mirastar®,
Shell®
and USA
Gasolinetm
brands). Our
Mirastar®
brand is used exclusively at 34 Wal-Mart stores in 9 western
states under a long-term agreement. We also operate under the
Shell®
brand at certain stations in California through a long-term
agreement and own the exclusive rights to the USA
Gasolinetm
brand in California, New Mexico and Washington. Our retail
stations (summarized by type and brand) were located in the
following states as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
|
Brand
|
|
|
|
Company-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
|
|
|
State
|
|
Operated
|
|
|
Jobber/ Dealer
|
|
|
Total
|
|
|
Tesoro®
|
|
|
Mirastar®
|
|
|
Shell®
|
|
|
Gasolinetm
|
|
|
Total
|
|
|
California
|
|
|
253
|
|
|
|
169
|
|
|
|
422
|
|
|
|
12
|
|
|
|
2
|
|
|
|
283
|
|
|
|
125
|
|
|
|
422
|
|
Alaska
|
|
|
29
|
|
|
|
56
|
|
|
|
85
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
North Dakota
|
|
|
1
|
|
|
|
92
|
|
|
|
93
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
Utah
|
|
|
31
|
|
|
|
34
|
|
|
|
65
|
|
|
|
59
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
Washington
|
|
|
22
|
|
|
|
28
|
|
|
|
50
|
|
|
|
38
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
50
|
|
Minnesota
|
|
|
|
|
|
|
70
|
|
|
|
70
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
Hawaii
|
|
|
29
|
|
|
|
4
|
|
|
|
33
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
Idaho
|
|
|
7
|
|
|
|
25
|
|
|
|
32
|
|
|
|
28
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Other states(a)
|
|
|
17
|
|
|
|
12
|
|
|
|
29
|
|
|
|
12
|
|
|
|
16
|
|
|
|
1
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
389
|
|
|
|
490
|
|
|
|
879
|
|
|
|
430
|
|
|
|
34
|
|
|
|
284
|
|
|
|
131
|
|
|
|
879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other states include New Mexico, South Dakota, Colorado, Oregon,
Wyoming, Nevada, and Arizona. |
10
The following table summarizes our retail operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Fuel Revenues (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
$
|
3,408
|
|
|
$
|
2,386
|
|
|
$
|
674
|
|
Jobber/dealer
|
|
|
776
|
|
|
|
560
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fuel Revenues
|
|
$
|
4,184
|
|
|
$
|
2,946
|
|
|
$
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise and Other Revenues (in millions)
|
|
$
|
248
|
|
|
$
|
221
|
|
|
$
|
144
|
|
Merchandise Margin (percent of merchandise revenues)
|
|
|
26
|
%
|
|
|
26
|
%
|
|
|
27
|
%
|
Number of Branded Retail Stations (end of year)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
389
|
|
|
|
449
|
|
|
|
194
|
|
Jobber/dealer
|
|
|
490
|
|
|
|
462
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Stations
|
|
|
879
|
|
|
|
911
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Number of Branded Retail Stations (during the
year)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
422
|
|
|
|
362
|
|
|
|
204
|
|
Jobber/dealer
|
|
|
489
|
|
|
|
384
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Average Retail Stations
|
|
|
911
|
|
|
|
746
|
|
|
|
465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fuel Volume (millions of gallons)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
1,072
|
|
|
|
856
|
|
|
|
248
|
|
Jobber/dealer
|
|
|
282
|
|
|
|
242
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fuel Volumes
|
|
|
1,354
|
|
|
|
1,098
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Fuel Volume Per Month Per Retail Station
(thousands of gallons)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
212
|
|
|
|
197
|
|
|
|
101
|
|
Jobber/dealer
|
|
|
48
|
|
|
|
53
|
|
|
|
60
|
|
All retail stations
|
|
|
124
|
|
|
|
123
|
|
|
|
78
|
|
COMPETITION
AND OTHER
We compete on a global basis with a number of major integrated
oil companies who produce crude oil, some of which is used in
their refining operations, and other companies that may have
greater financial and other resources. The availability and cost
of crude oil is affected by global supply and demand dynamics.
Similarly, the supply and prices of refined products are
impacted by global dynamics.
We sell gasoline through our network of retail stations and on a
wholesale basis competing with other suppliers in all of our
market areas. We sell our diesel fuel production primarily on a
wholesale basis, competing with other suppliers in all of our
market areas. Refined products from foreign sources also compete
for gasoline and distillate customers in our market areas.
Competition and concentrations specific to each of our
refineries are as follows:
|
|
|
|
|
Our Golden Eagle, Los Angeles and Washington refineries compete
with several refineries on the U.S. West Coast. In
addition, products flow into the West Coast from the Gulf Coast
and other parts of the world, including the Far East and Europe.
|
|
|
|
Our Alaska refinery competes with other refineries in Alaska
with a combined crude oil capacity to process approximately 280
Mbpd and refineries on the U.S. West Coast. Our jet fuel
sales in Alaska are concentrated in Anchorage, where we are one
of the principal suppliers to the Anchorage International
Airport.
|
|
|
|
Our Hawaii refinery competes primarily with one other refinery
in Hawaii, owned by a major integrated oil company that is also
located at Kapolei and has a crude oil capacity of approximately
54 Mbpd. Jet fuel sales in Hawaii are concentrated at the
Honolulu International Airport, where we are the principal
supplier. We
|
11
|
|
|
|
|
also serve four airports on other islands in Hawaii. We also
compete with other suppliers for U.S. military contracts.
|
|
|
|
|
|
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. The other refineries have a combined capacity to process
approximately 114 Mbpd of crude oil. These five refineries
collectively supply a high proportion of the gasoline and
distillate products consumed in the states of Utah and Idaho,
with additional supplies provided from refineries in surrounding
states.
|
Our retail marketing operations compete with other independent
marketers, integrated oil companies and high-volume retailers.
We sell gasoline in Alaska, California, Hawaii, North Dakota,
Utah, Washington and other western 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.
GOVERNMENT
REGULATION AND LEGISLATION
Environmental
Controls and Expenditures
All of our operations, like those of other companies engaged in
similar businesses, are subject to extensive and frequently
changing federal, state, regional and local laws, regulations
and ordinances relating to the protection of the environment,
including those governing emissions or discharges to the land,
air and water, the handling and disposal of solid and hazardous
wastes and the remediation of contamination. While we believe
our facilities are in substantial compliance with current
requirements, we will continue to engage in efforts to meet new
requirements promulgated by the EPA and the states and local
jurisdictions in which we operate. These laws and regulations
have required, and are expected to continue to require, us to
make significant expenditures. For additional information
regarding our environmental matters see Environmental and
Other Matters in Managements Discussion and Analysis
of Financial Condition and Results of Operations in Item 7.
Oil
Spill Prevention and Response
We operate in environmentally sensitive coastal waters, where
tanker, pipeline and other petroleum product transportation
operations are regulated by federal, state and local agencies
and monitored by environmental interest groups. The
transportation of crude oil and refined product over water
involves risk and subjects us to the provisions of the Federal
Oil Pollution Act of 1990 and related state requirements, which
require that most oil refining, transport and storage companies
maintain and update various oil spill prevention and oil spill
contingency plans. We have submitted these plans and received
federal and state approvals necessary to comply with the Federal
Oil Pollution Act of 1990 and related regulations. Our oil spill
prevention plans and procedures are frequently reviewed and
modified to prevent oil and refined 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 have a
controlling interest of approximately 85%) and Alyeska Pipeline
Service Company for spill-response services in Alaska and
(2) Clean Islands Council for response services throughout
the State of Hawaii. For larger spill contingency capabilities,
we have entered into contracts with Marine Spill Response
Corporation for Hawaii, the San Francisco Bay, Puget Sound
and the Ports of Los Angeles and Long Beach. In addition, we
contract with other spill response organizations outside the
U.S. for shipments of crude oil on chartered vessels in
foreign waters. We believe these contracts, and those with other
12
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.
We require time chartered vessels used for the transportation of
crude oil and heavy products over water to be double-hulled.
Time chartered vessels for other services and all other
chartered vessels are required to be
double-hulled
if available. All vessels used by us to transport crude oil and
refined products over water are examined or evaluated and
subject to approval prior to their use.
Regulation
of Pipelines
Our crude oil pipeline system in North Dakota and our pipeline
systems in Alaska are common carriers subject to regulation by
various federal, state and local agencies, including the FERC
under the Interstate Commerce Act. The Interstate Commerce Act
provides that, to be lawful, the rates of common carrier
petroleum pipelines must be just and reasonable and
not unduly discriminatory.
The intrastate operations of our North Dakota crude oil pipeline
system are subject to regulation by the North Dakota Public
Services Commission. The intrastate operations of our Alaska
pipelines are subject to regulation by the Regulatory Commission
of Alaska. Like the FERC, the state regulatory authorities
require that we notify shippers of proposed tariff increases and
the shippers 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 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, 2008, we had approximately
5,620 full-time employees approximately 1,400
of whom are covered by collective bargaining agreements. The
agreements for approximately 1,140 of those employees expire
February 1, 2012, and approximately 260 of the employees on
May, 1, 2009. 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 adequately maintained. We are the lessee
under a number of cancelable and non-cancelable leases for
certain properties, including office facilities, retail
facilities, ship charters, barges and equipment used in the
storage, transportation and production of feedstocks and refined
products. We conduct our retail business under the
Tesoro®,
Tesoro
Alaska®,
Mirastar®,
2-Go
Tesoro®,
Shell®
and USA
Gasolinetm
brands through a network of 879 retail stations, of which 389
are company-operated. See Notes I and M in our consolidated
financial statements in Item 8.
GLOSSARY
OF TERMS
Alkylation A process that chemically combines
isobutane with other hydrocarbons through the control of
temperature and pressure in the presence of an acid catalyst.
This process produces alkylates, which have a high octane value
and are blended into gasoline to improve octane values.
American Petroleum Institute
(API) the main U.S trade
association for the oil and natural gas industry, representing
about 400 corporations involved in production, refining,
distribution, and many other aspects of the industry.
API Gravity A scale for denoting the
lightness or heaviness of crude oils and other liquid
hydrocarbons. Calibrated in API degrees (or degrees API), it is
used universally to expresses a crudes relative density in
an inverse measure lighter the crude, higher the API
gravity, and vice versa.
13
CARB California Air Resources
Board. Gasoline and diesel fuel sold in the state of
California are regulated by CARB and require stricter quality
and emissions reduction performance than required by other
states.
Cogeneration Plant A plant that produces both
steam and electricity for refinery operations.
Cracking The process of breaking down larger
hydrocarbon molecules into smaller molecules, utilizing
catalysts
and/or
elevated temperatures and pressures.
Deasphalting The process of recovering
higher-value oils from refining residues.
Delayed Coking A process by which the
heaviest crude oil fractions can be thermally cracked under
conditions of elevated temperatures to produce both refined
products and petroleum coke.
Desulfurization The process of removing
sulfur from petroleum fuels to reduce sulfur dioxide emissions
that result from the use of these fuels.
Distillate Hydrocracking A catalytic
hydrocracking process designed to produce primarily diesel fuel
and jet fuel.
Exchange Arrangement An agreement providing
for the delivery of crude oil or refined products, primarily to
third-party terminals, in exchange for the delivery of crude oil
or refined products from third parties at specified locations.
Fluid Catalytic Cracking Catalytic cracking
is the refining process of breaking down larger, heavier, and
more complex hydrocarbon molecules into simpler and lighter
molecules through the use of a catalytic agent to increase the
yield of gasoline. Fluid catalytic cracking uses a catalyst in
the form of very fine particles, which behave as a fluid when
aerated with a vapor.
Fluid Coking A process similar to fluid
catalytic cracking which removes carbon (coke) from heavy low
quality crude oils to produce lighter products.
Gross Refining Margin The margin on products
manufactured and purchased, including those sold to our retail
segment. Gross refining margin is calculated as revenues less
costs of feedstocks, purchased refined products, transportation
and distribution.
Heavy Crude Oil Crude oil with an API gravity
of 24 degrees or less. Heavy crude oil is generally sold at a
discount to lighter crude oils.
Heavy Fuel Oils, Residual Products, Internally Produced Fuel
and Other Products other than gasoline, jet fuel
and diesel fuel produced in the refining process. These products
include residual fuels, gas oils, propane, petroleum coke,
asphalt and internally produced fuel.
Hydrocracking The process of using a catalyst
to crack heavy hydrocarbon molecules in the presence of
hydrogen. Major products from hydrocracking are jet fuel,
naphtha, propane and gasoline components such as butane.
Hydrotreating The process of removing sulfur
from refined products in the presence of catalysts and
substantial quantities of hydrogen to reduce sulfur dioxide
emissions that result from the use of the products.
Isomerization A process that alters the
fundamental arrangement of atoms in the molecule without adding
or removing anything from the original material. The process is
used to convert normal butane into isobutane and normal pentane
into isopentane and hexane into isohexane. Both isopentane and
isohexane are high-octane gasoline components.
Jobber/Dealer Stations Retail stations owned
by third parties that sell products purchased from or through
Tesoro and carry one of our brands.
Light Crude Oil Crude oil with an API gravity
greater than 24 degrees. Light crude oils are generally sold at
a premium to heavy crude oils.
Manufacturing Costs Costs associated directly
with the manufacturing process including cash operating
expenses, but excluding depreciation and amortization.
14
Mbpd Thousand barrels per day.
Naphtha Refined product used as a gasoline
blending component, a feedstock for reforming, and as a
petrochemical feedstock.
Refining Yield Volumes of product produced
from crude oils and feedstocks.
Reforming A process using controlled heat and
pressure with catalysts to rearrange certain hydrocarbon
molecules, thereby converting paraffinic and naphthenic type
hydrocarbons (e.g., low-octane gasoline boiling range fractions)
into petrochemical feedstocks and higher octane stocks suitable
for blending into finished gasoline.
Retail Fuel Margin The margin on fuel
products sold through our retail segment calculated as revenues
less costs of sales. Costs of sales in fuel margin are based on
purchases from our refining segment and third parties using
average bulk market prices adjusted for transportation and other
differentials.
Selective Hydrogenation A process utilizing a
catalyst to modify sulfur compounds in light catalytic gasoline
for ultimate removal in a downstream refining process.
Throughput The quantity of crude oil and
other feedstocks processed at a refinery measured in barrels per
day.
Turnaround The scheduled shutdown of a
refinery processing unit for significant overhaul and
refurbishment. Turnaround expenditures are capitalized and
amortized over the period of time until the next planned
turnaround of the unit.
Ultra Low Sulfur Diesel (ULSD) Diesel
fuel produced with lower sulfur content to lower emissions,
which has been required for on-road use in the
U.S. beginning since 2006.
Vacuum Distillation Distillation under
reduced pressure which lowers the boiling temperature of crude
oils in order to distill crude oil components that have high
boiling points.
Visbreaking A thermal cracking process in
which heavy atmospheric or vacuum unit residues are cracked at
moderate temperatures to increase production of distillate
products and reduce viscosity of the distillate residues.
15
EXECUTIVE
OFFICERS OF THE REGISTRANT
The following is a list of our executive officers, their ages
and their positions at Tesoro, effective as of February 1,
2009.
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Position Held Since
|
|
Bruce A. Smith
|
|
|
65
|
|
|
Chairman of the Board of Directors, President and Chief
Executive Officer
|
|
June 1996
|
William J. Finnerty
|
|
|
60
|
|
|
Executive Vice President, Strategy and Corporate Development
|
|
March 2008
|
Everett D. Lewis
|
|
|
61
|
|
|
Executive Vice President, Chief Operating Officer
|
|
March 2008
|
Gregory A. Wright
|
|
|
59
|
|
|
Executive Vice President and Chief Financial Officer
|
|
November 2008
|
Charles S. Parrish
|
|
|
51
|
|
|
Senior Vice President, General Counsel and Secretary
|
|
May 2006
|
Arlen O. Glenewinkel, Jr.
|
|
|
52
|
|
|
Vice President and Controller
|
|
December 2006
|
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 during the annual meeting of
stockholders. The term of each office runs until the
corresponding meeting of the Board of Directors in the next year
or until a successor has been elected or qualified. Positions
held for at least the past five years for each of our executive
officers is described below (positions, unless otherwise
specified, are with Tesoro).
Bruce A. Smith was named Chairman of the Board of
Directors, President and Chief Executive Officer in June 1996.
William J. Finnerty was named Executive Vice President,
Strategy and Corporate Development in March 2008. Prior to that,
he served as Executive Vice President and Chief Operating
Officer beginning in February 2006, 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.
Everett D. Lewis was named Executive Vice President,
Chief Operating Officer in March 2008. Prior to that he served
as Executive Vice President, Strategy and Asset Management
beginning in January 2007, as Executive Vice President, Strategy
beginning in January 2005 and as Senior Vice President,
Corporate Strategic Planning from November 2004 to January 2005.
Mr. Lewis served as Senior Vice President, Planning and
Optimization from February 2003 to November 2004.
Gregory A. Wright was named Executive Vice President and
Chief Financial Officer in November 2008. Prior to that, he
served as Executive Vice President and Chief Administrative
Officer beginning in June 2007 and as Executive Vice President
and Chief Financial Officer beginning in December 2003.
Charles S. Parrish was named Senior Vice President,
General Counsel and Secretary in May 2006. Prior to that, he
served as Vice President, General Counsel and Secretary
beginning in March 2005 and 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.
Arlen O. Glenewinkel, Jr. was named Vice President
and Controller in December 2006. Prior to that, he served as
Vice President, Enterprise Risk beginning in April 2005 and Vice
President, Internal Audit, from August 2002 to April 2005.
16
BOARD OF
DIRECTORS OF THE REGISTRANT
The following is a list of our Board of Directors:
|
|
|
Bruce A. Smith |
|
Chairman, President and Chief Executive Officer of Tesoro
Corporation |
|
Steven H. Grapstein |
|
Lead Director and Chairman of the Audit Committee of Tesoro
Corporation; Chief Executive Officer of Como Holdings USA, Inc.
(formerly known as Kuo Investment Company) |
|
John F. Bookout, III |
|
Director of McDermott International, Inc.; Senior Advisor to
Kohlberg Kravis Roberts & Co. |
|
Rodney F. Chase |
|
Non-Executive Chairman of Petrofac, Ltd.; Deputy Chairman of
Tesco, plc |
|
Robert W. Goldman |
|
Chairman of the Governance Committee of Tesoro Corporation;
Director of El Paso Corporation |
|
William J. Johnson |
|
Chairman of the Compensation Committee of Tesoro Corporation;
President, Director and sole shareholder of JonLoc Inc. |
|
J.W. (Jim) Nokes |
|
Retired Executive Vice President for ConocoPhillips; Director of
Post Oak Bank (Houston, Texas) |
|
Donald H. Schmude |
|
Chairman of the Environmental, Health and Safety Committee of
Tesoro Corporation; Retired Vice President of Texaco and
President and Chief Executive Officer of Texaco
Refining & Marketing, Inc. |
|
Michael E. Wiley |
|
Retired Chairman, President and Chief Executive Officer of Baker
Hughes, Inc.; Trustee of Fidelity Funds |
The
global financial crisis may have an impact on our business and
financial condition in ways that we currently cannot
predict.
The continued credit crisis and related turmoil in the global
financial system has had and may continue to have an impact on
our business. Recent declines in consumer and business
confidence and spending, together with severe reductions in the
availability and increases in the cost of credit and volatility
in the capital and credit markets, have adversely affected the
business and economic environment in which we operate. Our
business is exposed to risks associated with the
creditworthiness of our suppliers, customers and business
partners. The consequences of such adverse effects could include
interruptions or delays in our suppliers performance of
our contracts, reductions and delays in customer purchases,
delays in or the inability of customers to obtain financing to
purchase our products, and bankruptcy of customers. Any of these
events may adversely affect our cash flow, profitability and
financial condition.
The current worldwide financial crisis has reduced the
availability of credit to fund or support the continuation and
expansion of business operations worldwide. Many lenders and
institutional investors have reduced and, in some cases, ceased
to provide funding to borrowers. These conditions have not
impaired our ability to finance our operations, but there can be
no assurance that there will not be a further deterioration in
financial markets and confidence in major economies that could
negatively impact our access to credit. Continued disruption of
the credit markets has affected and could continue to adversely
affect our suppliers and customers access to credit
which supports the continuation and expansion of their
businesses worldwide and could result in disruptions in our
business operations, contract cancellations or suspensions and
payment delays or defaults by our customers.
In October 2008, Lehman Commercial Paper Inc. (Lehman
CPI), a previous lender under our credit agreement with a
$50 million commitment (less than 3% our total credit
agreement capacity), filed for bankruptcy. Lehman CPI will not
participate in any future requests for funding and it is not
certain whether another lender might
17
assume its commitment. While the financial crisis could impact
our ability to obtain future borrowings under our credit
agreement if other lenders are forced into receivership or to
file for bankruptcy or are otherwise unable to perform their
obligations, we are unaware of any reason to believe this will
happen.
The
volatility of crude oil prices, refined product prices and
natural gas and electrical power prices may have a material
adverse effect on our cash flow and results of
operations.
Our earnings and cash flows from our refining and wholesale
marketing operations depend on a number of factors, including
fixed and variable expenses (including the cost of crude oil and
other refinery feedstocks) and the margin relative to those
expenses at which we are able to sell refined products. In
recent years, the prices of crude oil and refined products have
fluctuated substantially. These prices depend on numerous
factors beyond our control, including the global supply and
demand for crude oil, gasoline and other refined products, which
are subject to, among other things:
|
|
|
|
|
changes in the global economy and the level of foreign and
domestic production of crude oil and refined products;
|
|
|
|
availability of crude oil and refined products and the
infrastructure to transport crude oil and refined products;
|
|
|
|
local factors, including market conditions, the level of
operations of other refineries in our markets, and the volume of
refined products imported;
|
|
|
|
threatened or actual terrorist incidents, acts of war, and other
global political conditions;
|
|
|
|
government regulations; and
|
|
|
|
weather conditions, hurricanes or other natural disasters.
|
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 differently based on global and
local market conditions. In addition, the timing of the relative
movement of the prices (both among different classes of refined
products and among various global markets for similar refined
products) as well as the overall change in refined product
prices, can reduce profit margins and could have a significant
impact on our refining and wholesale marketing operations,
earnings and cash flow. Also, crude oil supply contracts
generally have market-responsive pricing provisions. We purchase
our refinery feedstocks weeks before manufacturing and selling
the refined products. Price level changes during the period
between purchasing feedstocks and selling the manufactured
refined products from these feedstocks could have a significant
effect on our financial results. We also purchase refined
products manufactured by others for sale to our customers. Price
level changes during the periods between purchasing and selling
these refined products also could have a material adverse effect
on our business, financial condition and results of operations.
Volatile prices for natural gas and electrical power used by our
refineries and other operations affect manufacturing and
operating costs. Natural gas and electricity prices have been,
and will continue to be, affected by supply and demand for fuel
and utility services in both local and regional markets.
Our
operations are subject to operational hazards that could expose
us to potentially significant losses.
Our operations are subject to potential operational hazards and
risks inherent in refining operations and in transporting and
storing crude oil and refined products, such as fires natural
disasters, explosions, maritime disasters, labor disputes,
security breaches, pipeline ruptures and spills and mechanical
failure of equipment at our or third party facilities, any of
which can result in business interruptions and damage to our
properties and the properties of others. A serious accident at
our facilities could also result in serious injury or death to
our employees or contractors and could expose us to significant
liability for personal injury claims and reputational risk. In
addition, we operate seven 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.
18
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.
American International Group (AIG) is the lead
underwriter for many of our coverages, but actually underwrites
less than one-fourth of our aggregate coverage. The majority of
our insurance coverage is underwritten by insurers other than
AIG and its subsidiaries. AIGs exposure to subprime
mortgage securities and recent disruptions in the U.S. financial
markets have adversely impacted AIG. AIGs commercial
insurance subsidiary had funds in excess of loss reserves and
continued to be a fully accepted insurance carrier for major
brokers at December 31, 2008. However, continued volatility
in the U.S. financial markets and the financial condition of AIG
may adversely impact the financial strength of AIGs
commercial insurance subsidiaries.
Our
business is impacted by environmental risks inherent in refining
operations.
The operation of refineries, pipelines and refined products
terminals is inherently subject to the risks of spills,
discharges or other inadvertent releases of petroleum or
hazardous substances. If any of these events had previously
occurred or occurs in the future in connection with any of our
refineries, pipelines or refined products terminals, or in
connection with any facilities to which we sent or send wastes
or by-products for treatment or disposal, other than events for
which we are indemnified, we could be liable for all costs and
penalties associated with their remediation under federal, state
and local environmental laws or common law, and could be liable
for property damage to third parties caused by contamination
from releases and spills. The penalties and
clean-up
costs that we may have to pay for releases or the amounts that
we may have to pay to third parties for 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
and other 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 and foreign 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.
Our
operations are subject to general environmental risks, expenses
and liabilities which could affect our results of operations and
changes in environmental regulations and other obligations
relating to environmental matters could subject us to further
risks, expenses and liabilities.
From time to time we have been, and presently are, subject to
litigation and investigations with respect to environmental and
related matters, including product liability claims related to
the oxygenate Methyl Tertiary Butyl Ether (MTBE). We
may become involved in further litigation or other proceedings,
or we may be held responsible in any existing or future
litigation or proceedings, the costs of which could be material.
We have in the past operated retail stations with underground
storage tanks in various jurisdictions, and currently operate
retail stations that have underground storage tanks in
15 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 poses certain risks,
including soil and groundwater contamination. Leaks from
underground storage tanks which may occur at one or more of our
retail stations, or which may have occurred at our previously
operated retail stations, may impact soil or groundwater and
could result in fines or civil liability for us.
19
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, and energy 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 require a response. Future
developments in federal laws and regulations governing
environmental, health and safety and energy matters are
currently especially difficult to predict due to the new
President and Congress. These changes in the federal government
may increase the likelihood that we will be subject to new laws,
regulations and regulatory investigations.
Assembly Bill 32 (AB 32), California legislation
that creates a statewide cap on greenhouse gas emissions and
requires that the state return to 1990 emission levels by 2020,
was passed by the California legislature and was signed by
Governor Schwarzenegger on September 27, 2006. AB 32
focuses on using market mechanisms, such as offsets and
cap-and-trade
programs, to achieve the targets. Regulations under AB 32
requiring reductions in greenhouse gas emissions have not yet
been promulgated. AB 32 specifies that any established
greenhouse gas allowances will be assigned to the entity
regulated under the cap. Implementation is slated to begin
January 1, 2010 with full implementation to occur by 2020.
The implementation and implications of AB 32 will take many
years to realize, and we cannot predict at this time what
impact, if any, AB 32 will have on our business.
Currently, various legislative and regulatory measures to
address greenhouse gas emissions (including carbon dioxide,
methane and nitrous oxides) are in various phases of discussion
or implementation. These include proposed federal legislation
and state actions to develop statewide or regional programs,
each of which have imposed or would impose reductions in
greenhouse gas emissions. These actions could result in
increased costs to (i) operate and maintain our facilities,
(ii) install new emission controls on our facilities and
(iii) administer and manage any greenhouse gas emissions
program. These actions could also impact the consumption of
refined products, thereby affecting our operations.
In December 2007, the U.S. Congress passed the Energy
Independence and Security Act, which, among other things,
modified the industry requirements for the Renewable Fuel
Standard (RFS). This standard requires the total
volume of renewable transportation fuels (including ethanol and
biodiesel) sold or introduced in the U.S. to be
11.1 billion gallons in 2009 rising to 36 billion
gallons by 2022. Both requirements could reduce demand growth
for petroleum products in the future. In the near term, the RFS
presents ethanol production and logistics challenges for both
the ethanol and refining and marketing industries and may
require additional expenditures by us to accommodate increased
ethanol use.
In August 2008, CARB proposed amendments to the predictive model
for compliant gasoline in the state of California that decreases
the allowable sulfur levels to a cap of 20 parts per million and
allows for additional ethanol to be blended into gasoline. The
requirements begin December 31, 2009 but may be postponed
by individual companies until December 31, 2011 through the
use of the Alternative Emission Reduction Plan which allows for
the acquisition of emissions offsets from sources not directly
related to petroleum fuel use. We expect both of our California
refineries to be in compliance with the regulation by the 2009
deadline.
We are
subject to interruptions of supply and increased costs as a
result of our reliance on third-party transportation of crude
oil and refined products.
Our Washington refinery receives all of its Canadian crude oil
and delivers a high proportion of its gasoline, diesel fuel and
jet fuel through third-party pipelines and the balance through
marine vessels. Our Hawaii and Alaska refineries receive most of
their crude oil and transport a substantial portion of their
refined products through ships and barges. Our Utah refinery
receives substantially all of its crude oil and delivers
substantially all of its refined products through third-party
pipelines. Our North Dakota refinery delivers substantially all
of its refined products through a third-party pipeline system.
Our Golden Eagle refinery receives approximately one-third of
its crude oil through pipelines and the balance through marine
vessels. Substantially all of our Golden Eagle refinerys
production is delivered through third-party pipelines, ships and
barges. Our Los Angeles refinery receives California crudes
through third-party pipelines and the balance of its crude
supply through marine vessels.
20
Approximately two-thirds of our Los Angeles refinerys
production is delivered through third-party pipelines,
terminals, ships and barges. In addition to environmental risks
discussed above, we could experience an interruption of supply
or an increased cost to deliver refined products to market if
the ability of the pipelines or vessels to transport crude oil
or refined products is disrupted because of accidents,
governmental regulation or third-party action. A prolonged
disruption of the ability of a pipeline or vessels to transport
crude oil or refined product could have a material adverse
effect on our business, financial condition and results of
operations.
Terrorist
attacks and threats or actual war may negatively impact our
business.
Our business is affected by global economic conditions and
fluctuations in consumer confidence and spending, which can
decline as a result of numerous factors outside of our control,
such as actual or threatened terrorist attacks and acts of war.
Terrorist attacks, as well as events occurring in response to or
in connection with them, including future terrorist attacks
against U.S. targets, rumors or threats of war, actual
conflicts involving the United States or its allies, or military
or trade disruptions impacting our suppliers or our customers or
energy markets in general, may adversely impact our operations.
As a result, there could be delays or losses in the delivery of
supplies and raw materials to us, delays in our delivery of
refined products, decreased sales of our refined products and
extension of time for payment of accounts receivable from our
customers. Strategic targets such as energy-related assets
(which could include refineries such as ours) may be at greater
risk of future terrorist attacks than other targets in the
United States. These occurrences could significantly impact
energy prices, including prices for our crude oil and refined
products, and have a material adverse impact on the margins from
our refining and wholesale marketing operations. In addition,
significant increases in energy prices could result in
government-imposed price controls. Any one of, or a combination
of, these occurrences could have a material adverse effect on
our business, financial condition and results of operations.
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 changes in highway traffic. As a result, our
operating results for the first and fourth quarters are
generally lower than for those in the second and third quarters.
Competition
from companies that produce their own supply of feedstocks, have
more extensive retail outlets, or have greater financial
resources could materially affect our business, financial
condition and results of operations.
We compete on a global basis with a number of integrated oil
companies who produce crude oil, some of which is used in their
refining operations. Unlike the major integrated oil companies,
we obtain all of our feedstocks from unaffiliated sources.
Because of their integrated operations and larger
capitalization, these companies may be more flexible in
responding to volatile industry or market conditions, such as
shortages of crude oil and other feedstocks or extreme price
fluctuations. In addition, we compete with producers and
marketers in other industries that supply alternative forms of
energy and fuels to satisfy the requirements of our industrial,
commercial and individual customers.
We also face strong competition in the market for the sale of
retail gasoline and merchandise. Our competitors include service
stations operated by fully integrated major oil companies and
other well-recognized national or regional retail outlets, often
selling gasoline or merchandise at aggressively competitive
prices.
Some of our competitors also have materially greater financial
and other resources than we have. Such competitors have a
greater ability to bear the economic risks inherent in all
phases of our industry. The actions of our competitors, along
with changes in the supply and price of foreign imports, could
lead to lower prices or reduced margins for the products we
sell, which could have an adverse effect on our business,
financial condition and results of operations.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
21
|
|
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. Although we cannot provide
assurance, we believe that an adverse resolution of one or more
of the matters described below, individually or in the
aggregate, during a future reporting period will not have a
material adverse effect on our financial position or results of
operations.
On February 3, 2009, we received a Notice of Violation
(NOV) from the EPA relating to our compliance with
the Clean Air Act and the corresponding regulations concerning
the regulation of fuels and fuel additives. The allegations
arise from a compliance review conducted by the EPA in 2006 for
the years 2003 through the time of the review in 2006. We are
investigating the allegations contained in the NOV and we cannot
estimate the amount of the ultimate resolution of this NOV.
However, at this time we believe the final resolution of this
NOV will not have a material adverse effect on our financial
position or results of operations.
In January 2008, we received an offer of settlement in the
amount of $670,000 from the Alaska Department of Environmental
Conservation (ADEC) related to the grounding of a
vessel in the Alaska Cook Inlet on February 2, 2006. The
ADEC has alleged two vessels chartered by us violated provisions
of our Cook Inlet Vessel Oil Prevention and Contingency Plan
during the period from December 2004 to February 2006. The
resolution of this matter will not have a material adverse
effect on our financial position or results of operation.
In October 2008, we settled seven of the ten pending cases
alleging MTBE contamination in groundwater. In January 2009, we
were served with an additional lawsuit alleging MTBE
contamination in groundwater. We are a defendant, along with
other manufacturing, supply and marketing defendants, in all of
the cases. The defendants are being sued for having manufactured
MTBE and having manufactured, supplied and distributed gasoline
containing MTBE. The plaintiffs in the four cases, all in
California, are municipalities and governmental authorities. The
plaintiffs allege, in part, that the defendants are liable for
manufacturing or distributing a defective product. The suits
generally seek individual, unquantified compensatory and
punitive damages and attorneys fees. A reserve for the
three cases pending on December 31, 2008 was included in
Accrued liabilities in the consolidated balance
sheet at December 31, 2008. We believe the resolution of
the four remaining cases will not have a material adverse affect
on our financial position or results of operations. We believe
we have defenses against these claims and intend to vigorously
defend them.
In October 2008, we received a NOV from the EPA concerning our
Utah refinery alleging certain violations of the Clean Air Act
at the refinery beginning in 2004. We are investigating the
allegations contained in the NOV and cannot currently estimate
the amount of the ultimate resolution. However, we believe the
final resolution of this NOV will not have a material adverse
effect on our financial position or results of operations.
In June 2008, we received an offer from the Bay Area Air Quality
Management District (the District) to settle 44 NOVs
for $740,000. The NOVs were issued from May 2006 to April 2008
and allege violations of air quality regulations at our Golden
Eagle refinery. We are currently negotiating a settlement of the
NOVs with the District.
In March 2008, we settled 77 NOVs received from the District
alleging air quality violations at our Golden Eagle refinery for
the years 2003 through 2006. We agreed to settle these NOVs for
$1.4 million.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
22
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
The following performance graph and related information will
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor will such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
Tesoro specifically incorporates it by reference into such
filing.
The performance graph below compares the cumulative total return
of our common stock to the cumulative total return of the
S&P 500 Composite Index and to a composite peer group of
companies. The composite peer group (the Peer Group)
includes Alon USA Energy, Frontier Oil Corporation, Holly
Corporation, Sunoco, Valero Energy Corporation and Western
Refining. The graph below is for the period of five years
commencing December 31, 2003 and ending December 31,
2008.
Comparison
of Five Year Cumulative Total Return*
Among the Company, the S&P Composite 500 Index and
Composite Peer Group
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2003
|
|
|
|
12/31/2004
|
|
|
|
12/31/2005
|
|
|
|
12/31/2006
|
|
|
|
12/31/2007
|
|
|
|
12/31/2008
|
|
Tesoro
|
|
|
$
|
100
|
|
|
|
$
|
218.68
|
|
|
|
$
|
422.51
|
|
|
|
$
|
454.27
|
|
|
|
$
|
663.50
|
|
|
|
$
|
187.43
|
|
S&P 500
|
|
|
$
|
100
|
|
|
|
$
|
110.87
|
|
|
|
$
|
116.30
|
|
|
|
$
|
134.66
|
|
|
|
$
|
142.07
|
|
|
|
$
|
89.51
|
|
Peer Group
|
|
|
$
|
100
|
|
|
|
$
|
181.68
|
|
|
|
$
|
396.51
|
|
|
|
$
|
402.24
|
|
|
|
$
|
523.41
|
|
|
|
$
|
189.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
* |
|
Assumes that the value of the investment in common stock and
each index was $100 on December 31, 2003, and that all
dividends were reinvested. Investment is weighted on the basis
of market capitalization. |
Note: The stock price performance shown on the graph is not
necessarily indicative of future performance.
23
Our common stock is listed under the symbol TSO on
the New York Stock Exchange. Summarized below are high and low
sales prices of and dividends declared on our common stock on
the New York Stock Exchange during 2008 and 2007. All per share
data presented below reflects the effect of a two-for-one stock
split effected in the form of a stock dividend which was
distributed in May 2007.
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Sales Prices per
|
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Dividends
|
|
|
|
Common Share
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|
|
per
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
Common Share
|
|
|
December 31, 2008
|
|
$
|
16.87
|
|
|
$
|
6.71
|
|
|
$
|
0.10
|
|
September 30, 2008
|
|
$
|
20.17
|
|
|
$
|
14.29
|
|
|
$
|
0.10
|
|
June 30, 2008
|
|
$
|
33.40
|
|
|
$
|
18.46
|
|
|
$
|
0.10
|
|
March 31, 2008
|
|
$
|
48.35
|
|
|
$
|
26.55
|
|
|
$
|
0.10
|
|
December 31, 2007
|
|
$
|
65.98
|
|
|
$
|
44.53
|
|
|
$
|
0.10
|
|
September 30, 2007
|
|
$
|
62.00
|
|
|
$
|
42.64
|
|
|
$
|
0.10
|
|
June 30, 2007
|
|
$
|
64.65
|
|
|
$
|
50.06
|
|
|
$
|
0.10
|
|
March 31, 2007
|
|
$
|
51.40
|
|
|
$
|
31.47
|
|
|
$
|
0.05
|
|
On February 19, 2009, our Board of Directors declared a
quarterly cash dividend on common stock of
$0.10 per share, payable on March 16, 2009 to
shareholders of record on March 2, 2009. At
February 19, 2009, there were approximately 2,600 holders
of record of our 138,372,788 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 I and N in our consolidated financial
statements in Item 8.
The 2009 annual meeting of stockholders will be held at
4:00 P.M. Central Time on Wednesday, May 6, 2009,
at the Rosewood Crescent Hotel, 400 Crescent Court, Dallas,
Texas. Holders of common stock of record at the close of
business on March 12, 2009 are entitled to notice of and to
vote at the annual meeting.
The following table summarizes, as of December 31, 2008,
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
|
|
|
7,727,816
|
|
|
$
|
22.02
|
|
|
|
3,639,286
|
|
Equity compensation plans not approved by security holders(a)
|
|
|
248,738
|
|
|
$
|
4.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,976,554
|
|
|
$
|
21.49
|
|
|
|
3,639,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Key Employee Stock Option Plan was approved by our Board of
Directors in November 1999 and provided for stock option grants
to eligible employees who are not our executive officers. The
options expire ten years after the date of grant. Our Board of
Directors suspended any future grants under this plan in 2003. |
24
The table below provides a summary of all repurchases by Tesoro
of its common stock during the three-month period ended
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value of Shares
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
That May Yet be
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
Purchased under the
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced Plans or
|
|
|
Plans or
|
|
Period
|
|
Purchased*
|
|
|
Share
|
|
|
Programs**
|
|
|
Programs*
|
|
|
October 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
38 million
|
|
November 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
38 million
|
|
December 2008
|
|
|
182,250
|
|
|
$
|
8.44
|
|
|
|
|
|
|
$
|
38 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
182,250
|
|
|
$
|
8.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
All of the shares repurchased during the three-month period
ended December 31, 2008 were surrendered to Tesoro to
satisfy tax withholding obligations in connection with the
vesting of restricted stock issued to certain executive
officers. These shares were not repurchased under our stock
repurchase program. |
|
** |
|
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. |
25
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following table sets forth certain selected consolidated
financial data of Tesoro as of and for each of the five years in
the period ended December 31, 2008. The selected
consolidated financial information presented below has been
derived from our historical financial statements. Our financial
results include the results of our Los Angeles refinery and
Shell and USA Gasoline retail stations since they were acquired
in May 2007. All share and per share amounts presented reflect
our two-for-one stock split effected in the form of a stock
dividend which was distributed in May 2007. 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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in millions except per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
28,309
|
|
|
$
|
21,915
|
|
|
$
|
18,104
|
|
|
$
|
16,581
|
|
|
$
|
12,262
|
|
Net Earnings(a)
|
|
$
|
278
|
|
|
$
|
566
|
|
|
$
|
801
|
|
|
$
|
507
|
|
|
$
|
328
|
|
Net Earnings (Per Share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.03
|
|
|
$
|
4.17
|
|
|
$
|
5.89
|
|
|
$
|
3.72
|
|
|
$
|
2.50
|
|
Diluted
|
|
$
|
2.00
|
|
|
$
|
4.06
|
|
|
$
|
5.73
|
|
|
$
|
3.60
|
|
|
$
|
2.38
|
|
Weighted Shares Outstanding (millions):(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
136.8
|
|
|
|
135.7
|
|
|
|
136.0
|
|
|
|
136.3
|
|
|
|
131.0
|
|
Diluted
|
|
|
139.2
|
|
|
|
139.5
|
|
|
|
139.8
|
|
|
|
140.9
|
|
|
|
137.7
|
|
Dividends per share(c)
|
|
$
|
0.40
|
|
|
$
|
0.35
|
|
|
$
|
0.20
|
|
|
$
|
0.10
|
|
|
$
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
1,646
|
|
|
$
|
2,600
|
|
|
$
|
2,811
|
|
|
$
|
2,215
|
|
|
$
|
1,393
|
|
Property, Plant and Equipment, Net
|
|
$
|
5,081
|
|
|
$
|
4,780
|
|
|
$
|
2,687
|
|
|
$
|
2,467
|
|
|
$
|
2,304
|
|
Total Assets
|
|
$
|
7,433
|
|
|
$
|
8,128
|
|
|
$
|
5,904
|
|
|
$
|
5,097
|
|
|
$
|
4,075
|
|
Current Liabilities
|
|
$
|
1,441
|
|
|
$
|
2,494
|
|
|
$
|
1,672
|
|
|
$
|
1,502
|
|
|
$
|
993
|
|
Total Debt(d)
|
|
$
|
1,611
|
|
|
$
|
1,659
|
|
|
$
|
1,046
|
|
|
$
|
1,047
|
|
|
$
|
1,218
|
|
Stockholders Equity(b)
|
|
$
|
3,218
|
|
|
$
|
3,052
|
|
|
$
|
2,502
|
|
|
$
|
1,887
|
|
|
$
|
1,327
|
|
Current Ratio
|
|
|
1.1:1
|
|
|
|
1.0:1
|
|
|
|
1.7:1
|
|
|
|
1.5:1
|
|
|
|
1.4:1
|
|
Working Capital
|
|
$
|
205
|
|
|
$
|
106
|
|
|
$
|
1,139
|
|
|
$
|
713
|
|
|
$
|
400
|
|
Total Debt to Capitalization(b)(d)
|
|
|
33
|
%
|
|
|
35
|
%
|
|
|
29
|
%
|
|
|
36
|
%
|
|
|
48
|
%
|
Common Stock Outstanding (millions of shares)(b)
|
|
|
138.4
|
|
|
|
137.0
|
|
|
|
135.8
|
|
|
|
138.6
|
|
|
|
133.6
|
|
Book Value Per Common Share
|
|
$
|
23.25
|
|
|
$
|
22.28
|
|
|
$
|
18.42
|
|
|
$
|
13.61
|
|
|
$
|
9.93
|
|
Cash Flows From (Used In)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
716
|
|
|
$
|
1,322
|
|
|
$
|
1,139
|
|
|
$
|
758
|
|
|
$
|
681
|
|
Investing Activities
|
|
|
(610
|
)
|
|
|
(2,838
|
)
|
|
|
(430
|
)
|
|
|
(254
|
)
|
|
|
(174
|
)
|
Financing Activities(b)(c)(d)
|
|
|
(109
|
)
|
|
|
553
|
|
|
|
(163
|
)
|
|
|
(249
|
)
|
|
|
(399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
$
|
(3
|
)
|
|
$
|
(963
|
)
|
|
$
|
546
|
|
|
$
|
255
|
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures (e)
|
|
$
|
619
|
|
|
$
|
789
|
|
|
$
|
453
|
|
|
$
|
262
|
|
|
$
|
179
|
|
|
|
|
(a) |
|
Net earnings included the following pre-tax items that affect
the comparability of the periods presented. During 2008, we
incurred a $91 million charge to write-off a receivable for
which collection was deemed unlikely, reduced inventories
resulting in a LIFO liquidation or reduction in costs of sales
of $138 million and received net refunds of
$50 million from Trans Alaska Pipeline System
(TAPS) for prior years refinery transportation
and distribution costs associated with our protest of intrastate
rates between 1997 and 2003. During 2006, we incurred charges of
$28 million for termination of a delayed coker project at
the Washington |
26
|
|
|
|
|
refinery. For 2005, we incurred charges of $95 million for
debt refinancing and prepayment costs. In 2004, we incurred
charges of $23 million for debt prepayment and financing
costs. |
|
(b) |
|
During 2006, we repurchased 4.8 million shares of our
common stock for $148 million in connection with our share
repurchase program. |
|
(c) |
|
We began paying a quarterly dividend in June 2005. Prior to
2005, we had not paid dividends since 1986. |
|
(d) |
|
During 2007, we issued $500 million in senior notes
primarily to fund the acquisition of the Los Angeles refinery
and voluntarily prepaid the remaining $14 million on our
senior subordinated notes. During 2005, we voluntarily prepaid
the remaining $96 million of senior secured term loans and
refinanced nearly $1 billion of outstanding senior notes
through a $900 million notes offering and a
$92 million prepayment of debt. During 2004, we voluntarily
prepaid the $297 million of outstanding senior subordinated
notes and $100 million of senior secured term loans. |
|
(e) |
|
Capital expenditures include accruals for capital, but exclude
amounts for refinery turnaround and catalyst spending and
acquisitions. |
27
|
|
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 Important Information Regarding
Forward-Looking Statements on page 53 and Risk
Factors on page 17 for a discussion of the factors
that could cause actual results to differ materially from those
projected in these statements.
BUSINESS
STRATEGY AND OVERVIEW
Industry
Overview
Our profitability is substantially determined by the difference
between the price of refined products and the price of crude
oil, which is referred to below as refined product
margins. Beginning in the second half of 2007 and
continuing through the first half of 2008, crude oil prices
climbed rapidly until peaking at a record high in early July
2008 while product prices increased more gradually than crude
oil prices resulting in a weak margin environment. For example,
from July 2007 through June 2008 the price of West Texas
Intermediate crude oil increased by
approximately 97%, while the average spot price for gasoline on
the U.S. West Coast rose only 58%. The rapid increase in
crude oil prices was attributed in part to such factors as
continued global demand growth, concerns over declining crude
oil supplies and increasing investments in crude oil to hedge
against the weakening U.S. dollar. Gasoline prices
increased less dramatically than crude oil prices during the
period due to falling domestic demand and high product
inventories.
NYMEX WTI 2008 $/BBL
After crude oil prices peaked in early July 2008, recessionary
concerns, declining global demand and the strengthening of the
U.S. dollar resulted in a sharp decline in crude oil prices
through the end of the year. Gasoline prices declined with
falling crude oil prices due to declining demand, however, lower
industry production and the impacts of hurricanes Gustav and Ike
in September 2008 strengthened gasoline margins in September and
October. Gasoline margins declined through the remainder of the
year with the exception of margins on the U.S. West Coast.
Beginning in mid-December both planned and unplanned refinery
outages combined with historically low gasoline inventories to
benefit margins. Despite the overall decline in gasoline margins
in 2008 as compared to 2007, diesel fuel margins were higher
than 2007 levels due to continued strong global demand and low
inventories.
Strategy
and Goals
Our strategy is to create a value-added refining and marketing
business that has (i) economies of scale, (ii) a
competitive cost structure, (iii) effective management
information systems that enable success and
(iv) outstanding employees focused on achieving operational
excellence in a global market in order to provide stockholders
with competitive returns in any economic environment.
28
We focus our goals on: (i) operating our facilities in a
safe, reliable, and environmentally responsible way;
(ii) improving cash flow by achieving greater operational
and administrative efficiencies; and (iii) using excess
cash flows from operations to create further shareholder value.
We previously announced that our value creation strategy would
focus on pursuing internal yield and cost benefits rather than
external acquisitions. This change in our strategy was timely as
the industry has recently experienced declining refining
margins. We developed initiatives in late 2007 to improve
profitability at our Los Angeles and Hawaii refineries and
developed initiatives at our other refineries in 2008 in
response to a lower refining margin environment. These and other
company-wide initiatives are designed to minimize borrowings on
our revolving credit facility and fund capital expenditures
solely from operating cash flow. We funded our 2008 capital
program through operating cash flow and minimized borrowings by
accomplishing the following initiatives during 2008:
|
|
|
|
|
Optimized inventories to better match lower demand resulting in
an inventory reduction of approximately 5 million barrels
from the end of 2007;
|
|
|
|
Reduced capital expenditures to $619 million from our
original capital budget of $966 million. Most projects
impacted by this reduction have been delayed or adjusted in
scope rather than canceled; and
|
|
|
|
Improved capture of available margins (our ability to realize a
higher percentage of industry margins) by (i) refining
lower cost crude oils as a result of operating the delayed coker
at the Golden Eagle refinery beginning in the second quarter;
(ii) refining a greater percentage of lower cost,
waterborne crude oils at the Los Angeles refinery;
(iii) optimizing our diesel fuel and gasoline production to
respond to market demand; (iv) adjusting our run rates and
feedstock mix to respond to current market conditions
particularly at our Washington refinery; and
(v) implementing initiatives at our Hawaii refinery
primarily focused on processing lower cost crude oils and
improving reliability.
|
In 2009, our goals are to continue to gain sustainable
improvements in our capture of available margins, lower
break-even costs and fund our capital program through operating
cash flow. Plans to improve our capture of available margins in
2009 include (i) lowering crude costs through benefits of
our prior years capital programs, (ii) further
capitalizing on shipping economies of scale,
(iii) increasing crude flexibility, (iv) continuing to
match production to demand and (v) optimizing diesel fuel
and gasoline production. We plan to reduce operating expenses
through energy efficiency and maintenance efficiency programs.
Golden
Eagle Coker Modification Project
The delayed coker at our Golden Eagle refinery became fully
operational during the 2008 second quarter. Spending since
inception totaled $602 million. The modification of our
fluid coker unit to a delayed coker enabled us to comply with
the terms of an abatement order to lower air emissions while
also enhancing the refinerys capabilities in terms of
crude oil flexibility, reliability, lengthening turnaround
cycles and lowering maintenance costs. The project will
significantly reduce the duration and costs of coker turnarounds
as well as increase the coker turnaround cycle from
2.5 years to 5 years. In addition, we expect the
modified coker to significantly reduce greenhouse gas emissions
at the refinery.
Selective
Hydrogenation Unit
The selective hydrogenation unit (SHU) at our
Washington refinery was fully operational during the 2008 fourth
quarter and reduces the sulfur content in gasoline. The SHU
allows a higher percentage of sour crude oils to be processed at
the refinery while maintaining compliance with gasoline sulfur
regulations.
Future
Strategic Capital Projects
We have identified short-term, high return projects that focus
on lowering our feedstock costs, improving clean product yields
and reducing operating costs, including improving energy
efficiency at all of our refineries. These projects, which are
currently under evaluation, are not included in our 2009 capital
budget. However, certain of these projects may be implemented in
2009 or thereafter as we have cash flow available from
operations. Additionally, our long-term capital plans include
larger projects to further reduce feedstock costs at our Golden
29
Eagle, Los Angeles and Hawaii refineries. All of these projects
are preliminary and subject to further review and analysis.
Hedging Program
We periodically enter into non-trading derivative arrangements
primarily to manage price risks associated with the purchase
and/or sale of 1) crude oil and 2) finished products
involving inventories above our target levels. These derivative
arrangements typically involve exchange-traded futures and
over-the-counter
swaps, generally with durations of one year or less.
Historically, we hedged less than 20% of our crude oil and
products operating volumes. The crude oil hedges have primarily
covered price risks of foreign crude oils supplied to our Hawaii
and Golden Eagle refineries. A smaller percentage of the hedges
covered West Coast intermediate and finished products. During
the 2008 second quarter, we closed the majority of our crude oil
derivative positions associated with our long-haul strategy that
matched the price of long-haul crude oils to
day-of-processing
product margin. These closed positions did not have a further
significant impact on earnings. The impact of the rapidly rising
crude oil prices in the first six months of 2008 on our
derivative positions was a pretax loss of $206 million.
During the second half of 2008, declining crude oil prices
resulted in a pretax gain of $100 million. Net earnings for
the year included a pretax loss of $106 million on our
derivative positions.
Hawaii
Refinery Initiatives
We implemented several initiatives to improve profitability at
our Hawaii refinery in response to falling gross refining
margins during 2007 and the first half of 2008. One key
initiative was to reduce our reliance on light sweet crude oil
from Asia to achieve crude oil cost savings. Starting in the
2008 first quarter, we began to run more cost advantaged heavy
sweet and light sour crude oils reducing our light sweet crude
oils as a percent of total throughput to 20% from 37% a year
ago. We also increased our percentage of heavy crude oil to
total throughput from 19% in 2007 to 30% in 2008. Another
initiative was completed in March 2008 when we improved
reliability through the completion of a new electrical
substation. We also completed a controls modernization project
during the 2008 fourth quarter which is designed to improve
reliability and refining yields and reduce energy costs.
Los
Angeles Refinery Initiatives
Since acquiring the Los Angeles refinery in May 2007, we
achieved our annual synergy goal of $100 million during the
2008 second quarter mainly through shared crude oil cargo
benefits and other feedstock activities. We expect to realize
annual recurring synergies of approximately $100 million
through our crude oil purchasing and shipping logistics as well
as by maximizing the production of clean fuels for the
California market.
Our initiatives to improve profitability at our Los Angeles
refinery in 2008 included optimizing our crude oil supply,
increasing distillate production and reducing operating
expenses. During the 2008 second quarter, we opted not to renew
the remaining crude oil contracts assumed in the acquisition,
which allows us to process more cost advantaged foreign crude
oils. Beginning in June 2008, we also increased distillate
production by approximately 9,000 barrels per day versus
the last half of 2007 to take advantage of the strong distillate
margins.
Recent
Developments
As widely reported, financial markets in the United States,
Europe and Asia have been experiencing extreme disruption in
recent months, including, among other things, extreme volatility
in prices of securities, severely diminished liquidity and
credit availability, rating downgrades of certain investments
and declining valuations of others. These conditions, including
severely restricted new credit availability, have not impaired
our ability to finance our operations, but there can be no
assurance that there will not be a further deterioration in
financial markets and confidence in major economies that could
negatively impact us.
The global financial crisis and economic recessions in the
U.S. and abroad may also negatively impact our customers
and the demand for refined products. For example, an extension
of the credit crisis to our customers could adversely impact
their ability to maintain liquidity. We are monitoring our
customers liquidity in order to mitigate any adverse
impact on our results of operations.
30
American International Group (AIG) is the lead
underwriter for many of our coverages, but actually underwrites
less than one-fourth of our aggregate coverage. The majority of
our insurance coverage is underwritten by insurers other than
AIG and its subsidiaries. AIGs exposure to subprime
mortgage securities and recent disruptions in the
U.S. financial markets have adversely impacted AIG.
AIGs commercial insurance subsidiary had funds in excess
of loss reserves and continued to be a fully accepted insurance
carrier for major brokers at December 31, 2008. However,
continued volatility in the U.S. financial markets and the
financial condition of AIG may adversely impact the financial
strength of AIGs commercial insurance subsidiaries.
In October 2008, Lehman Commercial Paper Inc. (Lehman
CPI) filed for bankruptcy. Lehman CPI was a previous
lender under our credit agreement, with a commitment of
$50 million (less than 3% of our total credit agreement
capacity). Lehman CPI will not participate in any future
requests for funding and it is not certain whether another
lender will assume its commitment. While the financial crisis
could impact our ability to obtain future borrowings under our
credit agreement if other lenders are unable to perform their
obligations, we are unaware of any reason to believe this will
happen.
RESULTS
OF OPERATIONS
A discussion and analysis of the factors contributing to our
results of operations is presented hereafter. 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. Our results include the operations of our
Los Angeles refinery and Shell and USA Gasoline retail stations
since acquisition in May 2007.
Summary
Our net earnings for 2008 declined to $278 million ($2.00
per diluted share) from $566 million
($4.06 per diluted share) in 2007. The decline was due
primarily to the following:
|
|
|
|
|
substantially lower industry gasoline margins, particularly
during the first half of 2008 versus the first half of 2007;
|
|
|
|
lower gross refining margins at both our Washington and Golden
Eagle refineries reflecting planned turnarounds of several units
during the first and second quarters;
|
|
|
|
higher operating expenses primarily reflecting increased utility
expenses;
|
|
|
|
a $91 million pre-tax charge to write-off a receivable for
which collection was deemed unlikely; and
|
the impact of rising crude oil prices on our derivative
positions during the first half of 2008.
The decrease in net earnings during 2008 relative to 2007 was
partially offset by the following:
|
|
|
|
|
a LIFO liquidation associated with our working capital
management program during 2008 resulting in a reduction to costs
of sales of $138 million pre-tax;
|
|
|
|
refunds totaling $50 million pre-tax from the Trans Alaska
Pipeline System (TAPS) in connection with rulings
from the Regulatory Commission of Alaska concerning our protest
of intrastate pipeline rates between 1997 and 2003;
|
|
|
|
lower stock-based and incentive compensation costs of
$78 million pre-tax;
|
|
|
|
initiatives implemented to improve our capture of available
margins and match our yields to market demands including
increasing the yield of distillate products, and increasing the
utilization of heavy and sour crude oils;
|
|
|
|
utilization of the Golden Eagle delayed coker, beginning in May
2008, to capture yield improvements and increase our flexibility
to utilize advantaged, lower cost crude oil; and
|
|
|
|
improved retail margins.
|
31
Net earnings for 2007 declined to $566 million ($4.06 per
diluted share) from $801 million ($5.73 per diluted share)
in 2006. The decline was due primarily to the following:
|
|
|
|
|
substantially lower industry refined product margins on the
U.S. West Coast during the second half of the year as crude
oil prices rose rapidly and product prices increased more
gradually;
|
|
|
|
significantly lower gross refining margins at our Hawaii
refinery;
|
|
|
|
higher operating expenses reflecting increased repairs and
maintenance expenses and employee costs;
|
|
|
|
the impact of rising crude oil prices on our non-trading
derivative positions; and
|
|
|
|
increased selling, general and administrative expenses
reflecting higher stock-based compensation and employee costs.
|
Refining
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions except per
|
|
|
|
barrel amounts)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined products(a)
|
|
$
|
26,759
|
|
|
$
|
20,906
|
|
|
$
|
17,323
|
|
Crude oil resales and other
|
|
|
1,019
|
|
|
|
627
|
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
27,778
|
|
|
$
|
21,533
|
|
|
$
|
17,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput (thousand barrels per day)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy crude(c)
|
|
|
192
|
|
|
|
159
|
|
|
|
114
|
|
Light crude
|
|
|
369
|
|
|
|
407
|
|
|
|
397
|
|
Other feedstocks
|
|
|
34
|
|
|
|
29
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Throughput
|
|
|
595
|
|
|
|
595
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Heavy Crude Oil of Total Refining Throughput(c)
|
|
|
32
|
%
|
|
|
27
|
%
|
|
|
22
|
%
|
Yield (thousand barrels per day)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
275
|
|
|
|
280
|
|
|
|
245
|
|
Jet Fuel
|
|
|
78
|
|
|
|
77
|
|
|
|
68
|
|
Diesel Fuel
|
|
|
143
|
|
|
|
129
|
|
|
|
121
|
|
Heavy oils, residual products, internally produced fuel and other
|
|
|
129
|
|
|
|
133
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Yield
|
|
|
625
|
|
|
|
619
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin ($/throughput barrel)(d)
|
|
$
|
11.50
|
|
|
$
|
12.73
|
|
|
$
|
13.62
|
|
Manufacturing cost ($/throughput bbl)(d)(e)
|
|
$
|
5.19
|
|
|
$
|
4.37
|
|
|
$
|
3.54
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin(f)
|
|
$
|
2,506
|
|
|
$
|
2,762
|
|
|
$
|
2,631
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing costs(e)
|
|
|
1,131
|
|
|
|
949
|
|
|
|
684
|
|
Other operating expenses(e)
|
|
|
284
|
|
|
|
258
|
|
|
|
183
|
|
Selling, general and administrative
|
|
|
127
|
|
|
|
43
|
|
|
|
26
|
|
Depreciation and amortization(g)
|
|
|
326
|
|
|
|
314
|
|
|
|
221
|
|
Loss on asset disposals and impairments
|
|
|
11
|
|
|
|
10
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
$
|
627
|
|
|
$
|
1,188
|
|
|
$
|
1,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales (thousand barrels per
day)(a)(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasoline and gasoline blendstocks
|
|
|
326
|
|
|
|
319
|
|
|
|
280
|
|
Jet fuel
|
|
|
92
|
|
|
|
96
|
|
|
|
91
|
|
Diesel fuel
|
|
|
144
|
|
|
|
131
|
|
|
|
128
|
|
Heavy oils, residual products and other
|
|
|
94
|
|
|
|
97
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Refined Product Sales
|
|
|
656
|
|
|
|
643
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales Margin ($/barrel)(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price
|
|
$
|
112.06
|
|
|
$
|
89.47
|
|
|
$
|
81.26
|
|
Average costs of sales
|
|
|
102.37
|
|
|
|
78.14
|
|
|
|
69.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Product Sales Margin
|
|
$
|
9.69
|
|
|
$
|
11.33
|
|
|
$
|
11.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions except per
|
|
|
|
barrel amounts)
|
|
|
Refining Data by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
California (Golden Eagle and Los Angeles)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day)(b)(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden Eagle
|
|
|
153
|
|
|
|
154
|
|
|
|
165
|
|
Los Angeles
|
|
|
105
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
258
|
|
|
|
222
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin(d)
|
|
$
|
1,332
|
|
|
$
|
1,317
|
|
|
$
|
1,148
|
|
Gross refining margin ($/throughput barrel)(d)
|
|
$
|
14.08
|
|
|
$
|
16.33
|
|
|
$
|
19.08
|
|
Manufacturing cost ($/throughput bbl)(d)(e)
|
|
$
|
7.18
|
|
|
$
|
6.94
|
|
|
$
|
5.54
|
|
Pacific Northwest (Washington and Alaska)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day)(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington
|
|
|
103
|
|
|
|
121
|
|
|
|
111
|
|
Alaska
|
|
|
56
|
|
|
|
61
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
159
|
|
|
|
182
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin(d)
|
|
$
|
396
|
|
|
$
|
730
|
|
|
$
|
706
|
|
Gross refining margin ($/throughput barrel)(d)
|
|
$
|
6.82
|
|
|
$
|
10.94
|
|
|
$
|
11.57
|
|
Manufacturing cost ($/throughput bbl)(d)(e)
|
|
$
|
3.99
|
|
|
$
|
2.99
|
|
|
$
|
2.86
|
|
Mid-Pacific (Hawaii)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day)(i)
|
|
|
69
|
|
|
|
81
|
|
|
|
85
|
|
Gross refining margin(d)
|
|
$
|
170
|
|
|
$
|
35
|
|
|
$
|
199
|
|
Gross refining margin ($/throughput barrel)(d)
|
|
$
|
6.72
|
|
|
$
|
1.18
|
|
|
$
|
6.44
|
|
Manufacturing cost ($/throughput bbl)(d)(e)
|
|
$
|
3.30
|
|
|
$
|
2.23
|
|
|
$
|
1.84
|
|
Mid-Continent (North Dakota and Utah)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining throughput (thousand barrels per day)(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
North Dakota
|
|
|
56
|
|
|
|
58
|
|
|
|
56
|
|
Utah
|
|
|
53
|
|
|
|
52
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
109
|
|
|
|
110
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross refining margin(d)
|
|
$
|
603
|
|
|
$
|
701
|
|
|
$
|
577
|
|
Gross refining margin ($/throughput barrel)(d)
|
|
$
|
15.12
|
|
|
$
|
17.51
|
|
|
$
|
14.06
|
|
Manufacturing cost ($/throughput bbl)(d)(e)
|
|
$
|
3.44
|
|
|
$
|
3.07
|
|
|
$
|
2.90
|
|
|
|
|
(a) |
|
Includes intersegment sales to our retail segment, at prices
which approximate market of $3.9 billion, $2.8 billion
and $987 million in 2008, 2007 and 2006, respectively. |
|
(b) |
|
Volumes for 2007 include amounts for the Los Angeles refinery
since acquisition in May 2007, averaged over the periods
presented. Throughput and yield averaged over 365 days
since acquisition in 2007 were 68 Mbpd and 73 Mbpd,
respectively. Throughput and yield averaged over the
235 days of operation in 2007 were 106 Mbpd and 114
Mbpd, respectively. |
|
(c) |
|
We define heavy crude oil as crude oil with an American
Petroleum Institute gravity of 24 degrees or less. Amounts in
prior years have been reclassified to conform to the 2008
presentation. |
|
(d) |
|
Management uses gross refining margin per barrel to evaluate
performance and compare profitability to other companies in the
industry. Gross refining margin per barrel is calculated by
dividing gross refining margin by total refining throughput and
may not be calculated similarly by other companies. Gross
refining margin is calculated as revenues less costs of
feedstocks, purchased refined products, transportation and
distribution. |
33
|
|
|
|
|
Management uses manufacturing costs per barrel to evaluate the
efficiency of refinery operations. Manufacturing costs per
barrel is calculated by dividing manufacturing costs by total
refining throughput and may not be comparable to similarly
titled measures used by other companies. Investors and analysts
use these financial measures to help analyze and compare
companies in the industry on the basis of operating performance.
These financial measures should not be considered as
alternatives to segment operating income, revenues, costs of
sales and operating expenses or any other measure of financial
performance presented in accordance with accounting principles
generally accepted in the United States. |
|
(e) |
|
In 2008, we reclassified certain environmental expenses from
manufacturing expenses to other operating expenses. We have
reclassified expenses of $22 million and $5 million
for 2007 and 2006, respectively, to conform to the 2008
presentation. |
|
(f) |
|
Consolidated gross refining margin totals gross refining margin
for each of our regions adjusted for other costs not directly
attributable to a specific region. Other costs resulted in an
increase of $5 million for the year ended December 31,
2008, a decrease of $21 million for the year ended
December 31, 2007, and an increase of $1 million for
the year ended December 31, 2006. Gross refining margin
includes the effect of intersegment sales to the retail segment
at prices which approximate market. Gross refining margin
approximates total refining throughput times gross refining
margin per barrel. |
|
(g) |
|
Includes manufacturing depreciation and amortization per
throughput barrel of approximately $1.40, $1.37 and $1.06 for
2008, 2007 and 2006, respectively. |
|
(h) |
|
Sources of total refined product sales included refined products
manufactured at the refineries and refined products purchased
from third parties. Total refined product sales margin includes
margins on sales of manufactured and purchased refined products. |
|
(i) |
|
We experienced reduced throughput during scheduled turnarounds
for the following refineries: the Golden Eagle and
Washington refineries during 2008; the Los Angeles, Golden
Eagle, and Utah refineries during 2007; and the Golden Eagle,
Washington and Alaska refineries during 2006. |
2008
Compared to 2007
Overview. The decrease in operating income of
$561 million during 2008 was primarily due to lower gross
refining margins and increased operating expenses primarily due
to higher utility costs. In addition, the 2008 fourth quarter
included a $91 million charge to write-off a receivable for
which collection was deemed unlikely. The decrease in operating
income was partially offset by a decrease to costs of sales of
$138 million during 2008 resulting from the liquidation of
last-in
first-out (LIFO) inventory quantities acquired at
lower
per-barrel
costs. Our gross refining margin per barrel decreased by 10% in
2008 to $11.50 per barrel as compared to $12.73 per barrel in
2007 reflecting significantly lower industry margins for
gasoline. U.S. West Coast benchmark gasoline margins were
down from an average of $24 per barrel in 2007 to an average of
$12 per barrel in 2008 as a result of rapidly rising crude oil
prices during the first half of 2008 and weakening product
demand. During the second half of 2008, however, crude oil
prices declined primarily due to declining global crude oil
demand. The rapid decline in crude oil prices resulted in
slightly improved refining margins during the last six months of
2008 versus the prior year as product prices declined more
gradually. Weaker industry gasoline margins were partially
offset by higher diesel fuel margins in 2008 reflecting strong
global demand and low inventories. Industry market fundamentals
are further described above in Industry Overview.
Industry margins were higher in 2007 due to robust market
fundamentals during the first half of the year, including strong
demand for refined products, low refinery utilization, low
products inventories and the introduction of new lower sulfur
requirements for non-road diesel fuel which began in
June 2007.
Gross Refining Margins. Our total gross
refining margins declined to $2.5 billion in 2008 from
$2.8 billion in 2007, reflecting lower gross refining
margins
per-barrel
in all of our regions except for our Mid-Pacific region. Each of
our regions was impacted by lower industry gasoline margins and
other regional factors described below.
|
|
|
|
|
In our California region, gross refining margins decreased 14%
to $14.08 per barrel in 2008 as compared to 2007. Although gross
refining margins declined on a
per-barrel
basis, our total gross refining margins increased year-over-year
as a result of operating the Los Angeles refinery for a full
year in 2008. Our gross refining margins were negatively
impacted during 2008 by the turnaround of five major units at
our Golden
|
34
|
|
|
|
|
Eagle refinery from mid-March through April. We estimate that
our refining operating income was reduced by approximately
$97 million as a result of this turnaround. In addition,
our ability to capture the cost differentials between foreign
sourced and local crude oils at our Los Angeles refinery through
the first half of 2008 was limited by certain contractual
purchase commitments and refinery logistical limitations. In the
2008 second quarter, we opted not to renew the remaining crude
oil contracts assumed in the acquisition which has allowed us to
process more cost advantaged foreign crude oils. The decrease in
gross refining margins was partially offset as we increased runs
of more cost advantaged crude oil in connection with the
operation of the delayed coker at the Golden Eagle refinery
beginning in the 2008 second quarter. Our gross refining margins
in 2007 were negatively impacted at our Golden Eagle refinery
due to scheduled turnarounds of the fluid catalytic cracker and
hydrocracking units and other unscheduled downtime.
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Gross refining margins in our Pacific Northwest region decreased
38% to $6.82 per barrel in 2008 as compared to 2007. Gasoline
industry margins in the region declined by almost 60% from 2007
reflecting poor demand. Our gross refining margins were also
negatively impacted in 2008 due to the turnaround of our fluid
catalytic cracker and alkylation units at our Washington
refinery from late January to mid-February. Unplanned boiler
outages at the Washington refinery in December also negatively
impacted gross refining margins. During the 2007 first quarter,
we experienced scheduled and unscheduled downtime at our
Washington refinery. During the first half of 2007, heavy
industry turnaround activity and unscheduled downtime on the
U.S. West Coast benefited our gross refining margins in the
region.
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In our Mid-Pacific region, gross refining margins increased to
$6.72 per barrel from $1.18 per barrel in 2007. The increase in
our gross refining margins in the region reflects our ability to
run more cost advantaged heavy sweet and light sour crude oils
in 2008 as part of our Hawaii improvement initiatives previously
discussed. Starting in the 2008 first quarter, we began to run
more cost advantaged heavy sweet and light sour crude oils
reducing our light sweet crude oils as a percent of total
throughput to 20% from 37% a year ago. We also increased our
percentage of heavy crude oil to total throughput from 19% in
2007 to 30% in 2008. In addition, several of our term refined
product contracts have lagging pricing provisions (based on
prior months prices), which benefited our gross refinery margins
in the second half of 2008 as crude oil prices declined. Gross
refining margins were further benefited by our completion of a
controls modernization project in the 2008 fourth quarter which
improves reliability and refining yields and reduces energy
costs. We also completed a new electrical substation during the
2008 first quarter resulting in improved reliability.
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In our Mid-Continent region, gross refining margins decreased
14% to $15.12 per barrel in 2008 as compared to 2007. Our gross
refining margins in the region were negatively impacted by the
scheduled downtime of three units for mechanical repairs at our
Utah refinery during the 2008 third quarter. Further, poor
weather during the 2008 first quarter reduced our crude oil
supplies to the Utah refinery and dampened regional product
demand. Conversely, strong product demand from the farming
sector and unplanned outages at several refineries in the region
during the first half of 2007 benefited industry margins in the
prior year. The decrease in our gross refining margins was
partially offset by the availability of more cost advantaged
local light sweet crude oils which lowered our crude oil costs
during the second half of 2008. Due to incremental production
and supply of the crude oils in the region, we anticipate
continued cost benefits.
|
Our gross refining margins were also impacted by our derivative
positions during 2008. The rapid increase in crude oil prices
during the first half of 2008 negatively impacted our derivative
positions reducing our gross refining margins by
$45 million year-over-year. During the 2008 second quarter,
we closed the majority of our long-haul crude oil derivative
positions.
Refining Throughput. During both 2008 and
2007, total refining throughput averaged 595 Mbpd. Excluding the
Los Angeles refinery, throughput decreased by 37 Mbpd primarily
reflecting throughput reductions at our Alaska, Hawaii and
Washington refineries due to the weak market environment. For
information related to scheduled downtime for both periods see
footnote (i) of the table above.
Refined Product Sales. Revenues from sales of
refined products increased 28% to $26.8 billion in 2008
primarily due to significantly higher average refined product
sales prices and increased refined product sales
35
volumes. Our average refined product sales price increased 25%
to $112.06 per barrel as higher average crude oil prices put
upward pressure on product prices. Total refined product sales
volumes increased reflecting additional sales volumes from
operating our Los Angeles refinery for a full year in 2008.
Excluding the Los Angeles refinery, total refined product sales
volumes decreased by 55 Mbpd reflecting declining demand.
Costs of Sales and Expenses. Our average costs
of sales increased 31% to $102.37 per barrel during 2008,
reflecting the significant increase in average crude oil prices
during the year. Manufacturing and other operating expenses
increased to $1.4 billion in 2008, compared with
$1.2 billion in 2007, with $110 million of the
increase incurred by the Los Angeles refinery. The remaining
increase of $98 million primarily reflects higher utility
costs. Selling, general and administrative expenses increased by
$84 million as a result of a $91 million charge to
write-off a receivable discussed above.
2007
Compared to 2006
Overview. The decrease in operating income of
$288 million during 2007 was primarily due to reduced gross
refining margins per barrel and increased operating expenses and
depreciation and amortization, partially offset by increased
throughput. During 2007, total gross refining margin per barrel
decreased by 7% from 2006, reflecting significantly lower
industry margins on the U.S. West Coast during the last six
months of 2007. U.S. refined product margins during the
first six months of 2007 remained well above historical levels
primarily due to strong product demand, lower industry refinery
utilization due to heavy turnaround activity and unplanned
outages, low product inventories and the introduction of new
lower sulfur requirements for non-road diesel fuel beginning
June 1, 2007. However, during the second half of 2007
industry refined product margins on the U.S. West Coast
fell substantially as rising product prices lagged rapidly
rising crude oil prices. Industry margins on the U.S. West
Coast in the second half of 2006 were much stronger compared to
the second half of 2007 reflecting stronger product demand,
lower average product inventories and the introduction of new
sulfur requirements for gasoline and diesel fuel. In addition,
during the 2006 fourth quarter we experienced record industry
margins due to extensive industry turnaround activity and
unplanned downtime on the U.S. West Coast.
Gross Refining Margins. On an aggregate basis,
our total gross refining margins increased to $2.8 billion
in 2007 from $2.6 billion in 2006, reflecting increased
refining throughput as a result of acquiring the Los Angeles
refinery partly offset by lower per barrel gross refining
margins in all of our regions, except the Mid-Continent region.
Other regional factors impacting gross refining margins are
described below.
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During 2007, gross refining margins in our California and
Pacific Northwest regions declined 15% and 3%, respectively.
Factors that negatively impacted our gross refining margins in
the California region during 2007 included: (i) the
scheduled refinery maintenance turnarounds at our Golden Eagle
refinery of the fluid catalytic cracker and hydrocracking units
and subsequent extension of the fluid catalytic cracker
turnaround during the first quarter due to unanticipated repairs
and equipment malfunctions; (ii) unscheduled downtime at
our Golden Eagle refinery during the third quarter which
increased feedstock costs and reduced throughput; and
(iii) contractual purchase commitments and certain refinery
logistical limitations at our Los Angeles refinery which limited
our ability to capture the cost differentials between foreign
sourced and local crudes. The Pacific Northwest region was
negatively impacted by unscheduled maintenance of the boiler
unit for the fluid catalytic cracker and scheduled maintenance
on two hydrotreating units at our Washington refinery during the
2007 third quarter resulting in reduced operating income of
approximately $12 million.
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In our Mid-Pacific region, gross refining margins declined 82%
during 2007, reflecting the decline in U.S. West Coast
industry margins during the second half of 2007. Crude oil costs
in the region were impacted as Asian sweet crude oils realized
higher premiums due to strong Asian demand. At the same time,
several of our term product contracts have lagging pricing
provisions as discussed above, which delayed our fully passing
along the rising crude oil costs. In addition, an unplanned
outage of the Hawaii refinerys reformer unit during the
2007 fourth quarter negatively impacted results by an estimated
$30 million, including $10 million of higher repairs
and maintenance expenses.
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In our Mid-Continent region, gross refining margins increased
21% per barrel during 2007 reflecting strong product demand from
the farming sector and unplanned refinery outages at several
refineries during the first
|
36
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half of 2007. We were also able to take advantage of more
discounted local light sweet crudes during the 2007 fourth
quarter.
|
Our gross refining margins were also impacted by our non-trading
derivative positions during 2007. Our derivative positions were
negatively impacted by rapidly rising crude oil costs, which
reduced our gross refining margins by $104 million
year-over-year. During 2007 and 2006, our derivative positions
resulted in a $61 million loss and a $43 million gain,
respectively.
Refining Throughput. Total refining throughput
averaged 595 Mbpd in 2007 compared to 529 Mbpd during 2006,
primarily reflecting average refining throughput at our Los
Angeles refinery of 68 Mbpd (see footnote (b) of the table
above for information related to refining throughput at our Los
Angeles refinery). Scheduled downtime during 2007 and 2006 that
negatively impacted refining throughput is described in footnote
(i) of the table above. We also experienced unscheduled
downtime in 2007 at our Golden Eagle, Washington and Hawaii
refineries as described above. During 2006, we experienced
unscheduled downtime at our Alaska refinery as a result of the
grounding of our time-chartered vessel which impacted the supply
of feedstocks to the refinery.
Refined Product Sales. Revenues from sales of
refined products increased 21% during 2007 primarily due to
higher average refined product sales prices and increased
refined product sales volumes. Our average refined product sales
price increased 10% to $89.47 per barrel reflecting the increase
in crude oil prices. Total refined product sales volumes
increased 57 Mbpd in 2007, primarily reflecting additional sales
volumes from our Los Angeles refinery.
Costs of Sales and Expenses. Our average costs
of sales increased 13% to $78.14 per barrel during 2007,
reflecting the significant increase in crude oil prices during
the year. Manufacturing and other operating expenses increased
to $1.2 billion in 2007, compared with $867 million in
2006, with $196 million of the increase incurred by the Los
Angeles refinery. The remaining increase of $144 million
reflects higher repairs and maintenance expenses of
$52 million, increased employee costs of $42 million,
higher marine charter expenses of $22 million and increased
utilities costs of $18 million. Depreciation and
amortization increased to $314 million in 2007, compared to
$221 million in 2006, reflecting depreciation and
amortization of $48 million associated with the Los Angeles
refinery and increased depreciation from our recent investments
in capital projects. Loss on asset disposals and impairments
decreased by $31 million primarily due to charges of
$28 million during 2006 relating to the termination of a
delayed coker project at our Washington refinery.
37
Retail
Segment
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2008
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2007
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2006
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|
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(Dollars in millions except per gallon amounts)
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Revenues
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|
|
|
|
|
|
|
|
|
|
|
|
Fuel
|
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$
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4,184
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|
|
$
|
2,946
|
|
|
$
|
1,060
|
|
Merchandise and other(a)
|
|
|
248
|
|
|
|
221
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
4,432
|
|
|
$
|
3,167
|
|
|
$
|
1,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Sales (millions of gallons)
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|
|
1,354
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|
|
|
1,098
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|
|
|
434
|
|
Fuel Margin ($/gallon)(b)
|
|
$
|
0.21
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|
|
$
|
0.15
|
|
|
$
|
0.17
|
|
Merchandise Margin (in millions)
|
|
$
|
57
|
|
|
$
|
52
|
|
|
$
|
38
|
|
Merchandise Margin (percent of revenues)
|
|
|
26
|
%
|
|
|
26
|
%
|
|
|
27
|
%
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Number of Retail Stations (end of year)
|
|
|
|
|
|
|
|
|
|
|
|
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Company-operated
|
|
|
389
|
|
|
|
449
|
|
|
|
194
|
|
Jobber/dealer
|
|
|
490
|
|
|
|
462
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stations
|
|
|
879
|
|
|
|
911
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Number of Retail Stations (during the year)
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
422
|
|
|
|
362
|
|
|
|
204
|
|
Branded jobber/dealer
|
|
|
489
|
|
|
|
384
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total Average Retail Stations
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|
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911
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|
|
|
746
|
|
|
|
465
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|
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|
|
|
|
|
|
|
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|
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Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
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Gross Margins
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel(c)
|
|
$
|
286
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|
|
$
|
164
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|
|
$
|
72
|
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Merchandise and other non-fuel margin
|
|
|
78
|
|
|
|
69
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|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total gross margins
|
|
|
364
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|
|
|
233
|
|
|
|
113
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|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
216
|
|
|
|
182
|
|
|
|
87
|
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Selling, general and administrative
|
|
|
24
|
|
|
|
24
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|
|
|
25
|
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Depreciation and amortization
|
|
|
49
|
|
|
|
28
|
|
|
|
16
|
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Loss on asset disposals and impairments
|
|
|
29
|
|
|
|
7
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
$
|
46
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|
|
$
|
(8
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)
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|
$
|
(21
|
)
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(a) |
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Merchandise and other includes other revenues of
$25 million in 2008, $19 million in 2007 and
$3 million in 2006. |
|
(b) |
|
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 accountin g principles generally
accepted in the United States. |
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(c) |
|
Includes the effect of intersegment purchases from our refining
segment at prices which approximate market. |
2008 Compared to 2007 Operating income for
our retail segment was $46 million during 2008, compared to
an operating loss of $8 million in 2007. Total gross
margins increased by $131 million to $364 million
reflecting significantly increased fuel sales volumes combined
with higher fuel margin per gallon. Total gallons sold increased
38
to 1.4 billion gallons from 1.1 billion gallons in
2007, primarily reflecting additional volumes from the Shell and
USA Gasoline stations acquired in May 2007. Fuel margin
increased to $0.21 per gallon in 2008 from
$0.15 per gallon in 2007, primarily reflecting retail
prices lagging the rapid decrease in crude oil prices during the
last half of 2008. Our Shell and USA Gasoline stations
contributed additional gross margins of $96 million and
additional fuel sales of 266 million gallons during 2008
reflecting operation for a full year in 2008. Excluding the
acquired stations, total gross margins increased by
$36 million and fuel sales volumes remained flat in 2008 as
compared to 2007. The total number of retail stations in our
retail network at December 31, 2008 and 2007 is summarized
above. The decrease in our station count at December 31,
2008 is due to closing 42 Mirastar stations, partially offset by
our strategy to grow our branded jobber/dealer presence in the
Mid-Continent region and on the U.S. West Coast. In August
2008, we amended the ground lease agreement with Wal-Mart under
which we operated 76 retail stations on Wal-Mart parking lots in
the midwestern and western United States. Under the amendment,
we closed 42 retail stations during 2008 and will continue to
operate the remaining 34 retail stations.
Revenues on fuel sales increased to $4.2 billion in 2008,
from $2.9 billion in 2007, reflecting significantly higher
sales volumes and increased average sales prices. Excluding the
acquired stations, revenues on fuel sales increased
$191 million primarily due to higher average product sales
prices. Costs of sales increased in 2008 due to increased sales
volumes and higher average prices for purchased fuel. Operating
expenses increased by $34 million during 2008 as compared
to 2007. Shell and USA Gasoline retail stations contributed
$40 million in additional operating expenses in 2008.
Higher depreciation and amortization reflects operating the
Shell and USA Gasoline stations for a full year in 2008. The
loss on asset disposals and impairments increased by
$22 million during 2008 primarily reflecting closing 42
Mirastar stations and the potential sale of 20 retail stations.
2007 Compared to 2006 The operating loss for
our retail segment was $8 million during 2007, compared to
an operating loss of $21 million in 2006. Total gross
margins increased by $120 million to $233 million
reflecting significantly increased fuel and merchandise volumes
due to the increase in retail stations, partially offset by
slightly lower fuel margins. Total gallons sold increased
664 million, reflecting the increase in the average retail
station count during 2007. The Shell and USA Gasoline sites
acquired in May 2007 contributed gross margins of
$118 million and fuel sales of 643 million gallons.
The remaining increase in gross margins of $2 million and
fuel sales of 21 million gallons reflects an increase in
our Tesoro-branded jobber/dealer retail stations. Fuel margin
decreased to $0.15 per gallon in 2007 as retail prices lagged
rising wholesale prices.
Revenues on fuel sales increased to $2.9 billion in 2007
from $1.1 billion in 2006, reflecting increased sales
volumes and higher sales prices. Revenues on fuel sales from our
acquired Shell and USA Gasoline stations totaled
$1.8 billion during 2007. Costs of sales increased in 2007
due to increased sales volumes and higher average prices for
purchased fuel. Operating expenses increased $95 million
during 2007, of which $84 million represents operating
expenses incurred by our acquired stations.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses totaled
$325 million for 2008 compared to $263 million in
2007. The increase year-over-year was primarily due to a charge
of $91 million to write-off a receivable for which
collection was deemed unlikely. Excluding the receivable charge,
selling, general and administrative expenses decreased by
$29 million primarily due to lower stock-based and
incentive compensation costs of $53 million, partially
offset by higher employee costs of $19 million. Stock-based
compensation for our stock appreciation rights
(SARS) and phantom stock was lower due to our
declining stock price. Our SARS and phantom stock are revalued
to fair value at the end of each reporting period.
Selling, general and administrative expenses of
$263 million in 2007 increased from $176 million in
2006. The increase during 2007 was primarily due to higher
stock-based compensation costs of $31 million, higher
employee expenses of $31 million reflecting increased head
count, increased contract labor expenses of $12 million
primarily associated with software implementation, and
integration expenses related to our acquisitions totaling
$11 million.
39
Interest
and Financing Costs
Interest and financing costs were $111 million in 2008
compared to $91 million in 2007 and $77 million in
2006. The increases were primarily due to the additional debt we
incurred in May 2007 associated with our acquisitions.
Interest
Income
Interest income decreased to $7 million during 2008 from
$33 million in 2007 and $41 million in 2006. The
decreases reflect significant decreases in our cash investments
due to lower operating cash flows associated with a lower margin
environment in 2008 as compared to 2007, and the use of cash to
partially fund our acquisitions in 2007 and to repay borrowings
on our revolver in 2008 and 2007.
Foreign
Currency Exchange
During 2008, our foreign currency exchange gain was
$12 million as compared to a loss of $4 million in
2007. The change was primarily a result of the strengthening of
the U.S. dollar against the Canadian dollar during the 2008
fourth quarter.
Other
Income
Other income totaled $50 million in 2008 and
$5 million in 2006. In 2008, we received refunds from TAPS
in connection with rulings by the Regulatory Commission of
Alaska concerning our protest of intrastate rates. We received
net refunds totaling $50 million from TAPS concerning rates
set between 1997 and 2003. In 2006, the sale of our leased
corporate headquarters by a limited partnership, in which we
were a 50% partner, resulted in a $5 million gain.
Income
Tax Provision
The income tax provision amounted to $151 million in 2008
compared to $339 million in 2007 and $485 million in
2006. The fluctuations reflect decreases in earnings before
income taxes. The combined federal and state effective income
tax rates were 35%, 37% and 38% in 2008, 2007 and 2006,
respectively. The 2008 tax rate benefited from the favorable
settlement of federal tax audits for the years 1996 through 2005
while the decrease in our effective income tax rate from 2006 to
2007 was primarily a result of an increase in the federal tax
deduction for domestic manufacturing activities.
CAPITAL
RESOURCES AND LIQUIDITY
Overview
Our primary sources of liquidity have been cash flows from
operations and borrowing availability under revolving lines of
credit. Our credit agreement provides for borrowings (including
letters of credit) up to the lesser of the amount of a
periodically adjusted borrowing base or the agreements
total capacity. On December 31, 2008, based on a crude oil
(Alaska North Slope) price of $46 per barrel, our adjusted
borrowing base was approximately $620 million. Our total
capacity of $1.81 billion was increased by
$110 million in 2008 and can be increased up to a total
capacity of $1.95 billion. We also increased our separate
letter of credit capacity by $170 million to
$500 million during 2008. We increased our capacities due
to the significant increase in crude prices in the first half of
2008. We ended 2008 with $20 million of cash and cash
equivalents, $66 million of borrowings under our revolver,
and $251 million in available borrowing capacity under our
credit agreement after $303 million in outstanding letters
of credit. We also have three separate letter of credit
agreements of which we had $196 million available after
$304 million in outstanding letters of credit as of
December 31, 2008. During 2008, we reduced inventories by
5 million barrels through our working capital program to
improve cash flows from operations. In 2009, we plan to fund our
capital program of $460 million through operating cash
flows. We believe available capital resources will be adequate
to meet our capital expenditure and working capital requirements
in 2009.
Lehman Commercial Paper Inc. (Lehman CPI) was one of
the lenders under our credit agreement, representing a
commitment of $50 million (less than 3% of our total credit
agreement capacity). In October 2008,
40
Lehman CPI filed for bankruptcy. Lehman CPI will not participate
in any future requests for funding and it is not certain whether
another lender might assume its commitment. Our total capacity
of $1.81 billion at December 31, 2008 reflects this
commitment reduction. Based on the total amounts available under
our credit agreement and separate letter of credit agreements
and our anticipated utilization, we believe we will continue to
have sufficient liquidity to meet our working capital needs.
During the 2008 fourth quarter, our working capital was
negatively impacted by a $91 million charge to write-off a
receivable for which collection was deemed unlikely. We perform
ongoing evaluations of our customers financial condition
and the collectability of our receivables, and we have
implemented certain enhancements for reviewing, monitoring and
responding to these evaluations. In connection with the
receivable write-off, we have initiated a lawsuit against the
account debtor. We cannot give any assurances of when or whether
we will prevail in this lawsuit.
TAPS
Refunds
In 1996, Tesoro Alaska Company filed a protest of the intrastate
rates charged for the transportation of its crude oil through
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 2003. The RCA set
just and reasonable final rates for the years 1997 through 2003
and held that we were entitled to receive refunds, including
interest. In accordance with the rulings, in 2008 we received
refunds from TAPS totaling $50 million, net of contingent
legal fees.
Cash
Dividends
On February 19, 2009, our Board of Directors declared a
quarterly cash dividend on common stock of $0.10 per share,
payable on March 16, 2009 to shareholders of record on
March 2, 2009. During 2008, we paid cash dividends on
common stock of $0.40 per share totaling $55 million.
Capitalization
Our capital structure at December 31, 2008 was comprised of
(in millions):
|
|
|
|
|
Debt, including current maturities:
|
|
|
|
|
Credit Agreement Revolving Credit Facility
|
|
$
|
66
|
|
61/2% Senior
Notes Due 2017
|
|
|
500
|
|
61/4% Senior
Notes Due 2012
|
|
|
450
|
|
65/8% Senior
Notes Due 2015
|
|
|
450
|
|
Junior subordinated notes due 2012 (net of unamortized discount
of $32 in 2008)
|
|
|
118
|
|
Capital lease obligations and other
|
|
|
27
|
|
|
|
|
|
|
Total debt
|
|
|
1,611
|
|
Stockholders equity
|
|
|
3,218
|
|
|
|
|
|
|
Total Capitalization
|
|
$
|
4,829
|
|
|
|
|
|
|
At December 31, 2008, our debt to capitalization ratio was
33%, compared to 35% at year-end 2007, reflecting additional
earnings and repayments on our revolving credit facility.
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, pay dividends, or
repurchase stock. We do not believe that the limitations will
restrict our ability to pay dividends or repurchase stock under
our current programs.
Credit
Agreement Revolving Credit Facility
At December 31, 2008, our credit agreement provided for
borrowings (including letters of credit) up to the lesser of the
amount of a periodically adjusted borrowing base of
approximately $620 million (based upon an
41
Alaska North Slope crude oil price of $46 per barrel),
consisting of Tesoros eligible cash and cash equivalents,
receivables and petroleum inventories, net of the standard
reserve as defined, or the agreements total capacity of
$1.81 billion. The total capacity was increased by
$110 million in May 2008 and can be further increased up to
a total capacity of $1.95 billion. As of December 31,
2008, we had $66 million in borrowings and
$303 million in letters of credit outstanding under the
credit agreement, resulting in total unused credit availability
of $251 million or 40% of the eligible borrowing base.
Borrowings under the revolving credit facility bear interest at
either a base rate (3.25% at December 31, 2008) or a
Eurodollar rate (0.436% at December 31, 2008) plus an
applicable margin. The applicable margin at December 31,
2008 was 0.875% in the case of the Eurodollar rate, but varies
based upon our credit facility availability and credit ratings.
Letters of credit outstanding under the revolving credit
facility incur fees at an annual rate tied to the applicable
margin described above (0.875% at December 31, 2008). We
also incur commitment fees for the unused portion of the
revolving credit facility at an annual rate of 0.25% as of
December 31, 2008. Our credit agreement expires in May 2012.
The credit agreement contains covenants and conditions that,
among other things, limit our ability to pay cash dividends,
incur indebtedness, create liens and make investments. Tesoro is
also required to maintain a certain level of available borrowing
capacity and specified levels of tangible net worth. For the
year ended December 31, 2008, we satisfied all of the
financial covenants under the credit agreement. 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. In February 2008, we amended our credit
agreement to allow up to $100 million of restricted
payments during any four quarter period subject to credit
availability exceeding 20% of the borrowing base.
Letter
of Credit Agreements
The credit agreement allows us to issue letters of credit up to
$500 million under separate letter of credit agreements for
the purchase of foreign petroleum products. At December 31,
2008, we had three separate letter of credit agreements with a
total capacity of $500 million, of which $304 million
was outstanding. Letters of credit outstanding under these
agreements incur fees and are secured by the crude oil
inventories supported by the issued letters of credit. The
agreements may be terminated by either party, at any time.
61/2% Senior
Notes Due 2017
In May 2007, we issued $500 million aggregate principal
amount of
61/2% senior
notes due June 2017. The notes have a ten-year maturity with no
sinking fund requirements and are subject to optional redemption
by Tesoro beginning June 2012 at premiums of 3.25% through May
2013; 2.17% from June 2013 through May 2014; 1.08% from June
2014 through May 2015; and at par thereafter. We have the right
to redeem up to 35% of the aggregate principal amount at a
redemption price of 106.5% with proceeds from certain equity
issuances through June 1, 2010. The indenture for the notes
contains covenants and restrictions that are customary for notes
of this nature. Substantially all of these covenants will
terminate before the notes mature if either Standard and
Poors or Moodys assigns the notes an investment
grade rating and no events of default exist under the indenture.
The terminated covenants will not be restored even if the credit
rating assigned to the notes subsequently falls below investment
grade. The notes are unsecured and are guaranteed by
substantially all of our active domestic subsidiaries.
61/4% Senior
Notes Due 2012
In November 2005, we issued $450 million aggregate
principal amount of
61/4% senior
notes due November 2012. The notes have a seven-year maturity
with no sinking fund requirements and are not callable. The
indenture for the notes contains covenants and restrictions that
are customary for notes of this nature and are identical to the
covenants in the indenture for Tesoros
65/8% senior
notes due 2015. Substantially all of these covenants will
terminate before the notes mature if either Standard and
Poors or Moodys assigns the notes an investment
grade rating and no events of default exist under the indenture.
The terminated covenants will not be restored even if the credit
rating assigned to the notes subsequently falls below investment
grade. The notes are unsecured and are guaranteed by
substantially all of Tesoros active domestic subsidiaries.
42
65/8% Senior
Notes Due 2015
In November 2005, we issued $450 million aggregate
principal amount of
65/8% senior
notes due November 2015. The notes have a ten-year maturity
with no sinking fund requirements and are subject to optional
redemption by Tesoro beginning November 2010 at premiums of 3.3%
through October 2011, 2.2% from November 2011 to October 2012,
1.1% from November 2012 to October 2013, and at par thereafter.
The indenture for the notes contains covenants and restrictions
that are customary for notes of this nature and are identical to
the covenants in the indenture for Tesoros
61/4% senior
notes due 2012. Substantially all of these covenants will
terminate before the notes mature if either Standard and
Poors or Moodys assigns the notes an investment
grade rating and no events of default exist under the indenture.
The terminated covenants will not be restored even if the credit
rating assigned to the notes subsequently falls below investment
grade. The notes are unsecured and are guaranteed by
substantially all of Tesoros active domestic subsidiaries.
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.
Junior
Subordinated Notes Due 2012
In connection with our acquisition of the Golden Eagle 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 was non-interest bearing through May
2007, and carries a 7.5% interest rate thereafter, and
(ii) a $50 million junior subordinated note, due July
2012, which incurred interest at 7.47% from May 2003 through May
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.
Cash
Flow Summary
Components of our cash flows are set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash Flows From (Used In):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
716
|
|
|
$
|
1,322
|
|
|
$
|
1,139
|
|
Investing Activities
|
|
|
(610
|
)
|
|
|
(2,838
|
)
|
|
|
(430
|
)
|
Financing Activities
|
|
|
(109
|
)
|
|
|
553
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
$
|
(3
|
)
|
|
$
|
(963
|
)
|
|
$
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities decreased to
$716 million in 2008 primarily due to lower cash earnings
and higher working capital requirements reflecting significantly
lower payables associated with falling crude oil prices at year
end. Net cash used in investing activities of $610 million
in 2008 was primarily for capital expenditures. Net cash used in
financing activities primarily reflects payments under our
revolver and dividend payments of
43
$55 million. Gross borrowings under our revolving credit
agreement totaled $5.65 billion, and we repaid
$5.71 billion in borrowings during 2008. Working capital
totaled $205 million at December 31, 2008 compared to
$106 million at December 31, 2007, primarily
reflecting lower payables, partially offset by decreased
receivables and inventories. Payables and receivables decreased
due to the lower prices of crude oil and refined products.
Receivables decreased less than payables as a result of product
prices lagging sharply falling crude oil prices. Inventories
decreased from year end due in part to our efforts to reduce
inventories as described above.
Net cash from operating activities increased during 2007 to
$1.3 billion primarily due to lower working capital
requirements reflecting an increase in payables due to the
acquisitions and higher crude oil costs, and higher depreciation
and amortization, partially offset by lower earnings. Net cash
used in investing activities of $2.8 billion in 2007 was
primarily for acquisitions and capital expenditures. In 2006,
net cash used in investing activities of $430 million was
primarily for capital expenditures. Net cash from financing
activities in 2007 primarily reflects the indebtedness incurred
as part of our acquisition of the Los Angeles refinery and
borrowings on the revolver, partially offset by dividend
payments of $48 million. In 2006, net cash used in
financing activities primarily reflects repurchases of our
common stock totaling $151 million (including
$148 million under our common stock repurchase program) and
dividend payments of $27 million. Gross borrowings under
our revolving credit agreement totaled $1.1 billion, and we
repaid $940 million of these borrowings during 2007. We did
not have any borrowings or repayments under the revolving credit
facility during 2006. Working capital decreased to
$106 million at December 31, 2007 from
$1.1 billion at December 31, 2006, primarily due to
decreases in cash as a result of partially funding the
acquisitions with cash and repayments on our revolver.
Capital
Expenditures
During 2008, our capital expenditures totaled $619 million
(including accruals) which consisted of: (i) regulatory
projects (about 70% of total spending), (ii) sustaining
projects (about 20% of total spending) and (iii) income
improvements projects (about 10% of total spending). Our 2009
capital budget is $460 million and is comprised of:
(i) regulatory projects (about 65% of the capital budget),
(ii) sustaining projects (about 30% of the capital budget)
and (iii) income improvement projects (about 5% of the
capital budget). See Business Strategy and Overview
and Environmental Capital Expenditures for
additional information.
Refinery
Turnaround Spending
During 2008, we spent $105 million for refinery turnarounds
and catalyst, primarily at our Golden Eagle refinery and for
turnarounds scheduled in 2009. In 2009, we expect to spend
$140 million for refinery turnarounds, primarily at our
Golden Eagle, Los Angeles, and Alaska refineries. Refining
throughput and yields in 2009 will be affected by a planned
outage at our Washington refinery during the first quarter and
by scheduled turnarounds at our Golden Eagle and Alaska
refineries during the second quarter and our Los Angeles
refinery during the third quarter.
44
Long-Term
Commitments
Contractual
Commitments
We have numerous contractual commitments for purchases
associated with the operation of our refineries, debt service
and leases (see Notes I and M in our consolidated financial
statements in Item 8). We also have minimum contractual
spending requirements for certain capital projects. The
following table summarizes our annual contractual commitments as
of December 31, 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligation
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Long-term debt obligations(a)
|
|
$
|
104
|
|
|
$
|
104
|
|
|
$
|
104
|
|
|
$
|
693
|
|
|
$
|
129
|
|
|
$
|
1,116
|
|
Capital lease obligations(b)
|
|
|
5
|
|
|
|
4
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
21
|
|
Operating lease obligations(b)
|
|
|
268
|
|
|
|
236
|
|
|
|
189
|
|
|
|
144
|
|
|
|
101
|
|
|
|
413
|
|
Crude oil supply obligations(c)
|
|
|
3,378
|
|
|
|
1,080
|
|
|
|
625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other purchase obligations(d)
|
|
|
202
|
|
|
|
62
|
|
|
|
63
|
|
|
|
62
|
|
|
|
34
|
|
|
|
72
|
|
Capital expenditure obligations
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected pension contributions(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
4,015
|
|
|
$
|
1,486
|
|
|
$
|
984
|
|
|
$
|
902
|
|
|
$
|
267
|
|
|
$
|
1,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes maturities of principal and interest payments,
excluding capital lease obligations. Amounts and timing may be
different from our estimated commitments due to potential
voluntary debt prepayments and borrowings. |
|
(b) |
|
Capital lease obligations include amounts classified as
interest. Operating lease obligations represent our future
minimum lease commitments. Operating lease commitments for 2009
include lease arrangements with initial terms of less than one
year, and are not reduced by minimum rentals to be received by
us under subleases. |
|
(c) |
|
Represents an estimate of our contractual purchase commitments
for the supply of crude oil feedstocks, with remaining terms
ranging from 1 year to 3 years. 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 as of December 31, 2008, ranging by crude oil
type from $45 per barrel to $54 per barrel, 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. |
|
(d) |
|
Represents primarily long-term commitments for the
transportation and storage of crude oil and to purchase
industrial gases, chemical processing services and utilities at
our refineries. These purchase obligations are based on the
contracts minimum volume requirements. |
|
(e) |
|
We have no minimum required contribution obligation to our
pension plan under applicable laws and regulations.
Contributions 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 2013. |
In addition to the amounts shown in the table above,
$44 million of unrecognized tax benefits have been recorded
as liabilities in accordance with FIN 48, $15 million
of which is classified as current in the consolidated balance
sheet. With the exception of amounts classified as current
liabilities, we are uncertain as to when such amounts may be
settled. Related to these unrecognized tax benefits, we have
also recorded a liability for potential interest and penalties
of $27 million at December 31, 2008, $20 million
of which is classified as current in the consolidated balance
sheet. See Note K in our consolidated financial statements
in Item 8 for further information.
45
Off-Balance
Sheet Arrangements
Other than our leasing arrangements described in Note M to
our consolidated financial statements, we have not entered into
any transactions, agreements or other contractual arrangements
that would result in off-balance sheet liabilities.
Environmental
and Other Matters
We are a party to various litigation and contingent loss
situations, including environmental and income tax matters,
arising in the ordinary course of business. 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 outcome of
these matters with certainty. However, we have made accruals
based on our best estimates, subject to future developments. We
believe that the outcome of these matters will not have 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 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 certain
emission sources.
Conditions may develop that cause increases or decreases in
future expenditures for our various sites, including, but not
limited to, our refineries, tank farms, pipelines, retail
stations (operating and closed locations) and refined products
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.
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. During the year ended December 31, 2008, we
recognized a $6 million income tax benefit from the
favorable settlement of federal tax audits for the years 1996
through 2005. Although the income tax liability has been
settled, years 2002, 2003 and 2005 remain open to adjustment
pending the settlement of interest. All tax liabilities
resulting from these audits were previously recorded as
unrecognized tax benefits in our condensed consolidated balance
sheet in accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48).
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, 2008 and December 31, 2007, our accruals
for environmental expenditures totaled $123 million and
$90 million, respectively. Our accruals for environmental
expenses include retained liabilities for previously owned or
operated properties, refining, pipeline and terminal operations
and retail stations. We believe these accruals are adequate,
based on currently available information, including the
participation of other parties or former owners in remediation
actions. These estimated environmental liabilities require
judgment to assess and estimate the future costs to remediate.
It is reasonably possible that additional remediation costs will
be incurred as more information becomes available related to
these environmental matters.
In March 2007, we settled our dispute with a prior owner of our
Golden Eagle refinery concerning soil and groundwater conditions
at the refinery. We received $58.5 million in settlement
proceeds in exchange for assuming responsibility for certain
environmental liabilities arising from operations at the
refinery prior to August 2000. At December 31, 2008 and
2007, our accruals for these environmental liabilities totaled
$87 million and $64 million, respectively, which are
included in the environmental accruals referenced above. We
cannot presently estimate additional remedial activities that
may be required at the Golden Eagle refinery. Therefore, it is
reasonably possible that we will incur additional remediation
costs as more information becomes available. We expect to have
valid insurance claims under certain environmental insurance
policies that provide coverage up to $140 million for
46
liabilities in excess of the settlement proceeds. Amounts
recorded for these environmental liabilities have not been
reduced by possible insurance recoveries.
We are continuing to investigate environmental conditions at
certain active wastewater treatment units at our Golden Eagle
refinery. This investigation is driven by an order from the
San Francisco Bay Regional Water Quality Control Board that
names us as well as two previous owners of the Golden Eagle
refinery. A reserve to investigate these conditions is included
in the environmental accruals referenced above.
In July 2008, we received a Notice of Violation
(NOV) from the EPA for the Washington refinery. EPA
alleged that prior to our acquisition of the refinery certain
modifications were made to the fluid catalytic cracking unit in
violation of the Clear Air Act. In October 2005, we received a
NOV from EPA concerning the refinery also alleging that prior to
our acquisition of the refinery certain other modifications were
made to the fluid catalytic cracking unit in violation of the
Clean Air Act. We have investigated the allegations and we
cannot estimate the amount of the ultimate resolution of the
NOVs. However, at this time we believe the final resolution of
the NOVs will not have a material adverse effect on our
financial position or results of operations. We believe we have
defenses to the allegations and intend to vigorously defend
ourselves. A reserve for our response to the NOVs is included in
the environmental accruals referenced above.
Other
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 and the matters described below. On
the basis of existing information, we believe that the
resolution of these matters, individually or in the aggregate,
will not have a material adverse effect on our financial
position or results of operations.
On February 3, 2009, we received a NOV from the EPA
relating to our compliance with the Clean Air Act and the
corresponding regulations concerning the regulation of fuels and
fuel additives. The allegations arise from a compliance review
conducted by the EPA in 2006 for the years 2003 through the time
of the review in 2006. We are investigating the allegations
contained in the NOV and we cannot estimate the amount of the
ultimate resolution of this NOV. However, at this time we
believe the final resolution of this NOV will not have a
material adverse effect on our financial position or results of
operations.
In October 2008, we settled seven of the ten pending cases
alleging MTBE contamination in groundwater. In January 2009, we
were served with an additional lawsuit alleging MTBE
contamination in groundwater. We are a defendant, along with
other manufacturing, supply and marketing defendants, in all of
the cases. The defendants are being sued for having manufactured
MTBE and having manufactured, supplied and distributed gasoline
containing MTBE. The plaintiffs in the four cases, all in
California, are municipalities and governmental authorities. The
plaintiffs allege, in part, that the defendants are liable for
manufacturing or distributing a defective product. The suits
generally seek individual, unquantified compensatory and
punitive damages and attorneys fees. A reserve for the
three cases pending on December 31, 2008 was included in
accrued liabilities at December 31, 2008. We believe the
resolution of the four remaining cases will not have a material
adverse affect on our financial position or results of
operations. We believe we have defenses against these claims and
intend to vigorously defend them.
In October 2008, we received an NOV from the EPA concerning our
Utah refinery alleging certain violations of the Clean Air Act
at the refinery beginning in 2004. We are investigating the
allegations contained in the NOV and cannot currently estimate
the amount of the ultimate resolution. However, we believe the
final resolution of this NOV will not have a material adverse
effect on our financial position or results of operations.
Environmental
Capital Expenditures
EPA regulations related to the Clean Air Act require reductions
in the sulfur content in gasoline. In December 2008, a
gasoline hydrotreater was commissioned at our Utah refinery to
satisfy the requirements of
47
the regulations. We spent $50 million in 2008 to complete
the project. Our refineries will not require any additional
capital spending to meet the low sulfur gasoline standards.
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 through
2012. At our North Dakota refinery, we expect to spend
$9 million in 2009 to meet the standards. We are currently
evaluating alternative projects that will satisfy the future
requirements under existing regulations at our Utah and Hawaii
refineries. Our Golden Eagle, Los Angeles, Washington and Alaska
refineries will not require additional capital spending to meet
the diesel fuel standards.
In February 2007, the EPA issued regulations for the reduction
of benzene in gasoline. We are still evaluating the impact of
this standard; however, based on our most recent estimates we
expect to spend approximately $270 million to
$340 million through 2011 to meet the regulations at five
of our refineries. These cost estimates are subject to further
review and analysis. During 2008, we spent $13 million to
meet this regulation. Our Golden Eagle and Los Angeles
refineries will not require capital spending to meet the benzene
reduction standards.
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 Golden Eagle refinery which is designed to lower emissions
while also enhancing the refinerys capabilities in terms
of crude oil flexibility, reliability, lengthening turnaround
cycles and lowering maintenance 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 the fluid coker boiler at the Golden Eagle refinery. The
coker became fully operational during the 2008 second quarter.
We spent $602 million from inception of the project,
$103 million of which was spent in 2008.
Regulations issued by Californias South Coast Air Quality
Management District (the District) require the
emission of nitrogen oxides to be reduced through 2011 at our
Los Angeles refinery. We plan to meet this requirement by
replacing less efficient power cogeneration units and steam
boilers with more efficient equipment. The District has
determined that it cannot issue a permit for this replacement
project until it revises its regulation (and, in fact, has
implemented a temporary ban on a broad class of air permits). We
are evaluating other alternatives to meet the reduction
requirements during the short term pending the completion of the
equipment replacement project. During 2008, we spent
$48 million and we expect to spend an additional
$250 million to $325 million beginning in 2009 for the
equipment replacement and short-term alternative projects. In
2009, we expect to spend approximately $56 million for
design and procurement for the equipment replacement and to
evaluate the short-term alternative projects.
Other projects at our Los Angeles refinery include replacing
underground pipelines with above-ground pipelines as required by
an Order from the California Regional Water Quality Control
Board. We spent $5 million in 2008 and expect to spend an
additional $60 million to $80 million through 2014 to
complete the project. In 2008, we also installed new flare gas
recovery compressors designed to meet flaring requirements of
the South Coast Air Quality Management District. The new
compressors were commissioned in December 2008. We spent
$34 million in 2008 to install the flare gas recovery
compressors.
We are installing facilities at our Golden Eagle and North
Dakota refineries to eliminate the use of atmospheric blowdown
towers by rerouting these emergency relief systems. We believe
that this plan will provide safer operating conditions for our
employees and will address environmental regulatory issues
related to monitoring potential air emissions from components
connected to the blowdown towers. We spent $53 million in
2008 and expect to spend an additional $52 million through
2011. Our other refineries do not have emergency relief systems
routed to atmospheric blowdown towers.
We will spend additional capital at the Golden Eagle refinery
for reconfiguring and replacing above-ground storage tank
systems and upgrading piping within the refinery through 2013.
During 2008, we spent $18 million and expect to spend an
additional $90 million through 2013. We are also evaluating
alternative projects for our wharves at the Golden Eagle
refinery to meet engineering and maintenance standards issued by
the State of California in February 2006. These project
alternatives could cost between $50 million and
$200 million between 2009 and 2015. The timing of these
projects is subject to negotiations with the appropriate
regulatory agency.
48
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 to reduce air emissions.
Based upon our current plans, we spent $5 million in 2008
and expect to spend an additional $27 million through 2010
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.
California Air Resources Board regulations require the
installation of enhanced vapor recovery and in-station
diagnostic systems at all California gasoline retail stations by
April 2009. The enhanced vapor recovery systems control and
contain gasoline vapor emissions during motor vehicle fueling.
We spent $12 million during 2008 and expect to spend an
additional $11 million in 2009 to satisfy the requirements
of these regulations.
In December 2007, the U.S. Congress passed the Energy
Independence and Security Act, which, among other things,
modified the industry requirements for the Renewable Fuel
Standard (RFS). This standard requires the total
volume of renewable transportation fuels (including ethanol and
biodiesel) sold or introduced in the U.S. to be
11.1 billion gallons in 2009 rising to 36 billion
gallons by 2022. Both requirements could reduce demand growth
for petroleum products in the future. In the near term, the RFS
presents ethanol production and logistics challenges for both
the ethanol and refining and marketing industries and may
require additional expenditures by us to accommodate increased
ethanol use.
In June 2007, the California Air Resources Board proposed
amendments to the requirements for gasoline in the state of
California that decreases the allowable sulfur levels to 20
parts per million and allows for additional ethanol to be
blended into gasoline. The requirements begin December 31,
2009 but may be postponed by individual companies until
December 31, 2011 through the use of the Alternative
Emission Reduction Plan which allows for the acquisition of
emissions offsets from sources not directly related to petroleum
fuel use. We expect both of our California refineries to be in
compliance with the regulation by the 2009 deadline and expect
to spend approximately $1 million through 2010 to meet the
requirements.
The cost estimates for the environmental projects described
above are subject to further review and analysis and include
estimates for capitalized interest and labor costs.
Pension
Funding
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 loss of $94 million in 2008 and a gain of
$24 million in 2007. Based on a 6.28% discount rate and
fair values of plan assets as of December 31, 2008, the
fair values of the assets in our funded employee pension plan
were equal to approximately 56% of the projected benefit
obligation as of the end of 2008. At January 1, 2008 the
adjusted funding target attainment percentage (a funding measure
defined under applicable pension regulations) was 119%. Although
Tesoro had no minimum required contribution obligation to its
funded employee pension plan under applicable laws and
regulations in 2008, we voluntarily contributed $18 million
to improve the funded status of the plan. We currently plan to
contribute approximately $25 million in 2009. Future
contributions are affected by returns on plan assets, employee
demographics and other factors. See Note L in our
consolidated financial statements in Item 8 for further
discussion.
Claims
Against Third-Parties
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
were entitled to receive refunds, including interest. In
accordance with the ruling, in March 2008 we received a refund
from TAPS of $45 million, net of contingent legal fees. The
$45 million refund is included as Other income
in our statement of consolidated operations.
49
In 2002, the RCA rejected the TAPS Carriers proposed
intrastate rate increases for
2001-2003
and maintained the rate of $1.96 to the Valdez Marine Terminal.
The rate decrease has been in effect since June 2003. In June
2008, the Alaska Supreme Court upheld the $1.96 rate for the
years 2001 through 2003. We were awarded refunds in June and
July 2008 including interest totaling $5 million, net of
contingent legal fees, for the period 2001 through June 2003.
The rates paid from mid-June 2003 through June 2008 were also
upheld. The $5 million refund is included as Other
income in our statement of consolidated operations.
In January of 2005, Tesoro Alaska Company intervened in a
protest before the Federal Energy Regulatory Commission
(FERC), of the TAPS Carriers interstate rates
for 2005 and 2006. In July 2005, the TAPS Carriers filed a
proceeding at the FERC seeking to have the FERC assume
jurisdiction under Section 13(4) of the Interstate Commerce
Act and set future rates for intrastate transportation on TAPS.
We filed a protest in that proceeding, which was consolidated
with the other FERC proceeding seeking to set just and
reasonable interstate rates on TAPS for 2005 and 2006. In June
2008, the FERC issued a final order in this consolidated FERC
proceeding that lowered those interstate rates and refused to
revise the current intrastate rates. The TAPS Carriers have
sought rehearing and appealed the FERC order. We cannot give
assurances of whether they will ultimately prevail in any such
rehearing or appeal. However, should the TAPS Carriers prevail,
the result will not have a material impact on our operations or
financial results in future reporting periods but could affect
our future costs in the ordinary course of business.
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. During 2008,
we wrote-off a $91 million receivable for which collection
was deemed unlikely. With the exception of this write-off,
actual losses in our historical results of operations have not
been significant. Actual losses could vary from estimates, as
global economic conditions and the related credit environment
could change.
Inventory Our inventories are stated at the
lower of cost or market. We primarily 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 crude oil and refined products could impair
the carrying values of these inventories. We had 24 million
barrels of crude oil and refined product inventories at
December 31, 2008 with an average cost of approximately $29
per barrel on a LIFO basis. If crude oil and refined product
prices decline below the average cost, then we would be required
to write down the value of our inventories in future periods.
The use of LIFO may also result in increases or decreases to
costs of sales in years when inventory volumes decline and
result in costs of sales associated with inventory layers
established in prior periods. During 2008, a reduction in
inventory quantities resulted in a liquidation of applicable
LIFO inventory quantities carried at lower costs in prior years.
This LIFO liquidation resulted in a decrease in costs of sales
of $138 million.
Property, Plant and Equipment and Acquired
Intangibles We calculate depreciation and
amortization using the straight-line method based on estimated
useful lives and salvage values of our assets. When assets are
placed into service, we make estimates with respect to their
useful lives that we believe are reasonable. However, factors
such as maintenance levels, global economic conditions impacting
the demand for these assets, and regulatory or environmental
matters could cause us to change our estimates, thus impacting
the future calculation of depreciation and amortization. We
evaluate these assets for potential impairment when an asset
disposition is probable or by
50
identifying whether indicators of impairment exist (for example,
operating losses) and, if so, assessing whether the asset values
are recoverable from estimated future undiscounted cash flows.
The actual amount of an impairment loss, if any, to be recorded
is equal to the amount by which the assets carrying value
exceeds its fair value. Fair market value is generally based on
the present values of estimated future cash flows in the absence
of quoted market prices. Estimates of future undiscounted cash
flows and fair market values of assets require subjective
assumptions with regard to several factors, including an
assessment of global market conditions, future operating results
and forecasts of the remaining useful lives of the assets.
Actual results could differ from those estimates.
Goodwill As of December 31, 2008 and
2007, we had goodwill of $89 million and $92 million,
respectively. 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 and a market
approach using recent sales transactions and current stock
prices to determine the estimated fair value of our reporting
units. 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, growth rates and discount
rates. Our assumptions regarding future margins and volumes
require significant judgment as actual margins and volumes have
fluctuated in the past and will likely continue to do so.
Changes in market conditions could result in impairment charges
in the future. During 2008, we wrote-off goodwill of
$3 million associated with our retail segment in connection
with our annual assessment based upon forecasted discounted cash
flows.
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.
Environmental Liabilities At
December 31, 2008 and 2007, our total environmental
liabilities included in accrued liabilities and other
liabilities were $123 million and $90 million,
respectively. We record environmental liabilities when
environmental assessments
and/or
proposed environmental remedies are probable and can be
reasonably estimated. Generally, the timing of our accruals
coincides with assessing the liability and then completing a
feasibility study or committing to a formal plan of action. When
we complete our analysis or when we commit to a plan of action,
we accrue a liability based on the minimum range of the expected
costs, unless we consider another amount more likely. We base
our cost estimates on the extent of remedial actions required by
applicable governing agencies, experience gained from similar
environmental projects and the amounts to be paid by other
responsible parties. Accruals for our environmental liabilities
require judgment due to the uncertainties related to the
magnitude of the liability and timing of the remediation effort.
Our total environmental liability estimates are subject to
change due to potential changes in environmental laws,
regulations or interpretations, additional information related
to the extent and nature of the liability, and potential
improvements in remediation technologies. Our estimated
liabilities are not discounted to present value.
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 recorded a valuation allowance of $9 million on
certain state credit carryforwards as of December 31, 2008.
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 an additional valuation allowance. Beginning
January 1, 2007 with the adoption of FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes we recognize the financial statement effects of a
tax position when it is more likely than not that the position
will be sustained upon examination. Tax positions taken or
expected to be taken that are not recognized
51
under the pronouncement are recorded as liabilities. Our
liability for unrecognized tax benefits, including interest and
penalties totaled $71 million and $67 at December 31,
2008 and 2007, respectively.
Asset Retirement Obligations Our asset
retirement obligations totaled $35 million and
$82 million at December 31, 2008 and 2007,
respectively. We record asset retirement obligations in the
period in which the obligations are incurred and a reasonable
estimate of fair value can be made. We use the present value of
expected cash flows using third-party estimates or historical
data to estimate fair value. The calculation of fair value is
based on several estimates and assumptions, including, among
other things, projected cash flows, inflation, a credit-adjusted
risk-free rate, the settlement dates or a range of potential
settlement dates and the probabilities associated with
settlement. We consider our past practice, industry practice,
managements intent and estimated economic lives to
estimate settlement dates. Our estimates are subject to change
due to potential changes in laws, regulations or
interpretations, additional information related to the extent
and nature of the retirement and technological improvements
associated with the retirement activities. We cannot currently
make reasonable estimates of the fair values of some retirement
obligations, principally those associated with our refineries,
pipelines and certain terminals and retail stations, because the
related assets have indeterminate useful lives which preclude
development of assumptions about the potential timing of
settlement dates. Such obligations will be recognized in the
period in which sufficient information exists to estimate a
range of potential settlement dates.
Pension and Other Postretirement Benefits
Accounting for pensions and other postretirement benefits
involves several assumptions and estimates including discount
rates, expected rate of return on plan assets, rates of
compensation, health care cost trends, inflation, retirement
rates and mortality rates. We must 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 an asset for our
plans overfunded status and a liability for our plans
underfunded status. The funded status represents the difference
between the fair value of our plans assets and its projected
benefit obligations. While we believe that the assumptions used
are appropriate, significant differences in actual experience or
significant changes in assumptions would affect pension and
other postretirement benefits costs and obligations. We
determine the discount rate primarily by reference to rates of
high quality corporate bonds that mature in a pattern similar to
the expected payments to be made under our plans. The expected
return on plan assets is based upon the weighted averages of the
expected long-term rates of return for the broad categories of
investments held in our plans. These assumptions can have a
significant effect on the amounts reported in our consolidated
financial statements. A one-percentage-point change in the
expected return on plan assets and discount rate for the pension
plans would have had the following effects in 2008 (in millions):
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1-Percentage-
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1-Percentage-
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Point Increase
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Point Decrease
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Expected Rate of Return
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Effect on net periodic pension expense
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$
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(2.9
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)
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$
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3.0
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Discount Rate
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Effect on net periodic pension expense
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$
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(4.0
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)
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$
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4.4
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Effect on projected benefit obligation
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$
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(34.7
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)
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$
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40.6
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See Note L in our consolidated financial statements in
Item 8 for more information regarding costs and assumptions.
Stock-Based Compensation We follow the fair
value method of accounting for stock-based compensation. We
estimate the fair value of options and other certain stock-based
awards using the Black-Scholes option-pricing model with
assumptions based primarily on historical data. The assumptions
used in the Black-Scholes option-pricing model require estimates
of the expected term the stock-based awards are held until
exercised, the estimated volatility of our stock price over the
expected term and the number of awards that will be forfeited
prior to the completion of their vesting requirements. Changes
in our assumptions may impact the expenses related to our
stock-based awards. The estimated fair value of our stock
appreciation rights and phantom stock are revalued at the end of
each reporting period, and changes in our assumptions may impact
our liabilities and expenses associated with these awards.
52
New
Accounting Standards and Disclosures
See Note A in our consolidated financial statements in
Item 8.
IMPORTANT
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
(including information incorporated by reference) includes and
references forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to, among other things, expectations
regarding refining margins, revenues, cash flows, capital
expenditures, turnaround expenses, and other financial items.
These statements also relate to our business strategy, goals and
expectations concerning our market position, future operations,
margins and profitability. We have used the words
anticipate, believe, could,
estimate, expect, intend,
may, plan, predict,
project, will, would and
similar terms and phrases to identify forward-looking statements
in this Annual Report on
Form 10-K,
which speak only as of the date the statements were made.
Although we believe the assumptions upon which these
forward-looking statements are based are reasonable, any of
these assumptions could prove to be inaccurate and the
forward-looking statements based on these assumptions could be
incorrect.
The matters discussed in these forward-looking statements are
subject to risks, uncertainties and other factors that could
cause actual results and trends to differ materially from those
made, projected, or implied in or by the forward-looking
statements depending on a variety of uncertainties or other
factors including, but not limited to:
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changes in global economic conditions and the effects of the
global economic downturn on our business and the business of our
suppliers, customers, business partners and credit lenders;
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changes in capital requirements or in execution of planned
capital projects;
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the timing and extent of changes in commodity prices and
underlying demand for our refined products;
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operational hazards inherent in refining operations and in
transporting and storing crude oil and refined products;
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disruptions due to equipment interruption or failure at our
facilities or third-party facilities;
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the availability and costs of crude oil, other refinery
feedstocks and refined products;
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changes in our cash flow from operations;
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changes in the cost or availability of third-party vessels,
pipelines and other means of transporting crude oil feedstocks
and refined products;
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actions of customers and competitors;
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direct or indirect effects on our business resulting from actual
or threatened terrorist incidents or acts of war;
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political developments;
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changes in our inventory levels and carrying costs;
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seasonal variations in demand for refined products;
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changes in fuel and utility costs for our facilities;
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state and federal environmental, economic, health and safety,
energy and other policies and regulations, any changes therein,
and any legal or regulatory investigations, delays or other
factors beyond our control;
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risks related to labor relations and workplace safety;
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changes in insurance markets impacting costs and the level and
types of coverage available;
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adverse rulings, judgments, or settlements in litigation or
other legal or tax matters, including unexpected environmental
remediation costs in excess of any reserves;
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53
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weather conditions affecting our operations or the areas in
which our refined products are marketed; and
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earthquakes or other natural disasters affecting operations.
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Many of these factors, as well as other factors, are described
in greater detail in Competition and Other on
page 11 and Risk Factors on page 17. All
future written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in
their entirety by the previous statements. The forward-looking
statements in this Annual Report on
Form 10-K
speak only as of the date of this Annual Report on
Form 10-K.
We undertake no obligation to update any information contained
herein or to publicly release the results of any revisions to
any forward-looking statements that may be made to reflect
events or circumstances that occur, or that we become aware of,
after the date of this Annual Report on
Form 10-K.
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Our primary source of market risk is the difference between
prices received from the sale of refined products and the prices
paid for crude oil and other feedstocks. We have a risk
management committee responsible for, among other things,
reviewing a quarterly assessment of risks to the corporation and
presenting a quarterly risk report to executive management for
consideration.
Commodity
Price Risks
Our earnings and cash flows from operations depend on the margin
relative to fixed and variable expenses (including the costs of
crude oil and other feedstocks) and the margin relative to those
expenses at which we are able to sell refined products. The
prices of crude oil and refined products have fluctuated
substantially in recent years. These prices depend on many
factors, including the global supply and demand for crude oil,
gasoline and other refined products, which in turn depend on,
among other factors, changes in the global economy, the level of
foreign and domestic production of crude oil and refined
products, geo-political conditions, the availability of imports
of crude oil and refined products, the marketing of alternative
and competing fuels and the impact of government regulations.
The prices we receive for refined products are also affected by
local factors such as local market conditions and the level of
operations of other suppliers in our markets.
Prices for refined products are influenced by the price of crude
oil. Generally, an increase or decrease in the price of crude
oil results in a corresponding increase or decrease in the price
of gasoline and other refined products. However, the prices for
crude oil and prices for our refined products can fluctuate in
different directions based on global market conditions. The
timing, direction and the overall change in refined product
prices versus crude oil prices will impact profit margins and
could have a significant impact on our earnings and cash flows.
In addition, the majority of our crude oil supply contracts are
short-term agreements priced at market. 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 refined products. Assuming all other
factors remained constant, a $1.00 per barrel change in average
gross refining margins, based on our 2008 average throughput of
595 Mbpd, would change annualized pretax operating income by
approximately $217 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 24 million barrels
and 29 million barrels at December 31, 2008 and 2007,
respectively. The average cost of our refinery feedstocks and
refined products at December 31, 2008 was approximately $29
per barrel on a LIFO basis, compared to market prices of
approximately $49 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.
We periodically enter into non-trading derivative arrangements
primarily to manage exposure to price risks associated with the
purchase and/or sale of crude oil and finished products
involving inventories above our target levels. These derivative
instruments typically involve exchange-traded futures and
over-the-counter swaps, generally with durations of one year or
less. Historically, we hedged less than 20% of our crude oil and
products operating volumes. The crude oil hedges have primarily
covered price risks of foreign crudes supplied to our Hawaii
54
and Golden Eagle refineries. A smaller percentage of the hedges
covered West Coast intermediate and finished products. During
the 2008 second quarter, we closed the majority of our crude oil
derivative positions associated with our long-haul strategy that
matched the price of long-haul crude oils to day of processing
product margin. These closed positions did not have a further
significant impact on earnings.
We mark to market our derivative instruments and recognize the
changes in their fair values in earnings. We include the
carrying amounts of our derivatives in Prepayments and
other or Accrued liabilities in the
consolidated balance sheet. We did not designate or account for
any derivative instruments as hedges during 2008. Accordingly,
no change in the value of the related underlying physical asset
is recorded.
Net earnings during 2008 and 2007 included net losses of
$106 million and $61 million, respectively, on our
derivative positions comprised of the following (in millions):
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2008
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2007
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Contract
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Net Gain
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Contract
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Net Gain
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Volumes
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(Loss)
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Volumes
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(Loss)
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Unrealized gain or loss carried on open positions from prior year
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21
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$
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39
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10
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$
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(12
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)
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Settled derivative positions
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525
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(163
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)
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466
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|
(10
|
)
|
Unrealized gain or loss on open positions
|
|
|
1
|
|
|
|
18
|
|
|
|
21
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
$
|
(106
|
)
|
|
|
|
|
|
$
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our open positions at December 31, 2008 will expire at
various times primarily during 2009. We prepared a sensitivity
analysis to estimate our exposure to market risk associated with
our derivative instruments. This analysis may differ from actual
results. The fair value of each derivative instrument was based
on quoted market prices. Based on our open net positions of
1 million barrels at December 31, 2008, 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 $1 million.
55
|
|
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 sheet of
Tesoro Corporation as of December 31, 2008, and the related
consolidated statements of operations, comprehensive income and
stockholders equity, and cash flows for the year then
ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Tesoro Corporation at December 31,
2008, and the consolidated results of its operations and its
cash flows for the year then ended, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Tesoro Corporations internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 27, 2009 expressed
an unqualified opinion thereon.
San Antonio, Texas
February 27, 2009
56
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Tesoro Corporation
We have audited the accompanying consolidated balance sheet of
Tesoro Corporation and subsidiaries (the Company) as
of December 31, 2007, and the related consolidated
statements of operations, comprehensive income and
stockholders equity, and cash flows for each of the two
years in the period ended December 31, 2007. 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,
2007, and the results of their operations and their cash flows
for each of the two years in the period ended December 31,
2007, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note A to the consolidated financial
statements, in 2006 the Company changed its method of accounting
for refined product sales and purchases transactions with the
same counterparty that have been entered into in contemplation
of one another, and for its pension and other postretirement
plans.
/s/ DELOITTE &
TOUCHE LLP
San Antonio, Texas
February 28, 2008 (October 21, 2008, as to Note Q)
57
TESORO
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions except per share amounts)
|
|
|
REVENUES(a)
|
|
$
|
28,309
|
|
|
$
|
21,915
|
|
|
$
|
18,104
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of sales and operating expenses(a)
|
|
|
27,070
|
|
|
|
20,308
|
|
|
|
16,314
|
|
Selling, general and administrative expenses
|
|
|
325
|
|
|
|
263
|
|
|
|
176
|
|
Depreciation and amortization
|
|
|
401
|
|
|
|
357
|
|
|
|
247
|
|
Loss on asset disposals and impairments
|
|
|
42
|
|
|
|
20
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
471
|
|
|
|
967
|
|
|
|
1,317
|
|
Interest and financing costs
|
|
|
(111
|
)
|
|
|
(91
|
)
|
|
|
(77
|
)
|
Interest income
|
|
|
7
|
|
|
|
33
|
|
|
|
41
|
|
Foreign currency exchange gain (loss)
|
|
|
12
|
|
|
|
(4
|
)
|
|
|
|
|
Other income
|
|
|
50
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES
|
|
|
429
|
|
|
|
905
|
|
|
|
1,286
|
|
Income tax provision
|
|
|
151
|
|
|
|
339
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
278
|
|
|
$
|
566
|
|
|
$
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.03
|
|
|
$
|
4.17
|
|
|
$
|
5.89
|
|
Diluted
|
|
$
|
2.00
|
|
|
$
|
4.06
|
|
|
$
|
5.73
|
|
WEIGHTED AVERAGE COMMON SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
136.8
|
|
|
|
135.7
|
|
|
|
136.0
|
|
Diluted
|
|
|
139.2
|
|
|
|
139.5
|
|
|
|
139.8
|
|
DIVIDENDS PER SHARE
|
|
$
|
0.40
|
|
|
$
|
0.35
|
|
|
$
|
0.20
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes excise taxes collected by our retail segment
|
|
$
|
278
|
|
|
$
|
240
|
|
|
$
|
102
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
58
TESORO
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions except per share amounts)
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20
|
|
|
$
|
23
|
|
Receivables, less allowance for doubtful accounts
|
|
|
738
|
|
|
|
1,243
|
|
Inventories
|
|
|
787
|
|
|
|
1,200
|
|
Prepayments and other
|
|
|
101
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,646
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Refining
|
|
|
5,468
|
|
|
|
5,021
|
|
Retail
|
|
|
599
|
|
|
|
642
|
|
Corporate and other
|
|
|
198
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,265
|
|
|
|
5,856
|
|
Less accumulated depreciation and amortization
|
|
|
(1,184
|
)
|
|
|
(1,076
|
)
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
5,081
|
|
|
|
4,780
|
|
|
|
|
|
|
|
|
|
|
OTHER NONCURRENT ASSETS
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
89
|
|
|
|
92
|
|
Acquired intangibles, net
|
|
|
269
|
|
|
|
290
|
|
Other, net
|
|
|
348
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
Total Other Noncurrent Assets
|
|
|
706
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
7,433
|
|
|
$
|
8,128
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,027
|
|
|
$
|
2,004
|
|
Accrued liabilities
|
|
|
412
|
|
|
|
488
|
|
Current maturities of debt
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,441
|
|
|
|
2,494
|
|
|
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES
|
|
|
416
|
|
|
|
388
|
|
OTHER LIABILITIES
|
|
|
749
|
|
|
|
537
|
|
DEBT
|
|
|
1,609
|
|
|
|
1,657
|
|
COMMITMENTS AND CONTINGENCIES
(Note M) STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.162/3;
authorized 200,000,000 shares; 145,755,260 shares
issued (144,505,356 in 2007)
|
|
|
24
|
|
|
|
24
|
|
Additional paid-in capital
|
|
|
916
|
|
|
|
876
|
|
Retained earnings
|
|
|
2,616
|
|
|
|
2,393
|
|
Treasury stock, 7,380,182 common shares (7,460,518 in 2007), at
cost
|
|
|
(147
|
)
|
|
|
(151
|
)
|
Accumulated other comprehensive loss
|
|
|
(191
|
)
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
3,218
|
|
|
|
3,052
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
7,433
|
|
|
$
|
8,128
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
TESORO
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Comprehensive
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Treasury Stock
|
|
|
Comprehensive
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
|
(In millions)
|
|
|
AT JANUARY 1, 2006
|
|
|
|
|
|
|
141.7
|
|
|
$
|
24
|
|
|
$
|
782
|
|
|
$
|
1,102
|
|
|
|
(3.1
|
)
|
|
$
|
(19
|
)
|
|
$
|
(2
|
)
|
Net earnings
|
|
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.8
|
)
|
|
|
(151
|
)
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
0.3
|
|
|
|
11
|
|
|
|
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants and amortization
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply FASB Statement No. 158 (net
of related tax benefit of $42)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
$
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2006
|
|
|
|
|
|
|
143.4
|
|
|
$
|
24
|
|
|
$
|
829
|
|
|
$
|
1,876
|
|
|
|
(7.6
|
)
|
|
$
|
(159
|
)
|
|
$
|
(68
|
)
|
Net earnings
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(4
|
)
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
0.2
|
|
|
|
12
|
|
|
|
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants and amortization
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of FASB Interpretation No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other benefit liability adjustments (net of tax
benefit of $14)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
$
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2007
|
|
|
|
|
|
|
144.5
|
|
|
$
|
24
|
|
|
$
|
876
|
|
|
$
|
2,393
|
|
|
|
(7.5
|
)
|
|
$
|
(151
|
)
|
|
$
|
(90
|
)
|
Net earnings
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(5
|
)
|
|
|
|
|
Shares issued for stock options and benefit plans
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
0.3
|
|
|
|
9
|
|
|
|
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants and amortization
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other benefit liability adjustments (net of tax
benefit of $65)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT DECEMBER 31, 2008
|
|
|
|
|
|
|
145.8
|
|
|
$
|
24
|
|
|
$
|
916
|
|
|
$
|
2,616
|
|
|
|
(7.4
|
)
|
|
$
|
(147
|
)
|
|
$
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
TESORO
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
278
|
|
|
$
|
566
|
|
|
$
|
801
|
|
Adjustments to reconcile net earnings to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
401
|
|
|
|
357
|
|
|
|
247
|
|
Provision for bad debts
|
|
|
95
|
|
|
|
2
|
|
|
|
2
|
|
Amortization of debt issuance costs and discounts
|
|
|
11
|
|
|
|
12
|
|
|
|
15
|
|
Loss on asset disposals and impairments
|
|
|
42
|
|
|
|
20
|
|
|
|
50
|
|
Stock-based compensation
|
|
|
14
|
|
|
|
53
|
|
|
|
22
|
|
Deferred income taxes
|
|
|
89
|
|
|
|
(1
|
)
|
|
|
105
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
(3
|
)
|
|
|
(10
|
)
|
|
|
(17
|
)
|
Other changes in non-current assets and liabilities
|
|
|
(64
|
)
|
|
|
(76
|
)
|
|
|
(110
|
)
|
Changes in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
410
|
|
|
|
(362
|
)
|
|
|
(145
|
)
|
Inventories
|
|
|
413
|
|
|
|
(50
|
)
|
|
|
81
|
|
Prepayments and other
|
|
|
28
|
|
|
|
(34
|
)
|
|
|
(4
|
)
|
Accounts payable and accrued liabilities
|
|
|
(998
|
)
|
|
|
845
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
716
|
|
|
|
1,322
|
|
|
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(650
|
)
|
|
|
(747
|
)
|
|
|
(436
|
)
|
Acquisitions
|
|
|
|
|
|
|
(2,105
|
)
|
|
|
|
|
Proceeds from asset sales
|
|
|
40
|
|
|
|
14
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(610
|
)
|
|
|
(2,838
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit agreement
|
|
|
5,658
|
|
|
|
1,060
|
|
|
|
|
|
Repayments on revolving credit agreement
|
|
|
(5,712
|
)
|
|
|
(940
|
)
|
|
|
|
|
Proceeds from debt offerings, net of issuance costs of $6
|
|
|
|
|
|
|
494
|
|
|
|
|
|
Borrowings under term loan
|
|
|
|
|
|
|
700
|
|
|
|
|
|
Repayments of debt
|
|
|
(2
|
)
|
|
|
(216
|
)
|
|
|
(12
|
)
|
Debt refinanced
|
|
|
|
|
|
|
(500
|
)
|
|
|
|
|
Repurchases of common stock
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
(151
|
)
|
Dividend payments
|
|
|
(55
|
)
|
|
|
(48
|
)
|
|
|
(27
|
)
|
Proceeds from stock options exercised
|
|
|
5
|
|
|
|
9
|
|
|
|
12
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
3
|
|
|
|
10
|
|
|
|
17
|
|
Financing costs and other
|
|
|
(1
|
)
|
|
|
(12
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
(109
|
)
|
|
|
553
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(3
|
)
|
|
|
(963
|
)
|
|
|
546
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
23
|
|
|
|
986
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
20
|
|
|
$
|
23
|
|
|
$
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURES
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of capitalized interest
|
|
$
|
84
|
|
|
$
|
70
|
|
|
$
|
50
|
|
Income taxes paid, net of refunds
|
|
$
|
45
|
|
|
$
|
329
|
|
|
$
|
356
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued
liabilities
|
|
$
|
70
|
|
|
$
|
101
|
|
|
$
|
59
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
61
TESORO
CORPORATION
|
|
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 seven petroleum
refineries in the western and mid-continental United States with
a combined crude oil throughput capacity of 665 thousand barrels
per day (Mbpd), and we sell refined products to a
wide variety of customers. We market refined products to
wholesale and retail customers, as well as commercial end-users.
Our retail business includes a network of 389 branded stations
primarily operated by Tesoro under the
Tesoro®,
Mirastar®,
Shell®
and USA
Gasolinetm
brands and 490 branded stations operated by 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 global supply and
demand for crude oil, gasoline and other refined products, which
are subject to, among other things, changes in the global
economy and the level of foreign and domestic production of
crude oil and refined products, geo-political conditions,
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
suppliers in our markets. As a result of these factors, margin
fluctuations during any reporting period can have a significant
impact on our results of operations, cash flows, liquidity and
financial position.
Principles
of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Tesoro and its subsidiaries. All intercompany
accounts and transactions have been eliminated. Certain
investments are carried at cost. These investments are not
material, either individually or in the aggregate, to
Tesoros financial position, results of operations or cash
flows. Share and per share data (except par value) for the
periods presented reflect the effect of a two-for-one stock
split effected in the form of a stock dividend which was
distributed in May 2007.
Use of
Estimates
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.
Cash
and Cash Equivalents
Cash and cash equivalents include bank deposits and low-risk
short-term investments with original maturities of three months
or less at the time of purchase. Our cash investment policy
excludes investments with sub-prime market exposure. Cash
equivalents are stated at cost, which approximates market value.
Receivables
Tesoros receivables primarily consist of customer accounts
receivable, including proprietary credit card receivables.
Credit is extended based on evaluation of the customers
financial condition and in certain
62
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
circumstances, collateral, such as letters of credit or
guarantees, are required. Reserve for bad debts is based on a
combination of current sales, historical charge-offs and
specific accounts identified as high risk. Uncollectible
accounts receivable are charged against the allowance for
doubtful accounts when all reasonable efforts to collect the
amounts due have been exhausted.
Financial
Instruments
The carrying amounts of financial instruments, including cash
and cash equivalents, receivables, accounts payable and certain
accrued liabilities, approximate fair value because of the short
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 at December 31, 2008,
was approximately $246 million less than its total book
value of $1.4 billion.
Inventories
Inventories are stated at the lower of cost or market. We use
last-in,
first-out (LIFO) as the primary method to determine
the cost of crude oil 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 using the
straight-line method, based on the estimated useful life of each
asset. The useful lives range from 6 to 28 years for
refineries, 10 to 25 years for terminals, 5 to
16 years for retail stations, 6 to 22 years for
transportation assets and 3 to 25 years for corporate
assets. We record property under capital leases at the lower of
the present value of minimum lease payments using Tesoros
incremental borrowing rate or the fair value of the leased
property at the date of lease inception. We depreciate property
under capital leases over the lesser of the term of each lease
or the economic life of the asset. Leasehold improvements are
depreciated over the lesser of the lease term or the economic
life of the asset.
We capitalize interest and labor as part of the cost of major
projects during the construction period. Capitalized interest
totaled $27 million, $30 million and $11 million
during 2008, 2007 and 2006, respectively and is recorded as a
reduction to Interest and financing costs in the
statements of consolidated operations.
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
consider our past practice, industry practice, managements
intent and estimated economic lives to estimate settlement dates
or a range of settlement dates.
We cannot currently estimate the fair value for certain
retirement obligations primarily because we cannot estimate
settlement dates (or range of dates) associated with these
assets. Such obligations will be recognized in the period in
which sufficient information exists to determine a reasonable
estimate. 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 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 or removal of
certain major processing
63
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
units, buildings, tanks, pipelines or other equipment and
(iii) removal of underground storage tanks at our owned
retail stations at or near the time of closure. 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
implementation of technological advances. Also, we have not
historically incurred significant retirement obligations for
hazardous materials disposal or other removal costs associated
with asset retirements or replacements during scheduled
maintenance projects.
Environmental
Matters
We capitalize environmental expenditures that extend the life or
increase the capacity of facilities, as well as expenditures
that prevent environmental contamination. We expense costs that
relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation.
We record liabilities when environmental assessments
and/or
remedial efforts are probable and can be reasonably estimated.
Cost estimates are based on the expected timing and the extent
of remedial actions required by applicable governing agencies,
experience gained from similar sites for which environmental
assessments or remediation have been completed, and the amount
of our anticipated liability considering the proportional
liability and financial abilities of other responsible parties.
Generally, the timing of these accruals coincides with the
completion of a feasibility study or our commitment to a formal
plan of action. Estimated liabilities are not discounted to
present value.
Goodwill
and Acquired Intangibles
Goodwill represents the excess of cost (purchase price) over the
fair value of net assets acquired. Goodwill acquired in a
business combination is not amortized. We review goodwill for
impairment annually or more frequently, if events or changes in
business circumstances indicate the carrying values of the
assets may not be recoverable. Acquired intangibles consist
primarily of air emissions credits, customer agreements and
contracts, the USA Gasoline trade name, and software, which we
recorded at fair value as of the date acquired. We amortize
acquired intangibles on a straight-line basis over estimated
useful lives of 2 to 31 years, and we include the
amortization in Depreciation and amortization.
Other
Assets
We defer turnaround and certain catalyst costs and amortize the
costs on a straight-line basis over the expected periods of
benefit, generally ranging from 2 to 6 years. Turnaround
expenditures are amortized over the period of time until the
next planned turnaround of the processing unit. Certain
catalysts are used in refinery processing units for periods
exceeding one year. Amortization for these deferred costs, which
is included in Depreciation and amortization,
amounted to $127 million, $111 million and
$64 million in 2008, 2007 and 2006, 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.
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
record an impairment loss if the undiscounted cash flows
estimated to be generated by those assets is less than the
carrying amount of those assets. Factors that indicate potential
impairment include a
64
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
significant decrease in the market value of a long-lived asset,
operating or cash flow losses associated with the use of the
asset and a significant change in the long-lived assets
physical condition.
Revenue
Recognition
We recognize revenues from petroleum product sales upon delivery
to customers, which is the point at which title is transferred,
and when payment has either been received or collection is
reasonably assured. We include certain crude oil and refined
product purchases and resales used for trading purposes in
revenues on a net basis. Nonmonetary crude oil and refined
product 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 enter into a limited number of refined product sale
and purchase transactions with the same counterparty that have
been entered into in contemplation with one another. We record
these transactions for new arrangements or modifications of
existing arrangements on a net basis in Costs of sales and
operating expenses as required by Emerging Issues Task
Force (EITF) Issue
No. 04-13,
Accounting for Purchases and Sales of Inventory with the
Same Counterparty, which we adopted on January 1,
2006.
We include transportation fees charged to customers in
Revenues, and we include the related costs in
Costs of sales and operating expenses in our
statements of consolidated operations. Federal excise and state
motor fuel taxes, which are remitted to governmental agencies
through our refining segment and collected from customers in our
retail segment, are included in both Revenues and
Costs of sales and operating expenses. These taxes,
primarily related to sales of gasoline and diesel fuel, totaled
$278 million, $240 million and $102 million in
2008, 2007 and 2006, respectively.
Income
Taxes
We record deferred tax assets and liabilities for future income
tax consequences that are attributable to differences between
the financial statement carrying amounts of assets and
liabilities and their income tax bases. We base the measurement
of deferred tax assets and liabilities on enacted tax rates that
we expect will apply to taxable income in the year 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. Beginning
January 1, 2007 with the adoption of FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) we recognize the financial
statement effects of a tax position when it is more likely than
not that the position will be sustained upon examination. Tax
positions taken or expected to be taken that are not recognized
under the pronouncement are recorded as liabilities.
Pension
and Other Postretirement Benefits
Effective December 31, 2006, Tesoro adopted Statement of
Financial Accounting Standards (SFAS) No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans An Amendment of FASB Statement
No. 87, 88, 106 and 132R. SFAS No. 158
requires the recognition of an asset for a plans
overfunded status or a liability for a plans underfunded
status in the statement of financial position, measurement of
the funded status of a plan as of the date of its year-end
statement of financial position and recognition for changes in
the funded status of a defined benefit postretirement plan in
the year in which the changes occur as a component of other
comprehensive income. No measurement adjustment was required as
Tesoro measures the funded status of its defined benefit pension
and postretirement plans as of year end. Upon adoption of
SFAS No. 158, we recorded an after-tax charge totaling
$66 million to Accumulated other comprehensive
loss of stockholders equity at December 31,
2006. See Note L for further information on our pension and
other postretirement benefits.
65
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock-Based
Compensation
Our stock-based compensation awards include stock options,
restricted stock, stock-appreciation rights and phantom stock.
We estimate the fair value of certain stock-based awards using
the Black-Scholes option-pricing model. The fair value of our
restricted stock awards on the date of grant is equal to the
fair market price of our common stock. We amortize the fair
value of our stock options and restricted stock using the
straight-line method. The fair value of our stock appreciation
rights and phantom stock is estimated at the end of each
reporting period and is recorded as a liability in our
consolidated balance sheets.
Derivative
Instruments
We account for derivative instruments in accordance with
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. Tesoro
periodically enters into non-trading derivative arrangements
primarily to manage exposure to commodity price risks associated
with the purchase and/or sale of crude oil and finished products
involving inventories above our target levels. These derivative
arrangements typically involve exchange-traded futures and
over-the-counter swaps, generally with durations of one year or
less. We do not hold or issue derivative instruments for trading
purposes. We mark to market our non-hedging derivative
instruments and recognize the changes in their fair values in
earnings. The carrying amounts of our derivatives are recorded
at fair value in Prepayments and other or
Accrued liabilities in the consolidated balance
sheets. We did not designate or account for any derivative
instruments as hedges during 2008, 2007 or 2006.
Foreign
Currency Exchange
The functional currency for our foreign subsidiaries is the
U.S. dollar. The translation of our foreign operations into
U.S. dollars is computed for balance sheet accounts using
exchange rates in effect as of the balance sheet date and for
revenue and expense accounts using the weighted-average exchange
rates during the year. Amounts are recorded in Foreign
currency exchange gain (loss) in our statements of
consolidated operations.
New
Accounting Standards and Disclosures
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements.
SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements
and does not require any new fair value measurements. The
standard establishes a fair value hierarchy that prioritizes the
use of inputs used in valuation techniques into the following
three levels: level 1 quoted prices in active
markets for identical assets and liabilities;
level 2 observable inputs other than quoted
prices in active markets for identical assets and liabilities;
and level 3 unobservable inputs that are
supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
In February 2008, the FASB issued FASB Staff Position
(FSP)
No. 157-2,
Effective Date of FASB Statement No. 157. The
FSP delayed the effective date of SFAS No. 157 for
Tesoro until January 1, 2009 for nonfinancial assets and
nonfinancial liabilities, including long-lived assets measured
at fair value for an impairment assessment and asset retirement
obligations initially measured at fair value, except for items
that are recognized or disclosed at fair value on a recurring
basis. We adopted the provisions of SFAS No. 157
effective January 1, 2009, which did not have an impact on
our financial position or results of operations.
66
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The standards provisions for financial assets and
financial liabilities which became effective as of
January 1, 2008 had no material impact on our financial
position or results of operations. At December 31, 2008,
our only financial assets and financial liabilities that are
measured at fair value on a recurring basis are our derivative
instruments. Our derivative instruments consist primarily of
exchange traded futures and swaps. Exchange-traded futures are
valued based on quoted prices from exchanges and are categorized
in Level 1 of the fair value hierarchy. Swaps are priced
using third-party broker quotes, industry pricing services, and
exchange-traded curves, but since they have contractual terms
that are not identical to exchange-traded futures instruments
with a comparable market price, these financial instruments are
categorized in Level 2 of the fair value hierarchy. Our
derivative instruments measured at fair value by the three
levels described above are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Unobservable
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
20
|
|
|
$
|
23
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
|
|
Certain of our derivative contracts under master netting
arrangements include both asset and liability positions. Under
the guidance of FASB Interpretation (FIN)
39-1,
Amendment of FASB Interpretation No. 39, we
have elected to offset the fair value amounts recognized for
multiple derivative instruments executed with the same
counterparty, including the related cash collateral.
SFAS No. 159
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, which permits entities to measure many
financial instruments and certain other items at fair value at
specified election dates that are not currently required to be
measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected should be reported
in earnings at each subsequent reporting date. The provisions of
SFAS No. 159 were effective for Tesoro as of
January 1, 2008. We elected not to adopt the fair value
option under this standard.
SFAS No. 141(R)
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations, which requires that the
assets acquired and liabilities assumed in a business
combination be recorded at the acquisition-date fair value with
limited exceptions. SFAS No. 141(R) will change the
accounting treatment for certain specific acquisition related
items, including: (i) expensing acquisition related costs
as incurred; (ii) valuing noncontrolling interests at fair
value at the acquisition date; and (iii) expensing
restructuring costs associated with an acquired business. The
provisions of SFAS No. 141(R) will be applied
prospectively to business combinations occurring on or after
January 1, 2009.
SFAS No. 161
In March 2008, the FASB issued SFAS No. 161,
Disclosure about Derivative Instruments and Hedging
Activities. This standard changes the annual and interim
disclosure requirements for derivative instruments and hedging
activities. An entity with derivative instruments is required to
disclose how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted
for and how derivative instruments and related hedge items
affect an entitys financial position, financial
performance and cash flows. The
67
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
standard was effective beginning January 1, 2009. The
standard will not have an impact on our financial position or
results of operations.
FASB
Staff Position No. 132 (R) 1
In December 2008, the FASB issued FSP No. 132 (R)-1,
Employers Disclosures about Postretirement Benefit
Plan Assets which amends SFAS No. 132 to require
disclosure of the level within the fair value hierarchy (i.e.
level 1, level 2 and level 3) in which each
major category of plan assets falls using the guidance in
SFAS No. 157. The standard also requires disclosure of
the fair value of major categories of plan assets, the nature
and amount of any concentrations of risk within categories of
plan assets and the valuation techniques and inputs used to
develop fair value measurements of plan assets. The provisions
of the standard are effective as of December 31, 2009 for
Tesoro. Adoption of the standard is not expected to have an
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, common stock options and unvested
restricted stock outstanding during the period. Share and per
share amounts have been adjusted to reflect the May 2007
two-for-one stock split. Earnings per share calculations are
presented below (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
278
|
|
|
$
|
566
|
|
|
$
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
136.8
|
|
|
|
135.7
|
|
|
|
136.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
2.03
|
|
|
$
|
4.17
|
|
|
$
|
5.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
278
|
|
|
$
|
566
|
|
|
$
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
136.8
|
|
|
|
135.7
|
|
|
|
136.0
|
|
Dilutive effect of stock options and unvested restricted stock
|
|
|
2.4
|
|
|
|
3.8
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted shares
|
|
|
139.2
|
|
|
|
139.5
|
|
|
|
139.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
$
|
2.00
|
|
|
$
|
4.06
|
|
|
$
|
5.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los
Angeles Assets
On May 10, 2007 we acquired a 97 Mbpd refinery and a 42
Mbpd refined products terminal located south of Los Angeles,
California along with a network of 276
Shell®
branded retail stations (128 are company-operated) located
throughout Southern California (collectively, the Los
Angeles Assets) from Shell Oil Products
U.S. (Shell). The purchase price for the Los
Angeles Assets was $1.82 billion (which includes
$257 million for petroleum inventories and direct costs of
$16 million). The purchase price was allocated to the
assets acquired and liabilities assumed based upon their
respective fair market values at the date of acquisition. The
accompanying financial statements include the results of
operations of the Los Angeles Assets since the date of
acquisition in May 2007.
68
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
USA
Petroleum Retail Stations
On May 1, 2007, we acquired 138 retail stations located
primarily in California from USA Petroleum (the USA
Petroleum Assets). The purchase price of the assets and
the USA
Gasolinetm
brand name was paid in cash totaling $286 million
(including inventories of $15 million and direct costs of
$3 million). The purchase price was allocated based upon
fair market values at the date of acquisition. The accompanying
financial statements include the results of operations of the
USA Petroleum Assets since the date of acquisition in May 2007.
Concentrations of credit risk with respect to accounts
receivable are influenced by the large number of customers
comprising our customer base and their dispersion across various
industry groups and geographic areas of operations. We perform
ongoing credit evaluations of our customers financial
condition, and in certain circumstances, require prepayments,
letters of credit or other collateral arrangements. During 2008,
we incurred a $91 million charge to write-off a receivable
for which collection was deemed unlikely.
Receivables at December 31, 2008 and 2007 consisted of the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Trade receivables
|
|
$
|
675
|
|
|
$
|
1,213
|
|
Tax receivables
|
|
|
60
|
|
|
|
33
|
|
Other receivables
|
|
|
11
|
|
|
|
4
|
|
Allowance for doubtful accounts
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
Total receivables, net
|
|
$
|
738
|
|
|
$
|
1,243
|
|
|
|
|
|
|
|
|
|
|
The changes in the allowance for doubtful accounts for the years
ended December 31, 2008 and 2007 associated with our trade
receivables consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of year
|
|
$
|
7
|
|
|
$
|
6
|
|
|
$
|
5
|
|
Increase in allowance charged to expense
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Accounts charged against the allowance, net of recoveries
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of inventories at December 31, 2008 and 2007
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Crude oil and refined products
|
|
$
|
680
|
|
|
$
|
1,107
|
|
Oxygenates and by-products
|
|
|
22
|
|
|
|
17
|
|
Merchandise
|
|
|
13
|
|
|
|
15
|
|
Materials and supplies
|
|
|
72
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
Total Inventories
|
|
$
|
787
|
|
|
$
|
1,200
|
|
|
|
|
|
|
|
|
|
|
Crude oil and refined products inventories valued at LIFO cost
were less than replacement cost by approximately
$405 million and $1.4 billion, at December 31,
2008 and 2007, respectively. During 2008, a reduction in
inventory quantities resulted in a liquidation of applicable
LIFO inventory quantities carried at lower costs in prior years.
This LIFO liquidation resulted in a decrease in costs of sales
of $138 million.
69
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NOTE F
|
GOODWILL
AND ACQUIRED INTANGIBLES
|
Goodwill is not amortized but 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 carrying amount of
goodwill. Goodwill in our refining segment totaled
$84 million at both December 31, 2008 and 2007,
respectively. In our retail segment, goodwill totaled
$5 million and $8 million at December 31, 2008
and 2007, respectively. During 2008, we wrote-off goodwill of
$3 million associated with our retail segment in connection
with our annual assessment based upon forecasted discounted cash
flows.
All of our acquired intangible assets are subject to
amortization. Amortization expense of acquired intangible assets
amounted to $21 million, $16 million and
$7 million for the years ended December 31, 2008, 2007
and 2006, respectively. Our estimated amortization expense for
each of the following five years is: 2009
$22 million; 2010 $18 million;
2011 $19 million;
2012 $13 million; and 2013
$12 million.
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, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
|
|
|
Air emissions credits
|
|
$
|
211
|
|
|
$
|
33
|
|
|
$
|
178
|
|
|
$
|
211
|
|
|
$
|
24
|
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
Customer agreements and contracts
|
|
|
50
|
|
|
|
28
|
|
|
|
22
|
|
|
|
50
|
|
|
|
25
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
USA Gasoline tradename
|
|
|
35
|
|
|
|
3
|
|
|
|
32
|
|
|
|
35
|
|
|
|
1
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
20
|
|
|
|
9
|
|
|
|
11
|
|
|
|
20
|
|
|
|
4
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
Refinery permits and plans
|
|
|
17
|
|
|
|
5
|
|
|
|
12
|
|
|
|
17
|
|
|
|
4
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
Favorable leases
|
|
|
12
|
|
|
|
1
|
|
|
|
11
|
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
Other intangibles
|
|
|
6
|
|
|
|
3
|
|
|
|
3
|
|
|
|
6
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
351
|
|
|
$
|
82
|
|
|
$
|
269
|
|
|
$
|
351
|
|
|
$
|
61
|
|
|
$
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE G
|
OTHER
NONCURRENT ASSETS
|
Other noncurrent assets at December 31, 2008 and 2007
consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred maintenance costs, including refinery turnarounds, net
of amortization
|
|
$
|
287
|
|
|
$
|
310
|
|
Debt issuance costs, net of amortization
|
|
|
22
|
|
|
|
26
|
|
Notes receivable
|
|
|
10
|
|
|
|
2
|
|
Other assets, net of amortization
|
|
|
29
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
$
|
348
|
|
|
$
|
366
|
|
|
|
|
|
|
|
|
|
|
70
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NOTE H
|
ACCRUED
LIABILITIES
|
Our current accrued liabilities and noncurrent other liabilities
at December 31, 2008 and 2007 included (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued Liabilities Current:
|
|
|
|
|
|
|
|
|
Taxes other than income taxes, primarily excise taxes
|
|
$
|
156
|
|
|
$
|
205
|
|
Employee costs
|
|
|
63
|
|
|
|
108
|
|
Environmental liabilities
|
|
|
53
|
|
|
|
38
|
|
Liability for unrecognized tax benefits, including interest and
penalties
|
|
|
35
|
|
|
|
12
|
|
Income taxes payable
|
|
|
2
|
|
|
|
|
|
Interest
|
|
|
14
|
|
|
|
14
|
|
Casualty insurance payable
|
|
|
10
|
|
|
|
9
|
|
Asset retirement obligations
|
|
|
8
|
|
|
|
36
|
|
Pension and other postretirement benefits
|
|
|
10
|
|
|
|
8
|
|
Deferred income tax liability
|
|
|
|
|
|
|
2
|
|
Other
|
|
|
61
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Liabilities Current
|
|
$
|
412
|
|
|
$
|
488
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities Noncurrent:
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefits
|
|
$
|
570
|
|
|
$
|
348
|
|
Environmental liabilities
|
|
|
70
|
|
|
|
52
|
|
Liability for unrecognized tax benefits, including interest and
penalties
|
|
|
36
|
|
|
|
55
|
|
Asset retirement obligations
|
|
|
27
|
|
|
|
46
|
|
Other
|
|
|
46
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Total Other Liabilities Noncurrent
|
|
$
|
749
|
|
|
$
|
537
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 and 2007, debt consisted of (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Credit Agreement Revolving Credit Facility
|
|
$
|
66
|
|
|
$
|
120
|
|
61/2% Senior
Notes Due 2017
|
|
|
500
|
|
|
|
500
|
|
61/4% Senior
Notes Due 2012
|
|
|
450
|
|
|
|
450
|
|
65/8% Senior
Notes Due 2015
|
|
|
450
|
|
|
|
450
|
|
Junior subordinated notes due 2012 (net of unamortized discount
of $32 in 2008 and $38 in 2007)
|
|
|
118
|
|
|
|
112
|
|
Capital lease obligations and other
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,611
|
|
|
|
1,659
|
|
Less current maturities
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Debt, less current maturities
|
|
$
|
1,609
|
|
|
$
|
1,657
|
|
|
|
|
|
|
|
|
|
|
The aggregate maturities of Tesoros debt for each of the
five years following December 31, 2008 were:
2009 $2 million; 2010
$3 million; 2011 $1 million;
2012 $667 million; and 2013
$2 million.
71
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
See Note N for information related to limits imposed by our
debt agreements on restricted payments (as defined in our debt
agreements) which include cash dividends, stock repurchases or
voluntary prepayments of subordinated debt.
Credit
Agreement Revolving Credit Facility
At December 31, 2008, our credit agreement provided for
borrowings (including letters of credit) up to the lesser of the
amount of a periodically adjusted borrowing base of
approximately $620 million (based upon an Alaska North
Slope crude oil price of $46 per barrel), consisting of
Tesoros eligible cash and cash equivalents, receivables
and petroleum inventories, net of the standard reserve as
defined, or the agreements total capacity of
$1.81 billion. The total capacity was increased by
$110 million in May 2008 and can be further increased up to
a total capacity of $1.95 billion. As of December 31,
2008, we had $66 million in borrowings and
$303 million in letters of credit outstanding under the
credit agreement, resulting in total unused credit availability
of $251 million or 40% of the eligible borrowing base.
Borrowings under the revolving credit facility bear interest at
either a base rate (3.25% at December 31, 2008) or a
Eurodollar rate (0.436% at December 31, 2008) plus an
applicable margin. The applicable margin at December 31,
2008 was 0.875% in the case of the Eurodollar rate, but varies
based upon our credit facility availability and credit ratings.
Letters of credit outstanding under the revolving credit
facility incur fees at an annual rate tied to the applicable
margin described above (0.875% at December 31, 2008). We
also incur commitment fees for the unused portion of the
revolving credit facility at an annual rate of 0.25% as of
December 31, 2008. Our credit agreement expires in May 2012.
Lehman Commercial Paper Inc. (Lehman CPI) was one of
the lenders under our credit agreement, representing a
commitment of $50 million (less than 3% of our total credit
agreement capacity). In October 2008, Lehman CPI filed for
bankruptcy. Lehman CPI will not participate in any future
requests for funding and it is not certain whether another
lender might assume its commitment. Our total capacity of
$1.81 billion at December 31, 2008 reflects this
commitment reduction.
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 tangible net
worth. For the year ended December 31, 2008, we satisfied
all of the financial covenants under the credit agreement. 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. In February 2008, we
amended our credit agreement to allow up to $100 million of
restricted payments during any four quarter period subject to
credit availability exceeding 20% of the borrowing base.
Letter
of Credit Agreements
The credit agreement allows us to issue letters of credit up to
$500 million under separate letter of credit agreements for
the purchase of foreign crude oil. At December 31, 2008,
our letters of credit capacity under three agreements totaled
$500 million, of which $304 million was outstanding.
Letters of credit outstanding under these agreements incur fees
and are secured by the crude oil inventories supported by the
issued letters of credit. The agreements may be terminated by
either party, at any time.
61/2% Senior
Notes Due 2017
In May 2007, we issued $500 million aggregate principal
amount of
61/2% senior
notes due June 2017. The notes have a ten-year maturity with no
sinking fund requirements and are subject to optional redemption
by Tesoro beginning June 2012 at premiums of 3.25% through May
2013; 2.17% from June 2013 through May 2014; 1.08% from June
2014 through May 2015; and at par thereafter. We have the right
to redeem up to 35% of the aggregate principal amount at a
redemption price of 106.5% with proceeds from certain equity
issuances through June 1, 2010. The indenture for the notes
contains covenants and restrictions that are customary for notes
of this nature. Substantially all of these covenants will
terminate before the notes mature if either Standard and
Poors or Moodys
72
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
assigns the notes an investment grade rating and no events of
default exist under the indenture. The terminated covenants will
not be restored even if the credit rating assigned to the notes
subsequently falls below investment grade. The notes are
unsecured and are guaranteed by substantially all of our active
domestic subsidiaries.
61/4% Senior
Notes Due 2012
In November 2005, we issued $450 million aggregate
principal amount of
61/4% senior
notes due November 2012. The notes have a seven-year maturity
with no sinking fund requirements and are not callable. The
indenture for the notes contains covenants and restrictions that
are customary for notes of this nature and are identical to the
covenants in the indenture for Tesoros
65/8% senior
notes due 2015. Substantially all of these covenants will
terminate before the notes mature if one of two specified
ratings agencies assigns the notes an investment grade rating
and no events of default exist under the indenture. The
terminated covenants will not be restored even if the credit
rating assigned to the notes subsequently falls below investment
grade. The notes are unsecured and are guaranteed by
substantially all of Tesoros active domestic subsidiaries.
65/8% Senior
Notes Due 2015
In November 2005, we issued $450 million aggregate
principal amount of
65/8% senior
notes due November 2015. The notes have a ten-year maturity
with no sinking fund requirements and are subject to optional
redemption by Tesoro beginning November 2010 at premiums of 3.3%
through October 2011, 2.2% from November 2011 to October 2012,
1.1% from November 2012 to October 2013, and at par thereafter.
The indenture for the notes contains covenants and restrictions
that are customary for notes of this nature and are identical to
the covenants in the indenture for Tesoros
61/4% senior
notes due 2012. Substantially all of these covenants will
terminate before the notes mature if one of two specified
ratings agencies assigns the notes an investment grade rating
and no events of default exist under the indenture. The
terminated covenants will not be restored even if the credit
rating assigned to the notes subsequently falls below investment
grade. The notes are unsecured and are guaranteed by
substantially all of Tesoros active domestic subsidiaries.
Junior
Subordinated Notes Due 2012
In connection with our acquisition of the Golden Eagle 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 was non-interest bearing through May
2007, and carries a 7.5% interest rate thereafter, and
(ii) a $50 million junior subordinated note, due July
2012, which incurred interest at 7.47% from May 2003 through May
2007 and 7.5% thereafter. We initially recorded these two notes
at a combined present value of $61 million, discounted at
rates of 15.625% and 14.375%, respectively. We are amortizing
the discount over the term of the notes.
Capital
Lease Obligations
Our capital lease obligations are comprised primarily of 30
retail stations with initial terms of 17 years, with four
5-year
renewal options. The combined present value of minimum lease
payments related to the leased buildings and equipment totaled
$21 million at December 31, 2008. Tesoro also has
capital leases for tugs and barges used to transport refined
products, over varying terms ending in 2009 and 2010, in which
the combined present value of minimum lease payments totaled
$3 million at December 31, 2008. At December 31,
2008 and 2007, the total cost of assets under capital leases was
$37 million and $39 million, respectively, with
accumulated amortization of $19 million for both
December 31, 2008 and 2007. We include amortization of the
cost of assets under capital leases in Depreciation and
amortization.
73
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Future minimum annual lease payments, including interest, as of
December 31, 2008 for capital leases were (in millions):
|
|
|
|
|
2009
|
|
$
|
5
|
|
2010
|
|
|
4
|
|
2011
|
|
|
3
|
|
2012
|
|
|
3
|
|
2013
|
|
|
3
|
|
Thereafter
|
|
|
21
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
39
|
|
Less amount representing interest
|
|
|
15
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
24
|
|
|
|
|
|
|
|
|
NOTE J
|
ASSET
RETIREMENT OBLIGATIONS
|
We have recorded asset retirement obligations for requirements
imposed by certain regulations pertaining to hazardous materials
disposal and other cleanup obligations. Our asset retirement
obligations primarily include obligations pertaining to certain
lease agreements associated with our retail and terminal
operations upon lease termination, a project at our Golden Eagle
refinery to retire certain above-ground storage tanks primarily
between 2009 and 2011 and asbestos removal associated with the
replacement of certain processing equipment. Changes in asset
retirement obligations for the years ended December 31,
2008 and 2007 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
$
|
82
|
|
|
$
|
52
|
|
Additions to accrual
|
|
|
4
|
|
|
|
|
|
Accretion expense
|
|
|
3
|
|
|
|
3
|
|
Additions to accrual resulting from acquisitions
|
|
|
|
|
|
|
19
|
|
Settlements
|
|
|
(12
|
)
|
|
|
(1
|
)
|
Changes in timing and amount of estimated cash flows
|
|
|
(42
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
35
|
|
|
$
|
82
|
|
|
|
|
|
|
|
|
|
|
During 2008, the decrease in asset retirement obligations was
primarily due to changes in timing and the amount of estimated
cash flows for projects at our Golden Eagle refinery. The
remaining estimated costs were adjusted lower based primarily on
the actual costs for the projects incurred to date. During 2007,
we recorded asset retirement obligations in connection with our
acquisitions which included obligations associated with asbestos
removal during the replacement of certain processing equipment,
pipeline removal and underground storage tank removal at certain
leased stations.
74
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The income tax provision was comprised of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
52
|
|
|
$
|
279
|
|
|
$
|
315
|
|
State
|
|
|
10
|
|
|
|
59
|
|
|
|
65
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
79
|
|
|
|
2
|
|
|
|
99
|
|
State
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Provision
|
|
$
|
151
|
|
|
$
|
339
|
|
|
$
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008 and 2007 were (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Accrued pension and other postretirement benefits
|
|
$
|
222
|
|
|
$
|
131
|
|
Asset retirement obligations
|
|
|
14
|
|
|
|
32
|
|
Accrued environmental remediation liabilities
|
|
|
36
|
|
|
|
14
|
|
Other accrued liabilities
|
|
|
48
|
|
|
|
45
|
|
Stock-based compensation
|
|
|
28
|
|
|
|
23
|
|
Other
|
|
|
27
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets
|
|
$
|
375
|
|
|
$
|
283
|
|
Less: Valuation allowance
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
366
|
|
|
$
|
283
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Accelerated depreciation and property related items
|
|
$
|
(571
|
)
|
|
$
|
(434
|
)
|
Deferred maintenance costs, including refinery turnarounds
|
|
|
(85
|
)
|
|
|
(108
|
)
|
Amortization of intangible assets
|
|
|
(42
|
)
|
|
|
(45
|
)
|
Inventory
|
|
|
(45
|
)
|
|
|
(54
|
)
|
Other
|
|
|
(32
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities
|
|
$
|
(775
|
)
|
|
$
|
(668
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liabilities
|
|
$
|
(409
|
)
|
|
$
|
(385
|
)
|
|
|
|
|
|
|
|
|
|
We have recorded a valuation allowance as of December 31,
2008, due to uncertainties related to our ability to utilize
certain state credit carryforwards. The valuation allowance
reduces the benefit of those carryforwards to the amount that
will more likely than not be realized, and is based on
anticipated taxable income in the various jurisdictions. The
realization of our other deferred tax assets depends on
Tesoros ability to generate future taxable income.
Although realization is not assured, we believe it is more
likely than not that we will realize those deferred tax assets.
75
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The net deferred income tax liability is classified in the
consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Current Assets
|
|
$
|
7
|
|
|
$
|
5
|
|
Current Liabilities
|
|
$
|
|
|
|
$
|
2
|
|
Noncurrent Liabilities
|
|
$
|
416
|
|
|
$
|
388
|
|
The reconciliation of income tax expense at the
U.S. statutory rate to the income tax expense follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income Taxes at U.S. Federal Statutory Rate
|
|
$
|
150
|
|
|
$
|
317
|
|
|
$
|
450
|
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax effect
|
|
|
13
|
|
|
|
36
|
|
|
|
40
|
|
Manufacturing activities deduction
|
|
|
(7
|
)
|
|
|
(18
|
)
|
|
|
(11
|
)
|
Income tax settlements
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
1
|
|
|
|
4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Provision
|
|
$
|
151
|
|
|
$
|
339
|
|
|
$
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we have $11 million of state
income tax credits, most of which expire in 2026. We have no
regular tax net operating loss carryforwards, but have
approximately $800 million of alternative minimum tax net
operating loss carryforwards that can be carried forward to 2028.
We account for uncertainties in income taxes in accordance with
FIN 48 and are subject to U.S. federal income tax, and
income tax in multiple state jurisdictions and a few foreign
jurisdictions. Our unrecognized tax benefits totaled
$44 million as of December 31, 2008, of which
$23 million (net of the tax benefit on state issues) would
affect the effective tax rate if recognized. Within the next
twelve months we believe it is reasonably possible that we could
settle or otherwise conclude as much as $26 million of the
liability for uncertain tax positions, primarily regarding state
issues related to tax credits and to apportionment of income. At
December 31, 2008 and December 31, 2007, we had
accrued $27 million and $23 million, respectively, for
interest and penalties. During the years ended December 31,
2008 and December 31, 2007, we recognized $3 million
and $4 million, respectively, in interest and penalties
associated with unrecognized tax benefits. For interest and
penalties relating to income taxes we recognize accrued interest
in interest and financing costs, and penalties in selling,
general and administrative expenses in the statements of
consolidated operations. The federal tax years 2002 to 2003 and
2005 to 2007 remain open to adjustment, and in general the state
tax years open to adjustment range from 1994 to 2007. A
reconciliation of the beginning and ending amounts of gross
unrecognized tax benefits is as follows (in millions):
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
44
|
|
Increases related to prior year tax positions
|
|
|
5
|
|
Decreases related to prior year tax positions
|
|
|
(12
|
)
|
Increases related to current year tax positions
|
|
|
11
|
|
Decreases related to settlements with taxing authorities
|
|
|
(4
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
44
|
|
|
|
|
|
|
76
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Pension
and Other Postretirement Benefits
Tesoro sponsors the following four defined benefit pension
plans: a funded employee retirement plan; an unfunded executive
security plan, an unfunded non-employee director retirement
plan; and an unfunded restoration retirement plan. Our defined
benefit pension plans are described below.
|
|
|
|
|
The funded employee retirement plan provides benefits to all
eligible employees based on years of service and compensation.
Although our funded employee retirement plan fully meets all of
the funding requirements under applicable laws and regulations,
during 2008 and 2007, we voluntarily contributed
$18 million and $36 million, respectively, to improve
the funded status of the retirement plan. We also plan to
contribute $25 million to the retirement plan during 2009.
The retirement plans 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 both 2008 and 2007, we made
payments of $1 million for current retiree obligations
under the plan.
|
|
|
|
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 O). After the
amendment and transfer, only those retired directors or
beneficiaries who had begun to receive benefits remained
participants in the previous plan.
|
|
|
|
Our unfunded restoration retirement plan, which became effective
July 1, 2006, provides for the restoration of retirement
benefits to certain executives and other senior employees of
Tesoro that are not available due to the limits imposed by the
Internal Revenue Code on our funded employee retirement plan.
|
Tesoro provides health care benefits to retirees who met certain
service requirements and were participating in our group
insurance program at retirement. Tesoro also provides life
insurance benefits to qualified retirees. 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 our share of the
cost of postretirement health care and life insurance benefits
on a pay-as-you go basis.
77
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Our total pension and other postretirement liability was
$580 million and $356 million at December 31,
2008 and 2007, respectively. In 2007, we assumed certain
obligations under various pension and other postretirement
benefit plans in connection with our acquisition of the Los
Angeles Assets and USA Petroleum Assets. Changes in benefit
obligations and plan assets and the funded status for our
pension plans and other postretirement benefits as of
December 31, 2008 and 2007, were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Changes in benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations at beginning of year
|
|
$
|
375
|
|
|
$
|
320
|
|
|
$
|
292
|
|
|
$
|
192
|
|
Service cost
|
|
|
33
|
|
|
|
28
|
|
|
|
17
|
|
|
|
15
|
|
Interest cost
|
|
|
22
|
|
|
|
20
|
|
|
|
20
|
|
|
|
16
|
|
Actuarial (gain) loss
|
|
|
29
|
|
|
|
18
|
|
|
|
29
|
|
|
|
35
|
|
Business combinations
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
38
|
|
Benefits paid
|
|
|
(26
|
)
|
|
|
(16
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
Plan amendments
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailments
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Special termination benefits
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations at end of year
|
|
|
437
|
|
|
|
375
|
|
|
|
353
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
311
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
(94
|
)
|
|
|
24
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
19
|
|
|
|
37
|
|
|
|
5
|
|
|
|
4
|
|
Benefits paid
|
|
|
(26
|
)
|
|
|
(16
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
210
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(227
|
)
|
|
$
|
(64
|
)
|
|
$
|
(353
|
)
|
|
$
|
(292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for our pension plans at
December 31, 2008 and 2007 was $330 million and
$291 million, respectively. Amounts included in our
consolidated balance sheet related to our defined benefit
pension and postretirement plans as of December 31, 2008
and 2007 consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued liabilities
|
|
$
|
10
|
|
|
$
|
8
|
|
Other liabilities
|
|
$
|
570
|
|
|
$
|
348
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
$
|
580
|
|
|
$
|
356
|
|
|
|
|
|
|
|
|
|
|
78
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The components of pension and postretirement benefit expense
included in the consolidated statements of operations for the
years ended December 31, 2008, 2007 and 2006 were (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Components of net periodic benefit expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
33
|
|
|
$
|
27
|
|
|
$
|
21
|
|
|
$
|
17
|
|
|
$
|
15
|
|
|
$
|
12
|
|
Interest cost
|
|
|
22
|
|
|
|
20
|
|
|
|
15
|
|
|
|
20
|
|
|
|
16
|
|
|
|
10
|
|
Expected return on plan assets
|
|
|
(26
|
)
|
|
|
(22
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
4
|
|
|
|
4
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
Recognized net actuarial loss
|
|
|
6
|
|
|
|
7
|
|
|
|
5
|
|
|
|
2
|
|
|
|
3
|
|
|
|
1
|
|
Special termination benefits
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailments
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized curtailment (gain)loss
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$
|
42
|
|
|
$
|
36
|
|
|
$
|
24
|
|
|
$
|
40
|
|
|
$
|
35
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in Accumulated other comprehensive
loss before income taxes at December 31, 2008 and
2007 for our defined benefit pension and postretirement plans
are presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
Total
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net loss
|
|
$
|
220
|
|
|
$
|
77
|
|
|
$
|
71
|
|
|
$
|
45
|
|
|
$
|
291
|
|
|
$
|
122
|
|
Prior service cost
|
|
|
15
|
|
|
|
18
|
|
|
|
7
|
|
|
|
7
|
|
|
|
22
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
235
|
|
|
$
|
95
|
|
|
$
|
78
|
|
|
$
|
52
|
|
|
$
|
313
|
|
|
$
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the pretax change in accumulated
other comprehensive income for the year ended December 31,
2008 and 2007 related to our pension and postretirement plans
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Accumulated other comprehensive loss at beginning of year
|
|
$
|
95
|
|
|
$
|
52
|
|
|
$
|
90
|
|
|
$
|
21
|
|
Prior service cost recognized into income during the year
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(1
|
)
|
Net losses recognized into income during the year
|
|
|
(6
|
)
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
(3
|
)
|
Net loss during the year
|
|
|
148
|
|
|
|
30
|
|
|
|
15
|
|
|
|
35
|
|
Prior service cost occurring during the year
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss at end of year
|
|
$
|
235
|
|
|
$
|
78
|
|
|
$
|
95
|
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Amounts included in Accumulated other comprehensive
loss before income taxes as of December 31, 2008 that
are expected to be recognized as components of net periodic
benefit cost in 2009 for our defined benefit pension and
postretirement plans were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Total
|
|
|
Net loss
|
|
$
|
14
|
|
|
$
|
3
|
|
|
$
|
17
|
|
Prior service cost
|
|
|
3
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17
|
|
|
$
|
4
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant assumptions included in estimating Tesoros
pension and other postretirement benefits obligations were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed weighted average % as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate(a)
|
|
|
6.28
|
|
|
|
6.10
|
|
|
|
6.00
|
|
|
|
6.14
|
|
|
|
6.40
|
|
|
|
6.00
|
|
Rate of compensation increase
|
|
|
4.57
|
|
|
|
3.81
|
|
|
|
3.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Pension Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed weighted average % as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate(a)
|
|
|
6.10
|
|
|
|
6.00
|
|
|
|
5.52
|
|
|
|
6.40
|
|
|
|
6.00
|
|
|
|
5.50
|
|
Rate of compensation increase
|
|
|
4.11
|
|
|
|
3.95
|
|
|
|
3.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets(b)
|
|
|
8.50
|
|
|
|
8.50
|
|
|
|
8.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We determine the discount rate primarily by reference to rates
of high-quality, long-term corporate bonds that mature in a
pattern similar to the expected payments to be made under the
plans. |
|
(b) |
|
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:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Health care cost trend rate assumed for next year
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
Ultimate health care cost trend rate
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2015
|
|
|
|
2011
|
|
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
|
|
$
|
7
|
|
|
$
|
(5
|
)
|
Effect on postretirement benefit obligations
|
|
$
|
54
|
|
|
$
|
(44
|
)
|
80
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 2008 target allocations for the pension plan assets were 68%
equity securities (with sub-category allocation targets), 26%
debt securities and 6% real estate. Our other postretirement
benefit plans contained no assets at December 31, 2008 and
2007. The weighted-average asset allocations in our pension
plans at December 31, 2008 and 2007 were:
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at
|
|
|
|
December 31,
|
|
Asset Category
|
|
2008
|
|
|
2007
|
|
|
Equity Securities
|
|
|
67
|
%
|
|
|
68
|
%
|
Debt Securities
|
|
|
24
|
|
|
|
26
|
|
Real Estate
|
|
|
9
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2009
|
|
$
|
30
|
|
|
$
|
8
|
|
2010
|
|
|
38
|
|
|
|
10
|
|
2011
|
|
|
54
|
|
|
|
12
|
|
2012
|
|
|
46
|
|
|
|
15
|
|
2013
|
|
|
42
|
|
|
|
17
|
|
2014-2018
|
|
|
263
|
|
|
|
116
|
|
Thrift
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 collective bargaining agreement at the
Golden Eagle refinery. Participants with the exception of
executive officers are eligible to transfer out of Tesoros
common stock at any time, on an unlimited basis. Tesoros
contributions to the thrift plan amounted to $24 million,
$20 million and $16 million during 2008, 2007 and
2006, respectively, of which $9 million, $12 million
and $11 million consisted of treasury stock reissuances in
2008, 2007 and 2006, respectively.
The unfunded executive deferred compensation plan, which became
effective January 1, 2007, provides to certain executives
and other employees the ability to defer compensation and
receive a matching contribution by Tesoro that is not available
under the employee thrift plan due to salary deferral limits
imposed by the Internal Revenue Code.
Retail
Savings Plan
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
81
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $0.6 million, $0.5 million,
and $0.4 million in 2008, 2007 and 2006, respectively, of
which $0.1 million consisted of treasury stock reissuances
for each of the years in 2008, 2007 and 2006.
|
|
NOTE M
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases
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 crude oil feedstocks and
refined products. In general, these leases have remaining
primary terms up to 10 years and typically contain multiple
renewal options. Total rental expense for all operating leases,
excluding marine charters, amounted to $83 million in 2008,
$64 million in 2007 and $45 million in 2006. Total
marine charter expense for our time charters was
$154 million in 2008, $161 million in 2007 and
$148 million in 2006. See Note I for information
related to capital leases.
The majority of our future lease payments relate to marine
transportation and retail station leases. As of
December 31, 2008, we term-chartered four
U.S.-flagged
ships and seven foreign-flagged ships, used to transport crude
oil and refined products. Our term charters expire between 2009
and 2013. Most of our time charters contain terms of three to
eight years generally with renewal options and escalation
clauses. We have also entered into term-charters for four
U.S.-flag
tankers to be built and delivered between 2009 and 2010, each
with three-year terms. All four time charters have options to
renew. We also term-charter tugs and product barges at our
Alaska, Hawaii and Washington refineries over varying terms
ending in 2009 through 2015, with options to renew. Tesoro has
operating leases for most of its retail stations with primary
remaining terms up to 44 years, and generally containing
renewal options and escalation clauses. Our aggregate annual
lease commitments for our retail stations total approximately
$15 million to $22 million over the next five years.
Tesoros minimum annual lease payments as of
December 31, 2008, for operating leases having initial or
remaining noncancellable lease terms in excess of one year were
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ship
|
|
|
|
|
|
|
|
|
|
Charters(a)
|
|
|
Other
|
|
|
Total
|
|
|
2009
|
|
$
|
182
|
|
|
$
|
86
|
|
|
$
|
268
|
|
2010
|
|
|
150
|
|
|
|
86
|
|
|
|
236
|
|
2011
|
|
|
111
|
|
|
|
78
|
|
|
|
189
|
|
2012
|
|
|
76
|
|
|
|
68
|
|
|
|
144
|
|
2013
|
|
|
37
|
|
|
|
64
|
|
|
|
101
|
|
Thereafter
|
|
|
26
|
|
|
|
387
|
|
|
|
413
|
|
|
|
|
(a) |
|
Includes minimum annual lease payments for tugs and barges,
which range between $17 million and $43 million over
the next five years. |
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
3 years with renewal provisions. Prices under the term
agreements generally fluctuate with market prices. Assuming
actual market crude oil prices as of December 31, 2008,
ranging by crude oil type from $25 per barrel to $46 per barrel,
our minimum crude oil supply commitments for the following years
are: 2009 $3.4 billion; 2010
$1.1 billion; and 2011 $625 million. We
82
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 minimum contractual
capital spending commitments, totaling approximately
$58 million in 2009.
We also have long-term take-or-pay commitments for the
transportation and storage of crude oil and to purchase
industrial gases, chemical processing services and utilities
associated with the operation of our refineries. The minimum
annual payments under these take-or-pay agreements are estimated
to total $202 million in 2009, $62 million in 2010,
$63 million in 2011, $62 million in 2012, and
$34 million in 2013. The remaining minimum commitments
total approximately $72 million over 17 years. Tesoro
paid approximately $525 million, $108 million and
$125 million in 2008, 2007 and 2006, respectively, under
these take-or-pay contracts, which included a power agreement
containing a take or pay provision through 2008.
Environmental
and Tax Matters
We are a party to various litigation and contingent loss
situations, including environmental and income tax matters,
arising in the ordinary course of business. 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 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 certain
emission sources.
Conditions may develop that cause increases or decreases in
future expenditures for our various sites, including, but not
limited to, our refineries, tank farms, pipelines, retail
stations (operating and closed locations) and refined products
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.
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. During the year ended December 31, 2008, we
recognized a $6 million income tax benefit from the
favorable settlement of federal tax audits for the years 1996
through 2005. Although the income tax liability has been
settled, years 2002, 2003 and 2005 remain open to adjustment
pending the settlement of interest. All tax liabilities
resulting from these audits were previously recorded as
unrecognized tax benefits in our consolidated balance sheet in
accordance with FIN 48.
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, 2008 and 2007, our accruals for environmental
expenditures included in accrued and other liabilities in the
consolidated balance sheet totaled $123 million and
$90 million, respectively. Our accruals for environmental
expenses include retained liabilities for previously owned or
operated properties, refining, pipeline and terminal operations
and retail stations. We believe these accruals are adequate,
based on currently available information, including the
participation of other parties or former owners in remediation
actions. These estimated environmental liabilities require
judgment to assess and estimate the future costs to remediate.
It is reasonably possible that additional remediation costs will
be incurred as more information becomes available
83
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
related to these environmental matters. Changes in our
environmental liabilities for the years ended December 31,
2008 and 2007 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
$
|
90
|
|
|
$
|
23
|
|
Additions
|
|
|
65
|
|
|
|
29
|
|
Expenditures
|
|
|
(32
|
)
|
|
|
(24
|
)
|
Acquisitions
|
|
|
|
|
|
|
3
|
|
Settlement agreement
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
123
|
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
During 2008, our environmental liabilities increased to
$123 million from $90 million primarily as a result of
recording additional accruals for remediation costs at the
Golden Eagle refinery. In March 2007, we settled our dispute
with a prior owner of our Golden Eagle refinery concerning soil
and groundwater conditions at the refinery. We received
$58.5 million in settlement proceeds in exchange for
assuming responsibility for certain environmental liabilities
arising from operations at the refinery prior to August 2000. At
December 31, 2008 and 2007, our accruals for these
environmental liabilities totaled $87 million and
$64 million, respectively, which are included in the
environmental accruals referenced above. We cannot presently
estimate additional remedial activities that may be required at
the Golden Eagle refinery. Therefore, it is reasonably possible
that we will incur additional remediation costs as more
information continues to become available. We expect to have
valid insurance claims under certain environmental insurance
policies that provide coverage up to $140 million for
liabilities in excess of the settlement proceeds. Amounts
recorded for these environmental liabilities have not been
reduced by possible insurance recoveries.
We are continuing to investigate environmental conditions at
certain active wastewater treatment units at our Golden Eagle
refinery. This investigation is driven by an order from the
San Francisco Bay Regional Water Quality Control Board that
names us as well as two previous owners of the Golden Eagle
refinery. A reserve to investigate these conditions is included
in the environmental accruals referenced above.
In July 2008, we received a Notice of Violation
(NOV) from the EPA for the Washington refinery. EPA
alleged that prior to our acquisition of the refinery certain
modifications were made to the fluid catalytic cracking unit in
violation of the Clear Air Act. In October 2005, we received a
NOV from EPA concerning the refinery also alleging that prior to
our acquisition of the refinery certain other modifications were
made to the fluid catalytic cracking unit in violation of the
Clean Air Act. We have investigated the allegations and we
cannot estimate the amount of the ultimate resolution of the
NOVs. However, at this time we believe the final resolution of
the NOVs will not have a material adverse effect on our
financial position or results of operations. We believe we have
defenses to the allegations and intend to vigorously defend
ourselves. A reserve for our response to the NOVs is included in
the environmental accruals referenced above.
Other
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 and the matters described below. On
the basis of existing information, we believe that the
resolution of these matters, individually or in the aggregate,
will not have a material adverse effect on our financial
position or results of operations.
84
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In February 2009, we received a NOV from the EPA relating to our
compliance with the Clean Air Act and the corresponding
regulations concerning the regulation of fuels and fuel
additives. The allegations arise from a compliance review
conducted by EPA in 2006 for the years 2003 through the time of
the review in 2006. We are investigating the allegations
contained in the NOV and we cannot estimate the amount of the
ultimate resolution of this NOV. However, at this time we
believe the final resolution of this NOV will not have a
material adverse effect on our financial position or results of
operations.
In October 2008, we received an NOV from the EPA concerning our
Utah refinery alleging certain violations of the Clean Air Act
at the refinery beginning in 2004. We are investigating the
allegations contained in the NOV and cannot currently estimate
the amount of the ultimate resolution. However, we believe the
final resolution of this NOV will not have a material adverse
effect on our financial position or results of operations.
Claims
Against Third-Parties
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
were entitled to receive refunds, including interest. In
accordance with the ruling, in March 2008 we received a refund
from TAPS of $45 million, net of contingent legal fees. The
$45 million refund is included as Other Income
in our statement of consolidated operations.
In 2002, the RCA rejected the TAPS Carriers proposed
intrastate rate increases for
2001-2003
and maintained the rate of $1.96 to the Valdez Marine Terminal.
The rate decrease has been in effect since June 2003. In June
2008, the Alaska Supreme Court upheld the $1.96 rate for the
years 2001 through 2003. We were awarded refunds in June and
July 2008 including interest totaling $5 million, net
of contingent legal fees, for the period 2001 through June 2003.
The rates paid from mid-June 2003 through June 2008 were also
upheld. The $5 million refund is included as Other
Income in our statement of consolidated operations.
In January of 2005, Tesoro Alaska Company intervened in a
protest before the Federal Energy Regulatory Commission
(FERC), of the TAPS Carriers interstate rates
for 2005 and 2006. In July 2005, the TAPS Carriers filed a
proceeding at the FERC seeking to have the FERC assume
jurisdiction under Section 13(4) of the Interstate Commerce
Act and set future rates for intrastate transportation on TAPS.
We filed a protest in that proceeding, which was consolidated
with the other FERC proceeding seeking to set just and
reasonable interstate rates on TAPS for 2005 and 2006. In June
2008, the FERC issued a final order in this consolidated FERC
proceeding that lowered those interstate rates and refused to
revise the current intrastate rates. The TAPS Carriers have
sought rehearing and appealed the FERC order. We cannot give
assurances of whether they will ultimately prevail in any such
rehearing or appeal. However, should the TAPS Carriers prevail,
the result will not have a material impact on our operations or
financial results in future reporting periods but could affect
our future costs in the ordinary course of business.
|
|
NOTE N
|
STOCKHOLDERS
EQUITY
|
Our credit agreement and the 61/2%, 61/4% and 65/8% senior
notes each limit our ability to pay cash dividends or repurchase
stock. The limitation in each of our debt agreements is based on
limits on restricted payments (as defined in our debt
agreements), which include dividends, stock repurchases or
voluntary prepayments of subordinate debt. The aggregate amount
of restricted payments cannot exceed an amount defined in each
of the debt agreements. The indentures for our senior notes also
limit our subsidiaries ability to create restrictions on
making certain payments and distributions. We do not believe
that the limitations will restrict our ability to pay dividends
or repurchase stock under our current programs.
See Note O for information relating to stock-based
compensation and common stock reserved for exercise of options.
85
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock
Split
On May 1, 2007, our Board of Directors approved a
two-for-one stock split effected in the form of a stock
dividend, which was distributed on May 29, 2007 to
shareholders of record at the close of business on May 14,
2007. All references to the number of shares of common stock and
per share amounts (other than par value) have been adjusted to
reflect the split for all periods presented.
Cash
Dividends
On February 19, 2009, our Board of Directors declared a
quarterly cash dividend on common stock of $0.10 per share,
payable on March 16, 2009 to shareholders of record on
March 2, 2009. During 2008, we paid cash dividends on
common stock totaling $0.40 per share.
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 may repurchase our common stock from time to time in
the open market. Purchases will depend on price, market
conditions and other factors. In 2006, we repurchased
4.8 million shares for $148 million, or an average
cost per share of $31.17. No shares were repurchased under the
plan during 2007 and 2008. As of December 31, 2008,
$38 million remained available for future repurchases under
the program.
Shareholder
Rights Plan
In March 2008, our Board of Directors approved the termination
of the stockholder rights plan, dated as of November 20,
2007. The final expiration date of the rights was changed from
November 20, 2010 to March 6, 2008. The rights plan is
of no further force and effect, and the rights were
de-registered under the Securities Exchange Act of 1934.
|
|
NOTE O
|
STOCK-BASED
COMPENSATION
|
Stock-based compensation expense for our stock-based awards for
2008, 2007 and 2006 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Stock options
|
|
$
|
19
|
|
|
$
|
22
|
|
|
$
|
13
|
|
Restricted stock
|
|
|
12
|
|
|
|
6
|
|
|
|
5
|
|
Stock appreciation rights
|
|
|
(14
|
)
|
|
|
15
|
|
|
|
3
|
|
Phantom stock
|
|
|
(3
|
)
|
|
|
10
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock-Based Compensation
|
|
$
|
14
|
|
|
$
|
53
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit realized from tax deductions associated
with stock-based compensation totaled $4 million,
$22 million and $18 million during 2008, 2007 and
2006, respectively.
86
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock-Based
Compensation Plans
We issue stock-based awards as described below to employees
under the 2006 Long-Term Incentive Plan and non-employee
directors under the 1995 Non-Employee Director Stock Option
Plan, as amended. We also issue common stock to our eligible
non-employee directors as payment for a portion of director fees
under the 2005 Director Compensation Plan. We also have
outstanding awards under our Amended and Restated Executive
Long-Term Incentive Plan and Key Employee Stock Option Plan. At
December 31, 2008, Tesoro had 11,615,840 shares of
unissued common stock reserved under our plans. Our plans are
described below.
|
|
|
|
|
The 2006 Long-Term Incentive Plan (2006 Plan)
permits the grant of options, restricted stock, deferred stock
units, performance stock awards, other stock-based awards and
cash-based awards. The 2006 Plan became effective in May 2006
and no awards may be granted under the 2006 Plan on or after
May 3, 2016. The 2006 Plan was amended in June 2008 to,
among other things, increase the total number of shares
authorized under the plan to 6,000,000 shares from
3,000,000 shares, of which up to 2,750,000 shares in
the aggregate may be granted as restricted stock, deferred stock
units, performance shares, performance units and other
stock-based awards. 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 become exercisable
after one year in 33% annual increments and expire ten years
from the date of grant. Generally, when stock options are
exercised or when restricted stock is granted we issue new
shares rather than issuing treasury shares. At December 31,
2008, we had 2,103,762 options and 617,494 restricted stock
outstanding and 3,241,718 shares available for future
grants under this plan.
|
|
|
|
The Amended and Restated Executive Long-Term Incentive Plan,
which expired in May 2006, allowed grants in a variety of forms,
including restricted stock, nonqualified stock options, stock
appreciation rights and performance share and performance unit
awards. At December 31, 2008, we had 5,288,054 options and
142,036 restricted shares outstanding 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 1,594,000 shares of
common stock, of which 248,738 shares were outstanding at
December 31, 2008, which become exercisable one year after
grant in 25% annual increments. The options expire ten years
after the date of grant. Our Board of Directors has suspended
future grants under this plan.
|
|
|
|
The 1995 Non-Employee Director Stock Option Plan provides for
the grant of up to 900,000 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, 2008, Tesoro had 336,000 options
outstanding and 340,000 shares available for future grants
under this plan.
|
|
|
|
The 2005 Director Compensation Plan provides for the grant
of up to 100,000 shares of common stock to our eligible
non-employee directors as payment for a portion of director
retainer fees. We granted 23,384 shares of common stock
during 2008 at a weighted-average grant-date price per share of
$17.12. At December 31, 2008, we had 57,568 shares
available for future grants under the plan.
|
87
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock
Options
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, 2008
|
|
|
8,090
|
|
|
$
|
19.02
|
|
|
|
5.9 years
|
|
|
$
|
232
|
|
Granted
|
|
|
768
|
|
|
$
|
39.91
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(683
|
)
|
|
$
|
7.87
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(198
|
)
|
|
$
|
39.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
7,977
|
|
|
$
|
21.49
|
|
|
|
5.6 years
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2008
|
|
|
7,955
|
|
|
$
|
21.43
|
|
|
|
5.6 years
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
6,081
|
|
|
$
|
15.61
|
|
|
|
4.8 years
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated weighted-average grant-date fair value per share
of options granted during 2008, 2007 and 2006 was $17.60, $20.62
and $16.01, respectively. The total intrinsic value for options
exercised during 2008, 2007 and 2006 was $6 million,
$37 million and $44 million, respectively. Total
unrecognized compensation cost related to non-vested stock
options totaled $19 million as of December 31, 2008,
which is expected to be recognized over a weighted-average
period of 1.5 years. The income tax benefit realized from
tax deductions associated with stock options exercised during
2008 totaled $3 million.
We estimate the fair value of each option on the date of grant
using the Black-Scholes option-pricing model. We amortize the
estimated fair value of stock options granted over the vesting
period using the straight-line method. Our stock options
generally become exercisable after one year in 33% annual
increments and expire 10 years from the date of grant. The
expected life of options granted is based on historical data and
represents the period of time that options granted are expected
to be outstanding. Expected volatilities are based on the
historical volatility of our stock. We use historical data to
estimate option exercise and employee termination within the
valuation model. Expected dividend yield is based on annualized
dividends at the date of grant. The risk-free rate for periods
within the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant.
Tesoros weighted average assumptions are presented below:
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Expected life (years)
|
|
6
|
|
6
|
|
6
|
Expected volatility
|
|
45%
|
|
45% - 46%
|
|
46% - 48%
|
Expected dividend yield
|
|
0.78% - 0.85%
|
|
0.53% - 1.00%
|
|
0.63% - 0.79%
|
Weighted average volatility
|
|
45%
|
|
46%
|
|
48%
|
Risk-free interest rate
|
|
3.1%
|
|
4.8%
|
|
4.6%
|
88
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Restricted
Stock
The fair value of each restricted share on the date of grant is
equal to its fair market price. We amortize the estimated fair
value of our restricted stock granted over the vesting period
using the straight-line method. Our restricted shares vest in
three or five year increments assuming continued employment at
the vesting dates. A summary of our restricted stock activity is
set forth below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Restricted Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2008
|
|
|
961
|
|
|
$
|
15.23
|
|
Granted
|
|
|
575
|
|
|
|
40.37
|
|
Vested
|
|
|
(745
|
)
|
|
|
12.73
|
|
Forfeited
|
|
|
(31
|
)
|
|
|
40.40
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
|
760
|
|
|
$
|
35.67
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value per share of
restricted stock granted during 2008, 2007 and 2006 was $40.37,
$41.78 and $33.31, respectively. Total unrecognized compensation
cost related to non-vested restricted stock totaled
$16 million as of December 31, 2008, which is expected
to be recognized over a weighted-average period of
1.9 years. The total fair value of restricted shares vested
in 2008, 2007 and 2006 was $13 million, $13 million,
and $8 million, respectively.
Stock
Appreciation Rights
The 2006 Long-Term Stock Appreciation Rights Plan (the SAR
Plan) permits the grant of stock appreciation rights
(SARs) to key managers and other employees of
Tesoro. A SAR granted under the SAR Plan entitles an employee to
receive cash in an amount equal to the excess of the fair market
value of one share of common stock on the date of exercise over
the grant price of the SAR. Unless otherwise specified, all SARs
under the SAR Plan vest ratably during a three-year period
following the date of grant and expire seven years from the date
of grant. We paid cash of $1 million to settle stock
appreciation rights upon exercise in 2007. Prior to 2007, we did
not have any SARs that were exercised. During 2008 and 2007, the
estimated weighted-average grant-date fair value for each SAR
granted was $17.82 and $18.12, respectively, using the
Black-Scholes option-pricing model. The option-pricing model
weighted-average assumptions used to calculate the fair value of
SARS are similar to those used to calculate the fair value of
options as described above. At December 31, 2008 and 2007,
the liability associated with our SARs recorded in Accrued
liabilities in the consolidated balance sheet totaled
$3 million and $17 million, respectively.
A summary of stock appreciation right activity for the SAR plan
is set forth below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Outstanding at January 1, 2008
|
|
|
1,701
|
|
|
$
|
39.68
|
|
|
|
5.8 years
|
|
Granted
|
|
|
956
|
|
|
$
|
40.40
|
|
|
|
|
|
Exercised
|
|
|
(1
|
)
|
|
$
|
33.31
|
|
|
|
|
|
Forfeited
|
|
|
(132
|
)
|
|
$
|
39.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
2,524
|
|
|
$
|
39.94
|
|
|
|
5.3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2008
|
|
|
2,495
|
|
|
$
|
39.90
|
|
|
|
5.3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
713
|
|
|
$
|
38.21
|
|
|
|
4.6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Non-Employee
Director Phantom Stock Plan
Under the Non-Employee Director Phantom Stock Plan, a yearly
credit, limited to 15 full annual credits, 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. 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 separation of service,
death, disability or in the case of elective deferrals an
in-service lump sum. Payments may be made as a total
distribution or in annual installments, not to exceed ten years.
At December 31, 2008 and 2007, the liability associated
with our non-employee director phantom stock plan recorded in
Accrued liabilities in the consolidated balance
sheets totaled $1 million and $5 million, respectively.
Phantom
Stock Options
Tesoro granted 350,000 phantom stock options in 1997 to our
chief executive officer with a term of ten years at 100% of the
fair value of Tesoros common stock on the grant date, or
$8.49 per share. During 2007, all of the granted phantom stock
options were exercised prior to termination in October 2007.
Upon exercise, our chief executive officer received 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. During 2007, we
paid $17 million to settle the exercised phantom stock
options. The fair value of each phantom stock option was
estimated at the end of each reporting period using the
Black-Scholes option-pricing model with assumptions similar to
those used to calculate the fair value of options as described
above.
|
|
NOTE P
|
OPERATING
SEGMENTS
|
The Companys revenues are derived from our two operating
segments, refining and retail. Our refining segment owns and
operates seven petroleum refineries located in California,
Washington, Alaska, Hawaii, North Dakota and Utah. These
refineries manufacture gasoline and gasoline blendstocks, jet
fuel, diesel fuel, residual fuel oils and other refined
products. We sell these refined products, together with refined
products purchased from third parties, at wholesale through
terminal facilities and other locations, primarily in Alaska,
California, Nevada, Hawaii, Idaho, Minnesota, North Dakota,
Utah, Oregon and Washington. Our refining segment also sells
refined products to unbranded marketers and occasionally exports
refined products to other 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 15 western states from Minnesota to Alaska and
Hawaii. Retail operates under the
Tesoro®,
Mirastar®,
Shell®,
USA
Gasolinetm
and 2-Go
Tesoro®
brands.
90
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 based
primarily on segment operating income. Segment operating income
includes those revenues and expenses that are directly
attributable to management of the respective segment.
Intersegment sales from refining to retail are made at
prevailing market rates. Income taxes, other income, foreign
currency exchange gain (loss) interest and financing costs,
interest income, corporate depreciation and corporate general
and administrative expenses are excluded from segment operating
income. Identifiable assets are those 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 is as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining:
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined products
|
|
$
|
26,759
|
|
|
$
|
20,906
|
|
|
$
|
17,323
|
|
Crude oil resales and other(a)
|
|
|
1,019
|
|
|
|
627
|
|
|
|
564
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel(b)
|
|
|
4,184
|
|
|
|
2,946
|
|
|
|
1,060
|
|
Merchandise and other
|
|
|
248
|
|
|
|
221
|
|
|
|
144
|
|
Intersegment sales from Refining to Retail
|
|
|
(3,901
|
)
|
|
|
(2,785
|
)
|
|
|
(987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
28,309
|
|
|
$
|
21,915
|
|
|
$
|
18,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining(c)
|
|
$
|
627
|
|
|
$
|
1,188
|
|
|
$
|
1,476
|
|
Retail(d)
|
|
|
46
|
|
|
|
(8
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Income
|
|
|
673
|
|
|
|
1,180
|
|
|
|
1,455
|
|
Corporate and Unallocated Costs
|
|
|
(202
|
)
|
|
|
(213
|
)
|
|
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
471
|
|
|
|
967
|
|
|
|
1,317
|
|
Interest and Financing Costs
|
|
|
(111
|
)
|
|
|
(91
|
)
|
|
|
(77
|
)
|
Interest Income
|
|
|
7
|
|
|
|
33
|
|
|
|
41
|
|
Foreign Currency Exchange Gain (Loss)
|
|
|
12
|
|
|
|
(4
|
)
|
|
|
|
|
Other Income(e)
|
|
|
50
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
$
|
429
|
|
|
$
|
905
|
|
|
$
|
1,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$
|
326
|
|
|
$
|
314
|
|
|
$
|
221
|
|
Retail
|
|
|
49
|
|
|
|
28
|
|
|
|
16
|
|
Corporate
|
|
|
26
|
|
|
|
15
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Depreciation and Amortization
|
|
$
|
401
|
|
|
$
|
357
|
|
|
$
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$
|
561
|
|
|
$
|
720
|
|
|
$
|
401
|
|
Retail
|
|
|
20
|
|
|
|
10
|
|
|
|
5
|
|
Corporate
|
|
|
38
|
|
|
|
59
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital Expenditures
|
|
$
|
619
|
|
|
$
|
789
|
|
|
$
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Refining
|
|
$
|
6,542
|
|
|
$
|
7,068
|
|
|
$
|
4,486
|
|
Retail
|
|
|
649
|
|
|
|
771
|
|
|
|
207
|
|
Corporate
|
|
|
242
|
|
|
|
289
|
|
|
|
1,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
7,433
|
|
|
$
|
8,128
|
|
|
$
|
5,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
To balance or optimize our refinery supply requirements, we sell
certain crude oil that we purchase under our supply contracts. |
|
(b) |
|
Federal excise and state motor fuel taxes on sales by our retail
segment are included in both Revenues and
Costs of sales and operating expenses in our
statements of consolidated operations. These taxes totaled
$278 million, $240 million and $102 million for
the years ended December 31, 2008, 2007 and 2006,
respectively. |
|
(c) |
|
Refining operating income for 2006 included a pretax charge of
$28 million related to the termination of a delayed coker
project at our Washington refinery in July 2006. The charge is
included in Loss on asset disposals and impairments
in the statements of consolidated operations. |
|
(d) |
|
Includes impairment charges of $29 million in 2008
primarily related to closing 42 Mirastar stations and the
potential sale of 20 stations. |
|
(e) |
|
During 2008, we received net refunds totaling $50 million
from the Trans Alaska Pipeline System for prior years
refinery transportation and distribution costs associated with
our protest of intrastate rates between 1997 and 2003. See
Note M for further information. |
|
|
NOTE Q
|
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
|
Separate condensed consolidating financial information of Tesoro
Corporation, subsidiary guarantors and non-guarantors are
presented below. Tesoro and certain subsidiary guarantors have
fully and unconditionally guaranteed our
61/4% senior
notes due 2012,
65/8% senior
notes due 2015 and
61/2% senior
notes due 2017. All guarantees are joint and several. As a
result of these guarantee arrangements, we are required to
present the following condensed consolidating financial
information. The following condensed consolidating financial
information should be read in conjunction with the accompanying
consolidated financial statements and notes. The following
condensed consolidating financial information is provided as an
alternative to providing separate financial statements for
guarantor subsidiaries. Separate financial statements of
Tesoros subsidiary guarantors are not included because the
guarantees are full and unconditional and these subsidiary
guarantors are 100% owned and jointly and severally liable for
Tesoros outstanding senior notes. The accounts for all
companies reflected herein are presented using the equity method
of accounting for investments in subsidiaries.
92
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Condensed
Consolidating Balance Sheet as of December 31, 2008
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20
|
|
Receivables, less allowance for doubtful accounts
|
|
|
16
|
|
|
|
567
|
|
|
|
155
|
|
|
|
|
|
|
|
738
|
|
Inventories
|
|
|
|
|
|
|
777
|
|
|
|
10
|
|
|
|
|
|
|
|
787
|
|
Prepayments and other
|
|
|
23
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
39
|
|
|
|
1,442
|
|
|
|
165
|
|
|
|
|
|
|
|
1,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
|
|
|
|
4,938
|
|
|
|
143
|
|
|
|
|
|
|
|
5,081
|
|
Investment in Subsidiaries
|
|
|
4,134
|
|
|
|
(49
|
)
|
|
|
(2
|
)
|
|
|
(4,083
|
)
|
|
|
|
|
Long-Term Receivables from Affiliates
|
|
|
1,619
|
|
|
|
|
|
|
|
47
|
|
|
|
(1,666
|
)
|
|
|
|
|
Other Noncurrent Assets
|
|
|
38
|
|
|
|
667
|
|
|
|
1
|
|
|
|
|
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,830
|
|
|
$
|
6,998
|
|
|
$
|
354
|
|
|
$
|
(5,749
|
)
|
|
$
|
7,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
64
|
|
|
$
|
1,160
|
|
|
$
|
215
|
|
|
$
|
|
|
|
$
|
1,439
|
|
Current maturities of debt
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
64
|
|
|
|
1,162
|
|
|
|
215
|
|
|
|
|
|
|
|
1,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Payables to Affiliates
|
|
|
|
|
|
|
1,666
|
|
|
|
|
|
|
|
(1,666
|
)
|
|
|
|
|
Debt
|
|
|
1,584
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
1,609
|
|
Other Noncurrent Liabilities
|
|
|
964
|
|
|
|
199
|
|
|
|
2
|
|
|
|
|
|
|
|
1,165
|
|
Stockholders Equity
|
|
|
3,218
|
|
|
|
3,946
|
|
|
|
137
|
|
|
|
(4,083
|
)
|
|
|
3,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
5,830
|
|
|
$
|
6,998
|
|
|
$
|
354
|
|
|
$
|
(5,749
|
)
|
|
$
|
7,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Condensed
Consolidating Balance Sheet as of December 31, 2007
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
23
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23
|
|
Receivables, less allowance for doubtful accounts
|
|
|
1
|
|
|
|
1,157
|
|
|
|
85
|
|
|
|
|
|
|
|
1,243
|
|
Inventories
|
|
|
|
|
|
|
1,102
|
|
|
|
98
|
|
|
|
|
|
|
|
1,200
|
|
Prepayments and other
|
|
|
46
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
47
|
|
|
|
2,370
|
|
|
|
183
|
|
|
|
|
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
|
|
|
|
|
4,652
|
|
|
|
128
|
|
|
|
|
|
|
|
4,780
|
|
Investment in Subsidiaries
|
|
|
3,854
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(3,853
|
)
|
|
|
|
|
Long-Term Receivables from Affiliates
|
|
|
1,527
|
|
|
|
|
|
|
|
62
|
|
|
|
(1,589
|
)
|
|
|
|
|
Other Noncurrent Assets
|
|
|
44
|
|
|
|
703
|
|
|
|
1
|
|
|
|
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,472
|
|
|
$
|
7,724
|
|
|
$
|
374
|
|
|
$
|
(5,442
|
)
|
|
$
|
8,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
54
|
|
|
$
|
2,178
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
2,492
|
|
Current maturities of debt
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
54
|
|
|
|
2,180
|
|
|
|
260
|
|
|
|
|
|
|
|
2,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Payables to Affiliates
|
|
|
|
|
|
|
1,589
|
|
|
|
|
|
|
|
(1,589
|
)
|
|
|
|
|
Debt
|
|
|
1,632
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
1,657
|
|
Other Noncurrent Liabilities
|
|
|
734
|
|
|
|
189
|
|
|
|
2
|
|
|
|
|
|
|
|
925
|
|
Stockholders Equity
|
|
|
3,052
|
|
|
|
3,741
|
|
|
|
112
|
|
|
|
(3,853
|
)
|
|
|
3,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
5,472
|
|
|
$
|
7,724
|
|
|
$
|
374
|
|
|
$
|
(5,442
|
)
|
|
$
|
8,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Condensed
Consolidating Statement of Operations for the Year Ended
December 31, 2008
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES
|
|
$
|
|
|
|
$
|
33,439
|
|
|
$
|
4,030
|
|
|
$
|
(9,160
|
)
|
|
$
|
28,309
|
|
Costs and expenses
|
|
|
4
|
|
|
|
33,004
|
|
|
|
3,990
|
|
|
|
(9,160
|
)
|
|
|
27,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(4
|
)
|
|
|
435
|
|
|
|
40
|
|
|
|
|
|
|
|
471
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
280
|
|
|
|
(48
|
)
|
|
|
(2
|
)
|
|
|
(230
|
)
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES
|
|
|
276
|
|
|
|
345
|
|
|
|
38
|
|
|
|
(230
|
)
|
|
|
429
|
|
Income tax provision (benefit)(a)
|
|
|
(2
|
)
|
|
|
140
|
|
|
|
13
|
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
278
|
|
|
$
|
205
|
|
|
$
|
25
|
|
|
$
|
(230
|
)
|
|
$
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax provision (benefit) reflected in each column does
not include any tax effect of the equity in earnings from
subsidiaries. |
Condensed
Consolidating Statement of Operations for the Year Ended
December 31, 2007
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES
|
|
$
|
|
|
|
$
|
24,646
|
|
|
$
|
2,390
|
|
|
$
|
(5,121
|
)
|
|
$
|
21,915
|
|
Costs and expenses
|
|
|
7
|
|
|
|
23,664
|
|
|
|
2,398
|
|
|
|
(5,121
|
)
|
|
|
20,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(7
|
)
|
|
|
982
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
967
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
571
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
(549
|
)
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
(58
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES
|
|
|
564
|
|
|
|
902
|
|
|
|
(12
|
)
|
|
|
(549
|
)
|
|
|
905
|
|
Income tax provision (benefit)(a)
|
|
|
(2
|
)
|
|
|
344
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS)
|
|
$
|
566
|
|
|
$
|
558
|
|
|
$
|
(9
|
)
|
|
$
|
(549
|
)
|
|
$
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax provision (benefit) reflected in each column does
not include any tax effect of the equity in earnings from
subsidiaries. |
95
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Condensed
Consolidating Statement of Operations for the Year Ended
December 31, 2006
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES
|
|
$
|
|
|
|
$
|
19,982
|
|
|
$
|
1,748
|
|
|
$
|
(3,626
|
)
|
|
$
|
18,104
|
|
Costs and expenses
|
|
|
5
|
|
|
|
18,664
|
|
|
|
1,744
|
|
|
|
(3,626
|
)
|
|
|
16,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(5
|
)
|
|
|
1,318
|
|
|
|
4
|
|
|
|
|
|
|
|
1,317
|
|
Equity in earnings of subsidiaries
|
|
|
804
|
|
|
|
2
|
|
|
|
|
|
|
|
(806
|
)
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
(32
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES
|
|
|
799
|
|
|
|
1,288
|
|
|
|
5
|
|
|
|
(806
|
)
|
|
|
1,286
|
|
Income tax provision (benefit)(a)
|
|
|
(2
|
)
|
|
|
485
|
|
|
|
2
|
|
|
|
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
801
|
|
|
$
|
803
|
|
|
$
|
3
|
|
|
$
|
(806
|
)
|
|
$
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The income tax provision (benefit) reflected in each column does
not include any tax effect of the equity in earnings from
subsidiaries. |
96
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Condensed
Consolidating Statement of Cash Flows for the Year Ended
December 31, 2008
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
(12
|
)
|
|
$
|
714
|
|
|
$
|
14
|
|
|
$
|
|
|
|
$
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(634
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
(650
|
)
|
Intercompany notes, net
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
(122
|
)
|
|
|
|
|
Proceeds from asset sales
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities
|
|
|
122
|
|
|
|
(594
|
)
|
|
|
(16
|
)
|
|
|
(122
|
)
|
|
|
(610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolver
|
|
|
5,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,658
|
|
Repayments under revolver
|
|
|
(5,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,712
|
)
|
Repurchase of common stock
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
Dividend payments
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
Repayments of debt
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Proceeds from stock options exercised
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Net intercompany borrowings (repayments)
|
|
|
|
|
|
|
(124
|
)
|
|
|
2
|
|
|
|
122
|
|
|
|
|
|
Financing costs and other
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
(110
|
)
|
|
|
(123
|
)
|
|
|
2
|
|
|
|
122
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
|
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Condensed
Consolidating Statement of Cash Flows for the Year Ended
December 31, 2007
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
(3
|
)
|
|
$
|
1,281
|
|
|
$
|
44
|
|
|
$
|
|
|
|
$
|
1,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(734
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
(747
|
)
|
Acquisitions
|
|
|
(1,820
|
)
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,105
|
)
|
Intercompany notes, net
|
|
|
1,278
|
|
|
|
|
|
|
|
|
|
|
|
(1,278
|
)
|
|
|
|
|
Proceeds from asset sales
|
|
|
|
|
|
|
10
|
|
|
|
4
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(542
|
)
|
|
|
(1,009
|
)
|
|
|
(9
|
)
|
|
|
(1,278
|
)
|
|
|
(2,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt offerings, net of issuance costs of $6
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
494
|
|
Borrowings under revolver
|
|
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,060
|
|
Repayments under revolver
|
|
|
(940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(940
|
)
|
Borrowings under term loan
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700
|
|
Debt Refinanced
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500
|
)
|
Repurchase of common stock
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Dividend payments
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
Repayments of debt
|
|
|
(214
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(216
|
)
|
Proceeds from stock options exercised
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Net intercompany borrowings (repayments)
|
|
|
|
|
|
|
(1,242
|
)
|
|
|
(36
|
)
|
|
|
1,278
|
|
|
|
|
|
Financing costs and other
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
545
|
|
|
|
(1,234
|
)
|
|
|
(36
|
)
|
|
|
1,278
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
(962
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(963
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
|
|
|
|
985
|
|
|
|
1
|
|
|
|
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
|
|
|
$
|
23
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Condensed
Consolidating Statement of Cash Flows for the Year Ended
December 31, 2006
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Tesoro
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) operating activities
|
|
$
|
(5
|
)
|
|
$
|
1,137
|
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(402
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
(436
|
)
|
Intercompany notes, net
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
(182
|
)
|
|
|
|
|
Proceeds from asset sales
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) investing activities
|
|
|
182
|
|
|
|
(396
|
)
|
|
|
(34
|
)
|
|
|
(182
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
Dividend payments
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
Repayments of debt
|
|
|
(9
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
Proceeds from stock options exercised
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Excess tax benefits from stock-based compensation arrangements
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Net intercompany borrowings (repayments)
|
|
|
|
|
|
|
(210
|
)
|
|
|
28
|
|
|
|
182
|
|
|
|
|
|
Financing costs and other
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities
|
|
|
(177
|
)
|
|
|
(196
|
)
|
|
|
28
|
|
|
|
182
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
545
|
|
|
|
1
|
|
|
|
|
|
|
|
546
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
|
|
|
$
|
985
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
TESORO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
NOTE R
|
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
Total
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth(a)
|
|
|
Year
|
|
|
|
(In millions except per share amounts)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,531
|
|
|
$
|
8,754
|
|
|
$
|
8,698
|
|
|
$
|
4,326
|
|
|
$
|
28,309
|
|
Costs of sales and operating expenses
|
|
$
|
6,533
|
|
|
$
|
8,561
|
|
|
$
|
8,065
|
|
|
$
|
3,911
|
|
|
$
|
27,070
|
|
Operating Income (loss)
|
|
$
|
(158
|
)
|
|
$
|
27
|
|
|
$
|
452
|
|
|
$
|
150
|
|
|
$
|
471
|
|
Net Earnings (loss)
|
|
$
|
(82
|
)
|
|
$
|
4
|
|
|
$
|
259
|
|
|
$
|
97
|
|
|
$
|
278
|
|
Net Earnings (loss) Per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.60
|
)
|
|
$
|
0.03
|
|
|
$
|
1.89
|
|
|
$
|
0.71
|
|
|
$
|
2.03
|
|
Diluted
|
|
$
|
(0.60
|
)
|
|
$
|
0.03
|
|
|
$
|
1.86
|
|
|
$
|
0.70
|
|
|
$
|
2.00
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,876
|
|
|
$
|
5,604
|
|
|
$
|
5,902
|
|
|
$
|
6,533
|
|
|
$
|
21,915
|
|
Costs of sales and operating expenses
|
|
$
|
3,548
|
|
|
$
|
4,710
|
|
|
$
|
5,651
|
|
|
$
|
6,399
|
|
|
$
|
20,308
|
|
Operating Income (loss)
|
|
$
|
188
|
|
|
$
|
729
|
|
|
$
|
99
|
|
|
$
|
(49
|
)
|
|
$
|
967
|
|
Net Earnings (loss)
|
|
$
|
116
|
|
|
$
|
443
|
|
|
$
|
47
|
|
|
$
|
(40
|
)
|
|
$
|
566
|
|
Net Earnings (loss) Per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.86
|
|
|
$
|
3.26
|
|
|
$
|
0.35
|
|
|
$
|
(0.29
|
)
|
|
$
|
4.17
|
|
Diluted
|
|
$
|
0.84
|
|
|
$
|
3.17
|
|
|
$
|
0.34
|
|
|
$
|
(0.29
|
)
|
|
$
|
4.06
|
|
|
|
|
(a) |
|
During the 2008 fourth quarter, we incurred a $91 million
charge to write-off a receivable for which collection was deemed
unlikely. |
100
|
|
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. During the fourth quarter of 2008, there have
been no changes in our internal control over financial reporting
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Management
Report on Internal Control over Financial Reporting
We, as management of Tesoro Corporation and its subsidiaries
(the Company), are responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in the Securities Exchange Act of 1934,
Rule 13a-15(f).
The Companys internal control system is designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles in the United States of America. Due to
its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement
preparation and presentation.
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2008, 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, 2008, the Companys internal
control over financial reporting is effective. There has been no
change in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
The independent registered public accounting firm of
Ernst & Young LLP, as auditors of the Companys
consolidated financial statements, has issued an attestation
report on the effectiveness of the Companys internal
control over financial reporting, included herein.
101
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Tesoro Corporation
We have audited Tesoro Corporations internal control over
financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Tesoro
Corporations management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management
Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Tesoro Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Tesoro Corporation as of
December 31, 2008 and the related consolidated statements
of operations, comprehensive income and stockholders
equity, and cash flows for the year then ended and our report
dated February 27, 2009 expressed an unqualified opinion
thereon.
San Antonio, Texas
February 27, 2009
102
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information required under this Item will be contained in the
Companys 2009 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 2009 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 2009 Proxy Statement, incorporated herein by
reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information required under this Item will be contained in the
Companys 2009 Proxy Statement, incorporated herein by
reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information required under this Item will be contained in the
Companys 2009 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:
|
|
|
|
|
|
|
Page
|
|
|
|
|
56
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
62
|
|
103
|
|
2.
|
Financial
Statement Schedules
|
No financial statement schedules are submitted because of the
absence of the conditions under which they are required, the
required information is insignificant or because the required
information is included in the consolidated financial statements.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
2
|
.1
|
|
|
|
Stock Sale Agreement, dated March 18, 1998, among the
Company, BHP Hawaii Inc. and BHP Petroleum Pacific Islands Inc.
(incorporated by reference herein to Exhibit 2.1 to
Registration Statement
No. 333-51789).
|
|
2
|
.2
|
|
|
|
Stock Sale Agreement, dated May 1, 1998, among Shell
Refining Holding Company, Shell Anacortes Refining Company and
the Company (incorporated by reference herein to the
Companys Quarterly Report on
Form 10-Q
for the period ended March 31, 1998, File
No. 1-3473).
|
|
2
|
.3
|
|
|
|
Asset Purchase Agreement, dated July 16, 2001, by and among
the Company, BP Corporation North America Inc. and Amoco
Oil Company (incorporated by reference herein to
Exhibit 2.1 to the Companys Current Report on
Form 8-K
filed on September 21, 2001, File
No. 1-3473).
|
|
2
|
.4
|
|
|
|
Asset Purchase Agreement, dated July 16, 2001, by and among
the Company, BP Corporation North America Inc. and Amoco
Oil Company (incorporated by reference herein to
Exhibit 2.2 to the Companys Current Report on
Form 8-K
filed on September 21, 2001, File
No. 1-3473).
|
|
2
|
.5
|
|
|
|
Asset Purchase Agreement, dated July 16, 2001, by and among
the Company, BP Corporation North America Inc. and BP
Pipelines (North America) Inc. (incorporated by reference herein
to Exhibit 2.1 to the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2001, File
No. 1-3473).
|
|
2
|
.6
|
|
|
|
Asset Purchase Agreement by and between the Company and Shell
Oil Products U.S. dated as of January 29, 2007
(incorporated by reference herein to Exhibit 2.1 to the
Companys Current Report on
Form 8-K
filed on February 1, 2007, File
No. 1-3473).
|
|
2
|
.7
|
|
|
|
Sale and Purchase Agreement for Golden Eagle Refining and
Marketing Assets, dated February 4, 2002, by and among
Ultramar Inc. and Tesoro Refining and Marketing Company,
including First Amendment dated February 20, 2002 and
related Purchaser Parent Guaranty dated February 4, 2002,
and Second Amendment dated May 3, 2002 (incorporated by
reference herein to Exhibit 2.12 to the Companys
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001, File
No. 1-3473,
and Exhibit 2.1 to the Companys Current Report on
Form 8-K
filed on May 9, 2002, File
No. 1-3473).
|
|
2
|
.8
|
|
|
|
Asset Purchase and Sale Agreement by and between the Company and
Shell Oil Products U.S. dated as of January 29, 2007
(incorporated by reference herein to Exhibit 2.2 to the
Companys Current Report on
Form 8-K
filed on February 1, 2007, File
No. 1-3473).
|
|
2
|
.9
|
|
|
|
Purchase and Sale Agreement and Joint Escrow Instructions by and
among the Company and USA Petroleum Corporation, USA
Gasoline Corporation, Palisades Gas and Wash, Inc. and USA
San Diego LLC dated as of January 26, 2007
(incorporated by reference herein to Exhibit 2.3 to the
Companys Current Report on
Form 8-K
filed on February 1, 2007, File
No. 1-3473).
|
|
**2
|
.10
|
|
|
|
Letter Agreement to the Purchase and Sale Agreement and Joint
Escrow Instructions dated April 30, 2007 between the
Company and USA Petroleum Corporation, Palisades Gas and Wash,
Inc. and USA San Diego, LLC (incorporated by reference
herein to Exhibit 2.1 to the Companys Quarterly
Report on
Form 10-Q
for the quarterly period ended June 30, 2007, File
No. 1-3473).
|
|
3
|
.1
|
|
|
|
Restated Certificate of Incorporation of the Company
(incorporated by reference herein to Exhibit 3 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1993, File
No. 1-3473).
|
|
3
|
.2
|
|
|
|
Amendment to Restated Certificate of Incorporation of the
Company adding a new Article IX limiting Directors
Liability (incorporated by reference herein to Exhibit 3(b)
to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1993, File
No. 1-3473).
|
104
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
3
|
.3
|
|
|
|
Certificate of Amendment, dated as of May 4, 2006, to
Certificate of Incorporation of the Company, amending
Article IV, increasing the number of authorized shares of
common stock from 100 million to 200 million
(incorporated by reference herein to Exhibit 3.1 to the
Companys Quarterly Report on
Form 10-Q
for the period ended March 31, 2006, File
No. 1-3473).
|
|
3
|
.4
|
|
|
|
Certificate of Amendment, dated as of February 9, 1994, to
Restated Certificate of Incorporation of the Company amending
Article IV, Article V, Article VII and
Article VIII (incorporated by reference herein to
Exhibit 3(e) to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 1993, File
No. 1-3473).
|
|
3
|
.5
|
|
|
|
Certificate of Amendment, dated as of August 3, 1998, to
Certificate of Incorporation of the Company, amending
Article IV, increasing the number of authorized shares of
Common Stock from 50 million to 100 million
(incorporated by reference herein to Exhibit 3.1 to the
Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 1998, File
No. 1-3473).
|
|
3
|
.6
|
|
|
|
Certificate of Ownership of Merger merging Tesoro Merger Corp.
into Tesoro Petroleum Corporation and changing the name of
Tesoro Petroleum Corporation to Tesoro Corporation, dated
November 8, 2004 (incorporated by reference herein to
Exhibit 3.1 to the Current Report on
Form 8-K
filed on November 9, 2004).
|
|
3
|
.7
|
|
|
|
Amended and Restated Bylaws of Tesoro Corporation dated as of
October 29, 2008 (incorporated by reference herein to
Exhibit (3.ii) to the Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 2008, File
No. 1-3473).
|
|
4
|
.1
|
|
|
|
Form of Indenture relating to the 61/4% Senior Notes due
2012, dated as of November 16, 2005, among Tesoro
Corporation, certain subsidiary guarantors and U.S. Bank
National Association, as Trustee (including form of note)
(incorporated by reference herein to Exhibit 4.1 to the
Companys Current Report on
Form 8-K
filed on November 17, 2005, File
No. 1-3473).
|
|
4
|
.2
|
|
|
|
Form of Indenture relating to the 65/8% Senior Notes due
2015, dated as of November 16, 2005, among Tesoro
Corporation, certain subsidiary guarantors and U.S. Bank
National Association, as Trustee (including form of note)
(incorporated by reference herein to Exhibit 4.2 to the
Companys Current Report on
Form 8-K
filed on November 17, 2005, File
No. 1-3473).
|
|
4
|
.3
|
|
|
|
Form of Indenture relating to the 61/2% Senior Notes due
2017, dated as of May 29, 2007, among Tesoro Corporation,
certain subsidiary guarantors and U.S. Bank National
Association, as Trustee (including form of note) (incorporated
by reference herein to Exhibit 4.1 to the Companys
Current Report on
Form 8-K
filed on June 4, 2007, File
No. 1-3473).
|
|
4
|
.4
|
|
|
|
Form of 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
|
.5
|
|
|
|
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).
|
|
4
|
.6
|
|
|
|
Form of Registration Rights Agreement relating to the
61/2% Senior Notes due 2017, dated as of May 29, 2007,
among Tesoro Corporation, certain subsidiary guarantors, Lehman
Brothers, Inc., Goldman, Sachs & Co. and Greenwich
Capital Markets, Inc. (incorporated by reference herein to
Exhibit 4.2 to the Companys Current Report on
Form 8-K
filed on June 4, 2007, File
No. 1-3473).
|
|
10
|
.1
|
|
|
|
Fourth Amended and Restated Credit Agreement, dated as of
May 11, 2007, among the Company, JPMorgan Chase Bank, N.A
as administrative agent and a syndicate of banks, financial
institutions and other entities (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on May 15, 2007, File
No. 1-3473).
|
105
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.2
|
|
|
|
First Amendment to the Fourth Amended and Restated Credit
Agreement, dated as of February 22, 2008, among the
Company, JP Morgan Chase Bank, NA as administrative agent and a
syndicate of banks, financial institutions and other entities.
(incorporated by reference herein to Exhibit 10.2 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007, File
No. 1-3473).
|
|
10
|
.3
|
|
|
|
$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
|
.4
|
|
|
|
$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
|
.5
|
|
|
|
Amended and Restated Executive Security Plan effective
January 1, 2009 (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
10
|
.6
|
|
|
|
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
|
.7
|
|
|
|
2006 Long-Term Incentive Plan dated effective January 1,
2009 (incorporated by reference to Exhibit 10.4 to the
Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
10
|
.8
|
|
|
|
Tesoro Corporation 2006 Executive Deferred Compensation Plan
effective January 1, 2009 (incorporated by reference to
Exhibit 10.6 to the Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
10
|
.9
|
|
|
|
Tesoro Corporation Restoration Retirement Plan effective
January 1, 2009 (incorporated by reference to
Exhibit 10.5 to the Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
10
|
.10
|
|
|
|
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
|
.11
|
|
|
|
2006 Long-Term Stock Appreciation Rights Plan of Tesoro
Corporation (incorporated by reference herein to
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on February 8, 2006, File
No. 1-3473).
|
|
10
|
.12
|
|
|
|
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
|
.13
|
|
|
|
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
|
.14
|
|
|
|
Second Amendment to the Amended and Restated Employment
Agreement between the Company and Bruce A. Smith dated as of
November 1, 2006 (incorporated by reference herein to
Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q
for the period ended September 30, 2006, File
No. 1-3473).
|
|
10
|
.15
|
|
|
|
Third Amendment to the Amended and Restated Employment Agreement
between Tesoro and Bruce A. Smith (incorporated by reference to
Exhibit 10.7 to the Companys Current Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
10
|
.16
|
|
|
|
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
|
.17
|
|
|
|
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).
|
106
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.18
|
|
|
|
Form of Second Amendment to Employment Agreement between the
Company and William J. Finnerty dated as of July 11, 2007
(incorporated by reference herein to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed on July 16, 2007, File
No. 1-3473).
|
|
10
|
.19
|
|
|
|
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
|
.20
|
|
|
|
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
|
.21
|
|
|
|
Form of Second Amendment to Employment Agreement between the
Company and Everett D. Lewis dated as of July 11, 2007
(incorporated by reference herein to Exhibit 10.2 to the
Companys Current Report on
Form 8-K
filed on July 16, 2007, File
No. 1-3473).
|
|
10
|
.22
|
|
|
|
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
|
.23
|
|
|
|
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
|
.24
|
|
|
|
Second Amendment to Employment Agreement between the Company and
Gregory A. Wright dated as of June 8, 2007 (incorporated by
reference herein to Exhibit 10.1 to the Companys
Current Report on
Form 8-K
filed on June 13, 2007, File
No. 1-3473).
|
|
10
|
.25
|
|
|
|
Management Stability Agreement between the Company and Arlen O.
Glenewinkel, Jr. dated August 2, 2005 (incorporated by
reference herein to Exhibit 10.28 to the Companys
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2006, File
No. 1-3473).
|
|
10
|
.26
|
|
|
|
Amended and Restated Management Stability Agreement between the
Company and Charles S. Parrish dated May 3, 2006
(incorporated by reference herein to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed on May 25, 2006, File
No. 1-3473).
|
|
10
|
.27
|
|
|
|
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
|
.28
|
|
|
|
Amended and Restated 1995 Non-Employee Director Stock Option
Plan, as amended through March 15, 2000 (incorporated by
reference herein to Exhibit 10.2 to the Companys
Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2002, File
No. 1-3473).
|
|
10
|
.40
|
|
|
|
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
|
.29
|
|
|
|
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
|
.30
|
|
|
|
Copy of the Companys Board of Directors Deferred
Compensation Plan effective January 1, 2009 (incorporated
by reference to Exhibit 10.3 to the Companys Current
Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
10
|
.31
|
|
|
|
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
|
.32
|
|
|
|
Copy of the Companys Board of Directors Deferred Phantom
Stock Plan effective January 1, 2009, (incorporated by
reference to Exhibit 10.2 to the Companys Current
Report on
Form 8-K
filed December 18, 2008, File
No. 1-3473).
|
|
10
|
.33
|
|
|
|
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).
|
107
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.34
|
|
|
|
Form of Indemnification Agreement between the Company and its
officers (incorporated by reference herein to Exhibit 10.2
to the Companys Current Report on
Form 8-K
filed on August 4, 2008, File
No. 1-3473).
|
|
10
|
.35
|
|
|
|
Form of Indemnification Agreement between the Company and its
directors (incorporated by reference herein to Exhibit 10.3
to the Companys Current Report on
Form 8-K
filed on August 4, 2008, File
No. 1-3473).
|
|
14
|
.1
|
|
|
|
Code of Business Conduct and Ethics for Senior Financial
Executives (incorporated by reference herein to
Exhibit 14.1 to the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003, File
No. 1-3473).
|
|
*21
|
.1
|
|
|
|
Subsidiaries of the Company.
|
|
*23
|
.1
|
|
|
|
Consent of Independent Registered Public Accounting Firm
(Ernst & Young LLP).
|
|
*23
|
.2
|
|
|
|
Consent of Independent Registered Public Accounting Firm
(Deloitte & Touche LLP)
|
|
*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.
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Confidential treatment has been granted for certain portions of
this Exhibit pursuant to
Rule 24b-2
of the Securities Exchange Act of 1934, which portions have been
omitted and filed separately with the Securities and Exchange
Commission. |
|
|
|
Identifies management contracts or compensatory plans or
arrangements required to be filed as an exhibit hereto pursuant
to Item 15(a)(3) of
Form 10-K. |
Copies of exhibits filed as part of this
Form 10-K
may be obtained by stockholders of record at a charge of $0.15
per page, minimum $5.00 each request. Direct inquiries to the
Corporate Secretary, Tesoro Corporation, 300 Concord Plaza
Drive, San Antonio, Texas,
78216-6999.
108
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TESORO CORPORATION
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive Officer
Dated: February 27, 2009
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.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ BRUCE
A. SMITH
Bruce
A. Smith
|
|
Chairman of the Board of Directors, President and Chief
Executive Officer (Principal Executive Officer)
|
|
February 27, 2009
|
|
|
|
|
|
/s/ GREGORY
A. WRIGHT
Gregory
A. Wright
|
|
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
|
|
February 27, 2009
|
|
|
|
|
|
/s/ ARLEN
O. GLENEWINKEL, JR.
Arlen
O. Glenewinkel, Jr.
|
|
Vice President and Controller
(Principal Accounting Officer)
|
|
February 27, 2009
|
|
|
|
|
|
/s/ STEVEN
H. GRAPSTEIN
Steven
H. Grapstein
|
|
Lead Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ JOHN
F. BOOKOUT, III
John
F. Bookout, III
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ RODNEY
F. CHASE
Rodney
F. Chase
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ ROBERT
W. GOLDMAN
Robert
W. Goldman
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ J.W.
(JIM) NOKES
J.W.
(Jim) Nokes
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ DONALD
H. SCHMUDE
Donald
H. Schmude
|
|
Director
|
|
February 27, 2009
|
|
|
|
|
|
/s/ MICHAEL
E. WILEY
Michael
E. Wiley
|
|
Director
|
|
February 27, 2009
|
109