UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ........... TO ...........
COMMISSION FILE NUMBER 1-3473
TESORO PETROLEUM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-0862768
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8700 TESORO DRIVE, SAN ANTONIO, TEXAS 78217-6218
(Address of Principal Executive Offices) (Zip Code)
210-828-8484
(Registrant's Telephone Number, Including Area Code)
=============================
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No _____
=============================
There were 26,789,655 shares of the Registrant's Common Stock outstanding at
April 30, 1997.
<PAGE>
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 1997 and
December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Consolidated Operations - Three Months
Ended March 31, 1997 and 1996. . . . . . . . . . . . . . . . . 4
Condensed Statements of Consolidated Cash Flows - Three Months
Ended March 31, 1997 and 1996. . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
March 31, December 31,
1997 1996<F1>
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . $ 31,363 22,796
Receivables, less allowance for doubtful
accounts of $1,499 ($1,515 at
December 31, 1996). . . . . . . . . . . . . . . . 84,480 128,013
Inventories:
Crude oil and wholesale refined products,
at LIFO. . . . . . . . . . . . . . . . . . . . . 58,423 55,858
Merchandise and other refined products. . . . . . 14,045 13,539
Materials and supplies. . . . . . . . . . . . . . 5,109 5,091
Prepayments and other . . . . . . . . . . . . . . . 8,329 12,046
------- -------
Total Current Assets. . . . . . . . . . . . . . . 201,749 237,343
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Refining and marketing. . . . . . . . . . . . . . . 331,401 328,522
Exploration and production:
Oil and gas (full cost method of accounting). . . 202,794 191,777
Gas transportation. . . . . . . . . . . . . . . . 6,703 6,703
Marine services . . . . . . . . . . . . . . . . . . 35,645 33,820
Corporate . . . . . . . . . . . . . . . . . . . . . 12,639 12,531
------- -------
589,182 573,353
Less accumulated depreciation, depletion and
amortization. . . . . . . . . . . . . . . . . . 268,471 256,842
------- -------
Net Property, Plant and Equipment . . . . . . 320,711 316,511
------- -------
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . 29,511 28,733
------- -------
TOTAL ASSETS . . . . . . . . . . . . . . . . $ 551,971 582,587
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . $ 54,639 80,747
Accrued liabilities . . . . . . . . . . . . . . . . 30,556 33,256
Current income taxes payable. . . . . . . . . . . . 1,597 13,822
Current portion of long-term debt and other
obligations . . . . . . . . . . . . . . . . . . . 10,241 10,043
------- -------
Total Current Liabilities . . . . . . . . . . . 97,033 137,868
------- -------
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . 20,577 19,151
------- -------
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . 44,884 42,243
------- ------
LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS
CURRENT PORTION . . . . . . . . . . . . . . . . . . 79,063 79,260
------- -------
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY:
Common Stock, par value $.16-2/3; authorized
50,000 shares; 26,439 shares issued and
outstanding (26,414 in 1996). . . . . . . . . . . 4,406 4,402
Additional paid-in capital. . . . . . . . . . . . . 189,582 189,368
Retained earnings . . . . . . . . . . . . . . . . . 116,426 110,295
------- -------
Total Stockholders' Equity. . . . . . . . . . . . 310,414 304,065
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . $ 551,971 582,587
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<FN>
<F1> The balance sheet at December 31, 1996 has been taken from the audited
consolidated financial statements at that date and condensed.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Refining and marketing . . . . . . . . . . . . . . . $ 174,400 187,779
Exploration and production . . . . . . . . . . . . . 23,358 27,521
Marine services. . . . . . . . . . . . . . . . . . . 35,495 23,282
Other income . . . . . . . . . . . . . . . . . . . . 1,599 5,005
------- -------
Total Revenues. . . . . . . . . . . . . . . . . . . 234,852 243,587
------- -------
OPERATING COSTS AND EXPENSES:
Refining and marketing . . . . . . . . . . . . . . . 171,154 187,257
Exploration and production . . . . . . . . . . . . . 2,845 3,406
Marine services. . . . . . . . . . . . . . . . . . . 34,216 22,481
Depreciation, depletion and amortization . . . . . . 11,597 9,767
------- -------
Total Operating Costs and Expenses. . . . . . . . . 219,812 222,911
------- -------
OPERATING PROFIT. . . . . . . . . . . . . . . . . . . 15,040 20,676
General and Administrative. . . . . . . . . . . . . . (3,038) (2,971)
Interest Expense. . . . . . . . . . . . . . . . . . . (1,570) (3,945)
Interest Income . . . . . . . . . . . . . . . . . . . 434 409
Other Expense, Net. . . . . . . . . . . . . . . . . . (1,291) (5,432)
------- -------
EARNINGS BEFORE INCOME TAXES. . . . . . . . . . . . . 9,575 8,737
Income Tax Provision. . . . . . . . . . . . . . . . . 3,444 2,767
------- -------
NET EARNINGS. . . . . . . . . . . . . . . . . . . . . $ 6,131 5,970
======= =======
NET EARNINGS PER SHARE. . . . . . . . . . . . . . . . $ .23 .23
======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES. . . . . . . . . . . . . . . . . . 26,829 25,674
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net earnings. . . . . . . . . . . . . . . . . . . . $ 6,131 5,970
Adjustments to reconcile net earnings to net
cash from operating activities:
Depreciation, depletion and amortization . . . . 11,747 9,979
Amortization of deferred charges and other . . . 51 404
Changes in operating assets and liabilities:
Receivable from Tennessee Gas Pipeline Company - (6,521)
Receivables, other trade . . . . . . . . . . . 43,533 (8,929)
Inventories. . . . . . . . . . . . . . . . . . (3,089) 16,582
Other assets . . . . . . . . . . . . . . . . . 3,487 297
Accounts payable and other current liabilities (40,741) (1,396)
Obligation payments to State of Alaska . . . . (1,064) (940)
Deferred income taxes. . . . . . . . . . . . . 1,426 1,919
Other liabilities and obligations. . . . . . . 2,276 669
------- -------
Net cash from operating activities . . . . . 23,757 18,034
------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . (16,300) (14,249)
Acquisition of Coastwide Energy Services, Inc.. . . - (7,720)
Other . . . . . . . . . . . . . . . . . . . . . . . (479) (2,042)
------- -------
Net cash used in investing activities. . . . (16,779) (24,011)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Borrowings, net of repayments of $1,000 in 1997
and $4,200 in 1996, under revolving credit
facilities . . . . . . . . . . . . . . . . . . . . 2,182 -
Payments of long-term debt. . . . . . . . . . . . . (764) (1,004)
Other . . . . . . . . . . . . . . . . . . . . . . . 171 16
------- -------
Net cash from (used in) financing activities 1,589 (988)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . 8,567 (6,965)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . . 22,796 13,941
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . $ 31,363 6,976
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . . . . $ 1,010 2,988
======= =======
Income taxes paid . . . . . . . . . . . . . . . . . $ 14,245 835
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</TABLE>
5
<PAGE>
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The interim condensed consolidated financial statements of Tesoro Petroleum
Corporation and its subsidiaries (collectively, the "Company" or "Tesoro") have
been prepared by management without audit pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). Accordingly, the
accompanying financial statements reflect all adjustments that, in the opinion
of management, are necessary for a fair presentation of results for the periods
presented. Such adjustments are of a normal recurring nature. Certain
information and notes normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the SEC's rules and regulations. However, management
believes that the disclosures presented herein are adequate to make the
information not misleading. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
The preparation of these condensed consolidated financial statements required
the use of management's best estimates and judgment that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods. Actual results could differ from
those estimates. The results of operations for any interim period are not
necessarily indicative of results for the full year. Certain reclassifications
have been made to amounts previously reported for the interim period of 1996 to
conform to the current presentation of financial information.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Company is subject to extensive federal, state and local environmental laws
and regulations. These laws, which change frequently, regulate the discharge of
materials into the environment and may require the Company to remove or mitigate
the environmental effects of the disposal or release of petroleum or chemical
substances at various sites or install additional controls or other
modifications or changes in use for certain emission sources. The Company is
currently involved with a waste disposal site near Abbeville, Louisiana, at
which it has been named a potentially responsible party under the Federal
Superfund law. Although this law might impose joint and several liability upon
each party at the site, the extent of the Company's allocated financial
contributions to the cleanup of the site is expected to be limited based upon
the number of companies, volumes of waste involved and an estimated total cost
of approximately $500,000 among all of the parties to close the site. The
Company is currently involved in settlement discussions with the Environmental
Protection Agency ("EPA") and other potentially responsible parties at the
Abbeville, Louisiana site. The Company expects, based on these discussions,
that its liability will not exceed $25,000. The Company is also involved in
remedial responses and has incurred cleanup expenditures associated with
environmental matters at a number of sites, including certain of its own
properties.
At March 31, 1997, the Company's accruals for environmental expenses amounted to
$8.8 million, which included a noncurrent liability of approximately $3.3
million for remediation of Kenai Pipe Line Company's ("KPL") properties that has
been funded by the former owners of KPL through a restricted escrow deposit.
Based on currently available information, including the participation of other
parties or former owners in remediation actions, the Company believes these
accruals are adequate. In addition, to comply with environmental laws and
regulations, the Company anticipates that it will make capital improvements of
approximately $6 million in 1997 and $3 million in 1998. The Company also
expects to spend approximately $6 million by the year 2002 for secondary
containment systems for existing storage tanks in Alaska.
Conditions that require additional expenditures may exist for various Company
sites, including, but not limited to, the Company's refinery, retail gasoline
outlets (current and closed locations) and petroleum product terminals, and for
compliance with the Clean Air Act. The amount of such future expenditures cannot
currently be determined by the Company.
6
<PAGE>
NOTE 3 - STOCKHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM
On May 7, 1997, the Company's Board of Directors authorized the repurchase of up
to 3 million shares (approximately 11 percent of the current outstanding shares)
of Tesoro Common Stock in a buyback program that will extend through the end of
1998. Under the program, subject to certain conditions, the Company may
repurchase from time to time Tesoro Common Stock in the open market and through
privately negotiated transactions. Purchases will depend on price, market
conditions and other factors and will be made primarily from cash flow. The
repurchased Common Stock will be accounted for as treasury stock and may be used
for employee benefit plan requirements and other corporate purposes. For
further information on the repurchase program and related restrictions, see
"Capital Resources and Liquidity" in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 2 herein.
INCENTIVE COMPENSATION STRATEGY
In June 1996, the Company's Board of Directors unanimously approved a special
incentive compensation strategy in order to encourage a longer-term focus for
all employees to perform at an outstanding level. The strategy provides
eligible employees with incentives to achieve a significant increase in the
market price of the Company's Common Stock. Under the strategy, awards would be
earned only if the market price of the Company's Common Stock reaches an average
price per share of $20 or higher over any 20 consecutive trading days after June
30, 1997 and before December 31, 1998 (the "Performance Target"). In connection
with this strategy, non-executive employees will be able to earn cash bonuses
equal to 25% of their individual payroll amounts for the previous twelve
complete months and certain executives have been granted, from the Company's
Amended and Restated Executive Long-Term Incentive Plan ("Plan"), a total of
340,000 stock options at an exercise price of $11.375 per share, the fair market
value (as defined in the Plan) of a share of the Company's Common Stock on the
date of grant, and 350,000 shares of restricted Common Stock, all of which vest
only upon achieving the Performance Target.
NOTE 4 - ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No.
128, which establishes standards for computing and presenting earnings per
share, is effective for periods ending after December 15, 1997 and requires
restatement of earnings per share data presented in prior periods. Early
adoption is not permitted. The Company believes that the adoption of SFAS No.
128 will not materially impact its earnings per share computations.
7
<PAGE>
Item 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1996
SUMMARY
Net earnings of $6.1 million, or $.23 per share, for the three months ended
March 31, 1997 ("1997 quarter") compare with net earnings of $6.0 million, or
$.23 per share, for the three months ended March 31, 1996 ("1996 quarter").
Comparability between the results for the 1997 and 1996 quarters was impacted by
certain significant items. The 1996 quarter included revenues from sales of
natural gas at above-market prices under a contract with Tennessee Gas Pipeline
Company ("Tennessee Gas") which was terminated effective October 1, 1996.
Results of operations in 1997 and future years will no longer benefit from the
pricing provisions in the contract. In the 1996 quarter, results included $7.9
million pretax from the excess of these contract prices over spot market prices.
The Company's results of operations in the 1996 quarter also included income
related to retroactive severance tax refunds of $5.0 million pretax, compared to
refunds of $1.6 million pretax in the 1997 quarter. Partially offsetting the
benefits in the 1996 quarter were pretax charges of approximately $4 million
primarily related to a shareholder consent solicitation resolved in April 1996,
write-off of deferred financing costs and employee termination costs. Excluding
these significant items, the increase in pretax net earnings in the 1997 quarter
was largely due to higher natural gas spot market prices, better refining and
marketing margins, and improved marine services profitability. Additionally, at
the corporate level, interest expense was reduced by nearly 60% due to
redemptions of the Company's public debt in late 1996.
A discussion and analysis of the factors contributing to these results are
presented below. The Company conducts its operations in the following business
segments: Refining and Marketing, Exploration and Production, and Marine
Services.
8
<PAGE>
<TABLE>
<CAPTION>
REFINING AND MARKETING Three Months Ended
March 31,
-------------------
(Dollars in millions except per unit amounts) 1997 1996
---- ----
<S> <C> <C>
Gross Operating Revenues:
Refined products . . . . . . . . . . . . . . . . . $ 155.8 146.7
Other, primarily crude oil resales and
merchandise . . . . . . . . . . . . . . . . . . . 18.6 41.0
------ ------
Gross Operating Revenues . . . . . . . . . . . . $ 174.4 187.7
====== ======
Operating Profit (Loss):
Gross margin . . . . . . . . . . . . . . . . . . . $ 24.7 22.4
Operating expenses . . . . . . . . . . . . . . . . 21.5 21.8
Depreciation and amortization. . . . . . . . . . . 3.1 3.0
------ ------
Operating Profit (Loss). . . . . . . . . . . . . $ .1 (2.4)
====== ======
Capital Expenditures . . . . . . . . . . . . . . . . $ 2.9 1.8
====== ======
Refining and Marketing - Total Product Sales
(average daily barrels)<F1>:
Gasoline. . . . . . . . . . . . . . . . . . . . . 16,738 20,022
Middle distillates. . . . . . . . . . . . . . . . 26,253 29,355
Heavy oils and residual product . . . . . . . . . 17,890 17,086
------ ------
Total Product Sales. . . . . . . . . . . . . . . 60,881 66,463
====== ======
Refining and Marketing - Total Product Sales Prices
($/barrel):
Gasoline. . . . . . . . . . . . . . . . . . . . . $ 33.64 27.66
Middle distillates. . . . . . . . . . . . . . . . $ 32.09 25.81
Heavy oils and residual product . . . . . . . . . $ 18.19 17.63
Refining and Marketing - Gross Margins on
Total Product Sales ($/barrel)<F2>:
Average sales price. . . . . . . . . . . . . . . . $ 28.43 24.26
Average costs of sales . . . . . . . . . . . . . . 24.63 21.22
------ ------
Gross margin. . . . . . . . . . . . . . . . . . . $ 3.80 3.04
====== ======
Refinery Throughput
Barrels per day. . . . . . . . . . . . . . . . . . 49,140 45,047
% Alaska North Slope crude oil . . . . . . . . . . 79% 68%
Refined Products Manufactured (average daily
barrels):
Gasoline. . . . . . . . . . . . . . . . . . . . . 12,887 13,714
Middle distillates. . . . . . . . . . . . . . . . 20,829 18,083
Heavy oils and residual product . . . . . . . . . 14,539 12,321
Other . . . . . . . . . . . . . . . . . . . . . . 2,647 2,754
------ ------
Total Refined Products Manufactured. . . . . . . 50,902 46,872
====== ======
Refinery Operations - Product Spread ($/barrel)<F3>:
Average yield value of products manufactured . . . $ 25.44 21.81
Cost of raw materials. . . . . . . . . . . . . . . 20.54 17.92
------ ------
Refinery Product Spread . . . . . . . . . . . . . 4.90 3.89
Operating costs. . . . . . . . . . . . . . . . . . 2.81 2.90
Depreciation . . . . . . . . . . . . . . . . . . . .55 .57
------ ------
Net Refinery Margin . . . . . . . . . . . . . . . $ 1.54 .42
====== ======
Non-Refinery Margin, included in operating profit
above ($ millions)<F4> . . . . . . . . . . . . . . $ 3.1 6.5
====== ======
<FN>
<F1> Sources of total products sales include products manufactured at the
refinery, products drawn from inventory balances and products purchased
from third parties. The Company's purchases of refined products for resale
were approximately 11,500 and 11,000 average daily barrels for the three
months ended March 31, 1997 and 1996, respectively.
<F2> Margins on sales of purchased products, together with the effect of changes
in inventories, are included in the gross margin on total product sales.
<F3> Refinery product spread represents the excess of yield value of the
products manufactured at the refinery over the cost of raw materials used
to manufacture such products.
<F4> Includes intrasegment transportation revenues of $2.8 million for both
quarters presented.
</TABLE>
9
<PAGE>
REFINING AND MARKETING
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996. Results from the Company's Refining and Marketing segment improved during
the 1997 quarter with operating profit of $.1 million, compared with an
operating loss of $2.4 million in the 1996 quarter. Generally, results from
this segment are weak in the first quarter due to low, seasonal demand for
gasoline during the winter months in Alaska. However, during the 1997 quarter
the Company benefited from several operating improvements made during 1996,
primarily the use of an improved catalyst in the hydrocracker unit. The
improved catalyst provides for increased production of jet fuel, for which
Alaska is in short supply, and reduced production of lower valued gasoline.
Production of middle distillates, including jet fuel, increased by 15% to 20,829
barrels per day in the 1997 quarter from 18,083 barrels per day in the 1996
quarter, while gasoline production declined by 6%. Results for the 1997 quarter
also reflected improvements in the Company's retail marketing activities.
Gasoline sales in Alaska increased by 2.4 million gallons in the 1997 quarter,
as compared to the 1996 quarter.
The Company was able to achieve a refinery product spread of $4.90 per barrel in
the 1997 quarter, a 26% improvement from the $3.89 per barrel spread in the 1996
quarter. The Company's refined product yield values increased by 17% to $25.44
per barrel in the 1997 quarter from $21.81 per barrel in the 1996 quarter, while
the Company's feedstock costs increased by 15% to $20.54 per barrel in the 1997
quarter from $17.92 per barrel in the 1996 quarter. To further increase jet
fuel production, the Company intends to modify the refinery hydrocracker during
1997, at an estimated cost of $17 million. In conjunction with the modification
and other initiatives, a refinery downtime of approximately 30 days is
anticipated during 1997. The Company is also expanding its Alaskan retail
operations with the construction of new outlets and remodeling of existing
outlets.
Revenues from sales of refined products in the Company's Refining and Marketing
segment increased due primarily to higher sales prices, which rose 17% to $28.43
per barrel in the 1997 quarter from $24.26 per barrel in the 1996 quarter.
Partially offsetting this increase were reduced sales volumes which averaged
60,881 barrels per day in the 1997 quarter, compared to 66,463 barrels per day
in the 1996 quarter. This decrease in sales volumes was primarily due to the
discontinuance of certain West Coast operations. The Company at times resells
previously purchased crude oil, sales of which decreased to $10.7 million in the
1997 quarter compared to $34.5 million in the 1996 quarter. During the 1997
quarter, the Company had less crude oil available for resale as refinery
throughput averaged 4,093 barrels per day more than in the 1996 quarter and no
spot purchases of crude oil were made. Costs of sales decreased in the 1997
quarter due to lower volumes, partially offset by higher prices for crude oil
and refined products.
Results from the Company's Refining and Marketing segment for the 1997 quarter
improved over the prior year quarter due primarily to operating efficiencies and
marketing initiatives implemented by the Company during the past year and, in
part, by overall improvement in market conditions. Future profitability of this
segment will continue to be influenced by market conditions, particularly as
these conditions influence costs of crude oil relative to prices received for
sales of refined products, and other additional factors that are beyond the
control of the Company.
10
<PAGE>
<TABLE>
<CAPTION>
EXPLORATION AND PRODUCTION Three Months Ended
March 31,
-------------------
(Dollars in millions except per unit amounts) 1997 1996
---- ----
<S> <C> <C>
U.S. OIL AND GAS:
Gross operating revenues. . . . . . . . . . . . . $ 20.1 23.1
Other income - retroactive severance tax
refunds . . . . . . . . . . . . . . . . . . . . 1.6 5.0
Production costs. . . . . . . . . . . . . . . . . 1.7 1.4
Administrative support and other operating
expenses . . . . . . . . . . . . . . . . . . . . .4 1.0
Depreciation, depletion and amortization. . . . . 7.8 6.3
------ ------
Operating Profit - U.S. Oil and Gas<F1> . . . . 11.8 19.4
------ ------
U.S. GAS TRANSPORTATION:
Gross operating revenues . . . . . . . . . . . . . 1.4 1.4
Operating expenses . . . . . . . . . . . . . . . . .1 .1
Depreciation and amortization. . . . . . . . . . . .1 .1
------ ------
Operating Profit - U.S. Gas Transportation. . . 1.2 1.2
------ ------
BOLIVIA:
Gross operating revenues . . . . . . . . . . . . . 1.9 3.1
Production costs . . . . . . . . . . . . . . . . . .2 .2
Administrative support and other operating
expenses. . . . . . . . . . . . . . . . . . . . . .5 .7
Depreciation, depletion and amortization . . . . . .2 .3
------ ------
Operating Profit - Bolivia. . . . . . . . . . . 1.0 1.9
------ ------
TOTAL OPERATING PROFIT - EXPLORATION AND
PRODUCTION. . . . . . . . . . . . . . . . . . . . . $ 14.0 22.5
====== ======
U.S.:
Capital expenditures . . . . . . . . . . . . . . . $ 7.0 9.5
====== ======
Net natural gas production (average daily Mcf) -
Spot market and other. . . . . . . . . . . . . . 94,103 79,642
Tennessee Gas Contract<F1> . . . . . . . . . . . - 14,452
------ ------
Total production. . . . . . . . . . . . . . . 94,103 94,094
====== ======
Average natural gas sales prices ($/Mcf) -
Spot market<F2>. . . . . . . . . . . . . . . . . $ 2.34 1.70
Tennessee Gas Contract<F1> . . . . . . . . . . . $ - 8.17
Average. . . . . . . . . . . . . . . . . . . . $ 2.34 2.69
Average operating expenses ($/Mcfe) -
Lease operating expenses . . . . . . . . . . . . $ .16 .13
Severance taxes. . . . . . . . . . . . . . . . . .04 .03
------ ------
Total production costs . . . . . . . . . . . . .20 .16
Administrative support . . . . . . . . . . . . . .05 .12
------ ------
Total operating expenses . . . . . . . . . . . $ .25 .28
====== ======
Depletion ($/Mcfe) . . . . . . . . . . . . . . . . $ .91 .73
====== ======
BOLIVIA:
Capital expenditures . . . . . . . . . . . . . . . $ 4.0 2.1
Net natural gas production (average daily Mcf) . . 10,999 19,058
Average natural gas sales price ($/Mcf). . . . . . $ 1.32 1.32
Net condensate production (average daily barrels) 316 550
Average condensate price ($/barrel) . . . . . . . $ 19.28 15.72
Average operating expenses ($/Mcfe) -
Production costs . . . . . . . . . . . . . . . . $ .16 .10
Value-added taxes . . . . . . . . . . . . . . . . - .07
Administrative support . . . . . . . . . . . . . .41 .30
------ ------
Total operating expenses . . . . . . . . . . . $ .57 .47
====== ======
Depletion ($/Mcfe) . . . . . . . . . . . . . . . . $ .15 .13
====== ======
<FN>
<F1> Results for the three months ended March 31, 1996 included revenues from
above-market pricing provisions of a contract with Tennessee Gas which was
terminated effective October 1, 1996. Operating profit for the 1996
quarter included $7.9 million for the excess of these contract prices over
spot market prices.
<F2> Includes effects of the Company's natural gas price arrangements which
amounted to losses of $.19 per Mcf and $.08 per Mcf for the three months
ended March 31, 1997 and 1996, respectively.
<F3> Mcf is defined as one thousand cubic feet; Mcfe is defined as net
equivalent one thousand cubic feet.
</TABLE>
11
<PAGE>
U. S. OIL AND GAS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996. Operating profit of $11.8 million from the Company's U.S. oil and gas
operations in the 1997 quarter compares to operating profit of $19.4 million in
the 1996 quarter. Comparability between these quarters was impacted by certain
significant items. The 1996 quarter included revenues from the sale of natural
gas at above-market prices under a contract with Tennessee Gas, which was
terminated effective October 1, 1996. Results of operations in 1997 and future
years will no longer benefit from the pricing provisions of this contract. In
the 1996 quarter, Exploration and Production's operating profit included $7.9
million from the excess of these contract prices over spot market prices.
Operating profit also included income related to retroactive severance tax
refunds, which amounted to $5.0 million in the 1996 quarter and $1.6 million in
the 1997 quarter. Excluding the incremental value of the Tennessee Gas contract
and retroactive severance tax refunds, operating profit from the Company's U.S.
oil and gas operations would have been $10.2 million in the 1997 quarter
compared to $6.5 million in the 1996 quarter. The resulting increase of $3.7
million was primarily due to higher spot market prices for sales of natural gas,
as industry demand increased due to unusually cold weather combined with
below-normal storage levels.
Prices realized by the Company on its spot market natural gas production
increased 38% to $2.34 per Mcf in the 1997 quarter from $1.70 per Mcf in the
1996 quarter. On a weighted-average basis, the Company's natural gas sales
price was $2.69 per Mcf in the 1996 quarter due to sales under the Tennessee Gas
contract. The Company's natural gas production averaged 94.1 Mmcf per day in
both the 1997 and 1996 quarters.
Gross operating revenues from the Company's U.S. oil and gas operations, after
excluding amounts related to Tennessee Gas, increased due to the higher spot
market prices. Production costs increased by $.3 million in the 1997 quarter
due to higher lease operating expenses, while administrative and other operating
expenses were reduced by $.6 million. Depreciation and depletion increased by
$1.5 million, or 24%, due to a higher depletion rate.
From time to time, the Company enters into commodity price agreements to reduce
the risk caused by fluctuation in the prices of natural gas in the spot market.
In addition, the Company has entered into price agreements with collars, under
which no payments will be made by either party unless the price falls below a
designated floor price or above a designated ceiling price, at which time the
Company receives or pays the difference, respectively. During the 1997 and 1996
quarters, the Company used such agreements to set the price of 34% and 42%,
respectively, of the natural gas production that it sold in the spot market.
The Company recognized a loss of $1.6 million ($.19 per Mcf) and $.6 million
($.08 per Mcf) in the 1997 and 1996 quarters, respectively, related to these
price agreements. As of March 31, 1997, the Company has no remaining price
agreements for 1997.
Bolivia
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996. Operating profit from the Company's Bolivian operations decreased to $1.0
million in the 1997 quarter, from $1.9 million in the 1996 quarter, as
production of natural gas and condensate fell by 42%. During the 1997 quarter,
the Company's Bolivian natural gas production was reduced due to curtailment by
the Bolivian government to balance over-production requested by the government
during 1996. Production of natural gas was also reduced due to constraints
arising from repairs to a flood-damaged pipeline that transports gas from
Bolivia to Argentina. A temporary replacement pipeline is now operational,
which has essentially restored full capacity until a permanent line can be
constructed in the second half of 1997. Partially offsetting the decrease in
production in the 1997 quarter was a 23% rise in condensate sales prices. Total
operating costs and depreciation, depletion and amortization declined in
aggregate, but increased on a per unit basis due to the lower production
volumes.
In 1996, a new Hydrocarbons Law was passed by the Bolivian government that
significantly impacts the Company's operations in Bolivia. The new law, among
other matters, granted the Company the option to convert its Contracts of
Operation to new Shared Risk Contracts. During 1996, the Company signed
agreements to convert its Contracts of Operation to Shared Risk Contracts
subject to recision at the option of the Company if the Company is not satisfied
with modifications to the Bolivian fiscal law. The Company expects to complete
this conversion during the third quarter of 1997. The new contracts extend the
Company's term of operation, provide more favorable acreage relinquishment terms
and provide for a more favorable fiscal regime of royalties and taxes. The new
contracts will extend the term of the Company's operations for Block 18 ten
additional years to the year 2017. For Block 20, the new contract extends the
Company's term 21 additional years to the year 2029 for acreage that is in the
exploration phase of the contract, and 10 additional years to the year 2018 for
an area
12
<PAGE>
within Block 20 that is designated as being in the development phase of the new
contract. The new contract provisions, along with a substantial discovery
during 1996, significantly increased the Company's reserves at year-end 1996.
The Company's Bolivian natural gas production is sold to Yacimientos
Petroliferos Fiscales Bolivianos ("YPFB"), which in turn sells the natural gas
to Yacimientos Petroliferos Fiscales, SA ("YPF"), a publicly-held company based
in Argentina. Currently, the Company is selling its natural gas production to
YPFB based on the volume and pricing terms in the contract between YPFB and YPF.
The contract to sell gas to YPF expired March 31, 1997 and a contract extension
was signed effective April 1, 1997 extending the contract term two years to
March 31, 1999 with an option to extend the contract a maximum of one year if
the pipeline from Bolivia to Brazil is not complete. In the contract extension,
YPF negotiated an 11% reduction in the minimum contract volume it is required to
import from Bolivia, which in turn resulted in a corresponding 11% reduction of
Tesoro's minimum contract volume. The pipeline from Bolivia to Brazil is
scheduled to begin construction in the second half of 1997, with first gas
deliveries expected in 1999.
<TABLE>
<CAPTION>
MARINE SERVICES Three Months Ended
March 31,
-------------------
(Dollars in millions) 1997 1996
---- ----
<S> <C> <C>
Gross Operating Revenues:
Fuels. . . . . . . . . . . . . . . . . . . . . . . $ 28.2 18.9
Lubricants and other . . . . . . . . . . . . . . . 3.7 2.5
Services . . . . . . . . . . . . . . . . . . . . . 3.6 1.9
------ ------
Gross Operating Revenues . . . . . . . . . . . . 35.5 23.3
Costs of Goods Sold. . . . . . . . . . . . . . . . . 27.3 18.6
------ ------
Gross Profit . . . . . . . . . . . . . . . . . . . 8.2 4.7
Operating and Other Expenses . . . . . . . . . . . . 6.9 4.0
Depreciation and Amortization. . . . . . . . . . . . .4 .1
------ ------
Operating Profit . . . . . . . . . . . . . . . . . $ .9 .6
====== ======
Capital Expenditures . . . . . . . . . . . . . . . . $ 2.2 .7
====== ======
Sales Volumes (millions of gallons):
Fuels, primarily diesel. . . . . . . . . . . . . . 39.6 30.4
Lubricants . . . . . . . . . . . . . . . . . . . . .7 .5
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996. On February 20, 1996, the Company acquired Coastwide Energy Services,
Inc. ("Coastwide") and combined these operations with the Company's marine
petroleum products distribution business. Operating results from Coastwide have
been included in the Company's Marine Services segment since the date of
acquisition. Accordingly, results for the 1997 quarter included three full
months of Coastwide activities compared to the 1996 quarter which included only
a portion of Coastwide's activities.
Revenues from fuels and lubricants increased $10.5 million, or 49%, in the 1997
quarter, mainly due to added locations and associated volumes stemming from the
Coastwide acquisition together with internal growth initiatives. In addition,
higher market prices for fuel increased total revenues. Service revenues
increased by $1.7 million due to the expanded activity related to the Coastwide
acquisition. Costs of goods sold during the 1997 quarter increased due to the
higher volumes and prices and also included a $.7 million loss associated with
an inventory valuation as market prices declined from year-end levels. The
improved gross profit of $8.2 million in the 1997 quarter was partially offset
by higher operating and other expenses associated with the increased activity.
Depreciation and amortization increased during the 1997 quarter due to capital
additions made in 1996.
The Marine Services segment's business is largely dependent upon the volume of
oil and gas drilling, workover, construction and seismic activity in the Gulf of
Mexico.
INTEREST EXPENSE
Interest expense of $1.6 million for the 1997 quarter compares with $3.9 million
in the 1996 quarter. In November 1996, the Company redeemed $74.1 million of
public debt resulting in interest expense savings of $2.5 million in the 1997
quarter.
13
<PAGE>
OTHER EXPENSE, NET
Other expense of $1.3 million in the 1997 quarter compares with $5.4 million in
the 1996 quarter. Included in other expense in the prior year quarter were
shareholder consent solicitation costs of $2.3 million which was resolved in
April 1996 together with a write-off of deferred financing costs and employee
termination costs. There were no material comparable costs recorded in the 1997
quarter.
INCOME TAXES
Income taxes of $3.5 million in the 1997 quarter compare with $2.8 million in
the 1996 quarter. This increase, primarily in Federal income taxes, was due to
a higher effective tax rate in the 1997 quarter as available net operating
losses were fully utilized in 1996. Foreign income taxes were lower due to
reduced revenues from the Company's Bolivian operations, partially offset by
higher Bolivian tax rates resulting from changes in the Hydrocarbons Law.
IMPACT OF CHANGING PRICES
The Company's operating results and cash flows are sensitive to the volatile
changes in energy prices. Major shifts in the cost of crude oil used for
refinery feedstocks and the price of refined products can result in a change in
margin from the refining and marketing operations, as prices received for
refined products may or may not keep pace with changes in crude oil costs.
These energy prices, together with volume levels, also determine the carrying
value of crude oil and refined product inventory. The Company uses the last-in,
first-out ("LIFO") method of accounting for inventories of crude oil and U.S.
wholesale refined products. This method results in inventory carrying amounts
that are less likely to represent current values and in costs of sales which
more closely represent current costs.
Likewise, changes in natural gas prices impact revenues and the present value of
estimated future net revenues and cash flows from the Company's exploration and
production operations. The Company may increase or decrease its natural gas
production in response to market conditions. The carrying value of oil and
natural gas assets may be subject to noncash writedowns based on changes in
natural gas prices and other determining factors.
Changes in natural gas prices also influence the level of drilling activity in
the Gulf of Mexico. The Company's marine services operation, whose customers
include offshore drilling contractors and related industries, could be impacted
by significant fluctuations in natural gas prices.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
The Company's primary sources of liquidity are its cash and cash equivalents,
internal cash generation and external financing. Accomplishments in 1996,
including the resolution of litigation with Tennessee Gas and termination of the
remainder of the Tennessee Gas Contract combined with redemptions of public
debt, have strengthened the Company's financial condition and improved its
ability to access capital markets.
The Company has developed strategic plans to make operational improvements and
continues to assess its existing asset base in order to maximize returns and
develop full value through strategic diversification and acquisitions in all of
its operating segments. This ongoing assessment includes, in the Exploration
and Production segment, evaluating ways in which the Company could diversify its
oil and gas reserve base and offset the impact of declining production through
domestic development, exploration and acquisition outside of the Bob West Field.
In the Refining and Marketing segment, the Company has been engaged in studies
to improve profitability and has also evaluated possible joint ventures,
strategic alliances or business combinations; such evaluations have not resulted
in any transaction but operating strategies have been developed to optimize the
product and feedstock slates, improve efficiencies and reliability, and expand
marketing to increase placement of products in Alaska. The Company continues to
evaluate its Marine Services segment, pursuing opportunities for expansion as
well as optimizing existing operations.
The Company operates in an environment where its liquidity and capital resources
are impacted by changes in the supply of and demand for crude oil, natural gas
and refined petroleum products, market uncertainty and a variety
14
<PAGE>
of additional risks that are beyond the control of the Company. These risks
include, among others, the level of consumer product demand, weather conditions,
the proximity of the Company's natural gas reserves to pipelines, the capacities
of such pipelines, fluctuations in seasonal demand, governmental regulations,
the price and availability of alternative fuels and overall market and economic
conditions. The Company's future capital expenditures as well as borrowings
under its credit facility and other sources of capital will be affected by these
conditions.
STOCK REPURCHASE PROGRAM
On May 7, 1997, the Company's Board of Directors authorized the repurchase of up
to 3 million shares (approximately 11 percent of the current outstanding shares)
of Tesoro Common Stock in a buyback program that will extend through the end of
1998. Under the program, subject to certain conditions, the Company may
repurchase from time to time Tesoro Common Stock in the open market and through
privately negotiated transactions. Purchases will depend on price, market
conditions and other factors and will be made primarily from cash flow. The
repurchased Common Stock will be accounted for as treasury stock and may be used
for employee benefit plan requirements and other corporate purposes.
Repurchases of Common Stock are subject to the restricted payments provision of
the Credit Facility as described below.
CREDIT ARRANGEMENTS
The Company has financing and credit arrangements with a consortium of nine
banks under a corporate revolving credit agreement ("Credit Facility") which
provides total commitments of $150 million. The Credit Facility, which extends
through April 2000, provides for cash borrowings up to $100 million and issuance
of letters of credit, subject to a borrowing base (which was approximately $128
million at March 31, 1997). The Company, at its option, has currently activated
total commitments of $100 million. Outstanding obligations under the Credit
Facility are secured by liens on substantially all of the Company's trade
accounts receivable and product inventory and by mortgages on the Company's
refinery and South Texas natural gas reserves. Under the terms of the Credit
Facility, the Company is required to maintain specified levels of consolidated
working capital, tangible net worth, cash flow and interest coverage. Among
other matters, the Credit Facility contains covenants which limit the incurrence
of additional indebtedness and restricted payments. At March 31, 1997, the
Company had outstanding letters of credit of $45 million with no cash borrowings
outstanding. Cash borrowings made under the Credit Facility were minimal during
the 1997 quarter.
The terms of the Credit Facility allow for the payment of cash dividends and
open market stock repurchases subject to a cumulative amount available for
restricted payments (defined as the difference of (i) the sum since December 31,
1995, of (a) $5 million and (b) 50% of consolidated net earnings of the Company
in any calendar year and (ii) any restricted payments made since June 1996). At
March 31, 1997, the cumulative amount available for restricted payments was
approximately $45 million. Annually, however, the aggregate of cash dividends
and other restricted payments cannot exceed a maximum of $5 million. In
addition, the Credit Facility permits the Company to repurchase a limited amount
of Common Stock up to $5 million annually, specifically for oddlot buyback
programs and employee benefit plans. While the Board of Directors has no
present plans to pay dividends, from time to time the Board of Directors
reevaluates the feasibility of declaring future dividends.
In addition to the Credit Facility, a subsidiary of the Company has a three-year
line of credit with a bank which provides up to $10 million for the purchase of
real estate and equipment for the Company's Marine Services segment at the
bank's prime rate. The loan facility is not guaranteed by the Company and is
secured only by such real estate and equipment that are financed. Beginning in
March 1998, credit availability is reduced quarterly by 6.667%. At March 31,
1997, $ 3.1 million was outstanding under the loan facility.
To further enhance its financial flexibility, the Company is pursuing separate
financing for the modification of its refinery hydrocracker in Kenai, Alaska.
The Company is negotiating for interim construction financing and a seven-year
term loan for the lesser of 90% of the project costs, or $16.2 million, at a
rate less than prime. The Company anticipates that this financing, which is
subject to final approval by the lenders, will be completed during the third
quarter of 1997.
CAPITAL SPENDING
For the year 1997, the Company has a total capital budget of approximately $156
million, including $54 million for potential acquisitions. The Company expects
to finance its non-acquisition capital expenditures primarily with available
cash reserves and internally-generated cash flows from operations. In addition,
the Company is
15
<PAGE>
pursuing outside financing, as discussed above, for the modification to the
refinery hydrocracker. Acquisitions, if consummated, are anticipated to be
funded primarily with external borrowings under the Company's Credit Facility.
For the three months ended March 31, 1997, capital spending totaled $16 million,
which was financed by the Company's cash flows from operations.
The Exploration and Production segment accounts for $76 million of the budget
with $68 million planned for U.S. activities and $8 million in Bolivia. Planned
U.S. expenditures include $30 million for property acquisitions; $19 million for
development drilling (participation in 19 wells) and workovers; $9 million for
leasehold, geological and geophysical; and $10 million for exploratory drilling
(participation in 15 wells). In Bolivia, the drilling program is budgeted at $2
million for one exploratory well, with the remainder planned for
three-dimensional seismic activity. For the first three months of 1997, actual
U.S. expenditures were $7 million, principally for participation in the drilling
of four development wells (one completed) and six exploratory wells (three
completed). In Bolivia, capital spending for the first three months of 1997
totaled $4 million, primarily for exploratory drilling and workovers. Although
the Company continues to pursue exploratory, development and acquisition
opportunities, actual capital expenditures for the remainder of the year may
vary from budget due to a number of factors, including the timing of drilling
projects and the extent to which proved properties are acquired.
Capital spending for the Refining and Marketing segment is projected to be $50
million for the year, of which $3 million was spent during the first three
months of 1997. The capital budget for the year includes $17 million for
modification and expansion of the refinery hydrocracker to improve the product
slate and $20 million towards a three-year capital program to build new retail
outlets and remodel existing stations.
In the Marine Services segment, capital spending for 1997 is budgeted at $29
million, of which $2 million was spent during the first three months of 1997.
The capital budget for the year is primarily directed towards expansion of its
operations along the Gulf of Mexico and potential acquisitions.
CASH FLOWS FROM OPERATING, INVESTING AND FINANCING
Components of the Company's cash flows are set forth below (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows From (Used In):
Operating Activities . . . . . . . . . . . . . . . $ 23.8 18.0
Investing Activities . . . . . . . . . . . . . . . (16.8) (24.0)
Financing Activities . . . . . . . . . . . . . . . 1.6 (1.0)
------ ------
Increase (Decrease) in Cash and Cash Equivalents . . $ 8.6 (7.0)
====== ======
</TABLE>
Net cash from operating activities of $24 million during the 1997 quarter, which
compares to $18 million during the 1996 quarter, included improved profitability
plus noncash items, such as depreciation, depletion and amortization.
Additionally, receivables decreased due in part to collections related to the
higher sales volumes at year-end but were partially offset by income tax and
other payments. Net cash used in investing activities of $17 million during the
1997 quarter included capital expenditures of $11 million for the Company's
exploration and production activities, $3 million for refining and marketing
operations and $2 million for marine services. Net cash from financing
activities of $2 million during the 1997 quarter was primarily due to borrowings
under a loan facility for the marine services sector partially offset by
payments of other long-term debt. At March 31, 1997, the Company's net working
capital totaled $105 million, which included cash and cash equivalents of $31
million.
ENVIRONMENTAL
The Company is subject to extensive federal, state and local environmental laws
and regulations. These laws, which change frequently, regulate the discharge of
materials into the environment and may require the Company to remove or mitigate
the environmental effects of the disposal or release of petroleum or chemical
substances at various sites or install additional controls or other
modifications or changes in use for certain emission sources. The Company is
currently involved in remedial responses and has incurred cleanup expenditures
associated with environmental matters at a number of sites, including certain of
its own properties. At March 31, 1997, the Company's accruals for environmental
expenses amounted to $8.8 million, which included a noncurrent liability of $3.3
million for remediation of Kenai Pipe Line Company's ("KPL") properties that has
been funded by the
16
<PAGE>
former owners of KPL through a restricted escrow deposit. Based on currently
available information, including the participation of other parties or former
owners in remediation actions, the Company believes these accruals are adequate.
In addition, to comply with environmental laws and regulations, the Company
anticipates that it will make capital improvements of approximately $6 million
in 1997 and $3 million in 1998. The Company also expects to spend approximately
$6 million by the year 2002 for secondary containment systems for existing
storage tanks in Alaska.
Conditions that require additional expenditures may exist for various Company
sites, including, but not limited to, the Company's refinery, retail gasoline
outlets (current and closed locations) and petroleum product terminals, and for
compliance with the Clean Air Act. The amount of such future expenditures cannot
currently be determined by the Company. For further information on
environmental contingencies, see Note 2 of Notes to Condensed Consolidated
Financial Statements.
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q, including those contained in
the foregoing discussion and other items herein, concerning the Company which
are (a) projections of revenues, earnings, earnings per share, capital
expenditures or other financial items, (b) statements of plans and objectives
for future operations, (c) statements of future economic performance, or (d)
statements of assumptions or estimates underlying or supporting the foregoing
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
The ultimate accuracy of forward-looking statements is subject to a wide range
of business risks and changes in circumstances, and actual results and outcomes
often differ from expectations. Any number of important factors could cause
actual results to differ materially from those in the forward-looking statements
herein, including the following: the timing and extent of changes in commodity
prices and underlying demand and availability of crude oil and other refinery
feedstocks, refined products, and natural gas; actions of our customers and
competitors; changes in the cost or availability of third-party vessels,
pipelines and other means of transporting feedstocks and products; state and
federal environmental, economic, safety and other policies and regulations, any
changes therein, and any legal or regulatory delays or other factors beyond the
Company's control; execution of planned capital projects; weather conditions
affecting the Company's operations or the areas in which the Company's products
are marketed; future well performance; the extent of Tesoro's success in
acquiring oil and gas properties and in discovering, developing and producing
reserves; political developments in foreign countries, the conditions of the
capital markets and equity markets during the periods covered by the
forward-looking statements; earthquakes or other natural disasters affecting
operations; adverse rulings, judgments, or settlements in litigation or other
legal matters, including unexpected environmental remediation costs in excess of
any reserves; and adverse changes in the credit ratings assigned to the
Company's trade credit. For more information with respect to the foregoing, see
the Company's Annual Report on Form 10-K. The Company undertakes no obligation
to publicly release the result of any revisions to any such forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index immediately preceding the exhibits filed
herewith.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TESORO PETROLEUM CORPORATION
REGISTRANT
Date: May 15, 1997 /s/ BRUCE A. SMITH
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: May 15, 1997 /s/ DON E. BEERE
Don E. Beere
Vice President, Controller
(Chief Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number
10 Copy of the Company's Board of Directors Deferred Phantom Stock Plan.
27 Financial Data Schedule.
20
TESORO PETROLEUM CORPORATION
BOARD OF DIRECTORS DEFERRED PHANTOM STOCK PLAN
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TESORO PETROLEUM CORPORATION
BOARD OF DIRECTORS DEFERRED PHANTOM STOCK PLAN
TABLE OF CONTENTS
Section
ARTICLE I -- DEFINITIONS
Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.1
Beneficiary. . . . . . . . . . . . . . . . . . . . . . . . . . . .1.2
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . .1.3
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.4
Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.5
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .1.6
Deferred Phantom Stock Ledger. . . . . . . . . . . . . . . . . . .1.7
Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.8
Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . .1.9
NYSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.10
Participant. . . . . . . . . . . . . . . . . . . . . . . . . . . 1.11
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.12
Plan Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.13
Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.14
Tesoro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.15
ARTICLE II - ELIGIBILITY
ARTICLE III - INITIAL TRANSFER, YEARLY ACCRUAL AND DEFERRALS
Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1
Yearly Accrual . . . . . . . . . . . . . . . . . . . . . . . . . .3.2
Election to Defer. . . . . . . . . . . . . . . . . . . . . . . . .3.3
Failure to Elect . . . . . . . . . . . . . . . . . . . . . . . . .3.4
Revocation of Election . . . . . . . . . . . . . . . . . . . . . .3.5
Timing and Form of Election. . . . . . . . . . . . . . . . . . . .3.6
ARTICLE IV - ACCOUNT
Establishing a Participant's Account . . . . . . . . . . . . . . .4.1
Credit of Initial Transfer, Yearly Accruals and Deferrals. . . . .4.2
Crediting of Dividends and Distributions . . . . . . . . . . . . .4.3
ARTICLE V - VESTING
Deferrals. . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.1
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TABLE OF CONTENTS (CONTINUED)
Section
Yearly Accrual . . . . . . . . . . . . . . . . . . . . . . . . . .5.2
Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.3
General Vesting Provisions . . . . . . . . . . . . . . . . . . . .5.4
ARTICLE VI - DISTRIBUTIONS
Form and Period of Distribution. . . . . . . . . . . . . . . . . .6.1
Death/Beneficiary Designation. . . . . . . . . . . . . . . . . . .6.2
Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.3
Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.4
Cessation as a Director Prior to Death, Disability or Retirement .6.5
Responsibility for Distributions and
Withholding of Taxes . . . . . . . . . . . . . . . . . . . . . .6.6
ARTICLE VII - ADMINISTRATION
Committee Appointment. . . . . . . . . . . . . . . . . . . . . . .7.1
Committee Organization and Voting. . . . . . . . . . . . . . . . .7.2
Powers of the Committee. . . . . . . . . . . . . . . . . . . . . .7.3
Committee Discretion . . . . . . . . . . . . . . . . . . . . . . .7.4
Annual Statements. . . . . . . . . . . . . . . . . . . . . . . . .7.5
Reimbursement of Expenses. . . . . . . . . . . . . . . . . . . . .7.6
ARTICLE VIII - AMENDMENT AND/OR TERMINATION
Amendment or Termination of the Plan . . . . . . . . . . . . . . .8.1
No Retroactive Effect on Account . . . . . . . . . . . . . . . . .8.2
Effect of Termination. . . . . . . . . . . . . . . . . . . . . . .8.3
ARTICLE IX - FUNDING
ARTICLE X - MISCELLANEOUS
Limitation of Rights . . . . . . . . . . . . . . . . . . . . . . 10.1
Distributions to Incompetents or Minors. . . . . . . . . . . . . 10.2
Nonalienation of Benefits. . . . . . . . . . . . . . . . . . . . 10.3
Reliance Upon Information . . . . . . . . . . . . . . . . . . . 10.4
Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5
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TABLE OF CONTENTS (CONTINUED)
Section
Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6
Gender and Number. . . . . . . . . . . . . . . . . . . . . . . . 10.7
Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . 10.8
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TESORO PETROLEUM CORPORATION
BOARD OF DIRECTORS DEFERRED PHANTOM STOCK PLAN
WHEREAS, Tesoro Petroleum Corporation has previously established a
Non-Employee Director Retirement Plan (the "Director Retirement Plan") for
non-employee members of the Board of Directors;
WHEREAS, the Board of Directors wishes to align Director compensation
more directly with the shareholders' interest;
WHEREAS, the Board of Directors has determined that it is more in the
interest of the shareholders to amend the Director Retirement Plan so as to (i)
freeze that plan and convert all of the interest of the current Directors under
the plan to a lump sum present value which will be transferred to and become the
initial Account balance of the Directors in the Tesoro Petroleum Corporation
Board of Directors Deferred Phantom Stock Plan and (ii) provide for future
annual accruals to the Account balance of the Directors, so that after the
amendment and transfer only those retired Directors who have begun receiving
benefits under the Director's Retirement Plan shall remain participants in that
plan;
WHEREAS, the Board of Directors has determined that it is in the
interest of shareholders to allow Directors to defer all or part of the portion
of their annual retainer not paid in restricted stock into their Account
hereunder;
WHEREAS, the Board of Directors has now determined the terms and
conditions of the Tesoro Petroleum Corporation Board of Directors Deferred
Phantom Stock Plan and wish to formally establish the plan;
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NOW, THEREFORE, Tesoro Petroleum Corporation through this instrument
establishes the Tesoro Petroleum Corporation Board of Directors Deferred Phantom
Stock Plan which shall be as follows:
ARTICLE I
DEFINITIONS
1.1 ACCOUNT. "Account" means a Participant's Account in the
Deferred Phantom Stock Ledger maintained by the Committee which reflects the
benefits a Participant is entitled to under this Plan.
1.2 BENEFICIARY. "Beneficiary" means a person or entity designated
by the Participant under the terms of this Plan to receive any amounts
distributed under the Plan upon the death of the Participant.
1.3 BOARD OF DIRECTORS. "Board of Directors" means the Board of
Directors of Tesoro.
1.4 CODE. "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
1.5 COMMITTEE. "Committee" means the persons who are from time to
time serving as the Tesoro Petroleum Corporation Retirement Plan Committee.
1.6 COMMON STOCK. "Common Stock" means the $.16-2/3 par value common
stock of Tesoro.
1.7 DEFERRED PHANTOM STOCK LEDGER. "Deferred Phantom Stock Ledger"
means the ledger maintained by the Committee for all Participants, which
reflects the amount transferred from the Director Retirement Plan, the yearly
accrual to each Participant under this
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Plan, the one time committee chairman accrual to a Participant under this Plan
and the amount of each Participant's director retainer fees for the year which
is eligible for deferral if it has been deferred by the Participant and the
amount of dividends credited to his Account.
1.8 DISABILITY. "Disability" means a physical or mental condition
that meets the eligibility requirements for the receipt of disability income
under the federal Social Security Act.
1.9 EFFECTIVE DATE. "Effective Date" means March 6, 1997.
1.10 NYSE. "NYSE" shall mean the New York Stock Exchange, or, if the
Common Stock is no longer traded on such exchange, the principal stock exchange
or other securities market in which the Common Stock is publicly traded.
1.11 PARTICIPANT. "Participant" means a member of the Board of
Directors of Tesoro who is not otherwise employed by Tesoro or a subsidiary of
Tesoro.
1.12 PLAN. "Plan" means the Tesoro Petroleum Corporation Board of
Directors Deferred Phantom Stock Plan set forth in this document, as amended
from time to time.
1.13 PLAN YEAR. "Plan Year" means the calendar year.
1.14 RETIREMENT. "Retirement" or "Retires" means the retirement of a
Participant from the Board of Directors of Tesoro as a result of reaching the
age when he no longer may stand for election under the Company's Governance
Policy or otherwise ceasing to be a Director after service of at least three
years as a director and the Board by a duly adopted resolution declares the
Participant to have retired.
1.15 TESORO. "Tesoro" means the Tesoro Petroleum Corporation.
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ARTICLE II
ELIGIBILITY
All members of the Board of Directors who are not otherwise employed
and have not been employed within the last three years by Tesoro or a subsidiary
of Tesoro will be eligible to participate in this Plan. Any eligible member of
the Board of Directors will automatically become a Participant in this Plan.
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ARTICLE III
INITIAL TRANSFER, YEARLY ACCRUAL AND DEFERRALS
3.1 TRANSFER. Upon the establishment of the Plan the present value
of the lump sum accrued benefit of each Director listed in Exhibit A to this
Plan shall be transferred from the Director Retirement Plan to this Plan. The
transfer shall be credited to his Account in the Deferred Phantom Stock Ledger
as of the Effective Date of this Plan. By participating in, and accepting
benefits under, this Plan, as acknowledged in writing, each Director waives any
and all rights he may have under the Director Retirement Plan.
3.2 YEARLY ACCRUAL. Each Plan Year, commencing with 1997, each
Participant shall have credited to his Account in the Deferred Phantom Stock
Ledger as of the last day of the Plan Year the sum of $7,250.00; and each
Participant who is serving as a chairman of a committee of the Board of
Directors immediately prior to his termination as a director and who has served
at least three years as a director shall have an additional amount of $5,000.00
credited to his account in the Deferred Phantom Stock Ledger as of the date he
ceases to be a director. The yearly accruals for being a member of the Board of
Directors are limited to 15 full annual accruals (partial accruals being
aggregated for the purposes of this limitation), taking into account both the
previous accruals of retirement benefits under the Director Retirement Plan
(based on the Effective Date of service as listed in Exhibit A) and accruals
under this Plan. In the event a director only serves for part of a Plan year,
the $7,250 accrued shall be pro rated based on the actual number of days served.
3.3 ELECTION TO DEFER. Each Participant shall have the right to
elect to defer any part or all of the cash portion of his annual director
retainer fee. The election to defer is
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effective only if received by the Committee in proper form prior to the
beginning of the Plan Year or Years for which it is to be applicable. Once a
Plan Year has commenced the election to defer becomes irrevocable for that Plan
Year and shall remain in effect for all subsequent Plan Years until revoked
pursuant to Section 3.5. The initial election to defer will be effective
immediately for any director retainer fees not yet paid.
3.4 FAILURE TO ELECT. If the Committee fails to receive a
Participant's election in proper form prior to the beginning of a Plan Year for
which no prior election is effective, the Participant will be deemed to have
elected not to defer the cash portion of his director retainer fees for that
Plan Year.
3.5 REVOCATION OF ELECTION. Each Participant shall have the right
to revoke any prior election to defer the cash portion of his director retainer
fees. Any revocation of election shall be effective only on a prospective basis
beginning with the Plan Year next following the Committee's receipt of the
revocation in proper form. If the Committee fails to receive a Participant's
election for revocation of election in proper form prior to the beginning of a
Plan Year, the Participant will be deemed to have elected to defer the cash
portion of his director retainer fees in the same percentage as his current
deferral.
3.6 TIMING AND FORM OF ELECTION. The Committee shall have the right
to make such rules and regulations regarding the election or revocation of
election to defer as are not inconsistent with the requirements of Sections 3.3,
3.4 and 3.5, including establishing election periods, forms for election and all
other pertinent matters.
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ARTICLE IV
ACCOUNT
4.1 ESTABLISHING A PARTICIPANT'S ACCOUNT. The Committee will
establish an Account for each Participant in a special Deferred Phantom Stock
Ledger which will be maintained by Tesoro. The Account will reflect the amount
of Tesoro's obligation to the Participant.
4.2 CREDIT OF INITIAL TRANSFER, YEARLY ACCRUALS AND DEFERRALS. As
of the Effective Date of this Plan the Committee shall have credited to each
Participant's Account in the Deferred Phantom Stock Plan Ledger the present
value of the accrued benefit of that Participant set out in Exhibit A to this
Plan, which has been transferred from the Director Retirement Plan to this Plan.
Then, upon completion of each Plan Year on the last day of the Plan Year the
Committee will credit to each Participant $7,250.00 and to each Participant who
is serving as a chairman of a committee of the Board of Directors at the time of
his termination as a director and who has served at least three years as a
director, an additional $5,000.00 on the date of termination as a director.
Finally, upon completion of each quarter of the fiscal year of Tesoro, the
Committee will determine, as soon as administratively practicable, the amount of
each Participant's director retainer fees that have been deferred for that
quarter and will credit that amount to the Participant's Account in the Deferred
Phantom Stock Ledger as of the last business day of that fiscal quarter. Each
transfer, accrual or deferral shall be credited to the Participant's Account in
units based upon the number of shares, including fractions thereof, of Common
Stock that could have been purchased with the dollar amount credited, without
taking
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into account any brokerage fees, taxes or other expenses which might be incurred
in such a transaction, based upon the closing quotation on the NYSE on the date
the amount is credited.
4.3 CREDITING OF DIVIDENDS AND DISTRIBUTIONS. When dividends are
declared and paid, or other distributions, whether stock, property, cash, rights
or other are made with respect to the Common Stock, those dividends or
distributions shall be accrued in a Participant's Account based upon the units
then credited to the Participant's Account. The dividends or other
distributions in the form of shares of Common Stock shall be credited to the
Account as additional units. The dividends or other distributions or rights in
any other form, other than Common Stock, shall be valued at fair market value as
determined, in the case of non cash distributions, by resolutions duly adopted
by the Committee and shall then be credited to each Account as additional units.
The procedure for determining the number of units shall be that used in Section
4.2, including any fractional shares. All such units shall be credited as of
the date the dividend or distribution upon which the unit is based is paid or
issued.
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ARTICLE V
VESTING
5.1 DEFERRALS. All director retainer fees which are deferred
pursuant to Section 3.3 under an election by the Director and are credited to
his Account in the Deferred Phantom Stock Ledger as well as the $5000 accrual
for acting as a chairman of a committee of the Board of Directors pursuant to
Section 3.2 shall be 100% vested at all times, together with their pro rata
share of all appreciation or depreciation and all income earned.
5.2 YEARLY ACCRUAL. All yearly accruals pursuant to Section 3.2
credited to a Director's Account in the Deferred Phantom Stock Ledger, together
with their pro rata share of all appreciation or depreciation and all income
earned, shall immediately vest in full once the Participant has completed three
full years of service (including all service prior to the Effective Date) as a
member of the Board of Directors.
5.3 TRANSFER. The present value of the accrued benefit previously
awarded a member of the Board of Directors under the Director Retirement Plan
listed in Exhibit A that has been transferred to this Plan and credited to a
Director's Account in the Deferred Phantom Stock Ledger shall be 100% vested for
all Directors who have served three full years as a member of the Board of
Directors prior to the date hereof and all other Directors shall vest 100% after
the Director has served three full years as a member of the Board of Directors
(including service prior to the date hereof), together with its pro rata share
of all appreciation or depreciation and all income earned.
5.4 GENERAL VESTING PROVISIONS. Service for the purpose of vesting
under this Article V shall commence on the date of the Participant's initial
election to the Board of
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Directors. If a Director voluntarily resigns or is removed from the Board of
Directors, or is not re-elected to the Board, prior to meeting the three full
years of service requirement, he shall forfeit all amounts not then vested. If
a Director dies, Retires or becomes disabled, he shall be 100% vested in all
amounts credited to his Account without regard to his years of service on the
Board of Directors.
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ARTICLE VI
DISTRIBUTIONS
6.1 FORM AND PERIOD OF DISTRIBUTION.
(a) Election, Revocation or Change of Election of the Form and
Period of Distribution. Each Participant shall have the right to elect, to
revoke, or to change any prior election of the form and period of
distribution at the time and under the rules established by the Committee;
provided that the initial election hereunder must be made within 60 days of
the Effective Date or within 30 days of a Participant's first election to
the Board of Directors. The initial election of form and period of
distribution if received by the Committee in proper form shall be effective
immediately. All other elections of form and period of distribution and all
revocations or changes of election of form and period of distribution shall
be effective only if the election, revocation or change is received by the
Committee in proper form one year prior to the event which requires a
distribution under this Plan. During that one year period prior to the
effective date of an election, revocation or change, the last effective
election, revocation or change made by the Participant shall continue to
remain in force.
(b) Option As to Period of Distribution. A Participant may
elect either a total distribution, which distribution shall be made 30 days
after the event requiring distribution, or annual installments, not to
exceed ten years, the first installment of which shall be made 30 days after
the event occurs which requires distribution and each succeeding annual
installment being made on the same day of each succeeding calendar year, or
if such day is not a normal business day, the next business day, until the
entire
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Account has been fully distributed. If the Participant elects to receive
annual installments, then the entire Account shall be divided in to a number
of equal parts equal to the number of the installments. Each such part
shall continue to appreciate or depreciate and to accrue income thereon
until such time as a part is to be distributed as an installment.
(c) No Effective Election. If there is no effective election
as to form or period of distribution the Participant shall be conclusively
deemed to have elected one total distribution.
(d) Type of Distribution. Each distribution shall be in cash.
The Common Stock in the Account with respect to which the distribution is to
be made shall be valued at the closing quotation on the NYSE on the business
day immediately preceding the date on which the cash distribution is made.
(e) Event Requiring Distributions. Death, disability,
Retirement or cessation as a Director as contemplated by Section 6.5 shall
constitute an event requiring a distribution.
6.2 DEATH/BENEFICIARY DESIGNATION. Upon the death of a Participant,
the Participant's Beneficiary or Beneficiaries will receive the cash value of
the balance as of the date of death then credited plus any pro rata amounts not
yet posted to the Participant's Account in the Deferred Phantom Stock Ledger.
Each Participant, at the time of making his initial deferral election,
must file with the Committee a designation of one or more Beneficiaries to whom
distributions otherwise due the Participant will be made in the event of his
death prior to the complete distribution of the Participant's Account in the
Deferred Phantom Stock Ledger. The designation will be effective
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upon receipt by the Committee of a properly executed form which the Committee
has approved for that purpose. The Participant may from time to time revoke or
change any designation of Beneficiary by filing another approved Beneficiary
designation form with the Committee. If there is no valid designation of
Beneficiary on file with the Committee at the time of the Participant's death,
or if all of the Beneficiaries designated in the last Beneficiary designation
have predeceased the Participant or otherwise ceased to exist, the Beneficiary
will be the Participant's spouse, if the spouse survives the Participant, or
otherwise the Participant's estate. A Beneficiary must survive the Participant
by 60 days in order to be considered to be living on the date of the
Participant's death. If any Beneficiary survives the Participant but dies or
otherwise ceases to exist before receiving all amounts due the Beneficiary from
the Participant's Account, the balance of the amount which would have been paid
to that Beneficiary will, unless the Participant's designation provides
otherwise, be distributed to the individual deceased Beneficiary's estate or to
the Participant's estate in the case of a Beneficiary which is not an
individual. Any Beneficiary designation which designates any person or entity
other than the Participant's spouse must include the written consent, in a form
acceptable to the Committee, of the spouse in order to be effective.
6.3 DISABILITY. Upon incurring a Disability, the Participant shall
receive his entire Account in the Deferred Phantom Stock Ledger at the time and
in the manner provided in Section 6.1.
6.4 RETIREMENT. Upon Retirement, the Participant shall receive his
entire Account in the Deferred Phantom Stock Ledger at the time and in the
manner provided in Section 6.1.
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6.5 CESSATION AS A DIRECTOR PRIOR TO DEATH, DISABILITY OR
RETIREMENT. Upon a Participant's ceasing to serve on the Board of Directors
after three full years of service on the Board of Directors, other than as a
result of death, Disability or Retirement, the Participant shall receive his
entire Account in the Deferred Compensation Ledger which has vested at the time
and in the manner provided in Section 6.1.
6.6 RESPONSIBILITY FOR DISTRIBUTIONS AND WITHHOLDING OF TAXES. The
Committee will furnish information to Tesoro concerning the period and form of
distribution to be made to any Participant entitled to a distribution so that
Tesoro can make the distribution required. The Committee will also calculate
the deductions to be made from all distributions under the Plan for any taxes
required to be withheld by federal, state or local government and will cause
them to be withheld.
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ARTICLE VII
ADMINISTRATION
7.1 COMMITTEE APPOINTMENT. The Committee will be comprised of the
Tesoro Petroleum Corporation Retirement Committee as it is constituted from time
to time. The Board of Directors will have the sole discretion to remove any one
or more Committee members and appoint one or more replacement or additional
Committee members from time to time.
7.2 COMMITTEE ORGANIZATION AND VOTING. The Committee will select
from among its members a chairman who will preside at all of its meetings and
will elect a secretary without regard to whether that person is a member of the
Committee. The secretary will keep all records, documents and data pertaining
to the Committee's supervision and administration of the Plan. A majority of
the members of the Committee will constitute a quorum for the transaction of
business and the vote of a majority of the members present at any meeting will
decide any question brought before the meeting. In addition, the Committee may
decide any question by vote, taken without a meeting, of a majority of its
members. A member of the Committee who is also a Participant will not vote or
act on any matter relating solely to himself.
7.3 POWERS OF THE COMMITTEE. The Committee will have the exclusive
responsibility for the general administration of the Plan according to the terms
and provisions of the Plan and will have all powers necessary to accomplish
those purposes, including but not by way of limitation the right, power and
authority:
(a) to make rules and regulations for the administration of the
Plan;
(b) to construe all terms, provisions, conditions and
limitations of the Plan;
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(c) to correct any defect, supply any omission or reconcile any
inconsistency that may appear in the Plan in the manner and to the extent it
deems expedient to carry the Plan into effect for the greatest benefit of
all parties at interest;
(d) to designate the persons eligible to become Participants;
(e) to determine all controversies relating to the
administration of the Plan, including but not limited to:
(i) differences of opinion arising between Tesoro and a
Participant; and
(ii) any question it deems advisable to determine in order
to promote the uniform administration of the Plan for the benefit of all
parties at interest; and
(f) to delegate by written notice those clerical and
recordation duties of the Committee, as it deems necessary or advisable for
the proper and efficient administration of the Plan.
7.4 COMMITTEE DISCRETION. The Committee in exercising any power or
authority granted under this Plan or in making any determination under this Plan
shall perform or refrain from performing those acts using its sole discretion
and judgment. Any decision made by the Committee or any refraining to act or
any act taken by the Committee in good faith shall be final and binding on all
parties. The Committee's decision shall be final and binding on all parties and
shall not be subject to review.
7.5 ANNUAL STATEMENTS. The Committee will cause each Participant to
receive an annual statement as soon as administratively practicable after the
conclusion of each Plan Year containing the units credited to his Account during
that Plan Year, the total units credited
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to his Account at the end of the Plan Year and the value of those units at the
end of the Plan Year.
7.6 REIMBURSEMENT OF EXPENSES. The Committee will serve without
compensation for their services but will be reimbursed by Tesoro for all
expenses properly and actually incurred in the performance of their duties under
the Plan.
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ARTICLE VIII
AMENDMENT AND/OR TERMINATION
8.1 AMENDMENT OR TERMINATION OF THE PLAN. The members of the Board
of Directors may amend or terminate this Plan at any time by an instrument in
writing.
8.2 NO RETROACTIVE EFFECT ON ACCOUNT. No amendment will affect the
rights of any Participant to the units then standing to his credit in his
Account in the Deferred Phantom Stock Ledger or change the method of valuing the
units then credited to his Account without the Participant's consent.
8.3 EFFECT OF TERMINATION. If the Plan is terminated, each
Participant's Account shall become fully vested. Distribution shall commence in
accordance with Section 6.4 as if the Participant Retired on the date of
termination of the Plan as soon as conveniently practicable.
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ARTICLE IX
FUNDING
It is specifically recognized by both Tesoro and the Participants that
this Plan is only a general corporate commitment and that each Participant must
rely upon the general credit of Tesoro for the fulfillment of its obligations.
Under all circumstances the rights of Participants to any asset held by Tesoro
will be no greater than the rights expressed in this agreement. Nothing
contained in this agreement will constitute a guarantee by Tesoro that the
assets of Tesoro will be sufficient to pay any benefits under this Plan or would
place the Participant in a secured position ahead of general creditors of
Tesoro. The Plan will not create any lien, claim, encumbrance, right, title or
other interest of any kind whatsoever in any Participant in any asset held by
Tesoro. No specific assets of Tesoro have been or will be set aside, or will in
any way be transferred to any trust or will be pledged in any way for the
performance of Tesoro's obligations under this Plan which would remove those
assets from being subject to the general creditors of Tesoro.
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ARTICLE X
MISCELLANEOUS
10.1 LIMITATION OF RIGHTS. Nothing in this Plan will be construed:
(a) to give a Participant any right with respect to any amount
credited in the Deferred Phantom Stock Ledger, except in accordance with the
terms of this Plan;
(b) to limit in any way the right of Tesoro to remove a
Participant from the Board of Directors at any time;
(c) to evidence any agreement or understanding, expressed or
implied, that Tesoro will retain a Participant as a member of the Board of
Directors for any particular remuneration; or
(d) to give a Participant or any other person claiming through
him any interest or right under this Plan other than that of any unsecured
general creditor of Tesoro.
10.2 DISTRIBUTIONS TO INCOMPETENTS OR MINORS. Should a Participant
become incompetent or should a Participant designate a Beneficiary who is a
minor or incompetent, the Committee is authorized to distribute any funds due to
the parent of the minor or to the guardian of the minor or incompetent or
directly to the minor or to apply those funds for the benefit of the minor or
incompetent in any manner the Committee determines in its sole discretion.
10.3 NONALIENATION OF BENEFITS. No right or benefit provided in this
Plan will be transferable by the Participant except, upon his death, to a named
Beneficiary as provided in this Plan. No right or benefit under this Plan will
be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or
charge, and any attempt to anticipate, alienate, sell, assign,
X-1
<PAGE>
pledge, encumber, or charge the same will be void. No right or benefit under
this Plan will in any manner be liable for or subject to any debts, contracts,
liabilities or torts of the person entitled to a benefit. If any Participant or
any Beneficiary becomes bankrupt or attempts to anticipate, alienate, sell,
assign, pledge, encumber or charge any right or benefit under this Plan, that
right or benefit will, in the discretion of the Committee, cease. In that
event, the Committee may have Tesoro hold or apply the right or benefit or any
part of it to the benefit of the Participant or Beneficiary, his or her spouse,
children or other dependents or any of them in any manner and in any proportion
the Committee believes to be proper in its sole and absolute discretion, but is
not required to do so.
10.4 RELIANCE UPON INFORMATION. The Committee will not be liable for
any decision or action taken in good faith in connection with the administration
of this Plan. Without limiting the generality of the foregoing, any decision or
action taken by the Committee when it relies upon information supplied it by any
officer of Tesoro, Tesoro's legal counsel, Tesoro's independent accountants or
other advisors in connection with the administration of this Plan will be deemed
to have been taken in good faith.
10.5 SEVERABILITY. If any term, provision, covenant or condition of
the Plan is held to be invalid, void or otherwise unenforceable, the rest of the
Plan will remain in full force and effect and will in no way be affected,
impaired or invalidated.
10.6 NOTICE. Any notice or filing required or permitted to be given
to the Committee or a Participant will be sufficient if in writing and hand
delivered or sent by U.S. mail to the principal office of Tesoro or to the
residential mailing address of the Participant. Notice will be deemed to be
given as of the date of hand delivery or if delivery is by mail, as of the date
shown on the postmark.
X-2
<PAGE>
10.7 GENDER AND NUMBER. Words used in this Plan of one gender are to
be construed as though they were also used in another gender in all cases where
they would so apply and likewise words in the singular or plural are to be
construed as though they also included the other in all cases where they would
so apply.
10.8 GOVERNING LAW. The Plan will be construed, administered and
governed in all respects by the laws of the State of Texas.
IN WITNESS WHEREOF, Tesoro has executed this document on this 24th day
of April 1997, as authorized by the Board of Directors of Tesoro on the 6th day
of March 1997.
TESORO PETROLEUM CORPORATION
By /S/ James C. Reed, Jr.
James C. Reed, Jr.
Executive Vice President,
General Counsel and Secretary
X-3
<PAGE>
EXHIBIT A
Present Value of Accrued Retirement Benefit under the Tesoro Petroleum
Corporation Directors' Retirement Plan which was transferred to this Plan on the
Effective Date.
Present Value
of Accrued
Benefit as of March 1, Effective Date of
Director 1997 Service
Caverly, Robert J. 147,440 04/30/92
Grapstein, Steven H. 29,557 04/30/92
Johnson, William J. 9,056 06/06/96
Kaufman, Alan J. 9,462 04/12/96
Mason, Raymond K. 149,922 04/27/83
Ward, Patrick J. 14,194 03/11/96
Weidenbaum, Murray L. 74,924 04/30/92
X-4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TESORO
PETROLEUM CORPORATION'S FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTH
PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 31,363
<SECURITIES> 0
<RECEIVABLES> 85,979
<ALLOWANCES> 1,499
<INVENTORY> 77,577
<CURRENT-ASSETS> 201,749
<PP&E> 589,182
<DEPRECIATION> 268,471
<TOTAL-ASSETS> 551,971
<CURRENT-LIABILITIES> 97,033
<BONDS> 79,063
<COMMON> 4,406
0
0
<OTHER-SE> 306,008
<TOTAL-LIABILITY-AND-EQUITY> 551,971
<SALES> 233,253
<TOTAL-REVENUES> 234,852
<CGS> 208,215
<TOTAL-COSTS> 208,215
<OTHER-EXPENSES> 11,747
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,570
<INCOME-PRETAX> 9,575
<INCOME-TAX> 3,444
<INCOME-CONTINUING> 6,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,131
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
