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 SEPTEMBER 30, 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 26,750,314 shares of the Registrant's Common Stock outstanding
at October 31, 1997.
<PAGE>
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 1997 and
December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Consolidated Operations - Three Months
and Nine Months Ended September 30, 1997 and 1996. . . . . . . . . . 4
Condensed Statements of Consolidated Cash Flows - Nine Months Ended
September 30, 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 . . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands except per share amounts)
September 30, December 31,
1997 1996<FN1>
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 7,379 22,796
Receivables, less allowance for doubtful accounts of $1,420
($1,515 at December 31, 1996). . . . . . . . . . . . . . . . . 83,899 128,013
Inventories:
Crude oil and wholesale refined products, at LIFO. . . . . . . 55,431 55,858
Merchandise and other refined products . . . . . . . . . . . . 14,333 13,539
Materials and supplies . . . . . . . . . . . . . . . . . . . . 5,138 5,091
Prepayments and other . . . . . . . . . . . . . . . . . . . . . 9,452 12,046
-------- --------
Total Current Assets. . . . . . . . . . . . . . . . . . . . . 175,632 237,343
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Refining and marketing. . . . . . . . . . . . . . . . . . . . . 358,792 328,522
Exploration and production (full-cost method of accounting) . . 257,003 198,480
Marine services . . . . . . . . . . . . . . . . . . . . . . . . 38,953 33,820
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,170 12,531
-------- --------
667,918 573,353
Less accumulated depreciation, depletion and amortization. . . 291,113 256,842
-------- --------
Net Property, Plant and Equipment . . . . . . . . . . . . . . 376,805 316,511
-------- --------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . 35,377 28,733
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $ 587,814 582,587
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . $ 57,473 80,747
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 30,567 33,256
Current income taxes payable. . . . . . . . . . . . . . . . . . 1,951 13,822
Current maturities of long-term debt and other obligations. . . 9,778 10,043
-------- --------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . 99,769 137,868
-------- --------
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 24,552 19,151
-------- --------
OTHER LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . 45,786 42,243
-------- --------
LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS
CURRENT MATURITIES. . . . . . . . . . . . . . . . . . . . . . . 90,104 79,260
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY
Common Stock, par value $.16-2/3; authorized 50,000,000 shares;
26,498,745 shares issued (26,414,134 in 1996). . . . . . . . . 4,416 4,402
Additional paid-in capital. . . . . . . . . . . . . . . . . . . 190,093 189,368
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 134,043 110,295
Treasury stock, 66,998 shares at cost . . . . . . . . . . . . . (949) -
-------- --------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . 327,603 304,065
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . $ 587,814 582,587
======== ========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
<FN1> 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 Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Refining and marketing. . . . . . . . . . . . . . . $ 198,815 203,661 534,986 563,767
Exploration and production. . . . . . . . . . . . . 19,821 26,476 61,769 83,933
Marine services . . . . . . . . . . . . . . . . . . 32,433 32,660 98,266 87,467
Other income. . . . . . . . . . . . . . . . . . . . 403 (725) 4,609 4,378
-------- -------- -------- --------
Total Revenues . . . . . . . . . . . . . . . . . . 251,472 262,072 699,630 739,545
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES
Refining and marketing. . . . . . . . . . . . . . . 188,014 194,156 508,926 545,303
Exploration and production. . . . . . . . . . . . . 3,054 2,416 8,836 8,767
Marine services . . . . . . . . . . . . . . . . . . 29,691 30,273 93,406 82,153
Depreciation, depletion and amortization. . . . . . 11,357 10,026 34,183 29,797
-------- -------- -------- --------
Total Operating Costs and Expenses . . . . . . . . 232,116 236,871 645,351 666,020
-------- -------- -------- --------
OPERATING PROFIT . . . . . . . . . . . . . . . . . . 19,356 25,201 54,279 73,525
General and Administrative . . . . . . . . . . . . . (3,416) (3,056) (9,599) (8,960)
Interest Expense, Net of Capitalized Interest in 1997 (1,481) (4,142) (4,634) (12,142)
Interest Income. . . . . . . . . . . . . . . . . . . 135 7,100 1,459 7,681
Other Expense, Net . . . . . . . . . . . . . . . . . (1,233) (1,254) (3,465) (8,802)
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . 13,361 23,849 38,040 51,302
Income Tax Provision . . . . . . . . . . . . . . . . 5,382 7,686 14,292 17,159
-------- -------- -------- --------
EARNINGS BEFORE EXTRAORDINARY ITEM . . . . . . . . . 7,979 16,163 23,748 34,143
Extraordinary Loss on Extinguishment of Debt, Net of
Income Tax Benefit of $886 in 1996. . . . . . . . . - (2,290) - (2,290)
-------- -------- -------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . $ 7,979 13,873 23,748 31,853
======== ======== ======== ========
EARNINGS PER SHARE
Earnings Before Extraordinary Item. . . . . . . . . $ .30 .61 .88 1.30
Extraordinary Loss, Net of Income Tax Benefit . . . - (.09) - (.09)
-------- -------- -------- --------
Net Earnings. . . . . . . . . . . . . . . . . . . . $ .30 .52 .88 1.21
======== ======== ======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES . . . . . . . . . . . . . . . . . 26,938 26,816 26,857 26,370
======== ======== ======== ========
<FN>
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)
Nine Months Ended
September 30
-----------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,748 31,853
Adjustments to reconcile net earnings to net cash from operating activities:
Extraordinary loss on extinguishment of debt, net of income tax benefit . . - 2,290
Depreciation, depletion and amortization. . . . . . . . . . . . . . . . . . 34,643 30,386
Loss on sale of assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 30 678
Amortization of deferred charges and other. . . . . . . . . . . . . . . . . 622 1,316
Changes in operating assets and liabilities:
Receivable from Tennessee Gas Pipeline Company. . . . . . . . . . . . . . - 50,680
Receivables, other trade. . . . . . . . . . . . . . . . . . . . . . . . . 45,882 (6,228)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 16,901
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,219) 793
Accounts payable and other current liabilities. . . . . . . . . . . . . . (38,557) 8,066
Obligation payments to State of Alaska. . . . . . . . . . . . . . . . . . (3,406) (3,145)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 5,401 12,051
Other liabilities and obligations . . . . . . . . . . . . . . . . . . . . 5,569 2,760
-------- --------
Net cash from operating activities . . . . . . . . . . . . . . . . . . 71,071 148,401
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (95,082) (46,050)
Acquisition of Coastwide Energy Services, Inc. . . . . . . . . . . . . . . . - (7,720)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,155) (3,259)
-------- --------
Net cash used in investing activities. . . . . . . . . . . . . . . . . (98,237) (57,029)
-------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Borrowings, net of repayments of $28,500 in 1997 and $112,000
in 1996, under revolving credit facilities. . . . . . . . . . . . . . . . . 15,828 -
Payments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . (3,287) (2,885)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . (1,098) -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 1,144
-------- --------
Net cash from (used in) financing activities . . . . . . . . . . . . . 11,749 (1,741)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . (15,417) 89,631
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . 22,796 13,941
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . $ 7,379 103,572
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid, net of $313 capitalized in 1997 . . . . . . . . . . . . . . . $ 1,654 8,879
======== ========
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,764 3,925
======== ========
<FN>
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 and notes thereto 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 and notes 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 to
conform to the current presentation of financial information.
NOTE 2 - ACQUISITION
In July 1997, the Company purchased the interests held by Zapata Exploration
Company ("Zapata"), a wholly-owned subsidiary of Zapata Corporation, in two
jointly held contract blocks (Block 18 and Block 20) in southern Bolivia.
Zapata held a 25% interest in Block 18 and a 27.4% interest in Block 20. The
purchase price was approximately $20 million, which included working capital and
assumption of certain liabilities. The assignment of interests has been
approved by the Bolivian government. The Company's net proved Bolivian
reserves, which were estimated to be 253 billion cubic feet equivalent at 1996
year-end, increased more than 30% as a result of the acquisition.
NOTE 3 - LONG-TERM DEBT
In September 1997, the Company negotiated an amendment to its $150 million
corporate revolving credit facility ("Credit Facility"). The amendment reduces
the rate on cash borrowings under the Credit Facility to (i) the London
Interbank Offered Rate ("LIBOR") plus 1.0% or (ii) the prime rate. Fees on
outstanding letters of credit are reduced to 1.0%. The amendment also increases
the Company's borrowing base and makes certain covenants in the Credit Facility
less restrictive. Additionally, the Company is now permitted to utilize
unsecured letters of credit outside of the Credit Facility up to $40 million
(none outstanding at September 30, 1997). Under the Credit Facility, the
Company had letters of credit of $33.9 million, primarily for royalty crude oil
purchases from the State of Alaska, and cash borrowings of $11.9 million
outstanding at September 30, 1997.
In early October 1997, the Company completed an expansion of the hydrocracker
unit at its Alaska refinery. The expansion, together with the addition of a
new, high-yield jet fuel catalyst, has an estimated cost of approximately $19
million and is expected to improve the Company's refinery feedstock and product
slate beginning in the fourth quarter of 1997. In October 1997, the National
Bank of Alaska ("NBA") and the Alaska Industrial Development and Export
Authority ("AIDEA"), under a loan agreement ("Hydrocracker Loan") entered into
between the Company and NBA, provided a $16.2 million loan to the Company
towards the cost of the hydrocracker expansion. One-half of the loan was funded
by NBA and the other half was funded by AIDEA. The Hydrocracker Loan matures on
or before April 1, 2005 and requires 28 equal quarterly principal payments
beginning April 1998 together with interest at the unsecured 90-day commercial
paper rate (5.55% at October 30, 1997) plus (i) 2.6% per annum on 50% of the
amount borrowed and (ii) 2.35% per annum on the other 50% borrowed, each to be
6
<PAGE>
adjusted quarterly. The Hydrocracker Loan is secured by a second lien on the
refinery. Under the terms of the Hydrocracker Loan, the Company is required to
maintain specified levels of working capital and tangible net worth.
NOTE 4 - 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 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 September 30, 1997, the Company's accruals for environmental expenses
amounted to $8.7 million, which included a noncurrent liability of approximately
$3.1 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 currently anticipates that it will make capital
improvements of approximately $3 million in 1997 and $8 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.
NOTE 5 - 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% 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 flows. The
repurchased Common Stock is 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
7
<PAGE>
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 6 - ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 becomes effective for the Company in the fourth quarter of
1997. At that time, the Company will be required to present "basic" and
"diluted" earnings per share and to restate 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
disclosures.
In June 1997, the FASB issued SFAS No.130, "Reporting Comprehensive Income," and
SFAS No.131, "Disclosures about Segments of an Enterprise and Related
Information." Both Statements become effective for periods beginning after
December 15, 1997 with early adoption permitted. The Company is evaluating the
effects these Statements will have on its financial reporting and disclosures.
The Statements will have no effect on the Company's results of operations,
financial position, capital resources or liquidity.
8
<PAGE>
ITEM 2. TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
SUMMARY
Net earnings of $8.0 million, or $.30 per share, for the three months ended
September 30, 1997 ("1997 Quarter") compare with net earnings of $13.9 million,
or $.52 per share, for the three months ended September 30, 1996 ("1996
Quarter"). For the year-to-date period, net earnings of $23.8 million, or $.88
per share, for the nine months ended September 30, 1997 ("1997 Period") compare
with net earnings of $31.9 million, or $1.21 per share, for the nine months
ended September 30, 1996 ("1996 Period"). Results for the 1996 Quarter and
Period 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 include above-market revenues from this contract.
Significant items, including the impact of the Tennessee Gas contract, which
affect the comparability between results for 1997 and 1996 are highlighted in
the table below (in millions except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Earnings As Reported . . . . . . . . . . . . . . . . . . . $ 8.0 13.9 23.8 31.9
Extraordinary Loss on Debt Extinguishment,
Net of Income Tax Benefit. . . . . . . . . . . . . . . . . . - 2.3 - 2.3
------ ------ ------ ------
Earnings Before Extraordinary Item . . . . . . . . . . . . . . 8.0 16.2 23.8 34.2
------ ------ ------ ------
Significant Items Affecting Comparability, Pretax:
Operating profit from excess of Tennessee Gas contract
prices over spot market prices . . . . . . . . . . . . . . - 8.5 - 24.6
Interest and reimbursement of fees and costs from
resolution of litigation. . . . . . . . . . . . . . . . . . - 7.9 - 7.9
Income from collection of Bolivian receivable. . . . . . . . - - 2.2 -
Income from retroactive severance tax refunds. . . . . . . . - - 1.8 5.0
Costs of shareholder consent solicitation resolved
in April 1996 . . . . . . . . . . . . . . . . . . . . . . . - - - (2.3)
Employee terminations, restructuring costs and other . . . . - (.7) - (4.5)
------ ------ ------ ------
Total Significant Items, Pretax . . . . . . . . . . . . . . - 15.7 4.0 30.7
Income Tax Effect . . . . . . . . . . . . . . . . . . . . . - 4.4 1.2 8.3
------ ------ ------ ------
Total Significant Items, Aftertax . . . . . . . . . . . . . - 11.3 2.8 22.4
------ ------ ------ ------
Net Earnings Excluding Significant Items and Extraordinary
Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.0 4.9 21.0 11.8
====== ====== ====== ======
Earnings Per Share:
As Reported. . . . . . . . . . . . . . . . . . . . . . . . . $ .30 .52 .88 1.21
Extraordinary Loss . . . . . . . . . . . . . . . . . . . . . - (.09) - (.09)
Significant Items:
Impact of Tennessee Gas contract prices over
spot market prices . . . . . . . . . . . . . . . . . . . - .23 - .68
Other significant items. . . . . . . . . . . . . . . . . . - .20 .10 .17
------ ------ ------ ------
Excluding Significant Items and Extraordinary Loss . . . . . $ .30 .18 .78 .45
====== ====== ====== ======
</TABLE>
As shown above, net earnings of $8.0 million ($.30 per share) in the 1997
Quarter would compare to $4.9 million ($.18 per share) when excluding the
significant items in the 1996 Quarter. The resulting increase in net earnings
in the 1997 Quarter was mainly attributable to improved profitability from each
of the Company's business segments together with lower corporate interest
expense. For the year-to-date periods, excluding significant items, net
earnings would have been $21.0 million ($.78 per share) for the 1997 Period
compared to $11.8 million ($.45 per share) for the 1996 Period. The increase in
the 1997 Period was primarily due to higher spot market natural gas prices,
better refined product margins and lower corporate interest expense. A
discussion and analysis of the factors contributing to the Company's results of
operations are presented below. The Company conducts its operations in the
following business segments: Refining and Marketing, Exploration and
Production, and Marine Services.
9
<PAGE>
<TABLE>
<CAPTION>
REFINING AND MARKETING Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Dollars in millions except per unit amounts) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Operating Revenues:
Refined products. . . . . . . . . . . . . . . . . . . . . $ 177.5 169.9 486.9 465.7
Other, primarily crude oil resales and merchandise. . . . 21.3 33.8 48.1 98.1
------ ------ ------ ------
Gross Operating Revenues . . . . . . . . . . . . . . . . $ 198.8 203.7 535.0 563.8
====== ====== ====== ======
Total Operating Profit:
Gross margin. . . . . . . . . . . . . . . . . . . . . . . $ 34.2 31.7 94.8 85.5
Operating expenses. . . . . . . . . . . . . . . . . . . . 23.3 22.3 68.7 67.1
Depreciation and amortization . . . . . . . . . . . . . . 3.4 3.0 9.7 9.0
Loss on sale of assets and other. . . . . . . . . . . . . .1 .7 .1 .7
------ ------ ------ ------
Operating Profit . . . . . . . . . . . . . . . . . . . . $ 7.4 5.7 16.3 8.7
====== ====== ====== ======
Capital Expenditures . . . . . . . . . . . . . . . . . . . $ 11.8 3.1 30.6 6.9
====== ====== ====== ======
Refinery Throughput:
Barrels per day . . . . . . . . . . . . . . . . . . . . . 43,192 41,165 48,225 45,760
% Alaska North Slope crude oil. . . . . . . . . . . . . . 68% 69% 77% 71%
Refined Products Manufactured (average daily barrels)<FN1>:
Gasoline . . . . . . . . . . . . . . . . . . . . . . . . 11,351 10,953 12,499 12,717
Middle distillates. . . . . . . . . . . . . . . . . . . . 17,999 17,690 20,400 19,143
Heavy oils and residual product . . . . . . . . . . . . . 12,587 11,638 14,140 12,829
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,910 2,214 2,500 2,709
------ ------ ------ ------
Total Refined Products Manufactured. . . . . . . . . . . 43,847 42,495 49,539 47,398
====== ====== ====== ======
Refinery Operations - Product Spread ($/barrel)<FN1>:
Average yield value of products manufactured. . . . . . . $ 23.81 25.07 23.83 23.87
Cost of raw materials . . . . . . . . . . . . . . . . . . 17.92 19.33 18.69 19.03
------ ------ ------ ------
Refinery Product Spread. . . . . . . . . . . . . . . . . $ 5.89 5.74 5.14 4.84
====== ====== ====== ======
Non-Refinery Margin, included in operating profit
above ($ millions)<FN1><FN2> . . . . . . . . . . . . . . $ 10.8 10.0 27.1 24.9
====== ====== ====== ======
Total Segment Product Sales (average daily barrels)<FN3>:
Gasoline. . . . . . . . . . . . . . . . . . . . . . . . . 18,592 18,073 18,156 18,751
Middle distillates. . . . . . . . . . . . . . . . . . . . 37,844 32,123 30,138 30,159
Heavy oils and residual product . . . . . . . . . . . . . 13,748 16,489 17,700 14,594
------ ------ ------ ------
Total Product Sales. . . . . . . . . . . . . . . . . . . 70,184 66,685 65,994 63,504
====== ====== ====== ======
Total Segment Product Sales Prices ($/barrel):
Gasoline. . . . . . . . . . . . . . . . . . . . . . . . . $ 35.23 34.52 33.90 32.35
Middle distillates. . . . . . . . . . . . . . . . . . . . $ 27.00 29.33 28.46 28.08
Heavy oils and residual product . . . . . . . . . . . . . $ 18.40 17.03 17.53 16.86
Total Segment Gross Margins on Product
Sales ($/barrel)<FN4>:
Average sales price . . . . . . . . . . . . . . . . . . . $ 27.49 27.70 27.03 26.76
Average costs of sales. . . . . . . . . . . . . . . . . . 22.80 23.16 22.52 22.43
------ ------ ------ ------
Gross Margin . . . . . . . . . . . . . . . . . . . . . . $ 4.69 4.54 4.51 4.33
====== ====== ====== ======
<FN>
<FN1> Amounts reported in prior periods have been reclassified to conform with current presentation.
<FN2> Non-refinery margin includes margins on products purchased and resold, margins on products sold
in markets outside of Alaska, intrasegment pipeline revenues, retail margins, and adjustments
due to selling a volume and mix of products that is different than actual volumes manufactured.
<FN3> 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 averaged approximately 24,700 and 13,600 barrels per day for the
three months ended September 30, 1997 and 1996, respectively, and approximately 15,500 and
12,100 barrels per day for the nine months ended September 30, 1997 and 1996, respectively.
<FN4> Gross margins on total product sales include margins on sales of purchased products, together
with the effect of changes in inventories.
</TABLE>
10
<PAGE>
REFINING AND MARKETING
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996. Operating profit of $7.4 million from the Company's Refining and
Marketing segment during the 1997 Quarter represented a 30% improvement from the
1996 Quarter. The continued success of the Company's program to sell a larger
portion of its refinery production within the core Alaska market, together with
generally favorable industry conditions, contributed to this improvement. The
Company's sales of gasoline and asphalt in Alaska increased in the 1997 Quarter
as compared to the 1996 Quarter. Jet fuel sales also increased due to growing
trans-Pacific air cargo traffic through the international airport in Anchorage.
The Company's refinery product spread averaged $5.89 per barrel in the 1997
Quarter, a $.15 per barrel improvement from the 1996 Quarter. The Company's
refined product yield values decreased by 5% to $23.81 per barrel in the 1997
Quarter from $25.07 per barrel in the 1996 Quarter, while the Company's
feedstock costs decreased by 7% to $17.92 per barrel in the 1997 Quarter from
$19.33 per barrel in the 1996 Quarter. The 1997 Quarter and 1996 Quarter both
included scheduled turnarounds, during which the refinery was not fully
operational. Margins from non-refinery activities increased to $10.8 million
during the 1997 Quarter from $10.0 million in the 1996 Quarter due primarily to
higher retail sales and improved margins on refined products sold outside
Alaska.
The increase of $7.6 million in revenues from refined products sales during the
1997 Quarter was primarily due to higher sales volumes, which rose 5% to 70,184
barrels per day in the 1997 Quarter from 66,685 barrels per day in the 1996
Quarter. Other revenues declined by $12.5 million due primarily to lower sales
volumes of previously purchased crude oil together with lower prices. During
the 1997 Quarter, the Company had less crude oil available for resale as
refinery throughput averaged 2,027 barrels per day more than in the 1996
Quarter. Costs of sales decreased in the 1997 Quarter due to lower prices for
crude oil and refined products. The $1.0 million increase in operating expenses
included higher employee costs associated in part with expanded marketing
efforts and higher professional fees. The 1996 Quarter included a $.7 million
write-down of a West Coast terminal that was subsequently sold.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996. Operating profit of $16.3 million in the 1997 Period compares to
operating profit of $8.7 million in the 1996 Period. The Company's refinery
spread of $5.14 per barrel in the 1997 Period improved 6% from the prior year
period. The Company's production of jet fuel, a product in short supply in
Alaska, was higher in the 1997 Period principally due to the use of an improved
catalyst in the hydrocracker unit, a change made during the refinery turnaround
in the 1996 Period. Margins from non-refinery activities increased to $27.1
million during the 1997 Period as compared to $24.9 million in the 1996 Period
due primarily to higher retail sales and improved margins on refined products
sold outside of Alaska.
Revenues from sales of refined products in the Company's Refining and Marketing
segment increased by 5% during the 1997 Period due to higher sales volumes and
prices. Other revenues declined by $50.0 million during the 1997 Period due
primarily to lower sales volumes of crude oil together with lower prices.
During the 1997 Period, the Company had less crude oil available for resale as
refinery throughput averaged 2,465 barrels per day more than in the 1996 Period
and fewer spot purchases of crude oil were made. Costs of sales decreased in
the 1997 Period due to lower volumes of crude oil. The $1.6 million increase in
operating expenses included higher employee costs and professional fees.
FUTURE IMPACT. The improvement in Refining and Marketing results have been due
in part to the Company's marketing program to sell a larger portion of its
refinery production within the core Alaska market. In addition, favorable
summer and fall weather conditions in Alaska increased the demand for the
Company's in-state sales during the 1997 Period. In early October 1997, the
Company completed an expansion of its refinery hydrocracker unit, which
increases the unit's capacity by approximately 25% to 12,500 barrels per day and
enables the Company to produce more jet fuel. The expansion, together with the
addition of a new, high-yield jet fuel catalyst, has an estimated cost of $19
million with a projected payback period of two years and is expected to
favorably impact this segment's results beginning in the fourth quarter of 1997.
The Company is also expanding its Alaskan retail operations with the
construction of new outlets and remodeling of existing outlets. With respect to
crude oil supply, beginning in October 1997, a subsidiary of the Company has
contracts to purchase all of the approximately 34,000 barrels per day of Cook
Inlet production for various periods of more than one year. In the 1997 Period,
the Company processed approximately 9,300 barrels per day of Cook Inlet crude,
or 19% of the refinery's throughput. The increase in Cook Inlet crude oil as a
refinery feedstock will enable the Company to
11
<PAGE>
produce higher-valued products. Although the aforementioned initiatives are
expected to improve the fundamental earnings potential of this segment, 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.
<TABLE>
<CAPTION>
EXPLORATION AND PRODUCTION Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Dollars in millions except per unit amounts) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S.<FN1><FN2>:
Gross Operating Revenues. . . . . . . . . . . . . . . . . $ 15.9 23.0 53.3 73.4
Other Income (primarily retroactive severance tax
refunds). . . . . . . . . . . . . . . . . . . . . . . . - - 1.9 5.0
Production Costs . . . . . . . . . . . . . . . . . . . . 1.5 1.3 5.0 3.8
Administrative Support and Other Operating Expenses . . . .6 .2 1.7 2.2
Depreciation, Depletion and Amortization. . . . . . . . . 7.0 6.2 22.2 18.9
----- ----- ----- -----
Operating Profit - U.S.. . . . . . . . . . . . . . . . . 6.8 15.3 26.3 53.5
----- ----- ----- -----
BOLIVIA:
Gross Operating Revenues. . . . . . . . . . . . . . . . . 3.8 3.4 8.4 10.5
Other Income (related to collection of a receivable). . . - - 2.2 -
Production Costs. . . . . . . . . . . . . . . . . . . . . .3 .2 .7 .6
Administrative Support and Other Operating Expenses . . . .5 .6 1.3 2.1
Depreciation, Depletion and Amortization. . . . . . . . . .5 .4 1.0 1.0
----- ----- ----- -----
Operating Profit - Bolivia . . . . . . . . . . . . . . . 2.5 2.2 7.6 6.8
----- ----- ----- -----
TOTAL OPERATING PROFIT - EXPLORATION AND PRODUCTION. . . . $ 9.3 17.5 33.9 60.3
===== ===== ===== =====
U.S.:
Average Daily Net Production:
Natural gas (Mcf). . . . . . . . . . . . . . . . . . . . 79,683 80,612 86,317 88,723
Oil (barrels). . . . . . . . . . . . . . . . . . . . . . 93 39 119 15
Average Prices:
Natural gas ($/Mcf) -
Spot market<FN3>. . . . . . . . . . . . . . . . . . . . $ 2.01 1.71 2.08 1.77
Average<FN2>. . . . . . . . . . . . . . . . . . . . . . $ 2.01 2.92 2.08 2.85
Oil ($/barrel) . . . . . . . . . . . . . . . . . . . . . $ 18.23 20.93 19.44 20.59
Average Operating Expenses ($/Mcfe) -
Lease operating expenses . . . . . . . . . . . . . . . . $ .21 .14 .18 .12
Severance taxes. . . . . . . . . . . . . . . . . . . . . - .04 .03 .04
----- ----- ----- -----
Total Production Costs. . . . . . . . . . . . . . . . . .21 .18 .21 .16
Administrative support . . . . . . . . . . . . . . . . . .09 .01 .07 .08
----- ----- ----- -----
Total Operating Expenses. . . . . . . . . . . . . . . . $ .30 .19 .28 .24
===== ===== ===== =====
Depletion ($/Mcfe). . . . . . . . . . . . . . . . . . . . $ .93 .82 .92 .77
===== ===== ===== =====
Capital Expenditures. . . . . . . . . . . . . . . . . . . $ 16.3 11.7 32.5 27.1
===== ===== ===== =====
BOLIVIA:
Average Daily Net Production:
Natural gas (Mcf). . . . . . . . . . . . . . . . . . . . 26,856 20,945 18,452 21,355
Condensate (barrels) . . . . . . . . . . . . . . . . . . 760 605 529 611
Average Prices:
Natural gas ($/Mcf). . . . . . . . . . . . . . . . . . . $ 1.13 1.31 1.20 1.33
Condensate ($/barrel). . . . . . . . . . . . . . . . . . $ 15.00 16.92 16.23 16.50
Average Operating Expenses ($/Mcfe) -
Production costs . . . . . . . . . . . . . . . . . . . . $ .10 .11 .11 .10
Value-added taxes. . . . . . . . . . . . . . . . . . . . - .08 - .07
Administrative support . . . . . . . . . . . . . . . . . .20 .24 .25 .24
----- ----- ----- -----
Total Operating Expenses. . . . . . . . . . . . . . . . $ .30 .43 .36 .41
===== ===== ===== =====
Depletion ($/Mcfe). . . . . . . . . . . . . . . . . . . . $ .19 .17 .18 .15
===== ===== ===== =====
Capital Expenditures. . . . . . . . . . . . . . . . . . . $ 20.0 .8 26.0 5.7
===== ===== ===== =====
<FN>
<FN1> Represents the Company's U.S. oil and gas operations combined with gas transportation activities.
<FN2> Results for 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 three and
nine months ended September 30, 1996 included $8.5 million and $24.6 million, respectively, for
the excess of these contract prices over spot market prices. Net natural
12
<PAGE>
gas production sold under the contract averaged approximately 14 Mmcf per day for both the three
months and nine months ended September 30, 1996.
<FN3> Includes effects of the Company's natural gas commodity price agreements which amounted to a loss
of $.19 per Mcf for the three months ended September 30, 1996, and losses of $.06 per Mcf and $.15
per Mcf for the nine months ended September 30, 1997 and 1996, respectively.
<FN4> Mcf is defined as one thousand cubic feet; Mcfe is defined as net equivalent one thousand cubic
feet.
</TABLE>
EXPLORATION AND PRODUCTION - U. S.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996. Operating profit of $6.8 million from the Company's U.S. operations
in the 1997 Quarter compares to operating profit of $15.3 million in the 1996
Quarter. The 1996 Quarter included revenues from the sale of natural gas at
above-market prices under a contract with Tennessee Gas. The excess of these
contract prices over spot market prices contributed approximately $8.5 million
to operating profit in the 1996 Quarter. When excluding the incremental value
of the Tennessee Gas contract from the 1996 Quarter, operating profit from the
Company's U.S. operations for the 1997 Quarter would be relatively unchanged as
total production volumes remained flat during both quarters and increases in
spot market natural gas prices were offset by increased depreciation and
depletion and operating expenses.
Prices realized by the Company on spot market natural gas production increased
to $2.01 per Mcf in the 1997 Quarter from $1.71 per Mcf in the 1996 Quarter. On
a weighted-average basis, the Company's natural gas sales price was $2.92 per
Mcf in the 1996 Quarter due to sales under the Tennessee Gas contract. The
Company's production averaged 80.2 million cubic feet equivalents ("Mmcfe") per
day in the 1997 Quarter compared to 80.8 Mmcfe per day in the 1996 Quarter.
This decrease in the Company's production consisted of a 14.0 million cubic feet
("Mmcf") per day decline from the Bob West Field partially offset by a 13.4
Mmcfe per day production increase from other U.S. fields. The Company's
production outside of the Bob West Field rose to 23% of total production during
the 1997 Quarter, as compared to 6% in the 1996 Quarter. In September 1997,
production began from the Company's interest in the Vinegarone East Field in Val
Verde Basin of Southwest Texas at an initial flow rate of approximately 12 Mmcf
per day gross (8.6 Mmcf per day net). Drilling is underway on two development
wells in this field. In addition, the Cuellar 1 well, which was discovered
during the 1997 Quarter in the Wilcox Trend of South Texas, began production in
October 1997 at 8.0 Mmcf per day gross (6.0 Mmcf per day net). The Company's
net U.S. production reached 90 Mmcf per day in late October 1997.
Gross operating revenues from the Company's U.S. operations, after excluding
amounts related to Tennessee Gas, increased due to the higher spot market
prices. Production costs increased by $.2 million in the 1997 Quarter due
primarily to higher per-unit lease operating expenses from the Company's newer
fields. Depreciation and depletion increased by $.8 million, or 13%, 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.
During the 1996 Quarter, the Company used such agreements to set the price of
38% of the natural gas production that it sold in the spot market and recognized
a loss of $1.2 million ($.19 per Mcf) related to these price agreements. The
Company did not have any such transactions during the 1997 Quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996. Operating profit of $26.3 million from the Company's U.S. operations
in the 1997 Period compares to $53.5 million in the 1996 Period. Comparability
between these periods was impacted by certain significant items. The 1996
Period included operating profit of $24.6 million from the excess of Tennessee
Gas contract prices over spot market prices. Results of operations in 1997 and
future years will no longer include above-market revenues from this contract
which was terminated effective October 1, 1996. Operating profit also included
retroactive severance tax refunds of $1.8 million and $5.0 million in the 1997
and 1996 Periods, respectively. Excluding the incremental value of the
Tennessee Gas contract and retroactive severance tax refunds, operating profit
from the Company's U.S. operations would have been $24.5 million in the 1997
Period compared to $23.9 million in the 1996 Period. The resulting increase of
$.6 million was primarily attributable to higher spot market prices for sales of
natural gas partially offset by higher depreciation and depletion.
Prices realized by the Company on its spot natural gas production increased 18%
to $2.08 per Mcf in the 1997 Period from $1.77 per Mcf in the 1996 Period. The
increase in average spot market prices was attributable in part to unusually
high prices received during January and February when there was unusually cold
weather combined with below-normal natural gas storage levels. On a
weighted-average basis, the Company's natural
13
<PAGE>
gas sales price was $2.85 per Mcf in the 1996 Period due to sales under the
Tennessee Gas contract. The Company's production averaged 87.0 Mmcfe per day in
the 1997 Period, a decrease of 1.8 Mmcfe per day from the 1996 Period. This
decrease in the Company's production consisted of a 13.9 Mmcf per day decline
from the Bob West Field partially offset by a 12.1 Mmcfe per day increase from
other U.S. fields. Production from the Bob West Field, which accounted for 95%
of the Company's total U.S. production in the 1996 Period, was reduced to 81% in
the 1997 Period.
Gross operating revenues from the Company's U.S. operations, after excluding
amounts related to Tennessee Gas, increased due to the higher spot market
prices. Production costs increased by $1.2 million during the 1997 Period due
to higher per-unit lease operating expenses from the Company's newer fields.
Administrative support and other operating expenses decreased by $.5 million.
Depreciation and depletion increased by $3.3 million, or 17%, due to a higher
depletion rate.
From time to time, the Company enters into commodity price agreements to reduce
the risk caused by fluctuations in the prices of natural gas in the spot market.
In addition, from time to time 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 Periods, the Company used such agreements to set the price of
11% and 37%, respectively, of the natural gas production that it sold in the
spot market. During the 1997 and 1996 Periods, the Company realized losses of
$1.6 million ($.06 per Mcf) and $2.9 million ($.15 per Mcf), respectively, from
these price agreements. At September 30, 1997, the Company has no remaining
price agreements outstanding for the year.
EXPLORATION AND PRODUCTION - BOLIVIA
HYDROCARBONS LAW. 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. On November 6, 1997, the
Company completed the conversion of its Contracts of Operation for Block 18 and
Block 20 into four Shared Risk Contracts. The new contracts have an effective
date of July 29, 1996 and 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 contract for Block 18 is extended to the
year 2017. The new contracts for Block 20 are extended to the year 2029 for
Block 20-West and Block 20-East, which are in the exploration phase, and to the
year 2018 for Block 20-Los Suris that is in the development phase.
FARMOUT. A farmout agreement executed June 19, 1997, between the Company and
Total Exploration Production Bolivie, S.A. ("Total"), an affiliate of Total
S.A., became effective on a portion of Block 20-West on November 6, 1997.
Pursuant to the farmout agreement, Total established a financial guarantee to
the Bolivian government to guarantee the performance of exploration work on
Block 20-West. Under the farmout agreement, Total has the right to drill, at
its sole cost, two exploratory wells to earn a 75 percent interest in the
farmout area which consists of 315,000 acres of Block 20-West. The assignment
of interest by the Company to Total, which is subject to reversion if Total does
not earn the interest, has been approved by the Bolivian government and is
expected to become effective in the fourth quarter of 1997. It is anticipated
that Total will spud the first well by mid-1998.
YPFB AND YPF CONTRACT. The Company's Bolivian natural gas production has been
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's sales of
natural gas production is 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 additional year if the pipeline being constructed 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.
ACCESS TO NEW MARKETS. A lack of market access has constrained natural gas
production in Bolivia. Preliminary work on a new 1,900-mile pipeline that will
link Bolivia's gas reserves with markets in Brazil has begun and the pipeline is
expected to be operational in early 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996. Operating profit of $2.5 million from the Company's Bolivian
operations in the 1997 Quarter compares to
14
<PAGE>
operating profit of $2.2 million in the 1996 Quarter. With the Company's
purchase of Zapata's interests in Block 18 and Block 20 in July 1997, the
Company now holds a 100% interest in both blocks, subject to the farmout
agreement with Total (see Note 2 of Notes to Condensed Consolidated Financial
Statements). Beginning in the 1997 Quarter, the Company's net share of
production from Block 18 increased by approximately 33% as a result of this
purchase. Block 20 is currently shut-in waiting on the construction of the
pipeline to Brazil, which is expected to be operational in early 1999. Natural
gas prices for Bolivian production fell to $1.13 per Mcf in the 1997 Quarter, a
14% drop from the 1996 Quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996. Operating profit of $7.6 million from the Company's Bolivian
operations in the 1997 Period compares to operating profit of $6.8 million in
the 1996 Period. The 1997 Period included income of $2.2 million related to the
collection of a receivable for prior years production. Excluding this income,
operating profit would have decreased by $1.4 million as production of natural
gas and condensate fell by 14%. As discussed above, the Company's production
rose during the 1997 Quarter due to the purchase of the Zapata interests in July
1997 which will also benefit future periods. However, earlier in the year, the
Company's Bolivian natural gas production was lower due to a reduction in
minimum takes under the new contract between YPFB and YPF and also due to
constraints arising from repairs to a non-Company-owned pipeline that transports
gas from Bolivia to Argentina. A replacement pipeline is now operational, which
has restored full capacity. During the 1996 Period, production was higher due
to requests from YPFB for additional production from the Company to meet export
specifications. Natural gas prices declined to $1.20 per Mcf in the 1997 Period
compared to $1.33 per Mcf in the 1996 Period. Administrative support and other
operating expenses decreased by $.8 million in the 1997 Period due primarily to
the reduced production levels.
<TABLE>
<CAPTION>
MARINE SERVICES Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Dollars in millions) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Operating Revenues:
Fuels . . . . . . . . . . . . . . . $ 25.2 26.0 77.6 70.4
Lubricants and other. . . . . . . . 4.2 4.1 12.3 10.9
Services. . . . . . . . . . . . . . 3.1 2.6 8.4 6.2
---- ---- ---- ----
Gross Operating Revenues . . . . . 32.5 32.7 98.3 87.5
Costs of Sales . . . . . . . . . . . 22.9 24.5 72.6 66.7
---- ---- ---- ----
Gross Profit . . . . . . . . . . . 9.6 8.2 25.7 20.8
Operating Expenses and Other . . . . 6.5 5.8 20.4 15.4
Depreciation and Amortization. . . . .4 .4 1.2 .9
---- ---- ---- ----
Operating Profit . . . . . . . . . $ 2.7 2.0 4.1 4.5
==== ==== ==== ====
Sales Volumes (millions of gallons):
Fuels, primarily diesel . . . . . . 39.1 37.8 116.2 107.4
Lubricants. . . . . . . . . . . . . .7 .7 2.0 1.9
Capital Expenditures . . . . . . . . $ 2.0 1.2 5.3 6.2
</TABLE>
For the 1997 Quarter, gross operating revenues declined by $.2 million due
primarily to lower fuel sales prices partly offset by increased fuel volumes.
The $1.6 million decrease in cost of sales correlates to these lower fuel market
prices. The 19% increase in service revenues was associated with the increased
rig activity in the Gulf of Mexico and the Company's focus to serve these
customers. The improvement of $1.4 million in gross profit was partly offset by
higher operating expenses associated with the increased sales volumes and
service revenues.
For the 1997 Period, gross operating revenues increased by $10.8 million, with
an 11% increase in fuels and lubricants revenues and a 35% increase in service
revenues. These increases were mainly due to added locations and associated
volumes stemming from an acquisition consummated in February 1996 together with
internal growth initiatives. Costs of sales during the 1997 Period increased
due to the higher volumes and also included a $.7 million charge associated with
inventory valuations as market prices declined from year-end levels. The
improvement of $4.9 million in gross profit during the 1997 Period was offset by
higher operating and other expenses associated with the increased activity and
upgrades to facilities and services.
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.
15
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expense increased by $.3 million and $.6 million
during the 1997 Quarter and Period, respectively. These increases were
primarily due to higher employee costs partially offset by reduced professional
fees and insurance costs.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense decreased by $2.6 million and $7.5 million during the 1997
Quarter and Period, respectively. These decreases were primarily due to the
Company's redemption of $74.1 million of public debt in November 1996 which has
resulted in interest expense savings of approximately 60% in the 1997 Quarter
and Period.
Interest income decreased by $6.9 million and $6.2 million during the 1997
Quarter and Period, respectively. The 1996 Quarter and Period included interest
of approximately $7 million received from Tennessee Gas in conjunction with the
collection of a receivable which resulted from underpayment for natural gas sold
in prior periods. The 1997 Period included interest income of approximately $.4
million related to the collection of a Bolivia receivable.
OTHER EXPENSE, NET
For the 1997 Period, other expense decreased by $5.3 million primarily due to
charges incurred in the prior year period for 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 with no
material comparable costs recorded in the current period.
INCOME TAX PROVISION
Income taxes decreased by $2.2 million and $2.8 million during the 1997 Quarter
and Period, respectively. These decreases were primarily due to lower earnings.
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, condensate and oil 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 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. The Company's Marine
Services segment uses the first-in, first-out ("FIFO") method of accounting for
its inventories of fuel. Changes in fuel prices can significantly impact
inventory valuations and costs of sales in this segment.
16
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
The Company's primary sources of liquidity are its cash and cash equivalents,
internal cash generation and external financing. During the first nine months
of 1997, the Company made capital expenditures exceeding $95 million, which were
funded through a combination of cash flows from operations of $71 million,
external financing of $16 million and available cash balances. Subsequently, in
October 1997, the Company obtained a $16.2 million term loan to finance the
expansion of the refinery hydrocracker unit (see Note 3 of Notes to Condensed
Consolidated Financial Statements). At September 30, 1997, the Company's
debt-to-capitalization ratio was 22% which enhances the Company's ability to
access capital markets.
The Company is focused on its strategic plans to make operational improvements
and continues to assess its 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 significant transaction but operating strategies have been implemented to
optimize the product and feedstock slates, improve efficiencies and reliability,
and expand marketing to increase placement of products in Alaska. In the Marine
Services segment, the Company continues to pursue 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 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 arrangements 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% 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 flows. The
repurchased Common Stock is 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 $147
million at September 30, 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. An amendment to the Credit
Facility, which was negotiated in September 1997, reduces interest rates and
certain fees, increases the Company's borrowing base and makes certain covenants
less restrictive. Additionally, the Company is now
17
<PAGE>
permitted to utilize unsecured letters of credit outside of the Credit Facility
up to $40 million (none outstanding at September 30, 1997). Under the Credit
Facility, the Company had letters of credit of $33.9 million, primarily for
royalty crude oil purchases from the State of Alaska, and cash borrowings of
$11.9 million outstanding at September 30, 1997.
The terms of the Credit Facility allow for open market stock repurchases and the
payment of cash dividends 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
September 30, 1997, the cumulative amount available for restricted payments was
approximately $54 million. Annually, however, the aggregate of open market
stock repurchases and cash dividends 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 $10 million annually, specifically for oddlot buyback
programs and employee benefit or compensation 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 September
30, 1997, $ 4.8 million was outstanding under the loan facility.
In early October 1997, the Company completed an expansion of the hydrocracker
unit at its Alaska refinery. The expansion, together with the addition of a
new, high-yield jet fuel catalyst, has an estimated cost of approximately $19
million and is expected to improve the Company's refinery feedstock and product
slate beginning in the fourth quarter of 1997. In October 1997, the National
Bank of Alaska ("NBA") and the Alaska Industrial Development and Export
Authority ("AIDEA"), under a loan agreement ("Hydrocracker Loan") entered into
between the Company and NBA, provided a $16.2 million loan to the Company
towards the cost of the hydrocracker expansion. The Hydrocracker Loan matures
on or before April 1, 2005 and is secured by a second lien on the refinery.
Under the terms of the Hydrocracker Loan, the Company is required to maintain
specified levels of working capital and tangible net worth. See Note 3 of Notes
to Condensed Consolidated Financial Statements.
CAPITAL SPENDING
During the first nine months of 1997, the Company's capital expenditures totaled
$95 million which were financed with available cash reserves,
internally-generated cash flows from operations and external financing. In
addition, the Company has obtained outside financing, as discussed above, for
expansion of the refinery hydrocracker unit. Although capital expenditures for
the remainder of the year had been projected to reach $65 million, actual
capital spending will be less due to a number of factors, including the extent
to which properties are acquired and the timing of capital projects. Capital
expenditures for the remainder of the year are expected to be funded by cash
flows from operations and external borrowings under the Company's credit
arrangements.
The Exploration and Production segment accounts for $101 million of the
projected capital expenditures, with $71 million planned for U.S. activities and
$30 million in Bolivia. Planned U.S. expenditures include $22 million for
property acquisitions; $17 million for development drilling (participation in 16
wells), field facilities and workovers; $13 million for leasehold, geological
and geophysical; and $19 million for exploratory drilling (participation in 14
wells). For the first nine months of 1997, actual U.S. expenditures were $32
million, principally for participation in the drilling of five development wells
(all completed) and nine exploratory wells (seven completed). In Bolivia,
projected capital expenditures of $30 million for the year included an increase
for the purchase of additional contract interests in July 1997 (see Note 2 of
Notes to Condensed Consolidated Financial Statements). The projection in
Bolivia includes $3 million for one exploratory well and $2 million for
workovers and field facilities, with the remainder planned for three-dimensional
seismic. Capital spending for the first nine months of 1997 totaled $26 million
in Bolivia, primarily for the purchase of additional contract interests,
exploratory drilling, seismic activity and workovers. Although the Company
continues to pursue exploratory, development and acquisition opportunities, as
discussed above, actual capital expenditures for the remainder of the year may
vary from projections.
18
<PAGE>
Capital spending for the Refining and Marketing segment is projected to be $50
million for the year, including costs for the refinery hydrocracker expansion
and a multi-year capital program to improve marketing operations. During the
first nine months of 1997, the Refining and Marketing segment had spent
approximately $31 million towards capital projects.
In the Marine Services segment, capital spending for 1997 is currently projected
at $8 million, a $21 million reduction from the original budget. This
projection, of which $5 million was spent during the first nine months of 1997,
is now primarily directed towards expansion and improvement of operations along
the Gulf of Mexico rather than acquisitions.
CASH FLOWS
Components of the Company's cash flows are set forth below (in millions):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows From (Used In):
Operating Activities . . . . . . . . . . . . . . $ 71.1 148.4
Investing Activities . . . . . . . . . . . . . . (98.2) (57.0)
Financing Activities . . . . . . . . . . . . . . 11.7 (1.8)
------ ------
Increase (Decrease) in Cash and Cash Equivalents . $ (15.4) 89.6
====== ======
</TABLE>
Operating cash flows of $71 million during the 1997 Period included a $46
million decrease in receivables due in part to collections related to high
product and crude oil sales volumes at 1996 year-end and to a Bolivian
receivable representing production sold in prior years, partially offset by
income tax and other payments. The 1996 Period operating cash flows of $148
million included a $67.5 million receipt from Tennessee Gas and reduced working
capital requirements. Net cash used in investing activities of $98 million
during the 1997 Period included capital expenditures of $58 million for the
Company's Exploration and Production activities, $31 million for Refining and
Marketing operations and $5 million for Marine Services. Net cash from
financing activities during the 1997 Period included borrowings of $16 million
under revolving credit facilities partially offset by payments of other
long-term debt and purchases of treasury stock. At September 30, 1997, the
Company's net working capital totaled $76 million, which included cash and cash
equivalents of $7 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 September 30, 1997, the Company's accruals for
environmental expenses amounted to $8.7 million, which included a noncurrent
liability of $3.1 million for remediation of KPL's 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 $3
million in 1997 and $8 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 4 of Notes to Condensed Consolidated
Financial Statements.
19
<PAGE>
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.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, on June 21, 1997, the Company received a letter
from the Office of the Attorney General of the State of Alaska ("State")
alleging that Kenai Pipe Line Company ("KPL"), a wholly-owned subsidiary of
the Company, failed to follow the terms of its Oil Discharge Prevention and
Contingency Plan ("Contingency Plan"), which allegation arose out of the
State's investigation of a December 5, 1995 spill into the Cook Inlet from
KPL's facility. The Company has settled all claims with the State by
agreeing to (i) pay $70,000 to the State as a civil penalty and to
reimburse the State for its costs; (ii) contribute $10,000 to the Cook
Inlet Regional Citizens Advisory Council to conduct additional operational
oversight of KPL's Contingency Plan; and (iii) complete a pollution
prevention project at KPL's facility with an estimated cost of $50,000 by
December 31, 1998.
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.
21
<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: November 14, 1997 /s/ BRUCE A. SMITH
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: November 14, 1997 /s/ DON E. BEERE
Don E. Beere
Vice President, Controller
(Chief Accounting Officer)
22
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
4.1 First Amendment to Amended and Restated Credit Agreement ("Credit
Facility") among the Company and Banque Paribas, individually, as an
Issuing Bank and as Administrative Agent ("Banque Paribas"), The Bank of
Nova Scotia, individually and as Documentation Agent ("Bank of Nova
Scotia"), and other financial institution parties thereto, effective as
of March 21, 1997.
4.2 Second Amendment to Credit Facility among the Company, Banque Paribas,
Bank of Nova Scotia and other financial institution parties thereto,
effective as of March 31, 1997.
4.3 Third Amendment to Credit Facility among the Company, Banque Paribas,
Bank of Nova Scotia and other financial institution parties thereto,
effective as of September 15, 1997.
27 Financial Data Schedule.
23
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
Among
TESORO PETROLEUM CORPORATION
as the Company
and
BANQUE PARIBAS
Individually, as an Issuing Bank and as Administrative Agent,
THE BANK OF NOVA SCOTIA
Individually and as Documentation Agent
and
THE FINANCIAL INSTITUTIONS
NOW OR HEREAFTER PARTIES HERETO
Effective as of March 21, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. DEFINITIONS
Section 1.01 Terms Defined Above . . . . . . . . . . . . .1
Section 1.02 Terms Defined in Credit Agreement . . . . . .1
Section 1.03 Other Definitional Provisions . . . . . . . .1
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
Section 2.01 Amendments and Supplements to Definitions . .2
Section 2.02 Amendments to Article VI. . . . . . . . . . .2
ARTICLE III. CONDITIONS
Section 3.01 Loan Documents. . . . . . . . . . . . . . . .2
Section 3.02 Corporate Proceedings of Loan Parties . . . .2
Section 3.03 Representations and Warranties. . . . . . . .3
Section 3.04 No Default. . . . . . . . . . . . . . . . . .3
Section 3.05 Security Instruments. . . . . . . . . . . . .3
Section 3.06 Other Instruments or Documents. . . . . . . .3
ARTICLE IV. MISCELLANEOUS
Section 4.01 Adoption, Ratification and Confirmation of
Credit Agreement. . . . . . . . . . . . . .3
Section 4.02 Ratification and Affirmation of Guaranty. . .3
Section 4.03 Successors and Assigns. . . . . . . . . . . .4
Section 4.04 Counterparts. . . . . . . . . . . . . . . . .4
Section 4.05 Number and Gender . . . . . . . . . . . . . .4
Section 4.06 Entire Agreement. . . . . . . . . . . . . . .4
Section 4.07 Invalidity. . . . . . . . . . . . . . . . . .4
Section 4.08 Titles of Articles, Sections and Subsections.4
Section 4.09 Governing Law . . . . . . . . . . . . . . . .5
-i-
<PAGE>
FIRST AMENDMENT AND SUPPLEMENT TO
CREDIT AGREEMENT
This FIRST AMENDMENT AND SUPPLEMENT TO CREDIT AGREEMENT (this "First
Amendment") executed effective as of March 21, 1997 (the "Effective Date"), is
by and among TESORO PETROLEUM CORPORATION, a Delaware corporation (the
"Company"); BANQUE PARIBAS, individually, as an Issuing Bank and as
Administrative Agent, THE BANK OF NOVA SCOTIA, individually and as Documentation
Agent, and each of the lenders that is a signatory hereto or which becomes a
party hereto as provided in Section 9.07 (individually, a "Lender" and,
collectively, the "Lenders").
W I T N E S S E T H:
WHEREAS, the Company, the Administrative Agent, the Documentation Agent, the
Issuing Bank and the Lenders are parties to that certain Amended and Restated
Credit Agreement dated as of June 7, 1996 (the "Credit Agreement"), pursuant to
which the Lenders agreed to make loans and issue Letters of Credit to and for
the account of the Company; and
WHEREAS, the Company, the Guarantors, the Administrative Agent, the
Documentation Agent, and the Lenders desire to amend the Credit Agreement in the
particulars hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
Section 1.01 Terms Defined Above. As used in this First Amendment, each
of the terms "Company", "Credit Agreement", "Effective Date", "First Amendment",
and "Lenders" shall have the meaning assigned to such term hereinabove.
Section 1.02 Terms Defined in Credit Agreement. Each term defined in the
Credit Agreement and used herein without definition shall have the meaning
assigned to such term in the Credit Agreement, unless expressly provided to the
contrary.
Section 1.03 Other Definitional Provisions.
(a) The words "hereby", "herein", "hereinafter", "hereof",
"hereto" and "hereunder" when used in this First Amendment shall
refer to this First Amendment as a whole and not to any particular
Article, Section, subsection or provision of this First Amendment.
(b) Section, subsection and Exhibit references herein are to
such Sections, subsections and Exhibits to this First Amendment
unless otherwise specified.
<PAGE>
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
The Company, the Administrative Agent, the Documentation Agent, the Issuing
Bank and the Lenders agree that the Credit Agreement is hereby amended,
effective as of the Effective Date, in the following particulars.
Section 2.01 Amendments and Supplements to Definitions.
(a) The definition of "Agreement" in Section 1.01 of the
Credit Agreement is hereby amended to mean the Credit Agreement, as
amended by this First Amendment and as the same may from time to
time be further amended, supplemented or modified.
(b) Section 1.01 of the Credit Agreement is hereby further
amended and supplemented by adding the following new definition
where alphabetically appropriate, which read in their entirety as
follows:
"First Amendment" shall mean that certain First Amendment
to Amended and Restated Credit Agreement dated as of March 21,
1997, by and among the Company, the Administrative Agent, the
Documentation Agent, the Issuing Bank and the Lenders.
Section 2.02 Amendments to Article VI. Section 6.09(e) of the Credit
Agreement is hereby amended in its entirety to read as follows:
"(e) routine loans or advances to employees made in the ordinary
course of business not to exceed (A) $1,500,000 at any one time outstanding
to any one employee and (B) $5,000,000 in the aggregate;"
ARTICLE III. CONDITIONS
The enforceability of this First Amendment against the Administrative Agent,
the Documentation Agent, the Issuing Bank and the Lenders is subject to the
satisfaction of the following conditions precedent:
Section 3.01 Loan Documents. The Administrative Agent shall have received
multiple original counterparts, as requested by the Administrative Agent, of
this First Amendment executed and delivered by a duly authorized officer of the
Company, each of the Guarantors, the Administrative Agent, the Documentation
Agent, each Issuing Bank and each Lender, as applicable;
Section 3.02 Corporate Proceedings of Loan Parties. The Administrative
Agent shall have received multiple copies, as requested by the Administrative
Agent, of the resolutions, in form and substance reasonably satisfactory to the
Administrative Agent, of the Boards of Directors of the
-2-
<PAGE>
Company and the Guarantors, authorizing the execution, delivery and performance
of this First Amendment, each such copy being attached to an original
certificate of the Secretary or an Assistant Secretary of the Company or the
Guarantors, as applicable, dated as of the Effective Date, certifying (i) that
the resolutions attached thereto are true, correct and complete copies of
resolutions duly adopted by written consents or at meetings of the Boards of
Directors, (ii) that such resolutions constitute all resolutions adopted with
respect to the transactions contemplated hereby, (iii) that such resolutions
have not been amended, modified, revoked or rescinded as of the Effective Date,
(iv) that the respective articles of incorporation and bylaws of the Company and
the Guarantors have not been amended or otherwise modified since the effective
date of the Credit Agreement, except pursuant to any amendments attached
thereto, and (v) as to the incumbency and signature of the officers of the
Company or the Guarantors, as applicable, executing this First Amendment.
Section 3.03 Representations and Warranties. Except as affected by the
transactions contemplated in the Credit Agreement and this First Amendment, each
of the representations and warranties made by the Company and the Guarantors in
or pursuant to the Financing Documents, including the Credit Agreement, shall be
true and correct in all material respects as of the Effective Date, as if made
on and as of such date.
Section 3.04 No Default. No Default or Event of Default shall have
occurred and be continuing as of the Effective Date.
Section 3.05 Security Instruments. All of the Security Instruments
(subject to any partial releases thereof) shall be in full force and effect and
provide to the Administrative Agent the security intended thereby to secure the
Indebtedness.
Section 3.06 Other Instruments or Documents. The Administrative Agent or
any Lender or counsel to the Administrative Agent shall receive such other
instruments or documents as they may reasonably request.
ARTICLE IV. MISCELLANEOUS
Section 4.01 Adoption, Ratification and Confirmation of Credit Agreement.
Each of the Company, the Guarantors, the Administrative Agent, the Documentation
Agent, the Issuing Bank and the Lenders does hereby adopt, ratify and confirm
the Credit Agreement, as amended hereby, and acknowledges and agrees that the
Credit Agreement, as amended hereby, is and remains in full force and effect.
Section 4.02 Ratification and Affirmation of Guaranty. Each of the
Guarantors hereby expressly (i) acknowledges the terms of this First Amendment,
(ii) ratifies and affirms its obligations under the Second Amended and Restated
Guaranty Agreement dated as of January 28, 1997, in favor of the Administrative
Agent, the Documentation Agent, the Issuing Bank and the Lenders, as amended,
supplemented or otherwise modified ("Guaranty Agreement"), (iii) acknowledges,
renews and extends its continued liability under the Guaranty Agreement and
agrees that such Guaranty
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<PAGE
Agreement remains in full force and effect; and (iv) guarantees to the
Administrative Agent, the Documentation Agent, each Issuing Bank and each Lender
to promptly pay when due all amounts owing or to be owing by it under the
Guaranty Agreement pursuant to the terms and conditions thereof.
Section 4.03 Successors and Assigns. This First Amendment shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns permitted pursuant to the Credit Agreement.
Section 4.04 Counterparts. This First Amendment may be executed by one or
more of the parties hereto in any number of separate counterparts, and all of
such counterparts taken together shall be deemed to constitute one and the same
instrument and shall be enforceable as of the Effective Date upon the execution
of one or more counterparts hereof by the Company, the Guarantors, the
Administrative Agent, the Documentation Agent, the Issuing Bank and the Lenders.
In this regard, each of the parties hereto acknowledges that a counterpart of
this First Amendment containing a set of counterpart execution pages reflecting
the execution of each party hereto shall be sufficient to reflect the execution
of this First Amendment by each necessary party hereto and shall constitute one
instrument.
Section 4.05 Number and Gender. Whenever the context requires, reference
herein made to the single number shall be understood to include the plural; and
likewise, the plural shall be understood to include the singular. Words
denoting sex shall be construed to include the masculine, feminine and neuter,
when such construction is appropriate; and specific enumeration shall not
exclude the general but shall be construed as cumulative. Definitions of terms
defined in the singular or plural shall be equally applicable to the plural or
singular, as the case may be, unless otherwise indicated.
Section 4.06 Entire Agreement. This First Amendment constitutes the
entire agreement among the parties hereto with respect to the subject hereof.
All prior understandings, statements and agreements, whether written or oral,
relating to the subject hereof are superseded by this First Amendment.
Section 4.07 Invalidity. In the event that any one or more of the
provisions contained in this First Amendment shall for any reason be held
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this First Amendment.
Section 4.08 Titles of Articles, Sections and Subsections. All titles or
headings to Articles, Sections, subsections or other divisions of this First
Amendment or the exhibits hereto, if any, are only for the convenience of the
parties and shall not be construed to have any effect or meaning with respect to
the other content of such Articles, Sections, subsections, other divisions or
exhibits, such other content being controlling as the agreement among the
parties hereto.
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Section 4.09 Governing Law. This First Amendment and the rights and
obligations of the parties hereunder and under the Credit Agreement shall be
governed by and construed in accordance with the laws of the State of Texas and
the United States of America.
THIS FIRST AMENDMENT, THE CREDIT AGREEMENT, AS AMENDED AND
SUPPLEMENTED HEREBY, THE NOTES, AND THE OTHER FINANCING DOCUMENTS
CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[SIGNATURES BEGIN NEXT PAGE]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed and delivered by their proper and duly authorized officers as
of the Effective Date.
COMPANY: TESORO PETROLEUM CORPORATION
By: /s/ G. A. Wright
Name: G. A. Wright
Title: Vice President and Treasurer
ADMINISTRATIVE AGENT,
ISSUING BANK AND LENDER: BANQUE PARIBAS, individually, as an Issuing
Bank and as Administrative Agent
By: /s/ B. Malone
Name: Brian Malone
Title: Vice President
By: /s/ Barton D. Schouest
Name: Barton D. Schouest
Title: Group Vice President
DOCUMENTATION AGENT,
ISSUING BANK AND LENDER: THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
Name: F.C.H. Ashby
Title: Senior Manager
Loan Operations
LENDERS: BANK OF SCOTLAND
By: /s/ Annie Chin Tat
Name: Annie Chin Tat
Title: Assistant Vice President
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CHRISTIANIA BANK OG KREDITKASSE
By: /s/ Williams S. Phillips
Name: Williams S. Phillips
Title: Vice President
By: /s/ Peter M. Dodge
Name: Peter M. Dodge
Title: First Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as an Issuing Bank
By: /s/ George R. Schanz
Name: George R. Schanz
Title: Vice President
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By: /s/ Michael J. Kolosowsky
Name: Michael J. Kolosowsky
Title: Vice President
NATIONAL BANK OF CANADA
By: /s/ Larry L. Sears
Name: Larry L. Sears
Title: Group Vice President
By: /s/ Doug G. Clark
Name: Doug G. Clark
Title: Vice President
S-2
<PAGE>
THE FROST NATIONAL BANK
By: /s/ Jennifer A. Crabtree
Name: Jennifer A. Crabtree
Title: Associate Relationship Manager
DEN NORSKE BANK ASA
By: /s/ Morten Bjornsen
Name: Morten Bjornsen
Title: Senior Vice President
By: /s/ J. Morten Kreutz
Name: J. Morten Kreutz
Title: Vice President
GUARANTORS: TESORO ALASKA PETROLEUM COMPANY
TESORO EXPLORATION AND PRODUCTION
COMPANY
TESORO PETROLEUM COMPANIES, INC.
DIGICOMP, INC.
TESORO TECHNOLOGY PARTNERS COMPANY
INTERIOR FUELS COMPANY
TESORO ALASKA PIPELINE COMPANY
TESORO NORTHSTORE COMPANY
TESORO REFINING, MARKETING & SUPPLY
COMPANY
TESORO NATURAL GAS COMPANY
TESORO BOLIVIA PETROLEUM COMPANY
TESORO VOSTOK COMPANY
KENAI PIPE LINE COMPANY
TESORO MARINE SERVICES COMPANY
TESORO COASTWIDE SERVICES COMPANY
COASTWIDE MARINE SERVICES, INC.
By: /s/ G. A. Wright
Name: G. A. Wright
Title: Vice President and Treasurer
S-3
<PAGE>
TESORO GAS RESOURCES COMPANY, INC.
TESORO FINANCIAL SERVICES HOLDING COMPANY
By: /s/ J. B. Fabian
Name: J. B. Fabian
Title: President
VICTORY FINANCE COMPANY
By: /s/ David W. Dupert
Name: David W. Dupert
Title: President
S-4
<PAGE>
TESORO E&P COMPANY, L.P.
By: TESORO EXPLORATION AND PRODUCTION
COMPANY, as its general partner
By: /s/ G. A. Wright
G. A. Wright
Vice President and Treasurer
S-5
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
Among
TESORO PETROLEUM CORPORATION
as the Company
and
BANQUE PARIBAS
Individually, as an Issuing Bank and as Administrative Agent,
THE BANK OF NOVA SCOTIA
Individually and as Documentation Agent
and
THE FINANCIAL INSTITUTIONS
NOW OR HEREAFTER PARTIES HERETO
Effective as of March 31, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. DEFINITIONS
Section 1.01 Terms Defined Above . . . . . . . . . . . . .1
Section 1.02 Terms Defined in Credit Agreement . . . . . .1
Section 1.03 Other Definitional Provisions . . . . . . . .1
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
Section 2.01 Amendments and Supplements to Definitions . .2
Section 2.02 Amendments to Article V . . . . . . . . . . .2
Section 2.03 Amendments to Article VI. . . . . . . . . . .3
ARTICLE III. CONDITIONS
Section 3.01 Loan Documents. . . . . . . . . . . . . . . .3
Section 3.02 Corporate Proceedings of Loan Parties . . . .4
Section 3.03 Representations and Warranties. . . . . . . .4
Section 3.04 No Default. . . . . . . . . . . . . . . . . .4
Section 3.05 Security Instruments. . . . . . . . . . . . .4
Section 3.06 Other Instruments or Documents. . . . . . . .4
ARTICLE IV. MISCELLANEOUS
Section 4.01 Adoption, Ratification and Confirmation of
Credit Agreement. . . . . . . . . . . . . .4
Section 4.02 Ratification and Affirmation of Guaranty. . .4
Section 4.03 Successors and Assigns. . . . . . . . . . . .5
Section 4.04 Counterparts. . . . . . . . . . . . . . . . .5
Section 4.05 Number and Gender . . . . . . . . . . . . . .5
Section 4.06 Entire Agreement. . . . . . . . . . . . . . .5
Section 4.07 Invalidity. . . . . . . . . . . . . . . . . .5
Section 4.08 Titles of Articles, Sections and Subsections.5
Section 4.09 Governing Law . . . . . . . . . . . . . . . .6
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SECOND AMENDMENT AND SUPPLEMENT TO
CREDIT AGREEMENT
This SECOND AMENDMENT AND SUPPLEMENT TO CREDIT AGREEMENT (this "Second
Amendment") executed effective as of March 31, 1997 (the "Effective Date"), is
by and among TESORO PETROLEUM CORPORATION, a Delaware corporation (the
"Company"); BANQUE PARIBAS, individually, as an Issuing Bank and as
Administrative Agent, THE BANK OF NOVA SCOTIA, individually and as Documentation
Agent, and each of the lenders that is a signatory hereto or which becomes a
party hereto as provided in Section 9.07 (individually, a "Lender" and,
collectively, the "Lenders").
W I T N E S S E T H:
WHEREAS, the Company, the Administrative Agent, the Documentation Agent, the
Issuing Bank and the Lenders are parties to that certain Amended and Restated
Credit Agreement dated as of June 7, 1996, as amended by First Amendment to
Amended and Restated Credit Agreement dated as of March 21, 1997 (the "Credit
Agreement"), pursuant to which the Lenders agreed to make loans and issue
Letters of Credit to and for the account of the Company; and
WHEREAS, the Company, the Guarantors, the Administrative Agent, the
Documentation Agent, and the Lenders desire to amend the Credit Agreement in the
particulars hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
Section 1.01 Terms Defined Above. As used in this Second Amendment, each
of the terms "Company", "Credit Agreement", "Effective Date", "Second
Amendment", and "Lenders" shall have the meaning assigned to such term
hereinabove.
Section 1.02 Terms Defined in Credit Agreement. Each term defined in the
Credit Agreement and used herein without definition shall have the meaning
assigned to such term in the Credit Agreement, unless expressly provided to the
contrary.
Section 1.03 Other Definitional Provisions.
(a) The words "hereby", "herein", "hereinafter", "hereof",
"hereto" and "hereunder" when used in this Second Amendment shall
refer to this Second Amendment as a whole and not to any particular
Article, Section, subsection or provision of this Second Amendment.
(b) Section, subsection and Exhibit references herein are to
such Sections, subsections and Exhibits to this Second Amendment
unless otherwise specified.
<PAGE>
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
The Company, the Administrative Agent, the Documentation Agent, the Issuing
Bank and the Lenders agree that the Credit Agreement is hereby amended,
effective as of the Effective Date, in the following particulars.
Section 2.01 Amendments and Supplements to Definitions.
(a) The definition of "Agreement" in Section 1.01 of the
Credit Agreement is hereby amended to mean the Credit Agreement, as
amended by this Second Amendment and as the same may from time to
time be further amended, supplemented or modified.
(b) Section 1.01 of the Credit Agreement is hereby further
amended and supplemented by adding the following new definition
where alphabetically appropriate, which reads in its entirety as
follows:
"Second Amendment" shall mean that certain Second
Amendment to Amended and Restated Credit Agreement dated as of
March 31, 1997, by and among the Company, the Administrative
Agent, the Documentation Agent, the Issuing Bank and the
Lenders.
Section 2.02 Amendments to Article V. Section 5.15(e) of the Credit
Agreement is hereby amended in its entirety to read as follows:
"(e) Engineering Reports. Promptly after December 31st and June 30th
of each year, but in no event later than 60 days after such date, a report
(the "Reserve Report") in form and substance satisfactory to the Majority
Lenders, and in the case of the December 31 Reserve Report, prepared by the
engineering staff of the Company and audited by Netherland, Sewell &
Associates or other independent petroleum consultant(s) acceptable to the
Majority Lenders (the previous acceptability of an independent petroleum
consultant satisfactory to the Majority Lenders shall have no bearing on
such consultant's present or future acceptability), which Reserve Report
shall evaluate the Hydrocarbon reserves included in the Mortgaged Property
as of each such date and which shall, together with any other information
reasonably requested by any Lender, set forth the total Proved Hydrocarbon
reserves by accepted and customary reserve category attributable to such
Mortgaged Property, together with a projection of the rate of production and
future net income with respect thereto as of each such date. The June 30
Reserve Report shall be an unaudited Reserve Report prepared by the
engineering staff of the Company and shall update the most recent Reserve
Report. Notwithstanding the foregoing, (i) if the Company or any of its
Subsidiaries acquires additional Oil and Gas Properties that, in the
determination of the Majority Lenders, materially affects
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<PAGE>
the E&P Borrowing Base, then the Majority Lenders may require that an
initial Reserve Report relating to such newly acquired Oil and Gas
Properties be prepared by Netherland, Sewell & Associates or other
independent petroleum consultants acceptable to the Majority Lenders, to be
delivered to the Lenders concurrently with the next required Reserve Report
and (ii) if there is a material adverse effect on Tesoro LP because of a
change in the value of the Hydrocarbon reserves included in the
determination of the E&P Borrowing Base (other than solely as the result of
a change in the price of natural gas), then the Majority Lenders may require
that a Reserve Report relating to all of the Oil and Gas Properties included
in the determination of the E&P Borrowing Base be prepared by Netherland,
Sewell & Associates or other independent petroleum consultants acceptable to
the Majority Lenders, to be delivered within 60 days after the request
therefor by the Administrative Agent on behalf of the Majority Lenders."
Section 2.03 Amendments to Article VI.
(a) Section 6.05(n) of the Credit Agreement is hereby amended in its
entirety to read as follows:
"(n) Indebtedness, not to exceed $18,000,000 in the
aggregate, incurred by Tesoro Northstore or Tesoro Alaska, to
be used for (i) the purchase (in fee or leasehold),
construction, and/or upgrading of retail outlet stores or (ii)
modifications to the hydrocracker located at the Kenai
Refinery, subject, however, to the execution of an
intercreditor agreement satisfactory in form and substance to
the Administrative Agent and Documentation Agent."
(b) Section 6.06(p) of the Credit Agreement is hereby amended in its
entirety to read as follows:
"(p) Liens securing up to $18,000,000 of Indebtedness
permitted by Section 6.05(n);"
ARTICLE III. CONDITIONS
The enforceability of this Second Amendment against the Administrative
Agent, the Documentation Agent, the Issuing Bank and the Lenders is subject to
the satisfaction of the following conditions precedent:
Section 3.01 Loan Documents. The Administrative Agent shall have received
multiple original counterparts, as requested by the Administrative Agent, of
this Second Amendment executed and delivered by a duly authorized officer of the
Company, each of the Guarantors, the Administrative Agent, the Documentation
Agent, each Issuing Bank and each Lender, as applicable;
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<PAGE>
Section 3.02 Corporate Proceedings of Loan Parties. The Administrative
Agent shall have received multiple copies, as requested by the Administrative
Agent, of the resolutions, in form and substance reasonably satisfactory to the
Administrative Agent, of the Boards of Directors of the Company and the
Guarantors, authorizing the execution, delivery and performance of this Second
Amendment, each such copy being attached to an original certificate of the
Secretary or an Assistant Secretary of the Company or the Guarantors, as
applicable, dated as of the Effective Date, certifying (i) that the resolutions
attached thereto are true, correct and complete copies of resolutions duly
adopted by written consents or at meetings of the Boards of Directors, (ii) that
such resolutions constitute all resolutions adopted with respect to the
transactions contemplated hereby, (iii) that such resolutions have not been
amended, modified, revoked or rescinded as of the Effective Date, (iv) that the
respective articles of incorporation and bylaws of the Company and the
Guarantors have not been amended or otherwise modified since the effective date
of the Credit Agreement, except pursuant to any amendments attached thereto, and
(v) as to the incumbency and signature of the officers of the Company or the
Guarantors, as applicable, executing this Second Amendment.
Section 3.03 Representations and Warranties. Except as affected by the
transactions contemplated in the Credit Agreement and this Second Amendment,
each of the representations and warranties made by the Company and the
Guarantors in or pursuant to the Financing Documents, including the Credit
Agreement, shall be true and correct in all material respects as of the
Effective Date, as if made on and as of such date.
Section 3.04 No Default. No Default or Event of Default shall have
occurred and be continuing as of the Effective Date.
Section 3.05 Security Instruments. All of the Security Instruments
(subject to any partial releases thereof) shall be in full force and effect and
provide to the Administrative Agent the security intended thereby to secure the
Indebtedness.
Section 3.06 Other Instruments or Documents. The Administrative Agent or
any Lender or counsel to the Administrative Agent shall receive such other
instruments or documents as they may reasonably request.
ARTICLE IV. MISCELLANEOUS
Section 4.01 Adoption, Ratification and Confirmation of Credit Agreement.
Each of the Company, the Guarantors, the Administrative Agent, the Documentation
Agent, the Issuing Bank and the Lenders does hereby adopt, ratify and confirm
the Credit Agreement, as amended hereby, and acknowledges and agrees that the
Credit Agreement, as amended hereby, is and remains in full force and effect.
Section 4.02 Ratification and Affirmation of Guaranty. Each of the
Guarantors hereby expressly (i) acknowledges the terms of this Second Amendment,
(ii) ratifies and affirms its obligations under the Second Amended and Restated
Guaranty Agreement dated as of
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<PAGE>
January 28, 1997, in favor of the Administrative Agent, the Documentation Agent,
the Issuing Bank and the Lenders, as amended, supplemented or otherwise modified
("Guaranty Agreement"), (iii) acknowledges, renews and extends its continued
liability under the Guaranty Agreement and agrees that such Guaranty Agreement
remains in full force and effect; and (iv) guarantees to the Administrative
Agent, the Documentation Agent, each Issuing Bank and each Lender to promptly
pay when due all amounts owing or to be owing by it under the Guaranty Agreement
pursuant to the terms and conditions thereof.
Section 4.03 Successors and Assigns. This Second Amendment shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns permitted pursuant to the Credit Agreement.
Section 4.04 Counterparts. This Second Amendment may be executed by one
or more of the parties hereto in any number of separate counterparts, and all of
such counterparts taken together shall be deemed to constitute one and the same
instrument and shall be enforceable as of the Effective Date upon the execution
of one or more counterparts hereof by the Company, the Guarantors, the
Administrative Agent, the Documentation Agent, the Issuing Bank and the Lenders.
In this regard, each of the parties hereto acknowledges that a counterpart of
this Second Amendment containing a set of counterpart execution pages reflecting
the execution of each party hereto shall be sufficient to reflect the execution
of this Second Amendment by each necessary party hereto and shall constitute one
instrument.
Section 4.05 Number and Gender. Whenever the context requires, reference
herein made to the single number shall be understood to include the plural; and
likewise, the plural shall be understood to include the singular. Words
denoting sex shall be construed to include the masculine, feminine and neuter,
when such construction is appropriate; and specific enumeration shall not
exclude the general but shall be construed as cumulative. Definitions of terms
defined in the singular or plural shall be equally applicable to the plural or
singular, as the case may be, unless otherwise indicated.
Section 4.06 Entire Agreement. This Second Amendment constitutes the
entire agreement among the parties hereto with respect to the subject hereof.
All prior understandings, statements and agreements, whether written or oral,
relating to the subject hereof are superseded by this Second Amendment.
Section 4.07 Invalidity. In the event that any one or more of the
provisions contained in this Second Amendment shall for any reason be held
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Second Amendment.
Section 4.08 Titles of Articles, Sections and Subsections. All titles or
headings to Articles, Sections, subsections or other divisions of this Second
Amendment or the exhibits hereto, if any, are only for the convenience of the
parties and shall not be construed to have any effect or meaning with
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<PAGE>
respect to the other content of such Articles, Sections, subsections, other
divisions or exhibits, such other content being controlling as the agreement
among the parties hereto.
Section 4.09 Governing Law. This Second Amendment and the rights and
obligations of the parties hereunder and under the Credit Agreement shall be
governed by and construed in accordance with the laws of the State of Texas and
the United States of America.
THIS SECOND AMENDMENT, THE CREDIT AGREEMENT, AS AMENDED AND
SUPPLEMENTED HEREBY, THE NOTES, AND THE OTHER FINANCING DOCUMENTS
CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF
THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[SIGNATURES BEGIN NEXT PAGE]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed and delivered by their proper and duly authorized officers as
of the Effective Date.
COMPANY: TESORO PETROLEUM CORPORATION
By: /s/ G. A. Wright
Name: G. A. Wright
Title: Vice President and Treasurer
ADMINISTRATIVE AGENT,
ISSUING BANK AND LENDER: BANQUE PARIBAS, individually, as an Issuing
Bank and as Administrative Agent
By: /s/ B. Malone
Name: Brian Malone
Title: Vice President
By: /s/ Larry Robinson
Name: Larry Robinson
Title: Vice President
DOCUMENTATION AGENT,
ISSUING BANK AND LENDER: THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
Name: F.C.H. Ashby
Title: Senior Manager
Loan Operations
LENDERS: BANK OF SCOTLAND
By: /s/ Annie Chin Tat
Name: Annie Chin Tat
Title: Assistant Vice President
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<PAGE>
CHRISTIANIA BANK OG KREDITKASSE
By: /s/ Williams S. Phillips
Name: Williams S. Phillips
Title: Vice President
By: /s/ Peter M. Dodge
Name: Peter M. Dodge
Title: First Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as an Issuing Bank
By: /s/ D. Andrew Bateman
Name: D. Andrew Bateman
Title: Authorized Agent
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By: /s/ Michael J. Kolosowsky
Name: Michael J. Kolosowsky
Title: Vice President
NATIONAL BANK OF CANADA
By: /s/ John T. Dixon
Name: John T. Dixon
Title: Vice President
By: /s/ Doug G. Clark
Name: Doug G. Clark
Title: Vice President
S-2
<PAGE>
THE FROST NATIONAL BANK
By: /s/ Jim Crosby
Name: Jim Crosby
Title: SVP
DEN NORSKE BANK ASA
By: /s/ Byron L. Cooley
Name: Byron L. Cooley
Title: Senior Vice President
By: /s/ Morten Bjornsen
Name: Morten Bjornsen
Title: Senior Vice President
GUARANTORS: TESORO ALASKA PETROLEUM COMPANY
TESORO EXPLORATION AND PRODUCTION
COMPANY
TESORO PETROLEUM COMPANIES, INC.
DIGICOMP, INC.
TESORO TECHNOLOGY PARTNERS COMPANY
INTERIOR FUELS COMPANY
TESORO ALASKA PIPELINE COMPANY
TESORO NORTHSTORE COMPANY
TESORO REFINING, MARKETING & SUPPLY
COMPANY
TESORO NATURAL GAS COMPANY
TESORO BOLIVIA PETROLEUM COMPANY
TESORO VOSTOK COMPANY
KENAI PIPE LINE COMPANY
TESORO MARINE SERVICES COMPANY
TESORO COASTWIDE SERVICES COMPANY
COASTWIDE MARINE SERVICES, INC.
By: /s/ G. A. Wright
Name: G. A. Wright
Title: Vice President and Treasurer
S-3
<PAGE>
TESORO GAS RESOURCES COMPANY, INC.
TESORO FINANCIAL SERVICES HOLDING COMPANY
By: /s/ J. B. Fabian
Name: Jeffrey B. Fabian
Title: President
VICTORY FINANCE COMPANY
By: /s/ David W. Dupert
Name: David W. Dupert
Title: President
TESORO E&P COMPANY, L.P.
By: TESORO EXPLORATION AND PRODUCTION
COMPANY, as its general partner
By: /s/ G. A. Wright
Name: G. A. Wright
Title: Vice President and Treasurer
S-4
THIRD AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
Among
TESORO PETROLEUM CORPORATION
as the Company
and
BANQUE PARIBAS
Individually, as an Issuing Bank and as Administrative Agent,
THE BANK OF NOVA SCOTIA
Individually and as Documentation Agent
and
THE FINANCIAL INSTITUTIONS
NOW OR HEREAFTER PARTIES HERETO
Effective as of September 15, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. DEFINITIONS
Section 1.01 Terms Defined Above . . . . . . . . . . . . . . .1
Section 1.02 Terms Defined in Credit Agreement . . . . . . . .1
Section 1.03 Other Definitional Provisions . . . . . . . . . .1
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
Section 2.01 Amendments and Supplements to Definitions . . . .2
Section 2.02 Amendments to Article II. . . . . . . . . . . . .5
Section 2.03 Amendments to Article V . . . . . . . . . . . . .6
Section 2.04 Amendments to Article VI. . . . . . . . . . . . .6
ARTICLE III. CONDITIONS
Section 3.01 Loan Documents. . . . . . . . . . . . . . . . . .8
Section 3.02 Corporate Proceedings of Loan Parties . . . . . .8
Section 3.03 Representations and Warranties. . . . . . . . . .8
Section 3.04 No Default. . . . . . . . . . . . . . . . . . . .8
Section 3.05 Security Instruments. . . . . . . . . . . . . . .8
Section 3.06 Other Instruments or Documents. . . . . . . . . .8
ARTICLE IV. MISCELLANEOUS
Section 4.01 Adoption, Ratification and Confirmation of
Credit Agreement . . . . . . . . . . . . . . . .9
Section 4.02 Ratification and Affirmation of Guaranty. . . . .9
Section 4.03 Successors and Assigns. . . . . . . . . . . . . .9
Section 4.04 Counterparts. . . . . . . . . . . . . . . . . . .9
Section 4.05 Number and Gender . . . . . . . . . . . . . . . .9
Section 4.06 Entire Agreement. . . . . . . . . . . . . . . . .9
Section 4.07 Invalidity. . . . . . . . . . . . . . . . . . . 10
Section 4.08 Titles of Articles, Sections and Subsections. . 10
Section 4.09 Governing Law . . . . . . . . . . . . . . . . . 10
-i-
<PAGE>
THIRD AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Third
Amendment") executed effective as of September 15, 1997 (the "Effective Date"),
is by and among TESORO PETROLEUM CORPORATION, a Delaware corporation (the
"Company"); BANQUE PARIBAS, individually, as an Issuing Bank and as
Administrative Agent, THE BANK OF NOVA SCOTIA, individually and as Documentation
Agent, and each of the lenders that is a signatory hereto or which becomes a
party hereto as provided in Section 9.07 (individually, a "Lender" and,
collectively, the "Lenders").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company, the Administrative Agent, the Documentation Agent, the
Issuing Bank and the Lenders are parties to that certain Amended and Restated
Credit Agreement dated as of June 7, 1996, as amended by First Amendment to
Amended and Restated Credit Agreement dated as of March 21, 1997 and Second
Amendment to Amended and Restated Credit Agreement dated as of March 31, 1997
(the "Credit Agreement"), pursuant to which the Lenders agreed to make loans and
issue Letters of Credit to and for the account of the Company; and
WHEREAS, the Company, the Guarantors, the Administrative Agent, the
Documentation Agent, and the Lenders desire to amend the Credit Agreement in the
particulars hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
Section 1.01 Terms Defined Above. As used in this Third Amendment, each of
the terms "Company", "Credit Agreement", "Effective Date", "Third Amendment",
and "Lenders" shall have the meaning assigned to such term hereinabove.
Section 1.02 Terms Defined in Credit Agreement. Each term defined in the
Credit Agreement and used herein without definition shall have the meaning
assigned to such term in the Credit Agreement, unless expressly provided to the
contrary.
Section 1.03 Other Definitional Provisions.
(a) The words "hereby", "herein", "hereinafter", "hereof", "hereto"
and "hereunder" when used in this Third Amendment shall refer to this Third
Amendment as a whole and not to any particular Article, Section, subsection
or provision of this Third Amendment.
<PAGE>
(b) Section, subsection and Exhibit references herein are to such
Sections, subsections and Exhibits to this Third Amendment unless otherwise
specified.
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
The Company, the Administrative Agent, the Documentation Agent, the Issuing
Bank and the Lenders agree that the Credit Agreement is hereby amended,
effective as of the Effective Date, in the following particulars.
Section 2.01 Amendments and Supplements to Definitions.
(a) The definition of "Agreement" in Section 1.01 of the Credit
Agreement is hereby amended to mean the Credit Agreement, as amended by this
Third Amendment and as the same may from time to time be further amended,
supplemented or modified.
(b) The following terms, which are defined in Section 1.01 of the
Credit Agreement, are hereby amended in their entirety to read as follows:
"Applicable Margin" shall mean (i) 0% per annum with respect to
Base Rate Loans, and (ii) 1.0% per annum with respect to Eurodollar
Loans; provided, however, that during any Deficiency Period, the
"Applicable Margin" as would otherwise be in effect shall be increased
by 2.0% per annum for both Base Rate Loans and Eurodollar Loans.
"Borrowing Base" shall mean at any time the amount equal to the
sum of (i) eighty five percent (85%) of Eligible Accounts plus (ii)
seventy percent (70%) of the Loan Value of Eligible Inventory; plus
(iii) one hundred percent (100%) of the E&P Borrowing Base.
"Cash Flow" shall mean, as to any Person, the sum of the net
income of such Person after taxes for any period plus, to the extent
deducted from net income, all non-cash items, including, but not
limited to, depreciation, depletion and impairment, amortization of
leasehold and intangibles, deferred taxes and write-offs of exploration
costs and producing lease abandonments plus, but without duplication,
to the extent deducted from net income, cash not to exceed $15,000,000,
and all non-cash items related to that certain special incentive
compensation award program which will be funded if the Company's stock
price reaches an average price per share of $20 or higher over 20
consecutive trading days after June 30, 1997, and before December 31,
1998; in each case for such period and determined as to such Person.
-2-
<PAGE>
"Consolidated Tangible Net Worth" shall mean, at any time and from
time to time, the sum of preferred or common stock not subject to a
mandatory redemption obligation (other than a mandatory redemption
obligation that can be satisfied by the tendering of common stock of
the Company) as of the date of determination, par value of common
stock, additional paid-in capital of common stock and retained
earnings, plus to the extent deducted from net income, cash not to
exceed $15,000,000 and all non-cash items related to that certain
special incentive compensation award program which will be funded if
the Company's stock price reaches an average price per share of $20 or
higher over 20 consecutive trading days after June 30, 1997, and before
December 31, 1998, less treasury stock (if any), less goodwill, cost in
excess of net assets acquired and all other assets as are properly
classified as intangible assets, all as determined as to the Company
and its Subsidiaries on a consolidated basis.
"EBITDA" shall mean, as to the Company and its Subsidiaries on a
consolidated basis and, for each Rolling Period, the amount equal to
net income of the Company and its Subsidiaries, less any non-cash
income included in net income to the extent the applicable cash was not
received at any time during such Rolling Period, plus, to the extent
deducted from net income, interest expense, depreciation, depletion and
impairment, amortization of leasehold and intangible, other non-cash
expenses (including, but not limited to taxes (excluding Bolivian taxes
paid in kind), plus, but without duplication, to the extent deducted
from net income, cash not to exceed $15,000,000 and all non-cash items
related to that certain special incentive compensation award program
which will be funded if the Company's stock price reaches an average
price per share of $20 or higher over 20 consecutive trading days after
June 30, 1997, and before December 31, 1998; provided, that, gains or
losses on the disposition of assets shall not be included in EBITDA.
"Eligible Inventory" shall mean, at any time, all inventory (as
such term is defined in Section 9-109(4) of the UCC) of the Inventory
Borrowing Base Parties, including, without limitation, but without
duplication, the In Transit Inventory, inventory in the Tesoro
Terminals, inventory at the KPL Facility (as defined in clause (x)
below), and Consigned Inventory for which each of the following
statements is accurate and complete (and the Company by including such
inventory in any computation of the Borrowing Base shall be deemed to
represent and warrant to the Administrative Agent, each Issuing Bank
and each Lender the accuracy and completeness of such statements):
(a) Said inventory is, and at all times will be, free and clear
of all Liens (except for perfected Liens in favor of the Administrative
Agent and, in the case of In Transit Inventory described in the
definition of In Transit Inventory below, Liens securing the payment of
tariffs owed by Tesoro Alaska to a common carrier
-3-
<PAGE>
transporting feedstocks or blendstocks through the Trans-Alaska
Pipeline System or the KPL Facility, as defined below), and the
Administrative Agent has a first priority, perfected security interest
in such inventory;
(b) Said inventory does not include capitalized goods which are
part of inventory of any Inventory Borrowing Base Party;
(c) Said inventory is located in the states of Alaska,
California, Texas, Louisiana, Oregon or Washington, or the Yukon
territory or British Columbia, Canada, or to the extent that it
qualifies as In Transit Inventory, is located in the territorial waters
of the states of Alaska, California, Oregon, Texas, Louisiana,
Washington or the Yukon territory or British Columbia, Canada (and not
in international waters); and
(d) Said inventory, excluding Consigned Inventory, is not stored
at any terminal other than a Tesoro Terminal.
For purposes of this definition, "In Transit Inventory" shall mean, at any
time, feedstocks, blendstocks or refined products, including asphalt, solely
owned by an Inventory Borrowing Base Party that are in transit:
(x) to the Kenai Refinery (i) from Pump Station No. 1 on the
Trans-Alaska Pipeline System, including feedstocks or blendstocks in
storage at the Valdez Terminal in Valdez, Alaska, (ii) in a tanker or
barge located within Alaska, California, Washington or the Yukon
territory or British Columbia, Canada or their respective territorial
waters (and not in international waters) that has been time chartered
by any Inventory Borrowing Base Party, (iii) in or on any pipeline,
terminal, dock or storage tank of the KPL in the area of Cook Inlet,
Alaska (the "KPL Facility"), or (iv) in the Cook Inlet pipeline system
in the area of Cook Inlet, Alaska, including feedstocks or blendstocks
in storage at the Drift River Terminal in Drift River, Alaska;
(y) from the Kenai Refinery (i) in a tanker or barge located
within Alaska, California, Oregon, Washington or the Yukon territory or
British Columbia, Canada or their respective territorial waters (and
not in international waters) that has been time chartered by any
Inventory Borrowing Base Party, (ii) in the Anchorage Pipeline owned by
Tesoro Alaska Pipeline Company (formerly known as the Nikiski Alaska
Pipeline), or (iii) in the KPL Facility (as defined in Clause (x)
above); or
(z) between Alaska, California, Washington, Texas, Louisiana
Oregon or the Yukon territory or British Columbia, Canada and in their
respective territorial waters (and not in international waters) and is
inventory in which the Administrative Agent has been granted a first
priority perfected Lien which is in effect at such time.
-4-
<PAGE>
(c) Section 1.01 of the Credit Agreement is hereby further amended and
supplemented by adding the following new definitions where alphabetically
appropriate, which reads in their entirety as follows:
"Consigned Inventory" shall mean inventory owned by an Inventory
Borrowing Base Party being held in storage tanks of a third party
pursuant to a consignment arrangement between such Inventory Borrowing
Base Party and such third party, but not commingled with any other
inventory or goods of such third party or other Persons, and for which
such Inventory Borrowing Base Party has complied with the requirements
of the Uniform Commercial Code, including Section 9.114 thereof, such
that such Inventory Borrowing Base Party will have priority over a
secured party who is or becomes a creditor of such third party.
"Third Amendment" shall mean that certain Third Amendment to
Amended and Restated Credit Agreement dated as of September 15, 1997,
by and among the Company, the Administrative Agent, the Documentation
Agent, the Issuing Bank and the Lenders.
Section 2.02 Amendments to Article II. Section 2.20(a) of the Credit
Agreement is hereby amended by replacing the last sentence thereof in its
entirety with the following sentence:
"During the period from and after the effective date of the Third Amendment
until the next Redetermination Date occurring after October, 1997, unless
redetermined pursuant to any unscheduled redeterminations, the amount of the
E&P Borrowing Base shall be $56,000,000."
-5-
<PAGE>
Section 2.03 Amendments to Article V. Section 5.15(h) of the Credit
Agreement is hereby amended in its entirety to read as follows:
"(h) Quarterly Borrowing Base Reports. As soon as available and in
any event by the 105th day after the end of the fourth calendar quarter of
each year and the 60th day after the end of each of the first three calendar
quarters of each year of the Company, a quarterly Borrowing Base Report
dated and reflecting amounts as of the last day of such calendar year or
quarter, as the case may be, which have been reconciled to the financial
statements delivered pursuant to Subsection 5.15(a) or (b), as the case may
be, and in the case of the fourth calendar quarter, as soon as available and
in any event by the 60th day after the end of the fourth calendar quarter of
each year, a preliminary Borrowing Base Report for the prior four calendar
quarters not reconciled to such financial statements, upon which the
Borrowing Base will be determined for the interim period until receipt of
the reconciled Borrowing Base Report for such period; provided, however, the
Majority Lenders may, at any time, require up to four additional Borrowing
Base Reports per calender year and the Company may, at any time, submit up
to four additional Borrowing Base Reports per calender year, in addition to
the four additional Borrowing Base Reports required by the Majority
Lenders."
Section 2.04 Amendments to Article VI.
(a) Section 6.01 of the Credit Agreement is hereby amended in its entirety
to read as follows:
"Section 6.01 Consolidated Tangible Net Worth. Permit Consolidated
Tangible Net Worth as of the end of the calendar quarter to be less than
$189,950,000 plus 75% of the Company's consolidated net income aggregated
for each of the calendar quarters from and after July 1, 1997 in which
consolidated net income is positive; provided if at any time the Company
issues equity securities of any kind, such minimum amount of Consolidated
Tangible Net Worth shall be permanently increased by an amount equal to 75%
of the net cash proceeds from the issuance of such equity securities."
(b) Section 6.02 of the Credit Agreement is hereby amended in its entirety
to read as follows:
"Section 6.02 Consolidated Current Ratio. Permit the ratio of (i)
consolidated current assets to (ii) consolidated current liabilities
(excluding current maturities of the Notes) to be less than 1.3 to 1.0 at
any time. As used in this Section 6.02 "consolidated current assets" shall
mean assets which would, in accordance with GAAP, be included as current
assets on a consolidated balance sheet of the Company and its Subsidiaries
and "consolidated current liabilities" shall mean liabilities which would,
in accordance with GAAP, be included as current liabilities on a
consolidated
-6-
<PAGE>
balance sheet of the Company and its Subsidiaries; provided, however, for
the sole purpose of calculating such ratio, consolidated current liabilities
shall not include accrued amounts related to that certain special incentive
compensation award program which will be funded if the Company's stock price
reaches an average price per share of $20 or higher over 20 consecutive
trading days after June 30, 1997, and before December 31, 1998, except to
the extent that the cash component of such accrual exceeds $15,000,000, such
excess shall be included in consolidated current liabilities."
(c) Section 6.03 of the Credit Agreement is hereby amended by replacing the
second sentence thereof in its entirety to read as follows:
"As used in this Section 6.03, "cash flow coverage ratio" shall mean, as to
the Company, and for the Rolling Period ending on such Quarterly Date, the
ratio of (i) the sum of (A) Cash Flow of the Company and its Subsidiaries on
a consolidated basis, plus (B) the difference between (x) the lesser of the
Aggregate Revolving Credit Commitments or the Borrowing Base on the last day
of the applicable Rolling Period and (y) the outstanding principal amount of
the Revolving Credit Loans on the first day of the last calendar quarter of
such Rolling Period, plus (C) interest expense of the Company and its
Subsidiaries on a consolidated basis to (ii) the sum of (A) regularly
scheduled principal payments of Funded Indebtedness paid in cash, plus (B)
cash interest expense of the Company and its Subsidiaries on a consolidated
basis, plus (C) capital expenditures by the Company and its Subsidiaries on
a consolidated basis, excluding capital expenditures made by way of (x)
exchanges of equity and (y) loans provided by third parties to the extent
not prohibited by Section 6.05, plus (D) cash dividends actually paid by the
Company and its Subsidiaries on a consolidated basis."
(d) Section 6.05 of the Credit Agreement is hereby amended by adding
thereto a new Subsection (o) as follows:
"(o) Unsecured letters of credit (other than Letters of Credit) not to
exceed $25,000,000 in the aggregate; provided, however, if an unsecured
letter of credit is issued for the benefit of the State of Alaska, all
unsecured letters of credit (other than Letters of Credit) shall not exceed
$40,000,000 in the aggregate."
(e) Clause (v) of Section 6.08 is hereby amended in its entirety to read as
follows:
"(v) in an aggregate amount not to exceed $10,000,000, repurchase the
common stock issued by the Company from (A) shareholders owning 100 shares
or less pursuant to an oddlot buy back program and (B) the open market or
private sales for employee benefit or compensation plans, and"
-7-
<PAGE>
ARTICLE III. CONDITIONS
The enforceability of this Third Amendment against the Administrative Agent,
the Documentation Agent, the Issuing Bank and the Lenders is subject to the
satisfaction of the following conditions precedent:
Section 3.01 Loan Documents. The Administrative Agent shall have received
multiple original counterparts, as requested by the Administrative Agent, of
this Third Amendment executed and delivered by a duly authorized officer of the
Company, each of the Guarantors, the Administrative Agent, the Documentation
Agent, each Issuing Bank and each Lender.
Section 3.02 Corporate Proceedings of Loan Parties. The Administrative
Agent shall have received multiple copies, as requested by the Administrative
Agent, of the resolutions, in form and substance reasonably satisfactory to the
Administrative Agent, of the Boards of Directors of the Company and the
Guarantors, authorizing the execution, delivery and performance of this Third
Amendment, each such copy being attached to an original certificate of the
Secretary or an Assistant Secretary of the Company or the Guarantors, as
applicable, dated as of the Effective Date, certifying (i) that the resolutions
attached thereto are true, correct and complete copies of resolutions duly
adopted by written consents or at meetings of the Boards of Directors, (ii) that
such resolutions constitute all resolutions adopted with respect to the
transactions contemplated hereby, (iii) that such resolutions have not been
amended, modified, revoked or rescinded as of the Effective Date, (iv) that the
respective articles of incorporation and bylaws of the Company and the
Guarantors have not been amended or otherwise modified since the effective date
of the Credit Agreement, except pursuant to any amendments attached thereto, and
(v) as to the incumbency and signature of the officers of the Company or the
Guarantors, as applicable, executing this Third Amendment.
Section 3.03 Representations and Warranties. Except as affected by the
transactions contemplated in the Credit Agreement and this Third Amendment, each
of the representations and warranties made by the Company and the Guarantors in
or pursuant to the Financing Documents, including the Credit Agreement, shall be
true and correct in all material respects as of the Effective Date, as if made
on and as of such date.
Section 3.04 No Default. No Default or Event of Default shall have
occurred and be continuing as of the Effective Date.
Section 3.05 Security Instruments. All of the Security Instruments
(subject to any partial releases thereof) shall be in full force and effect and
provide to the Administrative Agent the security intended thereby to secure the
Indebtedness.
Section 3.06 Other Instruments or Documents. The Administrative Agent or
any Lender or counsel to the Administrative Agent shall receive such other
instruments or documents as they may reasonably request.
-8-
<PAGE>
ARTICLE IV. MISCELLANEOUS
Section 4.01 Adoption, Ratification and Confirmation of Credit Agreement.
Each of the Company, the Guarantors, the Administrative Agent, the Documentation
Agent, the Issuing Bank and the Lenders does hereby adopt, ratify and confirm
the Credit Agreement, as amended hereby, and acknowledges and agrees that the
Credit Agreement, as amended hereby, is and remains in full force and effect.
Section 4.02 Ratification and Affirmation of Guaranty. Each of the
Guarantors hereby expressly (i) acknowledges the terms of this Third Amendment,
(ii) ratifies and affirms its obligations under the Second Amended and Restated
Guaranty Agreement dated as of January 28, 1997, in favor of the Administrative
Agent, the Documentation Agent, the Issuing Bank and the Lenders, as amended,
supplemented or otherwise modified ("Guaranty Agreement"), (iii) acknowledges,
renews and extends its continued liability under the Guaranty Agreement and
agrees that such Guaranty Agreement remains in full force and effect; and (iv)
guarantees to the Administrative Agent, the Documentation Agent, each Issuing
Bank and each Lender to promptly pay when due all amounts owing or to be owing
by it under the Guaranty Agreement pursuant to the terms and conditions thereof.
Section 4.03 Successors and Assigns. This Third Amendment shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns permitted pursuant to the Credit Agreement.
Section 4.04 Counterparts. This Third Amendment may be executed by one or
more of the parties hereto in any number of separate counterparts, and all of
such counterparts taken together shall be deemed to constitute one and the same
instrument and shall be enforceable as of the Effective Date upon the execution
of one or more counterparts hereof by the Company, the Guarantors, the
Administrative Agent, the Documentation Agent, the Issuing Bank and the Lenders.
In this regard, each of the parties hereto acknowledges that a counterpart of
this Third Amendment containing a set of counterpart execution pages reflecting
the execution of each party hereto shall be sufficient to reflect the execution
of this Third Amendment by each necessary party hereto and shall constitute one
instrument.
Section 4.05 Number and Gender. Whenever the context requires, reference
herein made to the single number shall be understood to include the plural; and
likewise, the plural shall be understood to include the singular. Words
denoting sex shall be construed to include the masculine, feminine and neuter,
when such construction is appropriate; and specific enumeration shall not
exclude the general but shall be construed as cumulative. Definitions of terms
defined in the singular or plural shall be equally applicable to the plural or
singular, as the case may be, unless otherwise indicated.
Section 4.06 Entire Agreement. This Third Amendment constitutes the
entire agreement among the parties hereto with respect to the subject hereof.
All prior understandings, statements and
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<PAGE>
agreements, whether written or oral, relating to the subject hereof are
superseded by this Third Amendment.
Section 4.07 Invalidity. In the event that any one or more of the
provisions contained in this Third Amendment shall for any reason be held
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Third Amendment.
Section 4.08 Titles of Articles, Sections and Subsections. All titles or
headings to Articles, Sections, subsections or other divisions of this Third
Amendment or the exhibits hereto, if any, are only for the convenience of the
parties and shall not be construed to have any effect or meaning with respect to
the other content of such Articles, Sections, subsections, other divisions or
exhibits, such other content being controlling as the agreement among the
parties hereto.
Section 4.09 Governing Law. This Third Amendment and the rights and
obligations of the parties hereunder and under the Credit Agreement shall be
governed by and construed in accordance with the laws of the State of Texas and
the United States of America.
THIS THIRD AMENDMENT, THE CREDIT AGREEMENT, AS AMENDED AND
SUPPLEMENTED HEREBY, THE NOTES, AND THE OTHER FINANCING DOCUMENTS
CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[SIGNATURES BEGIN NEXT PAGE]
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third
Amendment to be duly executed and delivered by their proper and duly
authorized officers as of the Effective Date.
COMPANY: TESORO PETROLEUM CORPORATION
By: /s/ G. A. Wright
Name: G.A. Wright
Title: Vice President and Treasurer
GUARANTORS: TESORO ALASKA PETROLEUM COMPANY
TESORO EXPLORATION AND PRODUCTION
COMPANY
TESORO PETROLEUM COMPANIES, INC.
DIGICOMP, INC.
TESORO TECHNOLOGY PARTNERS COMPANY
INTERIOR FUELS COMPANY
TESORO ALASKA PIPELINE COMPANY
TESORO NORTHSTORE COMPANY
TESORO REFINING, MARKETING & SUPPLY
COMPANY
TESORO NATURAL GAS COMPANY
TESORO BOLIVIA PETROLEUM COMPANY
TESORO VOSTOK COMPANY
KENAI PIPE LINE COMPANY
TESORO MARINE SERVICES COMPANY
TESORO COASTWIDE SERVICES COMPANY
COASTWIDE MARINE SERVICES, INC.
By: /s/ G. A. Wright
Name: G.A. Wright
Title: Vice President and Treasurer
TESORO GAS RESOURCES COMPANY, INC.
TESORO FINANCIAL SERVICES HOLDING
COMPANY
By: /s/ Jeffrey B. Fabian
Name: Jeffrey B. Fabian
Title: President
S-1
<PAGE>
VICTORY FINANCE COMPANY
By: /s/ David W. Dupert
Name: David W. Dupert
Title: President
TESORO E&P COMPANY, L.P.
By: TESORO EXPLORATION AND
PRODUCTION COMPANY, as its general
partner
By: /s/ G.A. Wright
Name: G.A. Wright
Title: Vice President and Treasurer
ADMINISTRATIVE AGENT,
ISSUING BANK AND LENDER: BANQUE PARIBAS, individually, as an Issuing
Bank and as Administrative Agent
By: /s/ Brian Malone
Name: Brian Malone
Title: Vice President
By: /s/ Barton D. Schouest
Name: Barton D. Schouest
Title: Managing Director
DOCUMENTATION AGENT,
ISSUING BANK AND LENDER: THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
Name: F.C.H. Ashby
Title: Senior Manager
Loan Operations
S-2
<PAGE>
LENDERS: BANK OF SCOTLAND
By: /s/ Annie Chin Tat
Name: Annie Chin Tat
Title: Vice President
CHRISTIANIA BANK OG KREDITKASSE
By: /s/ William S. Phillips
Name: William S. Phillips
Title: Vice President
By: /s/ Peter M. Dodge
Name: Peter M. Dodge
Title: First Vice President
THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as an Issuing Bank
By: /s/ Dixon P. Schultz
Name: Dixon P. Schultz
Title: Vice President
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By: /s/ Michael J. Kolosowsky
Name: Michael J. Kolosowsky
Title: Vice President
S-3
<PAGE>
NATIONAL BANK OF CANADA
By: /s/ William Handley
Name: William Handley
Title: Vice President
By: /s/ Doug Clark
Name: Doug Clark
Title: Vice President
THE FROST NATIONAL BANK
By: /s/ Jim Crosby
Name: Jim Crosby
Title: Senior Vice President
DEN NORSKE BANK ASA
By: /s/ Bryon L. Cooley
Name: Bryon L. Cooley
Title: Senior Vice President
By: /s/ William V. Moyer
Name: William V. Moyer
Title: First Vice President
S-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 NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,379
<SECURITIES> 0
<RECEIVABLES> 85,319
<ALLOWANCES> 1,420
<INVENTORY> 74,902
<CURRENT-ASSETS> 175,632
<PP&E> 667,918
<DEPRECIATION> 291,113
<TOTAL-ASSETS> 587,814
<CURRENT-LIABILITIES> 99,769
<BONDS> 90,104
<COMMON> 4,416
0
0
<OTHER-SE> 323,187
<TOTAL-LIABILITY-AND-EQUITY> 587,814
<SALES> 695,021
<TOTAL-REVENUES> 699,630
<CGS> 611,168
<TOTAL-COSTS> 611,168
<OTHER-EXPENSES> 34,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,634
<INCOME-PRETAX> 38,040
<INCOME-TAX> 14,292
<INCOME-CONTINUING> 23,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,748
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
</TABLE>
