<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 29, 1998
TESORO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-3473 95-0862768
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
</TABLE>
8700 TESORO DRIVE, SAN ANTONIO, TEXAS 78217-6218
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 210-828-8484
================================================================================
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On May 29, 1998, Tesoro Petroleum Corporation ("Tesoro" or the "Company")
completed the acquisition (the "Hawaii Acquisition") of all of the outstanding
capital stock of BHP Petroleum Americas Refining Inc. and BHP Petroleum South
Pacific Inc. (together, "BHP Hawaii"), both of which were affiliates of The
Broken Hill Proprietary Company Limited ("BHP"). The acquisition includes a
95,000 barrel per day ("bpd") refinery in Kapolei, Hawaii, on the island of
Oahu, approximately 20 miles west of Honolulu, and 32 (two of which are owned,
but dealer operated) retail gasoline stations on Oahu, Maui and Hawaii.
Tesoro paid $243.5 million in cash at closing for the acquisition, including
$68.5 million for estimated working capital, which is subject to post-closing
adjustments to reflect actual net working capital at closing. In addition,
Tesoro issued an unsecured, non-interest bearing promissory note (the "BHP
Note") in the amount of $50 million for the Hawaii Acquisition, which is payable
in five equal annual installments, beginning on the eleventh anniversary date of
the closing. The BHP Note provides for earlier payment if the future financial
performance of BHP Hawaii exceeds certain thresholds.
To ensure the continuity of crude supply to the Hawaii refinery, the Company
also entered into a two-year agreement with an affiliate of BHP to assist Tesoro
in acquiring crude oil feedstock sourced outside of North America and arranging
for transportation of such crude oil to the Hawaii refinery.
To finance the cash consideration paid in the Hawaii Acquisition, the Company
entered into a senior secured interim credit facility (the "Interim Credit
Facility") provided by Lehman Commercial Paper, Inc., an affiliate of Lehman
Brothers Inc. (which served as a financial advisor to the Company in connection
with the Hawaii Acquisition). The Interim Credit Facility is comprised of a term
loan facility aggregating $750 million and a revolving credit facility in the
amount of $350 million. The Interim Credit Facility is guaranteed by
substantially all of the Company's active direct and indirect subsidiaries
(collectively, the "Guarantors"), and is secured by substantially all the
domestic assets of the Company and each of the Guarantors.
2
<PAGE> 3
ITEM 5. OTHER EVENTS
Washington Acquisition
On May 1, 1998, Tesoro entered into a stock purchase agreement (the "Washington
Agreement") to purchase (the "Washington Acquisition") all of the outstanding
capital stock of Shell Anacortes Refining Company ("Shell Washington"), an
affiliate of Shell Oil Company ("Shell"). Shell Washington owns and operates a
108,000 bpd refinery (the "Washington Refinery") located in Anacortes,
Washington (on the Puget Sound, approximately 60 miles north of Seattle).
Under the terms of the Washington Agreement, the Company has agreed to pay at
closing a purchase price of $237 million plus estimated working capital as of
closing. The Company has made a $5 million earnest money deposit and has agreed
to deposit in escrow by June 30, 1998, the balance of the purchase price. The
Washington Agreement contains representations and warranties and other general
provisions that are customary for transactions of this nature.
Shell is selling Shell Washington pursuant to agreements with the U.S. Federal
Trade Commission (the "FTC") and the states of Oregon and Washington (the
"States") resulting from its western states refining and marketing joint venture
with Texaco. The closing of the Washington Acquisition is contingent upon the
approval of the FTC and the States and other customary conditions. Tesoro
currently anticipates that the Washington Acquisition will close on or after
August 1, 1998.
Private Placement
Pursuant to Rule 135c of the Securities Act of 1933, as amended, attached
hereto as Exhibit 99.2 and incorporated herein by reference is a press release
by Tesoro Petroleum Corporation announcing plans to offer Senior Subordinated
Notes in a private offering.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The combined financial statements of BHP Petroleum
Americas Refining Inc. and BHP Petroleum South Pacific
Inc. have been previously filed in a Current Report on
Form 8-K dated May 13, 1998.
Included as Exhibit 99.1 to this Form 8-K are the
audited balance sheets of Shell Anacortes Refining
Company as of December 31, 1996 and 1997 and the
related statements of income, stockholders' equity and
cash flows for the period from inception (January 4,
1996) through December 31, 1996 and the year ended
December 31, 1997 and the unaudited balance sheets of
Shell Anacortes Refining Company as of March 31, 1998
and the related statements of income and cash flows for
the three months ended March 31, 1997 and 1998.
(b) PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma combined condensed financial
statements of the Company and BHP Petroleum Americas
Refining Inc. and BHP Petroleum South Pacific Inc. have
been previously filed in a Current Report on Form 8-K
dated May 13, 1998.
(c) EXHIBITS
*2.1 Stock Sale Agreement, dated May 1, 1998, among the
Company, Shell Anacortes Refining Company and Shell
Refining Holding Company (incorporated by reference to
the Company's Form 10-Q for the period ended March 31,
1998)
+12.1 Computation of Ratio of Earnings to Fixed Charges.
+23.1 Consent of Price Waterhouse LLP.
+23.2 Consent of Arthur Andersen LLP.
+23.3 Consent of Netherland, Sewell & Associates, Inc.
+99.1 Audited Financial Statements of Shell Anacortes
Refining Company as of December 31, 1996 and 1997 and
Unaudited Financial Statements of Shell Anacortes
Refining Company as of March 31, 1998.
+99.2 Press release issued by Tesoro Petroleum Corporation
on June 1, 1998.
- ---------------------------
* Previously filed.
+ Filed herewith.
3
<PAGE> 4
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 hereunto duly authorized.
TESORO PETROLEUM CORPORATION
REGISTRANT
Date: June 5, 1998 By: /s/ JAMES C. REED, JR.
-----------------------------------
James C. Reed, Jr.
Executive Vice President,
General Counsel and Secretary
4
<PAGE> 5
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
*2.1 Stock Sale Agreement, dated May 1, 1998, among the
Company, Shell Anacortes Refining Company and Shell
Refining Holding Company (incorporated by reference to
the Company's Form 10-Q for the period ended March 31,
1998)
+12.1 Computation of Ratio of Earnings to Fixed Charges.
+23.1 Consent of Price Waterhouse LLP.
+23.2 Consent of Arthur Andersen LLP.
+23.3 Consent of Netherland, Sewell & Associates, Inc.
+99.1 Audited Financial Statements of Shell Anacortes
Refining Company as of December 31, 1996 and 1997 and
Unaudited Financial Statements of Shell Anacortes
Refining Company as of March 31, 1998.
+99.2 Press release issued by Tesoro Petroleum Corporation
on June 1, 1998.
- ----------------------------
* Previously filed.
+ Filed herewith.
5
<PAGE> 1
EXHIBIT 12.1
TESORO PETROLEUM CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months
Ended
March 31
--------------------
1997 1998
-------- --------
<S> <C> <C>
EARNINGS:
Earnings before income taxes and extraordinary loss
on extinguishments of debt, net ................................. $ 9,575 $10,890
Interest expense, net of capitalized interest ...................... 1,570 2,665
Amortization of debt discount ...................................... -- --
Amortization of debt issuance costs ................................ -- --
Estimated interest portion of rents (a) ............................ 3,406 2,910
------- -------
Total Earnings ............................................. $14,551 $16,465
======= =======
FIXED CHARGES:
Interest expenses, whether expensed or capitalized ................. $ 1,570 $ 2,665
Amortization of debt discount ...................................... -- --
Amortization of debt issuance costs ................................ -- --
Estimated interest portion of rents (a) ............................ 3,406 2,910
------- -------
Total Fixed Charges ........................................ $ 4,976 $ 5,575
======= =======
PREFERRED STOCK DIVIDEND REQUIREMENTS ................................. $ -- $ --
======= =======
COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDEND REQUIREMENTS .............................................. $ 4,976 $ 5,575
======= =======
RATIO OF EARNINGS TO FIXED CHARGES .................................... 2.92 2.95
======= =======
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS .............................. 2.92 2.95
======= =======
</TABLE>
- ----------
(a) For a majority of leases, the interest portion of rents was estimated by
using the Company's incremental borrowing rate in effect at the inception
of the leases. For the remaining leases, interest expense was estimated
by using one third of the rental payments. Total rental expense,
including marine charters, was $11.7 million and $12.3 million for the
three months ended March 31, 1997 and 1998, respectively.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Accountant
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-51789) of
Tesoro Petroleum Corporation of our report dated May 29, 1998 relating to the
financial statements of Shell Anacortes Refining Company, which appears in the
Current Report on Form 8-K of Tesoro Petroleum Corporation dated June 5, 1998.
We also consent to the reference to us under the heading "Experts" in the two
Prospectus Supplements for the Common Stock and Premium Income Equity Securities
Offerings, which are a part of such Registration Statement.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Houston, Texas
June 5, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation by
reference in Registration Statement File No. 333-51789 of our report dated March
31, 1998 covering the audited combined financial statements of BHP Petroleum
Americas Refining Inc. and BHP Petroleum South Pacific Inc. included in Tesoro
Petroleum Corporation's Form 8-K, dated May 13, 1998, and to the reference to
our Firm under the heading "Experts" in the two Prospectus Supplements for the
Common Stock and Premium Income Equity Securities Offerings, which are a part of
such Registration Statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Honolulu, Hawaii
June 4, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the reference of our firm in the Annual Report on
Form 10-K of Tesoro Petroleum Corporation for the year ended December 31, 1997,
and the incorporation by reference of such report into the Registration
Statement on Form S-3 (No. 333-51789) of our reserve report dated as of
December 31, 1997. We also consent to the references to us, including the
reference under the heading "Experts" in the Prospectus Supplements, which are a
part of such Registration Statement on Form S-3.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ FREDERIC D. SEWELL
---------------------------------
Frederic D. Sewell
President
Dallas, Texas
June 5, 1998
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and
Shareholder of Shell Anacortes Refining Company
In our opinion, the accompanying balance sheet and the related statements of
income and shareholder's equity and of cash flows present fairly, in all
material respects, the financial position of Shell Anacortes Refining Company at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the year ended December 31, 1997 and for the period from inception (January
4, 1996) through December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Houston, Texas
May 29, 1998
<PAGE> 2
SHELL ANACORTES REFINING COMPANY
STATEMENT OF INCOME
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE THREE MONTHS ENDED
(JANUARY 4, 1996) YEAR ENDED MARCH 31,
THROUGH DECEMBER 31, --------------------
DECEMBER 31, 1996 1997 1997 1998
----------------- ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Sales
Third Parties......................... $296,168 $ 544,295 $130,553 $127,513
Related Parties....................... 525,120 545,623 160,662 73,918
Interest and other income................ 732 52 120 30
-------- ---------- -------- --------
Total Revenues........................... 822,020 1,089,970 291,335 201,461
-------- ---------- -------- --------
COSTS AND EXPENSES:
Purchases of raw materials
Third Parties......................... 542,949 888,057 260,887 161,142
Related Parties....................... 153,848 61,557 11,442 19,475
Other operating expenses................. 58,352 68,750 3,000 11,025
Depreciation and amortization............ 8,607 12,715 3,101 3,703
Operating taxes.......................... 11,458 18,584 5,043 3,752
Selling, general and administrative...... 7,547 14,277 3,042 2,512
Research and development................. 1,083 1,137 357 291
Interest expense on advances............. 9 252 37 10
-------- ---------- -------- --------
783,853 1,065,329 286,909 201,910
-------- ---------- -------- --------
Income (loss) before income taxes........ 38,167 24,641 4,426 (449)
Income tax............................... 13,444 8,902 1,636 (80)
-------- ---------- -------- --------
Net income (loss)........................ $ 24,723 $ 15,739 $ 2,790 $ (369)
======== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 3
SHELL ANACORTES REFINING COMPANY
BALANCE SHEET
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 25 $ 25 $ 25
Advances to Shell Oil Company......................... -- 6,470 --
Owing by related parties.............................. 45,991 17,512 11,313
Other receivables..................................... 1,486 363 1,287
Inventories of product and crude...................... 4,987 25,321 37,398
Inventories of materials and supplies................. 3,676 3,774 3,907
Other current assets.................................. 1,777 1,789 4,349
-------- -------- --------
Total Current Assets.......................... 57,942 55,254 58,279
Property, Plant and Equipment at cost, less
accumulated depreciation and amortization.......... 188,876 184,424 184,641
Other Noncurrent Assets............................... 7,524 8,093 8,774
-------- -------- --------
TOTAL ASSETS.................................. $254,342 $247,771 $251,694
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable...................................... $ 5,601 $ 5,030 $ 6,266
Advances from Shell Oil Company....................... 5,656 -- --
Income, operating, and consumer taxes................. 4,557 1,290 952
Owing to related parties.............................. 637 380 3,553
Other current liabilities............................. 3,855 3,753 3,881
-------- -------- --------
Total Current Liabilities..................... 20,306 10,453 14,652
Long-Term Liabilities................................. 13,240 14,149 14,412
Deferred Income Taxes................................. 24,059 25,693 25,523
-------- -------- --------
Total Liabilities............................. 57,605 50,295 54,587
-------- -------- --------
Shareholder's Equity:
Common Stock:
3,000 shares authorized, issued and outstanding at
$1.00 par value.................................. 3 3 3
Additional Paid in Capital......................... 181,011 181,011 181,011
Retained Earnings.................................. 15,723 16,462 16,093
-------- -------- --------
Total Shareholder's Equity.................... 196,737 197,476 197,107
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.... $254,342 $247,771 $251,694
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 4
SHELL ANACORTES REFINING COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- --------
<S> <C> <C> <C> <C>
Initial Capital Contribution........................ $-- $ 1 $ -- $ 1
Contribution of Anacortes refinery net assets....... 3 181,010 -- 181,013
Net income.......................................... -- -- 24,723 24,723
Dividends........................................... -- -- (9,000) (9,000)
--- -------- -------- --------
Balance at December 31, 1996........................ 3 181,011 15,723 196,737
Net income.......................................... -- -- 15,739 15,739
Dividends........................................... -- -- (15,000) (15,000)
--- -------- -------- --------
Balance at December 31, 1997........................ 3 181,011 16,462 197,476
Net income (loss) (unaudited)....................... -- -- (369) (369)
--- -------- -------- --------
Balance at March 31, 1998 (unaudited)............... $ 3 $181,011 $ 16,093 $197,107
=== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 5
SHELL ANACORTES REFINING COMPANY
STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FROM INCEPTION THREE MONTHS ENDED
(JANUARY 4, 1996) FOR THE MARCH 31,
THROUGH YEAR ENDED --------------------
DECEMBER 31, 1996 DECEMBER 31, 1997 1997 1998
----------------- ----------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flow Provided by Operating Activities:
Net income (loss).............................. $ 24,723 $ 15,739 $ 2,790 $ (369)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.............. 8,607 12,715 3,101 3,703
Deferred income taxes...................... 2,620 1,634 1,019 (170)
(Increases) decreases in working capital:
Owing by related parties................ (33,525) 28,479 45,990 6,199
Other receivables....................... (1,419) 1,123 (22,169) (924)
Inventories of product and crude........ 1,013 (20,334) (19,170) (12,077)
Inventories of materials and supplies... 1,252 (98) (48) (133)
Other current assets.................... (447) (12) 88 (2,560)
Accounts payable........................ 2,240 (571) (1,896) 1,236
Income, operating and consumer taxes.... 3,642 (3,267) 1,462 (338)
Owing to related parties................ (1,750) (257) 6,572 3,173
Other current liabilities............... 122 (102) (594) 128
Other noncurrent items..................... 1,450 340 141 (418)
-------- -------- -------- --------
Net Cash Provided by Operating Activities...... 8,528 35,389 17,286 (2,550)
-------- -------- -------- --------
Cash Flow Used for Investing Activities:
Capital expenditures........................... (4,892) (8,157) (2,625) (3,456)
Proceeds from property sales and salvage, net
of removal costs............................. (293) (106) 20 (464)
Advances to Shell Oil Company.................. -- (6,470) (5,275) 6,470
-------- -------- -------- --------
Net Cash Used for Investing Activities......... (5,185) (14,733) (7,880) 2,550
-------- -------- -------- --------
Cash Flow Used for Financing Activities:
Proceeds from issuance of common stock......... 1 -- -- --
Dividends to shareholder....................... (9,000) (15,000) (3,750) --
Advances from Shell Oil Company................ 5,656 (5,656) (5,656) --
-------- -------- -------- --------
Net Cash Used for Financing Activities......... (3,343) (20,656) (9,406) --
-------- -------- -------- --------
Net increase in cash and cash equivalents........ $ -- $ -- $ -- $ --
======== ======== ======== ========
Cash and cash equivalents
Balance at Beginning of period................. $ 25 $ 25 $ 25 $ 25
Increase in cash and cash equivalents...... -- -- -- --
-------- -------- -------- --------
Balance at End of period....................... $ 25 $ 25 $ 25 $ 25
======== ======== ======== ========
Interest Paid.................................... $ 9 $ 252 $ 37 $ 9
======== ======== ======== ========
Income taxes paid................................ $ 28,355 $ 7,700 $ -- $ 1,000
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 6
SHELL ANACORTES REFINING COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Shell Anacortes Refining Company ("the Company") was incorporated in the
state of Delaware on January 4, 1996. The total number of authorized shares for
the Company is 3,000 shares of common stock with a par value of $1 per share. On
April 1, 1996, Shell Oil Products Company ("SOPC"), a subsidiary of Shell Oil
Company ("Shell"), acquired 100 shares of common stock of the Company for
$1,000. On April 30, 1996, through a series of transactions amongst Shell
subsidiaries, the 100 shares of the Company's stock, which were previously owned
by SOPC, were transferred to Shell Refining Holdings Company ("SRHC") in
exchange for their stock.
On May 1, 1996, a series of transactions were executed amongst Shell and
certain subsidiaries of Shell which culminated in SRHC contributing the assets
and property described in the Subscription Agreement as Anacortes Refinery
Assets, comprised of property, plant and equipment, crude and product inventory,
store stock, catalysts and deferred taxes on property, plant and equipment, to
the Company in exchange for 2,900 shares of the Company's stock. Prior to May 1,
1996, the Anacortes Refinery Assets were owned by Shell. Therefore, refinery
operations for the Company effectively began on May 1, 1996 upon contribution of
the assets to the Company. The Company recorded the contributed assets at the
predecessor's book value of approximately $181,013 thousand as the assets were
contributed and ultimately held by entities under control.
On May 1, 1996, simultaneously with the contribution of the Anacortes
Refinery Assets, the Company assumed certain Shell net liabilities, as follows,
in exchange for an equal amount of cash to settle these net liabilities (in
thousands):
<TABLE>
<S> <C>
Net Working Capital Deficits................................ $ 7,066
Deferred Tax Assets......................................... (497)
Prepaid Qualified Pension Plan.............................. (7,000)
Unqualified Pension Plan Liabilities........................ 500
Other Postretirement Employee Benefits Liabilities.......... 11,900
Deferred Tax on Postretirement Liabilities.................. (1,890)
-------
Cash Received............................................... $10,079
=======
</TABLE>
The cash payment was accounted for as a component of the Revolver (See Note
3).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Uses of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents -- Cash equivalents consist of all highly liquid
investments that are readily convertible to cash and have a maturity of three
months or less at date of acquisition.
Inventories -- Inventories of crude oil and products are valued at the
lower of cost, predominantly on a last-in, first-out (LIFO) basis, or market,
and include certain costs directly related to the production process. Materials
and supplies are carried at average cost or less.
Depreciation and Amortization -- Properties, plant and equipment are
depreciated on a straight-line basis over their estimated useful lives which
range between four and twenty years. Gains and losses are not recognized for
normal retirements of properties, plant and equipment subject to composite group
amortization or depreciation. Gains or losses from abnormal retirements or sales
are recognized currently in income. Expenditures for maintenance and repairs are
expensed as incurred.
<PAGE> 7
SHELL ANACORTES REFINING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes -- The Company follows Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109
prescribes an asset and liability approach in accounting for income taxes. It
requires that deferred tax assets and liabilities be determined using enacted
tax laws for the estimated future tax effects attributable to temporary
differences and carryforwards; the effects of future tax laws or rates are not
anticipated. Under this method, future financial results will be impacted by the
effect of future changes in income tax rates on cumulative deferred income tax
balances.
Fair Value of Financial Instruments -- The reported amounts of financial
instruments such as cash equivalents, advances to Shell Oil Company and owing by
related parties, approximate fair value because of their short maturities.
Concentration of risk -- All of the Company's trade receivables are from
Shell. Although collection of these receivables could be influenced by economic
factors affecting the petroleum industry, the risk of significant loss is
considered remote.
Impairment of Long-Lived Assets -- Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" requires that long-lived assets and
certain identifiable intangibles to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
affected assets may not be recoverable. Long-lived assets were tested for
impairment by comparing carrying amounts with estimated future cash flows
expected from use of the assets and from their disposition. Estimates of future
cash flows were developed utilizing internal estimates of future costs, product
prices, capital costs and salvage values. At December 31, 1996 and December 31,
1997, no impairment write-down of reported balances was necessary.
Interim Financial Data -- The interim financial data for the three months
ended March 31, 1998 and March 31, 1997 is unaudited; however, in the opinion of
the Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the interim period.
NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES
The Company has entered into transactions with related parties including
Shell and certain of its subsidiaries. Such transactions were in the ordinary
course of business and include the purchase, sale and transportation of crude
oil and refined products, as well as charges for certain general, administrative
and other functions performed by Shell and its affiliates for the Company. The
aggregate amounts of related party transactions during 1997 and 1996 were (in
thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JANUARY 4, 1996)
THROUGH
1997 DECEMBER 31, 1996
-------- -----------------
<S> <C> <C>
Sales and other operating revenue......................... $545,623 $525,120
Purchases and transportation.............................. 61,557 153,848
Selling, general, and administrative...................... 12,952 6,553
Research and development.................................. 1,137 1,083
Interest income on Revolver............................... 35 732
Interest expense on Revolver.............................. 252 9
</TABLE>
Purchases, Sales and Receivables
Under various agreements between Shell and the Company, Shell arranges on
behalf of the Company feedstock purchases in the Company's name from third
parties and refined product sales in the Company's name to third parties. For
feedstock purchases, Shell remits payments to the suppliers and charges the
<PAGE> 8
SHELL ANACORTES REFINING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company for the cost via intercompany accounts. Pursuant to an agreement with
Shell for sales to third parties, the Company records an intercompany receivable
from Shell and Shell collects the payments from the customers on behalf of the
Company and credits the Company through the intercompany account. As a result of
this agreement, the Company has sales and purchases with third parties yet cash
on these transactions is settled via the Company's owing by/to related parties
account with Shell. Since the legal right of offset exists with Shell, trade
receivables and trade payables are reflected as a net amount within the owing
by/to related parties balance. The Company also has entered into transactions
with related parties for the purchase of feedstocks and the sale of refined
products. The related trade payables and trade receivables are also included in
the owing by/to related parties balance.
At December 31, 1997 and 1996, trade receivables and trade payables,
including the reconciliation to owing by related were as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Trade receivables........................................... $86,502 $111,367
Trade payables.............................................. 67,914 83,708
------- --------
Net owing by related parties balance for trade receivables
and payables.............................................. 18,588 27,659
Receivable for overpayment of taxes (see below)............. -- 17,872
Other owing by related parties, net......................... (1,076) 460
------- --------
Owing by related parties.................................... $17,512 $ 45,991
======= ========
</TABLE>
Advances with Shell
The Company is party to a Revolving Credit and Cash Management Agreement
(the "Revolver") with Shell. Under the Agreement, the Company will advance its
excess cash (including net cash resulting from the proceeds of the refining
business) to Shell, and Shell will pay the Company interest on such advances at
a rate equal to the prime rate established from time to time by The Chase
Manhattan Bank (N.A.), less one percent. In addition, under the Agreement, Shell
has irrevocably committed to make a line of credit available to the Company in
an aggregate principal amount not exceeding $40 million. The Company may draw on
this line of credit on demand. Funds advanced by Shell to the Company under this
line of credit will bear interest at the prime rate established from time to
time by The Chase Manhattan Bank (N.A.).
The funds maintained in the Revolver are liquid and available for use at
the Company's discretion. Funds advanced to Shell under the Revolver as of
December 31, 1997 amounted to $6.5 million and the interest rate on the amount
outstanding at December 31, 1997 was 7.5%. As of December 31, 1996, funds
advanced to the Company by Shell amounted to $5.7 million and the interest rate
on the amount outstanding at December 31, 1996 was 8.25%. Under the Revolver
there were amounts advanced to Shell and amounts due to Shell at various times
throughout the period from the date of commencement of the Revolver (April 1,
1996) to December 31, 1997. Interest income earned on the funds advanced to
Shell for the year ended December 31, 1997 and the period from inception
(January 4, 1996) to December 31, 1996 amounted to $35 thousand and $732
thousand, respectively. Interest expense incurred on the funds advanced from
Shell for the year ended December 31, 1997 and the period from inception
(January 4, 1996) to December 31, 1996 amounted to $252 thousand and $9
thousand, respectively.
Cost Sharing and other charges
Under the Cost Sharing Agreement between Shell and the Company, research,
development, and technology service costs related to the refining of crude oil
and other raw materials are allocated to the
<PAGE> 9
SHELL ANACORTES REFINING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company based upon a percentage equal to the Company's equivalent distillation
capacity as compared to the combined capacity for all refineries participating
under the agreement. The Company is required under the agreement to pay Shell
its share of estimated research, development, and technology service costs on a
monthly basis. The Company is also charged for certain overhead administrative
expenses at rates which have been agreed upon by the Company and Shell.
Receivable for overpayment of taxes
The Company files a separate tax return; however, for the period from
inception (January 4, 1996) through December 31, 1996, the Company paid their
estimated tax liability to SRHC which then remitted the taxes for itself and
certain of its subsidiaries, including the Company, to the Internal Revenue
Service. The amount submitted by the Company exceeded their tax liability by
approximately $17 million due to estimates of the tax liability differing from
actual results. The amount due for the overpayment is recorded in the owing by
related parties balance.
NOTE 4 -- INVENTORIES OF CRUDE OILS AND REFINED PRODUCTS
Inventories are carried on a LIFO basis which was lower than current cost
by $1.6 million at December 31, 1997 and $12.3 million at December 31, 1996.
A portion of Shell's inventory was held on consignment by the Company. The
title to and ownership of such inventory is intended to remain with Shell until
purchased by the refining company in accordance with the Feedstock Consignment
Agreement. For the year ended December 31, 1997 and the period from inception
(January 4, 1996) through December 31, 1996, $13,395 thousand and $14,690
thousand, respectively, of crude and refined products were purchased from
consignment. As of December 31, 1997, all the consigned crude inventory had been
purchased by the Company with some product inventory remaining on consignment.
During the period from May 1, 1996, the date of contribution of the
Anacortes Refinery Assets, to December 31, 1996 inventory quantities were
reduced. This reduction resulted in a liquidation of LIFO inventory quantities
carried at lower costs prevailing in prior years, as the inventory was
contributed at book value, as compared with the 1996 purchases for the period
from May 1, 1996 to December 31, 1996, the effect of which decreased operating
expenses by approximately $2,825 thousand.
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment as of December 31, 1997 and
1996, respectively, are reported at historical cost as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
COST RESERVE* NET COST RESERVE* NET
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Land.................. $ 2,808 $ 2,808 $ 2,808 $ 2,808
Manufacturing
assets.............. 342,844 $161,228 181,616 334,693 $148,625 186,068
-------- -------- -------- -------- -------- --------
Total....... $345,652 $161,228 $184,424 $337,501 $148,625 $188,876
======== ======== ======== ======== ======== ========
</TABLE>
* Accumulated depreciation and amortization.
<PAGE> 10
SHELL ANACORTES REFINING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- TAXES
Operating and income taxes incurred by the Company in 1997 and 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JANUARY 4, 1996)
THROUGH
DECEMBER 31,
1997 1996
------- -----------------
<S> <C> <C>
Operating Taxes
- ---------------
Hazardous substance....................................... $ 8,092 $ 3,978
Business and occupation................................... 5,745 4,980
Real and personal property................................ 2,089 1,192
Payroll................................................... 1,377 657
Other..................................................... 1,281 651
------- -------
$18,584 $11,458
======= =======
Federal and Other Incomes Taxes
- -------------------------------
Current:
Federal................................................ $ 6,758 $10,484
State.................................................. 510 340
Deferred:
Federal................................................ 1,634 2,620
------- -------
$ 8,902 $13,444
======= =======
</TABLE>
Total income tax expense for 1997 and 1996 was equivalent to an effective
tax rate of 36% and 35%, respectively. Reconciliation to the expected tax at the
U.S. statutory rate of 35% is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JANUARY 4, 1996)
THROUGH
DECEMBER 31,
1997 1996
------ -----------------
<S> <C> <C>
Expected tax at statutory rate.............................. $8,624 $13,358
State tax................................................... 332 221
Other....................................................... (54) (135)
------ -------
$8,902 $13,444
====== =======
</TABLE>
<PAGE> 11
SHELL ANACORTES REFINING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes are provided for the temporary differences between
the tax basis of the Company's assets and liabilities and the amounts reported
in the financial statements. Significant components of deferred tax liabilities
and assets as of December 31, 1997 and December 31, 1996 are as follows (in
millions):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax liabilities:
- -------------------------
Depreciation of properties, plant, and equipment.......... $30 $27
Other..................................................... 2 1
--- ---
Total deferred tax liabilities.................... 32 28
--- ---
Deferred tax assets:
- --------------------
Other postretirement liabilities.......................... 4 4
Other..................................................... 2 --
--- ---
Total deferred tax assets......................... 6 4
--- ---
Net deferred tax liabilities...................... $26 $24
=== ===
</TABLE>
The Company has assessed the need for establishing a valuation allowance
for its deferred tax assets and has determined that such an allowance is
unnecessary.
NOTE 7 -- POSTRETIREMENT BENEFITS
The employees associated with fuels operations of the refinery became
employees of the refinery subsidiary on April 1, 1996. In participation with
Shell, the Company currently provides health care benefits for retired employees
and their dependents. Eligibility for such benefits requires retirement from the
Company with entitlement to an immediate pension generally upon the earlier of
the attainment of age 50, when such age plus years of service equals 80, or the
attainment of age 65. Other postretirement benefits provided to the employees
include life insurance benefits. These life insurance benefits are primarily
funded by employees; as a result, the cost of such benefits to the Company is
not material.
The health care benefits for retired employees and their dependents are
provided by Shell's unfunded defined benefit plans. The benefit is defined as
the Company's contributions to such plans. Annually, retirees are advised of the
amount of the Company's monthly contribution to the plans for the following year
and the monthly amount such retirees must pay for the particular coverage
desired. Retiree health care costs allocated from Shell amounted to $503
thousand in 1997 and $364 thousand in 1996. Other long-term liabilities include
$11.9 million in connection with retiree health care cost allocations as of both
December 31, 1997 and 1996.
As of May 1, 1996, the pre-existing liabilities of the refinery
subsidiaries for post-retirement benefits of $11.9 million were conveyed to the
Company in addition to an equal amount of cash to settle the net liabilities,
based on actuarial data.
<PAGE> 12
SHELL ANACORTES REFINING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- PENSION PLAN AND PROVIDENT FUND
The Company participates with Shell in the Shell Pension Plan (Plan), the
Benefit Restoration Plan, the Senior Staff Plan, and the Shell Provident Fund.
The Plan covers substantially all of the Company's employees. Benefits are based
on years of service and the employee's average final compensation. The prepaid
cost (accrued liability) conveyed to the Company on May 1, 1996 in addition to
an equal amount of cash to settle the net liability, based on actuarial data was
as follows (in millions):
<TABLE>
<CAPTION>
MAY 1,
1996
------
<S> <C>
Qualified Pension Plan
- ----------------------
Employees................................................. $ 3
Pensioners and deferred vested............................ 4
----
$ 7
====
Non-qualified Pension Plan
- --------------------------
Employees................................................. $(.3)
Pensioners and deferred vested............................ (.2)
----
$(.5)
====
</TABLE>
There were no contributions to the Shell Pension Trust since May 1, 1996
due to the full-funding limitation of the applicable law. The Benefits
Restoration Plan generally provides for payments of amounts in excess of limits
imposed by federal tax law on benefit payments under the Shell Pension Plan. The
Senior Staff Plan provides for defined monthly supplemental pension payments to
members of the senior staff (consisting of certain officers and other high
ranking employees). Both of these plans are unfunded. The Shell Provident Fund
covers employees of the Company after stated periods of service, and provides
for contributions by the employing company based on a stated percentage of the
employees' salaries and wages. Employees may also contribute amounts up to a
stated percentage. The Company's portion of the total cost of the Shell
Provident Plan and the Shell Pension Plan was $1,306 thousand and $523 thousand,
respectively, in 1997, and was $774 thousand and $540 thousand, respectively, in
1996.
NOTE 9 -- CONTINGENCIES AND OTHER MATTERS
The Company and related Shell subsidiaries are named defendants in certain
lawsuits and named parties in certain governmental proceedings arising in the
ordinary course of business. While the outcome of such contingencies, lawsuits
or other proceedings against the Company cannot be predicted with certainty,
management expects that such liability, to the extent not provided for through
insurance or otherwise, will not have material adverse effect on the financial
statements of the Company.
In connection with the commencement of operations of the Company, Shell
agreed to retain liability for, and indemnify the Company for all other
liabilities and costs arising as the result of governmental or private claims,
suits or enforcement actions, either threatened or asserted prior to May 1, 1996
or arising out of acts or incidents occurring prior to May 1, 1996, except for
environmental claims, suits or actions. As to environmental claims, suits or
actions, either private or governmental, and all other environmental costs and
expenses, Shell has agreed to indemnify the Company for all liabilities and
costs (including those for claims, suits or actions) in any year which exceed
the budgeted environmental expenditures for such year.
<PAGE> 13
SHELL ANACORTES REFINING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- SUBSEQUENT EVENTS
On January 15, 1998, Shell Oil and Texaco Inc. ("Texaco") reached an
agreement on the formation and operational start up of Equilon Enterprises LLC
("Equilon"). Equilon is a joint venture which combines major elements of both
companies' western and midwestern United States refining and marketing
businesses and both companies' nationwide trading, transportation and lubricants
businesses.
The Company will be sold as part of a settlement agreement with the Federal
Trade Commission involving the joint venture with Texaco. Beginning in December
1997, the Company must be held separate from all other operations within Shell
and Texaco. On May 1, 1998, Shell Oil Company entered into an agreement to sell
the stock of the Company to Tesoro Petroleum Corporation ("Tesoro"). Tesoro will
acquire the Company for $237 million plus an additional payment for net working
capital at the time of closing. The Federal Trade Commission and the states of
Oregon and Washington will have final approval of the transaction and Tesoro as
the buyer.
Also as part of Federal Trade Commission agreement, effective January 1,
1998, the Company acquired all the third parties contracts in the state of
Oregon previously held by Shell and purchased the associated inventory in the
state of Oregon.
<PAGE> 1
Exhibit 99.2
NEWS RELEASE
FOR IMMEDIATE RELEASE: CONTACT: SUSAN PIROTINA
(210) 283-2631
TESORO ANNOUNCES PRIVATE OFFERING
OF SENIOR SUBORDINATED NOTES
SAN ANTONIO -- JUNE 1, 1998 -- Tesoro Petroleum Corporation (NYSE: TSO)
announced today that it plans a private offering of $300 million in Senior
Subordinated Notes eligible for Rule 144A in connection with its plans to
finance its recent refinery acquisitions.
The Company recently completed the acquisition of a refinery and 32 retail
marketing outlets in Hawaii from The Broken Hill Proprietary Company Limited and
has agreed to acquire a refinery in Anacortes, Washington from Shell Refining
Holding Company. In connection with these acquisitions, the Company intends to
raise proceeds from certain previously announced public equity offerings and the
proposed offering of Senior Subordinated Notes.
The Senior Subordinated Notes are expected to have a ten-year maturity
without sinking fund requirements. The Notes will be subject to optional
redemption by the Company after five years at declining premiums.
The Senior Subordinated Notes will not be registered under the Securities
Act of 1933, as amended, and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
Tesoro Petroleum Corporation is a natural resource company engaged in
petroleum refining and marketing, natural gas exploration and production,
marketing and distributing petroleum products and providing marine logistics
services.
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