<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 13, 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 5. OTHER EVENTS
As previously reported, on March 18, 1998, Tesoro Petroleum Corporation
("Tesoro", the "Company" or the "Registrant") entered into a stock sale
agreement ("Hawaii Stock Sale Agreement") to purchase (the "Hawaii Acquisition")
all of the outstanding stock of two subsidiaries of The Broken Hill Proprietary
Company Limited ("BHP") (together, "BHP Hawaii"). BHP Hawaii owns and operates a
95,000-barrel per day refinery in Kapolei, Hawaii, on the island of Oahu,
approximately 20 miles west of Honolulu, and 32 retail gasoline stations on the
islands of Oahu, Maui and Hawaii. The cash purchase price for the Hawaii
Acquisition is currently estimated to be approximately $275 million. The cash
purchase price will be adjusted after closing for the amount by which the
working capital of BHP Hawaii differs from $100 million at the closing date. In
addition, Tesoro will issue an unsecured, non-interest bearing promissory note
(the "BHP Note") in the amount of $50 million, payable in five equal annual
installments of $10 million each, beginning on the eleventh anniversary date of
the closing. The BHP Note provides for earlier payment based on the financial
performance of BHP Hawaii.
The Hawaii Acquisition is scheduled to close on May 29, 1998.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Included as Exhibit 99.1 to this Form 8-K are the
audited combined balance sheets of BHP Petroleum
Americas Refining Inc. and BHP Petroleum South Pacific
Inc. as of May 31, 1997 and 1996 and the related
combined statements of operations, stockholders' equity
and cash flows for each of the three years in the
period ended May 31, 1997. Included as Exhibit 99.2 to
this Form 8-K are the unaudited combined balance sheets
of BHP Petroleum Americas Refining Inc. and BHP
Petroleum South Pacific Inc. as of December 31, 1997
and 1996 and the related combined statements of
operations and cash flows for the seven months then
ended.
(b) PRO FORMA FINANCIAL INFORMATION.
Included as Exhibit 99.3 of this Form 8-K is the
unaudited pro forma combined condensed financial
statements of the Company and BHP Petroleum Americas
Refining Inc. and BHP Petroleum South Pacific Inc. as
of and for the year ended December 31, 1997.
(c) EXHIBITS
*2.1 Stock Sale Agreement, dated March 18, 1998, among the
Company, BHP Hawaii Inc. and BHP Petroleum Pacific
Islands Inc.
+23.1 Consent of Arthur Andersen LLP.
+99.1 Audited Combined Financial Statements of BHP Petroleum
Americas Refining Inc. and BHP Petroleum South Pacific
Inc. as of May 31, 1997 and 1996.
+99.2 Unaudited Combined Financial Statements of BHP
Petroleum Americas Refining Inc. and BHP Petroleum
South Pacific Inc. as of December 31, 1997 and 1996.
+99.3 Pro Forma Combined Condensed Financial Statements of
the Company and BHP Petroleum Americas Refining Inc.
and BHP Petroleum South Pacific Inc. as of and for the
year ended December 31, 1997.
- ---------------------------
* Previously filed.
+ Filed herewith.
2
<PAGE> 3
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: May 13, 1998 By: /s/ BRUCE A. SMITH
-----------------------------------
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive Officer
3
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
*2.1 Stock Sale Agreement, dated March 18, 1998, among the
Company, BHP Hawaii Inc. and BHP Petroleum Pacific
Islands Inc.
+23.1 Consent of Arthur Andersen LLP.
+99.1 Audited Combined Financial Statements of BHP Petroleum
Americas Refining Inc. and BHP Petroleum South Pacific
Inc. as of May 31, 1997 and 1996.
+99.2 Unaudited Combined Financial Statements of BHP Petroleum
Americas Refining Inc. and BHP Petroleum South Pacific
Inc. as of December 31, 1997 and 1996.
+99.3 Pro Forma Combined Condensed Financial Statements of the
Company and BHP Petroleum Americas Refining Inc. and BHP
Petroleum South Pacific Inc. as of and for the year ended
December 31, 1997.
- ---------------------------
* Previously filed.
+ Filed herewith.
4
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation 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 this Form 8-K of Tesoro Petroleum Corporation, into
the Company's previously filed Registration Statement File No. 333-51789.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Honolulu, Hawaii
May 12, 1998
<PAGE> 1
EXHIBIT 99.1
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED FINANCIAL STATEMENTS
AS OF MAY 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of BHP Petroleum Americas Refining Inc.
and BHP Petroleum South Pacific Inc.:
We have audited the accompanying combined balance sheets of BHP Petroleum
Americas Refining Inc. and BHP Petroleum South Pacific Inc. (the Company) as of
May 31, 1997 and 1996, and the related combined statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended May 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of BHP Petroleum Americas
Refining Inc. and BHP Petroleum South Pacific Inc. as of May 31, 1997 and 1996,
and the combined results of their operations and their cash flows for each of
the three years in the period ended May 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Honolulu, Hawaii
March 31, 1998
<PAGE> 3
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED BALANCE SHEETS
(Amounts in 000s)
<TABLE>
<CAPTION>
ASSETS As of May 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,420 $ 1,043
Accounts receivable, net 47,675 43,913
Due from affiliates - trade 9,906 10,742
Due from affiliates - other 22,115 22,369
Inventories 83,864 52,354
Other current assets 4,802 5,712
------------ ------------
Total current assets 169,782 136,133
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization (Note 5) 303,442 378,235
------------ ------------
NON-CURRENT ASSETS
Goodwill, net of accumulated amortization (Note 5) -- 32,931
Other 4,220 7,653
------------ ------------
Total non-current assets 4,220 40,584
------------ ------------
Total Assets $ 477,444 $ 554,952
============ ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
<PAGE> 4
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED BALANCE SHEETS
(Amounts in 000s)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY As of May 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Cash overdraft $ 6,840 $ 6,668
Accounts payable 12,287 7,557
Due to affiliates - trade 29,933 4,587
Capital lease obligations, current portion 1,055 685
Accrued liabilities 20,782 13,213
------------ ------------
Total current liabilities 70,897 32,710
------------ ------------
NOTES PAYABLE TO AFFILIATE - noncurrent 145,000 145,000
CAPITAL LEASE OBLIGATIONS, net of current portion 9,361 5,917
DEFERRED INCOME TAXES 30,659 66,014
OTHER LIABILITIES 28,540 31,746
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY
Common stock, no par value, 1,000,500 shares
authorized, issued and outstanding 8,208 8,208
Additional paid-in capital 52,362 52,362
Retained earnings:
BHP Petroleum Americas Refining Inc. 122,378 204,205
BHP Petroleum South Pacific Inc. 10,039 8,790
------------ ------------
Total stockholders' equity 192,987 273,565
------------ ------------
Total Liabilities and Stockholders' Equity $ 477,444 $ 554,952
============ ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
<PAGE> 5
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED STATEMENTS OF OPERATIONS
(Amounts in 000s)
<TABLE>
<CAPTION>
Years Ended May 31,
----------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Sales and other revenue - trade $ 886,380 $ 741,631 $ 752,044
Sales and other revenue - affiliates 111,258 72,992 79,908
Other income 211 905 750
------------ ------------ ------------
Total Revenue 997,849 815,528 832,702
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of sales 881,991 711,131 720,597
Operating and selling 43,363 43,661 42,148
Depreciation and amortization 30,596 29,507 27,745
Refinery assets write-down to fair value (Note 5) 88,813 -- --
Goodwill write-off (Notes 2 and 5) 30,351 -- --
------------ ------------ ------------
Total Operating Costs and Expenses 1,075,114 784,299 790,490
------------ ------------ ------------
OPERATING INCOME (LOSS) (77,265) 31,229 42,212
General and administrative (24,731) (21,238) (22,319)
Interest (9,976) (9,887) (11,274)
Capitalized interest 1,269 765 857
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (110,703) 869 9,476
Income tax benefit (provision) 30,125 (1,474) (4,673)
------------ ------------ ------------
NET INCOME (LOSS) $ (80,578) $ (605) $ 4,803
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
<PAGE> 6
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
($ Amounts in 000s)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------------ Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
--------------- -------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance May 31,1994
BHP Petroleum Americas Refining Inc. 500 $ 8,008 $ 42,000 $ 200,219 $ 250,227
BHP Petroleum South Pacific Inc. 1,000,000 200 10,362 8,578 19,140
--------- ------- -------- --------- ---------
Total 1,000,500 8,208 52,362 208,797 269,367
Net income - - - 4,803 4,803
--------- ------- -------- --------- ---------
Balance May 31,1995 1,000,500 8,208 52,362 213,600 274,170
Net loss - - - (605) (605)
--------- ------- -------- --------- ---------
Balance May 31,1996 1,000,500 8,208 52,362 212,995 273,565
Net loss - - - (80,578) (80,578)
--------- ------- -------- --------- ---------
Balance, May 31, 1997 1,000,500 $ 8,208 $ 52,362 $ 132,417 $ 192,987
========= ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
<PAGE> 7
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED STATEMENTS OF CASH FLOWS
(Amounts in 000s)
<TABLE>
<CAPTION>
Years Ended May 31,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (80,578) $ (605) $ 4,803
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Refinery assets write-down to fair value 88,813 -- --
Goodwill write-off 30,351 -- --
Depreciation and amortization 30,596 29,507 27,745
Deferred income taxes (35,355) 285 (6,067)
Changes in:
Accounts receivable, net (3,762) 7,767 (44,397)
Due from affiliates, trade and other 1,090 (786) 29,368
Inventories (31,510) 18,916 (6,803)
Other assets 4,343 (8,903) 2,569
Accounts payable and accrued liabilities 12,471 (4,343) 13,644
Due to affiliates, trade 25,346 (15,106) (1,274)
Other liabilities (3,206) 4,008 4,499
----------- ----------- -----------
Net cash provided by operating activities 38,599 30,740 24,087
CASH FLOWS FROM INVESTING ACTIVITIES --
Additions to property plant and equipment (37,467) (29,568) (23,461)
CASH FLOWS FROM FINANCING ACTIVITIES --
Repayment of principal on capital leases (755) (654) (527)
----------- ----------- -----------
Net increase in cash 377 518 99
Cash, beginning of period 1,043 525 426
----------- ----------- -----------
Cash, end of period $ 1,420 $ 1,043 $ 525
=========== =========== ===========
Supplemental disclosures:
Acquisition of equipment under capital lease $ 4,569 $ 1,900 $ --
Fixed assets from parent company, at book value $ -- $ 7,540 $ --
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
<PAGE> 8
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in 000s)
1. ORGANIZATION
BHP Petroleum Americas Refining Inc. (BHPPAR), a Hawaii corporation, and BHP
Petroleum South Pacific Inc. (BHPPSP), a California corporation, collectively
referred to as "the Company," are affiliated companies and wholly-owned indirect
subsidiaries of The Broken Hill Proprietary Company Limited (BHP), an Australian
company. All capital and financing requirements of the Company are provided for
by BHP, except for capital and operating leases.
BHPPAR operates an oil refinery, product storage and distribution facilities,
and retail gasoline stations in the state of Hawaii. Crude oil is purchased
through other BHP affiliates and shipped to Hawaii by tanker. Refined product
exports usually are sold through other BHP affiliates. BHPPSP is a petroleum
products marketer in American Samoa, and operates the government-owned product
storage and distribution facilities. BHPPSP purchases most of its refined
products from BHPPAR.
The Companies were part of a consolidated group, Pacific Resources, Inc. and
Subsidiaries (PRI), purchased by BHP in March 1989. The purchase price was
allocated to assets and liabilities based on fair values at the acquisition
date. The purchase price in excess of fair values was reported as goodwill until
May 1997 when the refinery assets were written down to estimated fair value and
the unamortized goodwill was written off (see Note 5).
There have been changes in the former PRI group since 1989: certain subsidiaries
were liquidated, others were merged or became subsidiaries of other BHP
affiliates. In 1995 two affiliates, BHP Petroleum Americas Terminals Inc.
(Terminals), and BHP Petroleum Americas Gas Express Inc. (Gas Express), were
merged into BHPPAR. In connection with this reorganization, all employees of
Terminals, Gas Express and parent company, BHP Hawaii Inc., became employees of
BHPPAR. The 1995 financial statements reflect the results of operations of these
combined entities, consistent with the presentation in 1996 and 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
Combined Financial Statements - The combined financial statements include the
accounts of BHPPAR and BHPPSP. These companies are combined to present the
financial position and results of operations of BHP's downstream petroleum
refining and marketing business. The combined financial statements have been
prepared using the historical costs and results of operations of the affiliated
entities. There were no significant differences in accounting methods or their
application among the combining entities. All significant intercompany balances
and transactions between the combined entities are eliminated.
Use of Estimates and Presentation - Preparation of the combined financial
statements, in conformity with generally accepted accounting principles,
requires management to make estimates and assumptions which affect the amounts
of assets and liabilities, and disclosure of
6
<PAGE> 9
contingencies at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from these estimates.
Financial Instruments - The carrying amounts of financial instruments, including
cash, accounts receivable, accounts payable, and certain other current
liabilities, approximate fair value because of the short maturity of these
instruments. The carrying amounts of the Company's long-term notes payable and
other obligations approximate the Company's estimate of fair values of such
items.
Hedging Activities - The Company periodically enters into hedging arrangements
through BHP affiliates to manage petroleum price risks and not for speculative
purposes. Gains and losses from hedging are recognized in income when the hedged
transaction occurs. Historically, gains and losses from hedging transactions
have not been material.
Inventories - Crude oil and refined products are valued at the lower of cost or
market (net realizable value). Cost is determined primarily on the last-in,
first-out (LIFO) basis. Other inventories held for sale, materials and supplies
are stated at the lower of average cost, not in excess of market.
Property, Plant and Equipment - Property, plant and equipment is stated at cost.
Major replacements, renewals and improvements are capitalized. Maintenance,
repairs and replacements, which do not improve or extend the lives of assets,
are charged to expense. Depreciation and amortization, including amortization of
assets under capital leases, are computed using the straight-line method over
estimated useful lives or lease terms, if shorter. Estimated useful lives range
up to 20 years for buildings and up to 25 years for plant and equipment.
Refinery Maintenance Turnaround Costs - The costs of refinery unit shutdown and
maintenance turnaround costs are included in other assets and amortized over the
estimated period of benefit, generally one to three years, depending on the
process unit.
Goodwill - Goodwill represents BHP's purchase price in excess of the fair values
of net BHPPAR assets acquired in March 1989, after providing noncurrent deferred
tax liabilities on the difference between the assets' fair values and their
income tax basis. Goodwill was amortized on a straight-line, 20 year rate until
the goodwill was determined to be without further value and was written off in
May 1997 (see Note 5).
Income Taxes - Deferred tax assets and liabilities are recognized for future
income tax effects of temporary differences between financial statement carrying
amounts and the related income tax bases of assets and liabilities. Deferred
income tax assets and liabilities measurements are based on enacted tax rates
expected to apply when the temporary differences are expected to be settled. The
effect of tax rate changes on deferred tax assets and liabilities is recognized
when rate changes are enacted.
Income taxes are computed and recorded as if each company were filing separate
tax returns, although BHPPAR and BHPPSP are included in different federal and
state consolidated income tax returns which include other BHP companies in the
affiliated groups. Current income tax liabilities or refunds are settled with
BHP through intercompany accounts.
Environmental Expenditures - Environmental expenditures for current operations
are expensed or capitalized, as appropriate. Expenditures are capitalized if
they extend the useful lives of
7
<PAGE> 10
assets, increase capacity, or mitigate or prevent environmental contamination.
Expenditures are expensed if they are for existing conditions caused by past
operations, and if the expenditures will not contribute to future revenue
generation. Liabilities are recorded when environmental assessments and/or
remedial efforts are probable and when costs can be estimated reasonably. Such
amounts are based on the estimated timing and extent of remedial actions
required by regulatory agencies, experience gained from other sites where
assessments and remediation have been completed, and the amount of the Company's
estimated liability, considering proportional liability and financial abilities
of other responsible parties. Adjustments to accrued liabilities are made as
changes in conditions and estimated costs become known.
Pension Plans and Other Post-Employment Benefits - Pension costs are accounted
for in conformity with Statements of Financial Accounting Standards No. 87 and
88. Funding is based on required contributions under the Employee Retirement
Income Security Act of 1974. Other post-employment benefits, primarily medical
insurance, are accounted for in conformity with Statement of Financial
Accounting Standards No. 106.
3. RECEIVABLES
The Company operates in a single industry, marketing refined petroleum products
in a limited geographic area, primarily Hawaii and American Samoa. The markets
are subject to economic and industry changes, including changes in market prices
and sources of supply. Concentration of credit risk in trade receivables is
limited by the numbers and variety of customers. In October 1997, BHP sold a
Hawaii gas services subsidiary (the Gas Company) to an unrelated company. The
Gas Company continues to purchase naphtha and propane (LPG) from the refinery.
Receivables from the Gas Company amounted to $3,886 and $3,243 at May 31, 1997
and 1996, respectively.
BHPPSP operates the government-owned fuel storage facilities and markets to a
wide range of customers in American Samoa. The facilities management contract
expired in 1997 and was awarded to a competitor. BHPPSP has contested the award,
but there is no assurance that the company will be able to continue as the
facilities operator and/or as a marketer in American Samoa. Transfer of
operations to a competitor could increase the collection risk of receivables in
that market. BHPPSP's receivables, net of allowance for doubtful accounts,
amounted to $4,273 and $3,331 at May 31, 1997 and 1996, respectively.
The company performs on-going credit evaluations of its customers financial
condition, and in some circumstances requires prepayment or letters of credit.
The allowance for doubtful accounts is included in the combined balance sheets
as a reduction of receivables. The allowance for doubtful accounts as of May 31,
1997, 1996 and 1995, was $698, $734 and $1,561, respectively.
4. INVENTORIES
Inventories at May 31 consisted of:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Crude oil and refined products $ 73,601 $ 42,107
Merchandise and packaged petroleum products 1,243 896
Materials and supplies 9,020 9,351
-------- --------
Total inventories $ 83,864 $ 52,354
======== ========
</TABLE>
8
<PAGE> 11
At May 31, 1997 and 1996, crude oil and product inventories at LIFO cost
amounting to $71.5 million and $41.0 million, respectively, were below current
cost by approximately $7.0 million and $10.7 million, respectively.
5. PROPERTY, PLANT AND EQUIPMENT, GOODWILL, AND RELATED WRITE-DOWNS
Principal assets include the oil refinery, its buildings and its property site
on the island of Oahu. The Company owns pipelines connecting the refinery to an
off-shore, single-point mooring, to a barge harbor near the refinery, and to
Honolulu International Airport and Honolulu Harbor. Marketing facilities include
product storage and distribution terminals on the islands of Maui and Hawaii, as
well as retail gas stations.
In 1997 BHP developed a plan to sell the Company, engaged an investment advisor,
completed an appraisal of assets, and began discussions with potential buyers.
Management determined that net book value of refinery assets had been impaired
based in part on the appraisal. The refinery property, plant and equipment were
written down to estimated fair value in May 1997, based on an evaluation of
these assets, related operating results, and in accordance with provisions of
Statement of Financial Accounting Standards No. 121. The write-down, net of
accumulated depreciation, amounted to $88.8 million ($54.2 million after a $34.6
million reduction in deferred income taxes), as summarized below. BHP reached an
agreement in March 1998 to sell the Company, and as a result of the sale, the
Company anticipates recognizing an estimated loss of approximately $120-125
million, in addition to the loss recognized in May 1997 (see Note 15).
Substantially all of the loss is expected to be allocated to a further reduction
in the fair value of the property, plant and equipment.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land and buildings $ 70,451 $ 67,708
Plant and equipment, including capital leases 582,076 548,067
--------- ---------
Total before revaluation write-down 652,527 615,775
Accumulated depreciation and amortization (260,272) (237,540)
--------- ---------
Property, plant and equipment, net before write-down 392,255 378,235
--------- ---------
Less write-down to estimated fair value:
Land and buildings (23,451) --
Plant and equipment (325,634) --
Accumulated depreciation and amortization 260,272 --
--------- ---------
Net write-down to estimated fair value (88,813) --
--------- ---------
Property, plant and equipment, net $ 303,442 $ 378,235
========= =========
</TABLE>
In connection with management's determination that the carrying amount of
refinery assets had become impaired, it was also determined that goodwill had no
continuing value. Therefore, the remaining net goodwill of $30,351 ($51,636, net
of accumulated amortization of $21,285) was also written off in May 1997. Annual
goodwill amortization expense included in statements of operations was $2,580
for each of the three years ended May 31, 1997.
9
<PAGE> 12
6. LEASES
The company leases equipment and some properties under various lease agreements
covering periods through 2024. Properties include the pipeline corridor from the
refinery to Honolulu International Airport and Honolulu Harbor, as well as land
underlying terminal facilities and most of the gas stations. The Company also
uses product terminals owned by others, including deliveries at Honolulu Harbor,
Honolulu International Airport, and all sales in American Samoa. Rent,
through-put fees, and storage fees are paid for use of these facilities. Certain
operating leases contain provisions for renegotiation or escalation of rents
based on operating costs or usage. Rent expense for operating leases, including
leases with terms of a month or less, was $13,330 in 1997, $13,125 in 1996 and
$13,696 in 1995.
Capital leases are for tugs and barges used in transportation of petroleum
products within Hawaii. Cost and accumulated amortization of capitalized leased
assets at May 31 amounted to:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Capitalized leases - cost $ 15,023 $ 12,204
Accumulated amortization (5,123) (5,965)
---------- ----------
Capitalized leases included in property - net $ 9,900 $ 6,239
========== ==========
</TABLE>
Minimum lease commitments under non-cancelable leases (excluding leases with
terms of one year or less) at May 31, 1997 are summarized below:
<TABLE>
<CAPTION>
Fiscal Operating Capital
Year Leases Leases
----- ------ ------
<S> <C> <C> <C>
1998 $ 12,186 $ 2,005
1999 10,763 1,884
2000 9,394 1,677
2001 9,441 1,634
2002 8,221 1,468
Thereafter 96,027 6,659
--------- --------
Total minimum lease payments $ 146,032 15,327
=========
Less amount representing interest (4,911)
--------
Present value of net minimum lease payments 10,416
Less current portion (1,055)
--------
Noncurrent portion $ 9,361
========
</TABLE>
7. ACCRUED LIABILITIES
Accrued current liabilities at May 31 included the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Environmental costs $ 3,950 $ 3,190
Accrued employee compensation 10,768 5,502
Taxes, other than income taxes 5,908 4,239
Other accrued liabilities 156 282
------- -------
Total accrued liabilities, current $20,782 $13,213
======= =======
</TABLE>
10
<PAGE> 13
8. NOTES PAYABLE TO AFFILIATE
Noncurrent debt consists of two unsecured promissory notes totaling $145
million, payable to BHPPAR's parent company, BHP Hawaii Inc. The notes are
payable 395 days from demand, and interest is payable at the monthly average
short-term Applicable Federal Rate, as determined under Internal Revenue Code
Sec. 1274(d). Interest rates ranged from 5.63% to 6.23% in 1997, 5.05% to 6.37%
in 1996, and 5.56% to 7.43% in 1995. The rates for May 1997 and 1996 were 6.23%
and 5.76%, respectively. Interest is paid as accrued through settlement of
inter-company accounts. Interest expense on the notes was $8,734 in 1997, $8,364
in 1996, and $9,415 in 1995.
9. INCOME TAXES
The income tax provision (benefit) for the three years ended May 31, 1997,
included:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current income tax provision $ 5,285 $ 1,990 $ 10,738
Deferred tax benefit (35,410) (516) (6,065)
---------- ---------- ----------
Total income tax provision (benefit) $ (30,125) $ 1,474 $ 4,673
========== ========== ==========
</TABLE>
The deferred income tax benefit in 1997 includes the deferred tax effect of the
fair value write-down of refinery property, plant and equipment.
The following table reconciles taxes on income at the normal 35% Federal income
tax rate with the effective tax rate:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Earnings (loss) before income taxes $ (110,703) $ 869 $ 9,476
---------- ---------- ----------
Tax provision (benefit) at U.S. corporate tax rate $ (38,746) $ 304 $ 3,317
Effect of:
Write-off / amortization of goodwill 11,526 903 900
State income taxes, net of Federal tax effects (3,027) 149 470
Other 122 118 (14)
---------- ---------- ----------
Income tax provision (benefit) $ (30,125) $ 1,474 $ 4,673
========== ========== ==========
Effective combined income tax rate 27.2% 169.6% 49.3%
---------- ---------- ----------
</TABLE>
The effective tax rates are significantly different than "normal" because of the
amortization and write-off of goodwill related to BHP's 1989 acquisition of
BHPPAR.
11
<PAGE> 14
Deferred income tax liabilities and assets, resulting from timing differences,
as of May 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred Federal tax assets:
Accrued vacation pay, incentive compensation $ 692 $ 1,824
Accrued retirement benefits 4,417 4,376
Environmental provisions 7,236 7,862
Other 995 895
---------- ----------
Total deferred tax assets 13,340 14,957
---------- ----------
Deferred Federal tax liabilities:
Accelerated depreciation and other property items 39,410 71,844
Refinery turn-around costs 976 2,011
Other 525 525
---------- ----------
Total deferred tax liabilities 40,911 74,380
---------- ----------
Net Federal deferred tax liability 27,571 59,423
Net State deferred tax liability 3,088 6,591
---------- ----------
Deferred income tax liability - net $ 30,659 $ 66,014
========== ==========
</TABLE>
10. RETIREMENT PLANS
Employees are covered by a qualified noncontributory defined benefit pension
plan. BHPPAR and BHPPSP participate with many other BHP affiliates in the BHP
(USA) Pension Plan, and the plan's actuary allocates assets and liabilities to
the participating entities, as well as determining annual costs and recommended
contributions. The plan's benefit formula is a final-pay formula. The plan
funding policy is to fund a contribution of at least the minimum funding
requirement, but no more than the maximum tax-deductible contribution.
The following plan information covers all the employees of the Company, as well
as certain employees and retirees of affiliates which were merged into BHPPAR or
disposed of during the three years ended May 31, 1997. Plan assets exceeded
projected benefit obligations, with respect to BHPPAR and BHPPSP, at May 31,
1997 and 1996. The following tables present pension expense, funded status and
major actuarial assumptions used to determine amounts.
<TABLE>
<CAPTION>
Net Periodic Pension Cost 1997 1996 1995
- ------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost $ 1,550 $ 1,530 $ 1,330
Interest cost 1,660 1,470 1,420
Actual return on plan assets (4,920) (3,000) (2,600)
Net amortization and deferral 3,061 1,521 1,381
--------- --------- ---------
Net periodic pension cost $ 1,351 $ 1,521 $ 1,531
========= ========= =========
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Funded Status of Pension Plans as of May 31 1997 1996
- ------------------------------------------- ---------- ----------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested $ 14,380 $ 13,670
---------- ----------
Total $ 17,610 $ 16,490
---------- ----------
Projected benefit obligation $ 24,420 $ 22,060
Plan assets at fair value 27,120 22,540
---------- ----------
Plan assets in excess of projected benefit obligation 2,700 480
Unrecognized net gain (4,800) (2,590)
Unrecognized prior service cost 1,002 1,093
---------- ----------
Accrued net pension liability $ (1,098) $ (1,017)
========== ==========
</TABLE>
The accrued net pension liability is included in other liabilities (noncurrent)
in the accompanying balance sheets.
<TABLE>
<CAPTION>
Actuarial Assumptions 1997 1996 1995
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Discount rate 7.75% 7.75% 8.00%
Rate of increase in future compensation levels 5.00 5.00 5.00
Expected long-term rate of return on plan assets 8.50 8.50 8.50
</TABLE>
In addition to the defined benefit plan, the Company is a participating sponsor
in a defined contribution plan. The BHP Retirement Savings Plan (RSP) is a
deferred compensation plan which covers employees of the Company and other BHP
entities in the U.S. The Company matches and contributes an amount equal to each
employee's contribution up to 6 percent of the employee's salary and incentive
compensation. Plan contributions charged to expense amounted to $1,421, $1,222
and $1,071 in 1997, 1996 and 1995, respectively.
Liabilities also are accrued for supplemental retirement benefits for
executives. The unfunded liabilities and expense are actuarially determined.
Payments are made for vested benefits after retirement.
11. OTHER RETIREMENT BENEFITS
Certain medical and life insurance benefits are provided for qualified retirees
and their qualified dependents. Employees who retire at ages 55-61 with at least
15 years of continuous service, or who retire at age 62, or later, with at
least 10 years of continuous service, become eligible for these benefits. The
health care plan is contributory with retiree contributions adjusted
periodically. The life insurance plan is noncontributory. Plan expense and
liabilities are accrued as actuarially determined and funded on a pay-as-you-go
basis. The following tables present the composition of post-retirement benefit
expense and the accumulated post-retirement benefit obligation.
13
<PAGE> 16
<TABLE>
<CAPTION>
Components of Net Periodic Post-Retirement Benefit Cost 1997 1996 1995
- ------------------------------------------------------- ----- ----- -----
<S> <C> <C> <C>
Service cost $ 83 $ 100 $ 108
Interest cost on accumulated benefit obligation 424 528 601
Amortization of unrecognized net transition asset (48) (48) (48)
Amortization of unrecognized (gain) loss (78) - 8
----- ----- -----
Net periodic post-retirement benefit cost $ 381 $ 580 $ 669
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Accrued Post-Retirement Benefit Obligation as of May 31 1997 1996
- ------------------------------------------------------- ------- -------
<S> <C> <C>
Retirees and beneficiaries $ 4,553 $ 4,742
Active participants eligible to retire 282 264
Other active participants 873 733
------- -------
Total post-retirement benefit obligation 5,708 5,739
Unrecognized transition asset 728 776
Unrecognized gain 1,441 1,614
------- -------
Accrued post-retirement benefit obligation $ 7,877 $ 8,129
======= =======
</TABLE>
The accrued obligation is included in other liabilities (noncurrent) in the
accompanying balance sheets. Amounts to be paid during the next twelve months
are included in current liabilities.
The weighted average rate of increase in the per capita cost of covered health
care benefits was assumed to be 8% for 1997, decreasing by 1/2% per year to 5.5%
in 2002 and thereafter. A 1% increase in the health care cost trend rate would
increase the accumulated post-retirement benefit obligation by $149 at May 31,
1997, and the net periodic service and interest cost by $13 for the year.
Actuarial assumptions used to measure the accrued post-retirement obligation at
May 31, 1997, 1996 and 1995 included a discount rate of 7.75% and a compensation
rate increase of 6%.
12. RELATED PARTY BALANCES AND TRANSACTIONS
The Company enters into transactions with BHP-affiliated companies primarily for
petroleum operations and general financing activities. Crude oil is purchased
through BHP Petroleum affiliates in the U.S., Australia and Singapore. Crude oil
transportation costs are either included in the purchase price or paid to an
affiliated BHP Transport company. Export products are sold through BHP Petroleum
affiliates. Amounts due to and from BHP-affiliated companies as of May 31 were:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Due from affiliates:
Current - trade receivables $ 9,906 $ 10,742
Current - other 22,115 22,369
Due to affiliates:
Current - trade payables 29,933 4,587
Noncurrent notes payable, interest at variable rate 145,000 145,000
</TABLE>
14
<PAGE> 17
Transactions with BHP-affiliated companies for the three years ended May 31,
1997 were:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Revenues:
Sales and other revenue $ 111,258 $ 72,992 $ 79,908
Operating Costs and Expenses:
Petroleum purchases, including freight 614,076 584,714 575,175
Guarantee fees, included in operating costs 617 1,539 1,213
Interest on noncurrent promissory notes 8,734 8,364 9,415
Securitization fees, included in interest - - 1,287
</TABLE>
Sales of refined products to BHP affiliates are negotiated with reference to
current published market prices. Sales include export cargoes marketed primarily
in Asia. Also, naphtha and LPG are sold to a Hawaii gas utility affiliate (the
Gas Company) under term contracts. BHP sold the Gas Company to an unrelated
company effective October 31, 1997 (see Note 15).
Domestic (Alaskan North Slope) crude oil is purchased from a BHP Petroleum
affiliate at their cost, net of their price hedging transactions. BHPPAR also
imports crude oil, primarily from Australia and Asia, under term agreements with
BHP Petroleum affiliates, and purchase prices are determined by a formula using
current published market prices.
13. FUTURES CONTRACTS
BHPPAR has a term agreement with a third-party customer for the sale of physical
product in exchange for futures contracts (plus a cash location/quality
differential), which are settled through a BHP Petroleum affiliate. The futures
contracts are sold ratably over each month, and proceeds from selling the
futures contracts at current market prices (plus the cash differential)
determine the sales value of product delivered during the month. Futures
contracts at May 31,1997 and 1996, are summarized below (amounts in 000's):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Contract barrels 240 250
Contract amounts $ 5,645 $ 5,597
Unrealized gains (losses) $ (19) $ (257)
Maturity dates June 1997 June 1996
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
The Company is party to litigation and claims in the normal course of business.
The outcome of individual matters is not predictable. However, management
believes that the ultimate resolution of all of these matters, after considering
insurance coverages, is not likely to have a material adverse effect on the
Company's combined financial statements.
Environmental
The Company's operations are subject to various Federal and state environmental
laws and regulations. The Company has received notices of violation or potential
liability from the U.S. Environmental Protection Agency (EPA), the State of
Hawaii Department of Health (HDOH) and private parties relating to various
environmental matters associated with the Company's ownership and/or operations
of its assets. Generally, the timing of liability accruals corresponds
15
<PAGE> 18
with the completion of remedial investigations or feasibility studies, and are
adjusted as necessary. Although the amount of future environmental expenditures
cannot be determined with certainty, Company management believe that compliance
with present laws will not have a material adverse effect on its financial
statements. Environmental provisions as of May 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Accrued liabilities - current $ 3,950 $ 3,190
Other liabilities - noncurrent 16,724 19,785
------------ ------------
Total $ 20,674 $ 22,975
============ ============
</TABLE>
Total environmental expense, including provisions, charged to cost of sales and
operating expense, amounted to $4,936, $7,198 and $9,003 in 1997, 1996, and
1995, respectively.
Refinery - Based on an inspection conducted by a U.S. EPA consultant, the EPA
issued a Notice of Violation (NOV) in June 1997 against BHP Hawaii and BHPPAR
pursuant to Section 311 of the Clean Water Act (CWA). The NOV alleged violations
of the Spill Prevention, Control and Countermeasures (SPCC) regulations of the
CWA. The Company has submitted information in response to EPA requests. The EPA
has subsequently dropped its allegations relating to the oil releases and the
parties remain engaged in settlement discussions over issues relating to the
refinery's SPCC plan.
In 1993, BHPPAR settled an administrative complaint filed by the EPA in May
1991. The complaint alleged various Resource Conservation and Recovery Act
(RCRA) violations at the refinery involving surface impoundment closure and
groundwater monitoring requirements. The settlement, embodied in a Consent
Agreement/Final Order (dated July 1993) required BHPPAR to pay a fine (which was
satisfied); conduct certain groundwater monitoring tasks and closure of the
surface impoundments (which have been done and for which final EPA approval was
received in January 1996); complete a supplemental environmental project (which
has been done); and investigate and, if required, implement Corrective Action
under RCRA in and about the refinery site (which is in progress). A report of
the investigation results, dated March 1997, was submitted to the EPA. The
majority of the costs related to the closure plans have been expended. At May
31, 1997, $1.9 million remained in other liabilities to provide for estimated
post-closure monitoring costs over a 30 year period.
Under authority of the Emergency Planning and Community Right-to-Know Act
(EPCRA), the EPA issued a Request for Information relating to past releases of
reportable quantities of regulated EPCRA substances and oil. Pertinent data and
documentation were transmitted to the EPA. A Notice of Violation (NOV) was
issued in June 1997 against BHP Hawaii and BHPPAR, alleging eight violations.
The Company has submitted further information in response. The matter remains
subject to EPA review. No penalty amounts have been assessed to date.
Under a permit application and required compliance certification submitted by
BHPPAR pursuant to Title V of the Clean Air Act (CAA), BHPPAR noted several
regulatory requirements that were not being met at the time of submission, and
included a schedule for addressing or correcting these in accordance with
application regulations. BHPPAR has implemented corrective measures to address
the foregoing items in accordance with its proposed compliance schedule. Under
authority of the CAA, the EPA asked for additional information relating to such
past non-compliance matters. BHPPAR provided the information and documents
requested. In 1996 the EPA issued a Finding of Violation (FOV) against BHP
Hawaii and BHPPAR. The parties
16
<PAGE> 19
have engaged in settlement negotiations and no penalty amount has been assessed.
It is not anticipated that any penalty imposed or settlement concluded will have
a material adverse effect on the Company's financial condition.
Honolulu Harbor - Properties adjacent to Honolulu Harbor have been impacted by
the conduct of a variety of industrial activities since the beginning of this
century. The HDOH, under the authority of the Hawaii Environmental Response Law,
requested information from various owners and operators in the area surrounding
the harbor to determine the extent of hydrocarbon contamination. A group of
owners and operators, including BHP Hawaii Inc., on behalf of the Company, have
entered into a voluntary agreement with the HDOH to undertake an initial phase
of environmental site investigation in exchange for certain commitments from the
HDOH, including the notification of additional potentially responsible parties
to participate in this activity. A provision of $600 was accrued for the
estimated costs of this initial phase. An additional $2.8 million was accrued to
perform hydrogeological studies and groundwater monitoring in the vicinity of
Pier 29 which was formerly leased and operated by the Company.
Honolulu International Airport - As a result of environmental site assessments
commissioned by the State of Hawaii Department of Transportation (HDOT) in
conjunction with the proposed development of properties in the vicinity of the
airport, the HDOT requested that costs be shared among certain facility owners
and operators to remedy an alleged hydrocarbon condition in the area. At the
time of the site assessment, BHPPAR operated certain aboveground fuel tanks
located near the development area. The HDOT subsequently deferred its
development plans indefinitely. BHPPAR sold its interests in the fuel tank
facilities and underlying real property to an adjacent tank farm operator which
continues to operate the facilities. To date no claims or demands have been made
against BHPPAR. The Company has accrued $1.6 million for estimated hydrocarbon
recovery and clean-up costs.
Gas Express Retail Gas Stations - The Company has sixteen stations which have
been subject to known petroleum product releases. Of these, eight have received
"no further action" determinations from the HDOH, and one has a "no further
action" request pending. Of the remaining stations, one site has been scheduled
for demolition and the reconstruction of a new gas station facility.
Contaminated soil is to be removed at the time of demolition. Another station
has been completely reconstructed and a request for "no further action" status
is in the process of being submitted. Five remaining stations are currently
still being investigated and/or remediated in accordance with regulatory
requirements. The Company is responsible to assure proper closure of the
underground storage tank systems in compliance with regulatory requirements when
each of its stations is eventually taken out of service. As closures occur, the
Company incurs costs for the excavation of soils, the removal and disposal of
tanks, environmental site assessments and media remediation, if necessary, as
well as costs to buy-out unexpired lease commitments and write-off any
unamortized improvements. The Company has prepared cost estimates for the
closure of each site. As of May 31, 1997, total closure costs were estimated to
be $14.3 million, of which $7.7 million has been provided for. Of this amount,
$2.7 million was provided for stations with known or suspected product leakage.
The remainder of the estimated closure costs are being accrued over the
remaining terms of stations' respective leases.
Capital Expenditure Commitments
The Company had capital projects in progress at May 31, 1997, which were
expected to require an additional $11.6 million to complete.
17
<PAGE> 20
15. SUBSEQUENT EVENTS
Sale of Company to Tesoro Petroleum Corporation - March 1998
On March 18, 1998, the Company's stockholders entered into a stock sale
agreement with Tesoro Petroleum Corporation (Tesoro), whereby Tesoro will
purchase all of the outstanding common stock of BHPPAR and BHPPSP. The sale is
expected to close by the end of May 1998, subject to regulatory review and other
customary conditions. The price to be paid at closing amounts to $275 million in
cash (including a $5 million escrow deposit). After closing, the cash price will
be increased by the amount that net working capital sold exceeds $100 million,
or reduced by the amount that net working capital is less than $100 million. In
addition, Tesoro will issue an unsecured, non-interest bearing, promissory note
for $50 million payable in five equal annual installments of $10 million each,
beginning in 2009. The note will provide for earlier payment, depending on
earnings performance of the acquired assets.
The parties will execute a separate environmental agreement at closing, whereby
the selling stockholders will indemnify Tesoro and the Company for environmental
costs arising out of conditions which exist at, or existed prior to, closing
subject to a maximum limit of $9.5 million. The environmental indemnity will
survive for a ten-year period. Certain environmental liabilities of the
Companies will be retained by BHP and are not subject to the $9.5 million
indemnity.
As a result of the sale, the Company anticipates recognizing an estimated loss
of approximately $120-125 million. This estimated loss will increase or decrease
based on results of operations and changes in noncurrent assets and liabilities
through the closing date. Substantially all of the loss is expected to be
allocated to a further reduction in the fair value of the property, plant and
equipment.
Sale of the Gas Company - October 1997
An affiliated Hawaii company, Gasco, Inc. (the Gas Company), was sold effective
October 31, 1997. The Gas Company provides public utility gas service and
non-utility propane (LPG) to residential and commercial customers throughout
Hawaii. The Gas Company continues to purchase naphtha, for the manufacture of
synthetic natural gas, and liquified petroleum gas from BHPPAR under term
contracts. Sales to the Gas Company are included in sales to affiliates in the
accompanying statements of operations and in related-party information (see Note
12). Sales to the Gas Company amounted to $21.8 million in 1997, $21.4 million
in 1996, and $ 21.3 million in 1995.
18
<PAGE> 1
EXHIBIT 99.2
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
(UNAUDITED)
<PAGE> 2
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED BALANCE SHEETS
(UNAUDITED)
(Amounts in 000s)
<TABLE>
<CAPTION>
ASSETS As of December 31,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,704 $ 3,978
Accounts receivable, net 45,044 59,865
Due from affiliates - trade 7,096 7,742
Due from affiliates - other 4,513 42,333
Inventories 84,331 63,682
Other current assets 3,539 3,700
---------- ----------
Total current assets 147,227 181,300
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 331,247 382,101
---------- ----------
NON-CURRENT ASSETS
Goodwill, net of accumulated amortization (Note 4) -- 31,426
Other 3,350 7,570
---------- ----------
Total non-current assets 3,350 38,996
---------- ----------
Total Assets $ 481,824 $ 602,397
========== ==========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
1
<PAGE> 3
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED BALANCE SHEETS
(UNAUDITED)
(Amounts in 000s)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY As of December 31,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Cash overdraft $ 4,842 $ 8,485
Accounts payable 10,545 18,610
Due to affiliates - trade 20,485 29,799
Capital lease obligations, current portion 1,007 685
Accrued liabilities 12,667 12,842
---------- ----------
Total current liabilities 49,546 70,421
---------- ----------
NOTES PAYABLE TO AFFILIATE - noncurrent 145,000 145,000
CAPITAL LEASE OBLIGATIONS, net of current portion 8,751 5,496
DEFERRED INCOME TAXES 36,086 62,839
OTHER LIABILITIES 31,032 32,891
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Common stock, no par value, 1,000,500 shares
authorized, issued and outstanding 8,208 8,208
Additional paid-in capital 52,362 52,362
Retained earnings:
BHP Petroleum Americas Refining Inc. 140,517 216,490
BHP Petroleum South Pacific Inc. 10,322 8,690
---------- ----------
Total stockholders' equity 211,409 285,750
---------- ----------
Total Liabilities and Stockholders' Equity $ 481,824 $ 602,397
========== ==========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
2
<PAGE> 4
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in 000s)
<TABLE>
<CAPTION>
Seven Months Ended December 31,
-------------------------------
1997 1996
--------- ---------
<S> <C> <C>
REVENUES
Sales and other revenue - trade $ 456,817 $ 520,483
Sales and other revenue - affiliates 74,684 61,929
Other income 3 3
--------- ---------
Total Revenue 531,504 582,415
--------- ---------
OPERATING COSTS AND EXPENSES
Cost of sales 460,310 504,913
Operating and selling 25,543 24,190
Depreciation and amortization (Note 4) -- 16,834
--------- ---------
Total Operating Costs and Expenses 485,853 545,937
--------- ---------
OPERATING INCOME 45,651 36,478
General and administrative (10,648) (10,325)
Interest (5,802) (5,934)
Capitalized interest 1,097 749
--------- ---------
INCOME BEFORE INCOME TAXES 30,298 20,968
Income tax provision (11,876) (8,783)
--------- ---------
NET INCOME $ 18,422 $ 12,185
========= =========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
3
<PAGE> 5
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in 000s)
<TABLE>
<CAPTION>
Seven Months Ended December 31,
-------------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,422 $ 12,185
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization -- 16,834
Deferred income taxes 5,427 (3,175)
Changes in:
Accounts receivable, net 2,631 (15,952)
Due from affiliates, trade and other 20,412 (16,964)
Inventories (467) (11,328)
Other assets 2,133 2,095
Accounts payable and accrued liabilities (11,855) 12,499
Due to affiliates, trade (9,448) 25,212
Other liabilities 2,492 1,145
---------- ----------
Net cash provided by operating activities 29,747 22,551
CASH FLOWS FROM INVESTING ACTIVITIES --
Additions to property plant and equipment (27,805) (19,195)
CASH FLOWS FROM FINANCING ACTIVITIES --
Repayment of principal on capital leases (658) (421)
---------- ----------
Net increase in cash 1,284 2,935
Cash, beginning of period 1,420 1,043
---------- ----------
Cash, end of period $ 2,704 $ 3,978
========== ==========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
4
<PAGE> 6
BHP PETROLEUM AMERICAS REFINING INC.
BHP PETROLEUM SOUTH PACIFIC INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in 000s)
1. ORGANIZATION
BHP Petroleum Americas Refining Inc. (BHPPAR), a Hawaii corporation, and BHP
Petroleum South Pacific Inc. (BHPPSP), a California corporation, collectively
referred to as "the Company," are affiliated companies and wholly-owned indirect
subsidiaries of The Broken Hill Proprietary Company Limited (BHP), an Australian
company. All capital and financing requirements of the Company are provided for
by BHP, except for capital and operating leases.
BHPPAR operates an oil refinery, product storage and distribution facilities,
and retail gasoline stations in the state of Hawaii. Crude oil is purchased
through other BHP affiliates and shipped to Hawaii by tanker. Refined product
exports usually are sold through other BHP affiliates. BHPPSP is a petroleum
products marketer in American Samoa, and operates the government-owned product
storage and distribution facilities. BHPPSP purchases most of its refined
products from BHPPAR.
The Companies were part of a consolidated group, Pacific Resources, Inc. and
Subsidiaries (PRI), purchased by BHP in March 1989. The purchase price was
allocated to assets and liabilities based on fair values at the acquisition
date. The purchase price in excess of fair values was reported as goodwill until
May 1997 when the refinery assets were written down to estimated fair value and
the unamortized goodwill was written off.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company's interim combined financial statements and notes thereto have been
prepared by management without audit. 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. However,
management believes that the disclosures presented herein are adequate to make
the information not misleading.
Combined Financial Statements - The combined financial statements include the
accounts of BHPPAR and BHPPSP. These companies are combined to present the
financial position and results of operations of BHP's downstream petroleum
refining and marketing business. The combined financial statements have been
prepared using the historical costs and results of operations of the affiliated
entities. There were no significant differences in accounting methods or their
application among the combining entities. All significant intercompany balances
and transactions between the combined entities are eliminated.
Use of Estimates and Presentation - Preparation of the combined financial
statements, in conformity with generally accepted accounting principles,
requires management to make
5
<PAGE> 7
estimates and assumptions which affect the amounts of assets and liabilities,
and disclosure of contingencies at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from these estimates.
Financial Instruments - The carrying amounts of financial instruments, including
cash, accounts receivable, accounts payable, and certain other current
liabilities, approximate fair value because of the short maturity of these
instruments. The carrying amounts of the Company's long-term notes payable and
other obligations approximate the Company's estimate of fair values of such
items.
Hedging Activities - The Company periodically enters into hedging arrangements
through BHP affiliates to manage petroleum price risks and not for speculative
purposes. Gains and losses from hedging are recognized in income when the hedged
transaction occurs. Historically, gains and losses from hedging transactions
have not been material.
Inventories - Crude oil and refined products are valued at the lower of cost or
market (net realizable value). Cost is determined primarily on the last-in,
first-out (LIFO) basis. Other inventories held for sale, materials and supplies
are stated at the lower of average cost, not in excess of market.
Property, Plant and Equipment - Property, plant and equipment is stated at cost.
Major replacements, renewals and improvements are capitalized. Maintenance,
repairs and replacements, which do not improve or extend the lives of assets,
are charged to expense. In accordance with provisions of Statement of Financial
Accounting Standards No. 121, no depreciation or amortization has been recorded
since May 1997. In previous years, depreciation and amortization, including
amortization of assets under capital leases, were computed using the
straight-line method over estimated useful lives or lease terms, if shorter.
Estimated useful lives range up to 20 years for buildings and up to 25 years for
plant and equipment.
Refinery Maintenance Turnaround Costs - The costs of refinery unit shutdown and
maintenance turnaround costs are included in other assets and amortized over the
estimated period of benefit, generally one to three years, depending on the
process unit.
Goodwill - Goodwill represents BHP's purchase price in excess of the fair values
of net BHPPAR assets acquired in March 1989, after providing noncurrent deferred
tax liabilities on the difference between the assets' fair values and their
income tax basis. Goodwill was amortized on a straight-line, 20 year rate until
the goodwill was determined to be without further value and was written off in
May 1997.
Income Taxes - Deferred tax assets and liabilities are recognized for future
income tax effects of temporary differences between financial statement carrying
amounts and the related income tax bases of assets and liabilities. Deferred
income tax assets and liabilities measurements are based on enacted tax rates
expected to apply when the temporary differences are expected to be settled. The
effect of tax rate changes on deferred tax assets and liabilities is recognized
when rate changes are enacted.
Income taxes are computed and recorded as if each company were filing separate
tax returns, although BHPPAR and BHPPSP are included in different federal and
state consolidated income tax returns which include other BHP companies in the
affiliated groups. Current income tax liabilities or refunds are settled with
BHP through intercompany accounts.
6
<PAGE> 8
Environmental Expenditures - Environmental expenditures for current operations
are expensed or capitalized, as appropriate. Expenditures are capitalized if
they extend the useful lives of assets, increase capacity, or mitigate or
prevent environmental contamination. Expenditures are expensed if they are for
existing conditions caused by past operations, and if the expenditures will not
contribute to future revenue generation. Liabilities are recorded when
environmental assessments and/or remedial efforts are probable and when costs
can be estimated reasonably. Such amounts are based on the estimated timing and
extent of remedial actions required by regulatory agencies, experience gained
from other sites where assessments and remediation have been completed, and the
amount of the Company's estimated liability, considering proportional liability
and financial abilities of other responsible parties. Adjustments to accrued
liabilities are made as changes in conditions and estimated costs become known.
Pension Plans and Other Post-Employment Benefits - Pension costs are accounted
for in conformity with Statements of Financial Accounting Standards No. 87 and
88. Funding is based on required contributions under the Employee Retirement
Income Security Act of 1974. Other post-employment benefits, primarily medical
insurance, are accounted for in conformity with Statement of Financial
Accounting Standards No. 106.
3. INVENTORIES
Inventories at December 31 consisted of:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Crude oil and refined products $ 75,366 $ 53,977
Merchandise and packaged petroleum products 1,189 868
Materials and supplies 7,776 8,837
---------- ----------
Total inventories $ 84,331 $ 63,682
========== ==========
</TABLE>
At December 31, 1997 and 1996, crude oil and product inventories at LIFO cost
were below current cost by approximately $7.8 million and $16.3 million,
respectively.
4. PROPERTY, PLANT AND EQUIPMENT, GOODWILL, RELATED WRITE-DOWNS, AND CHANGE IN
DEPRECIATION METHOD
In 1997 BHP developed a plan to sell the Company, engaged an investment advisor,
completed an appraisal of assets, and began discussions with potential buyers.
Management determined that net book value of refinery assets had been impaired
based in part on the appraisal. The refinery property, plant and equipment were
written down to estimated fair value in May 1997, based on an evaluation of
these assets, related operating results, and in accordance with provisions of
Statement of Financial Accounting Standards (SFAS) No. 121. The write-down, net
of accumulated depreciation, amounted to $88.8 million ($54.2 million after a
$34.6 million reduction in deferred income taxes). In accordance with SFAS No.
121, no depreciation and amortization expense has been included in the financial
statements since May 1997. BHP reached an agreement in March 1998 to sell the
Company, and as a result of the sale, the Company anticipates recognizing an
estimated loss of approximately $120-125 million, in addition to the loss
recognized in May 1997 (see Note 8). Substantially all of the loss is expected
to be allocated to a further reduction in the fair value of the property, plant
and equipment.
7
<PAGE> 9
In connection with management's determination that the carrying amount of
refinery assets had become impaired, it was also determined that goodwill had no
continuing value. Therefore, the remaining net goodwill of $30,351 ($51,636, net
of accumulated amortization of $21,285) was also written off in May 1997.
Goodwill amortization expense included in statements of operations was $1,505
for the seven months ended December 31, 1996.
5. INCOME TAXES
The income tax provisions were 39% and 42% of income before income taxes for the
seven months ended December 31, 1997 and 1996, respectively. The effective
income tax rates differed from the normal 35% Federal income tax rate because of
state income taxes and the effects of permanent differences between book and tax
income, primarily the amortization of goodwill in 1996.
6. RELATED PARTY BALANCES AND TRANSACTIONS
The Company enters into transactions with BHP-affiliated companies primarily for
petroleum operations and general financing activities. Crude oil is purchased
through BHP Petroleum affiliates in the U.S., Australia and Singapore. Crude oil
transportation costs are either included in the purchase price or paid to an
affiliated BHP Transport company. Export products are sold through BHP Petroleum
affiliates.
Sales of refined products to BHP affiliates are negotiated with reference to
current published market prices. Sales include export cargoes marketed primarily
in Asia. Also, naphtha and LPG were sold to a Hawaii gas utility affiliate (the
Gas Company) under term contracts. BHP sold the Gas Company to an unrelated
company effective October 31, 1997, and continues to sell products to the Gas
Company.
Domestic (Alaskan North Slope) crude oil is purchased from a BHP Petroleum
affiliate at their cost, net of their price hedging transactions. BHPPAR also
imports crude oil, primarily from Australia and Asia, under term agreements with
BHP Petroleum affiliates, and purchase prices are determined by a formula using
current published market prices.
7. COMMITMENTS AND CONTINGENCIES
The Company is party to litigation and claims in the normal course of business.
The outcome of individual matters is not predictable. However, management
believes that the ultimate resolution of all of these matters, after considering
insurance coverages, is not likely to have a material adverse effect on the
Company's combined financial statements.
Environmental
The Company's operations are subject to various Federal and state environmental
laws and regulations. The Company has received notices of violation or potential
liability from the U.S. Environmental Protection Agency (EPA), the State of
Hawaii Department of Health (HDOH) and private parties relating to various
environmental matters associated with the Company's ownership and/or operations
of its assets. There have been no significant changes in environmental matters
disclosed in the audited financial statements for the fiscal year ended May 31,
1997.
8
<PAGE> 10
8. SUBSEQUENT EVENT
On March 18, 1998, the Company's stockholders entered into a stock sale
agreement with Tesoro Petroleum Corporation (Tesoro), whereby Tesoro will
purchase all of the outstanding common stock of BHPPAR and BHPPSP. The sale is
expected to close by the end of May 1998, subject to regulatory review and other
customary conditions. The price to be paid at closing amounts to $275 million in
cash (including a $5 million escrow deposit). After closing, the cash price will
be increased by the amount that net working capital sold exceeds $100 million,
or reduced by the amount that net working capital is less than $100 million. In
addition, Tesoro will issue an unsecured, non-interest bearing, promissory note
for $50 million payable in five equal annual installments of $10 million each,
beginning in 2009. The note will provide for earlier payment, depending on
earnings performance of the acquired assets.
The parties will execute a separate environmental agreement at closing, whereby
the selling stockholders will indemnify Tesoro and the Company for environmental
costs arising out of conditions which exist at, or existed prior to, closing
subject to a maximum limit of $9.5 million. The environmental indemnity will
survive for a ten-year period. Certain environmental liabilities of the
Companies will be retained by BHP and are not subject to the $9.5 million
indemnity.
As a result of the sale, the Company anticipates recognizing an estimated loss
of approximately $120-125 million. This estimated loss will increase or decrease
based on results of operations and changes in noncurrent assets and liabilities
through the closing date. Substantially all of the loss is expected to be
allocated to a further reduction in the fair value of the property, plant and
equipment.
9
<PAGE> 1
EXHIBIT 99.3
PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed financial statements give effect to
the following transactions, which are anticipated to occur on May 29, 1998,
(collectively, the "Transactions"):
(i) Tesoro Petroleum Corporation (the "Company" or "Tesoro") closes the
acquisition (the "Hawaii Acquisition") of all of the outstanding
capital stock of BHP Petroleum Americas Refining Inc. and BHP South
Pacific Inc. (together, "BHP Hawaii"), both of which are affiliates of
The Broken Hill Proprietary Company Limited ("BHP"). The cash
purchase price for the Hawaii Acquisition is $275 million, subject to
adjustment for an amount by which working capital of BHP Hawaii at the
closing date differs from $100 million. In addition, Tesoro will issue
an unsecured, non-interest bearing promissory note (the "BHP Note") in
the amount of $50 million, payable in five equal annual installments
of $10 million each, beginning on the eleventh anniversary date of the
closing.
(ii)In conjunction with closing the Hawaii Acquisition, Tesoro will borrow
funds to finance the cash consideration for the Hawaii Acquisition and
refinance substantially all of its existing indebtedness. These
borrowings will be financed through term loans and a revolving credit
facility which will be fully underwritten by Lehman Brothers.
The unaudited pro forma combined condensed financial statements have been
prepared from, and should be read in conjunction with, the historical combined
financial statements and notes thereto of BHP Hawaii, which are included as
Exhibits 99.1 and 99.2 to this Form 8-K, and the historical consolidated
financial statements and notes thereto of Tesoro which have been previously
filed. The Hawaii Acquisition will be accounted for using the purchase method of
accounting for Tesoro's acquisition of BHP Hawaii after giving effect to the pro
forma reclassifications and adjustments described in the accompanying notes.
The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect to the
Transactions as if each had occurred on December 31, 1997. The Unaudited Pro
Forma Combined Condensed Statement of Operations for the year ended December 31,
1997 gives effect to the Transactions as if each had occurred on January 1,
1997. BHP Hawaii's results of operations, which are reported on a fiscal year
ending May 31, have been adjusted to a December 31 year end. The estimates of
the fair value of BHP Hawaii's assets and liabilities are based on valuations
that are preliminary. Such valuations will be updated to the closing date of the
Hawaii Acquisition and may change from the amounts shown herein; however, the
Company does not expect such changes to be material.
The unaudited pro forma combined condensed financial statements are intended for
informational purposes and are not necessarily indicative of the future
financial position or future results of the combined companies or of the
financial position or the results of operations that would have actually
occurred had the Hawaii Acquisition been in effect as of the date or for the
period presented. The Unaudited Pro Forma Combined Condensed Statement of
Operations does not reflect any benefits from cost savings or revenue
enhancements that are anticipated to result from the integration of operations
of Tesoro and BHP Hawaii. There can be no assurance that the Hawaii Acquisition,
related financing or any other pending transactions will be consummated.
<PAGE> 2
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
Tesoro BHP Hawaii Adjustments Combined
--------- ---------- ------------ ---------
(In Thousands of Dollars)
ASSETS
Current Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents ...................................... $ 8,352 2,704 (2,704)(a) 8,352
Receivables .................................................... 76,282 56,653 (4,513)(a) 128,422
Inventories .................................................... 87,359 84,331 7,800(b) 179,490
Prepayments and other .......................................... 9,842 3,539 13,381
--------- ------- -------- ---------
Total Current Assets ......................................... 181,835 147,227 583 329,645
--------- ------- -------- ---------
Property, Plant and Equipment:
Refining and marketing ......................................... 370,174 680,332 (467,018)(c) 583,488
Exploration and production ..................................... 291,411 291,411
Marine services ................................................ 43,072 43,072
Corporate ...................................................... 13,689 13,689
--------- ------- -------- ---------
718,346 680,332 (467,018) 931,660
Less accumulated depreciation, depletion and amortization..... 304,523 349,085 (349,085)(c) 304,523
--------- ------- -------- ---------
Net Property, Plant and Equipment ............................ 413,823 331,247 (117,933)(c) 627,137
--------- ------- -------- ---------
Other Assets ...................................................... 32,150 3,350 (1,008)(d) 47,643
14,200(d)
(1,049)(e)
--------
12,143
--------- ------- -------- ---------
Total Assets ............................................... $ 627,808 481,824 (105,207) 1,004,425
========= ======= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................... $ 58,767 35,872 94,639
Accrued liabilities and current income taxes payable ........... 31,726 12,667 (3,950)(f) 44,659
6,375(e)
(2,159)(g)
Current maturities of long-term debt and other obligations...... 17,002 1,007 (15,294)(d) 2,715
--------- ------- -------- ---------
Total Current Liabilities .................................... 107,495 49,546 (15,028) 142,013
--------- ------- -------- ---------
Deferred Income Taxes ............................................. 28,824 36,086 (36,086)(h) 28,824
--------- ------- -------- ---------
Other Liabilities ................................................. 43,211 31,032 (15,858)(f) 58,385
--------- ------- -------- ---------
Long-Term Debt and Other Obligations, Less Current Maturities 115,314 8,751 323,724(d) 447,789
--------- ------- -------- ---------
Notes Payable to Affiliate ........................................ -- 145,000 (145,000)(a) --
--------- ------- -------- ---------
Stockholders' Equity:
Common stock ................................................... 4,418 8,208 (8,208)(i) 4,418
Additional paid-in capital ..................................... 190,925 52,362 (52,362)(i) 190,925
Retained earnings .............................................. 140,980 150,839 (150,839)(i) 135,430
(7,709)(d)
2,159(g)
Treasury stock ................................................. (3,359) (3,359)
--------- ------- -------- ---------
Total Stockholders' Equity ................................... 332,964 211,409 (216,959) 327,414
--------- ------- -------- ---------
Total Liabilities and Stockholders' Equity ................. $ 627,808 481,824 (105,207) 1,004,425
========= ======= ======== =========
</TABLE>
<PAGE> 3
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET
DECEMBER 31, 1997
(a) Represents an adjustment to exclude assets and liabilities of BHP Hawaii
that will not be acquired by Tesoro.
(b) Represents an adjustment of BHP Hawaii's finished goods inventories to net
realizable value, less an allowance for a normal profit margin, and of raw
materials inventories to replacement cost.
(c) Represents an adjustment of BHP Hawaii's property, plant and equipment to
fair value.
(d) Represents an adjustment to reflect the BHP Note (discounted at 10%) plus
aggregate borrowings of $415 million to finance the Hawaii Acquisition, to
refinance existing indebtedness of Tesoro and to pay related fees,
expenses and debt issuance costs.
(e) Represents an adjustment to conform BHP Hawaii's accounting policy for
refinery maintenance costs to that of Tesoro.
(f) Represents an adjustment of BHP Hawaii's liabilities for certain employee
benefits and for environmental matters taking into effect an environmental
agreement which provides for certain environmental indemnifications.
(g) Represents an adjustment to reduce income taxes payable for the tax effect
resulting from a charge to earnings related to the refinancing of existing
indebtedness.
(h) Represents the elimination of the deferred tax obligations of BHP Hawaii.
(i) Represents the elimination of BHP Hawaii's historical equity.
<PAGE> 4
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
Tesoro BHP Hawaii Adjustments Combined
------ ---------- ----------- --------
(In Thousands of Dollars, Except Per Share Amounts)
Revenues:
<S> <C> <C> <C> <C>
Refining and marketing ................................................. $ 720,868 946,727 1,667,595
Exploration and production ............................................. 84,798 -- 84,798
Marine services ........................................................ 132,251 -- 132,251
Other income ........................................................... 5,543 211 5,754
--------- ---------- ---------
Total Revenues ...................................................... 943,460 946,938 1,890,398
--------- ---------- ---------
Operating Costs and Expenses:
Refining and marketing ................................................. 687,036 882,104 (1,000)(a)1,568,140
Exploration and production ............................................. 13,230 -- 13,230
Marine services ........................................................ 124,725 -- 124,725
Depreciation, depletion and amortization ............................... 45,729 13,762 (3,858)(b) 55,633
Refinery assets write-down ............................................. -- 88,813 (88,813)(c) --
Goodwill write-off ..................................................... -- 30,351 (30,351)(c) --
--------- ---------- -------- ----------
Total Operating Costs and Expenses .................................. 870,720 1,015,030 (124,022) 1,761,728
--------- ---------- -------- ----------
Operating Profit (Loss) .................................................... 72,740 (68,092) 124,022 128,670
General and Administrative ................................................ (13,588) (25,054)(h) (38,642)
Interest Expense, Net of Capitalized Interest .............................. (6,699) (8,227) 13,966(d) (41,927)
(37,312)(e)
(3,655)(f)
Interest Income ............................................................ 1,597 -- 1,597
Other Expense, Net ......................................................... (4,930) -- (4,930)
--------- ---------- -------- ----------
Earnings Before Income Taxes ............................................... 49,120 (101,373) 97,021 44,768
Income Tax Provision ....................................................... 18,435 (27,032) 27,166(g) 18,569
--------- ---------- -------- ----------
Earnings Before Extraordinary Items ........................................ $ 30,685 (74,341) 69,855 26,199
========= ========== ======== ==========
Weighted Average Common Shares - Basic ..................................... 26,410 26,410
========= ==========
Weighted Average Common Shares and Potentially
Dilutive Common Shares - Diluted ....................................... 26,868 26,868
========= ==========
Earnings Before Extraordinary Items:
Per Share - Basic ...................................................... $ 1.16 0.99
========= ==========
Per Share - Diluted .................................................... $ 1.14 0.98
========= ==========
</TABLE>
<PAGE> 5
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(a) Represents an adjustment for a Tesoro contract termination.
(b) Represents an adjustment in depreciation expense due to the change in BHP
Hawaii's property, plant and equipment to fair value. Pro Forma
depreciation is calculated on the straight-line method over estimated
useful lives of 28 years for the refinery and five to ten years for
machinery, equipment and buildings.
(c) Represents elimination of the charge for asset and goodwill impairment
recognized in BHP Hawaii's historical financial statements.
(d) Represents elimination of interest on BHP Hawaii's obligations that will
not be assumed by Tesoro and the elimination of interest on Tesoro's
obligations that will be refinanced.
(e) Represents accretion, based on a 10% discount rate, of the $50 million BHP
Note and additional interest on borrowings of approximately $415 million to
finance the Hawaii Acquisition, refinance existing indebtedness and pay
related fees and costs.
(f) Represents amortization of debt issuance costs related to the financing
under term loans and revolving credit facility.
(g) Represents an adjustment to increase the income tax provision for the tax
effect resulting from the adjustments to earnings described above.
(h) Includes BHP Hawaii employee bonuses of $4 million, which were awarded
based upon the performance of BHP operations that are not to be
acquired by Tesoro.
