<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM .......... TO ..........
COMMISSION FILE NUMBER 1-3473
TESORO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-0862768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
8700 TESORO DRIVE, SAN ANTONIO, TEXAS 78217-6218
(Address of principal executive offices) (Zip Code)
210-828-8484
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
------------------------
There were 26,674,910 shares of the registrant's Common Stock outstanding
at April 30, 1998.
================================================================================
<PAGE> 2
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- March 31, 1998
and December 31, 1997................................. 3
Condensed Statements of Consolidated
Operations -- Three Months Ended March 31, 1998 and
1997.................................................. 4
Condensed Statements of Consolidated Cash
Flows -- Three Months Ended March 31, 1998 and 1997... 5
Notes to Condensed Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................. 19
SIGNATURES.................................................. 20
EXHIBIT INDEX............................................... 21
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997*
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 2,274 $ 8,352
Receivables, less allowance for doubtful accounts of
$1,292 ($1,373 at December 31, 1997)................... 64,518 76,282
Inventories:
Crude oil and wholesale refined products, at LIFO...... 75,983 68,227
Merchandise and other refined products................. 14,424 13,377
Materials and supplies................................. 7,386 5,755
Prepayments and other..................................... 7,984 9,842
-------- --------
Total Current Assets.............................. 172,569 181,835
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Refining and marketing.................................... 368,183 370,174
Exploration and production (full-cost method of
accounting)............................................ 311,872 291,411
Marine services........................................... 48,201 43,072
Corporate................................................. 13,802 13,689
-------- --------
742,058 718,346
Less accumulated depreciation, depletion and
amortization.......................................... 317,645 304,523
-------- --------
Net Property, Plant and Equipment...................... 424,413 413,823
-------- --------
OTHER ASSETS................................................ 38,447 32,150
-------- --------
Total Assets...................................... $635,429 $627,808
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 44,275 $ 58,767
Accrued liabilities and current income taxes payable...... 30,253 31,726
Current maturities of long-term debt and other
obligations............................................ 11,428 17,002
-------- --------
Total Current Liabilities......................... 85,956 107,495
-------- --------
DEFERRED INCOME TAXES....................................... 31,003 28,824
-------- --------
OTHER LIABILITIES........................................... 42,821 43,211
-------- --------
LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS CURRENT
MATURITIES................................................ 136,290 115,314
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes D and E)
STOCKHOLDERS' EQUITY
Common stock, par value $0.16 2/3; authorized 50,000,000
shares; 26,515,868 shares issued (26,506,601 in
1997).................................................. 4,419 4,418
Additional paid-in capital................................ 191,000 190,925
Retained earnings......................................... 147,039 140,980
Treasury stock, 200,198 common shares (216,453 in 1997),
at cost................................................ (3,099) (3,359)
-------- --------
Total Stockholders' Equity........................ 339,359 332,964
-------- --------
Total Liabilities and Stockholders' Equity........ $635,429 $627,808
======== ========
</TABLE>
- ---------------
* The balance sheet at December 31, 1997 has been taken from the audited
consolidated financial statements at that date and condensed.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 4
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUES
Refining and marketing.................................... $140,213 $174,400
Exploration and production................................ 22,222 23,358
Marine services........................................... 32,818 35,495
Other income.............................................. 786 1,599
-------- --------
Total Revenues.................................... 196,039 234,852
-------- --------
OPERATING COSTS AND EXPENSES
Refining and marketing.................................... 130,720 171,154
Exploration and production................................ 3,925 2,845
Marine services........................................... 30,597 34,216
Depreciation, depletion and amortization.................. 12,944 11,597
-------- --------
Total Operating Costs and Expenses................ 178,186 219,812
-------- --------
OPERATING PROFIT............................................ 17,853 15,040
General and Administrative.................................. (3,372) (3,038)
Interest Expense............................................ (2,665) (1,570)
Interest Income............................................. 108 434
Other Expense, Net.......................................... (1,034) (1,291)
-------- --------
EARNINGS BEFORE INCOME TAXES................................ 10,890 9,575
Income Tax Provision........................................ 4,831 3,444
-------- --------
NET EARNINGS................................................ $ 6,059 $ 6,131
======== ========
NET EARNINGS PER SHARE -- BASIC............................. $ 0.23 $ 0.23
======== ========
NET EARNINGS PER SHARE -- DILUTED........................... $ 0.23 $ 0.23
======== ========
WEIGHTED AVERAGE COMMON SHARES -- BASIC..................... 26,309 26,430
======== ========
WEIGHTED AVERAGE COMMON AND POTENTIALLY DILUTIVE COMMON
SHARES -- DILUTED......................................... 26,789 26,829
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings.............................................. $ 6,059 $ 6,131
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation, depletion and amortization............... 13,154 11,747
Amortization of deferred charges and other............. (54) 51
Changes in operating assets and liabilities:
Receivables.......................................... 11,764 43,533
Inventories.......................................... (10,434) (3,089)
Other assets......................................... 1,691 3,487
Accounts payable and other current liabilities....... (15,980) (40,741)
Obligation payments to State of Alaska............... (1,412) (1,064)
Deferred income taxes................................ 2,179 1,426
Other liabilities and obligations.................... (530) 2,276
-------- --------
Net cash from operating activities................ 6,437 23,757
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures...................................... (23,761) (16,300)
Deposits and other acquisition costs (Note B)............. (5,976) --
Other..................................................... 247 (479)
-------- --------
Net cash used in investing activities............. (29,490) (16,779)
-------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Borrowings, net of repayments of $92,100 in 1998 and
$1,000 in 1997, under revolving credit facilities...... 17,689 2,182
Payments of other long-term debt.......................... (732) (764)
Other..................................................... 18 171
-------- --------
Net cash from financing activities................ 16,975 1,589
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (6,078) 8,567
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 8,352 22,796
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 2,274 $ 31,363
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid............................................. $ 1,706 $ 1,010
======== ========
Income taxes paid......................................... $ 1,379 $ 14,245
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The interim condensed consolidated financial statements and notes thereto
of Tesoro Petroleum Corporation and its subsidiaries (collectively, the
"Company" or "Tesoro") have been prepared by management without audit pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, the accompanying financial statements reflect all adjustments that,
in the opinion of management, are necessary for a fair presentation of results
for the periods presented. Such adjustments are of a normal recurring nature.
Certain information and notes normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the SEC's rules and regulations. However, management
believes that the disclosures presented herein are adequate to make the
information not misleading. The accompanying condensed consolidated financial
statements and notes should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
The preparation of these condensed consolidated financial statements
required the use of management's best estimates and judgment that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods. Actual results could differ from
these estimates. The results of operations for any interim period are not
necessarily indicative of results for the full year.
Earnings per share have been restated for the prior period to conform with
the requirements of Statement of Financial Accounting Standard No. 128 which
establishes standards for computing and presenting basic and diluted earnings
per share calculations.
NOTE B -- PROPOSED ACQUISITIONS
Hawaii Refinery Acquisition
On March 18, 1998, the Company entered into a stock sale agreement ("Hawaii
Stock Sale Agreement") with BHP Hawaii Inc. and BHP Petroleum Pacific Islands
Inc. (collectively, the "Sellers"), subsidiaries of The Broken Hill Proprietary
Company Limited ("BHP"), whereby Tesoro will purchase (the "Hawaii Acquisition")
all of the outstanding stock of BHP Petroleum Americas Refining Inc. ("BHP
Refining") and BHP Petroleum South Pacific Inc. ("BHP South Pacific"). The
primary assets of BHP Refining and BHP South Pacific include a 95,000-barrel per
day refinery and 32 retail gasoline stations located in Hawaii. In addition,
Tesoro and a BHP affiliate will enter into a two-year crude supply agreement
pursuant to which the BHP affiliate will assist Tesoro in acquiring crude oil
feedstock sourced outside of North America and arrange for the transportation of
such crude oil to the Hawaiian refinery. Under the terms of the Hawaii Stock
Sale Agreement, the Company has deposited $5 million into an escrow account for
the acquisition. The Hawaii Acquisition is scheduled to close on May 29, 1998.
The purchase price to be paid at closing for the Hawaii Acquisition
includes $275 million in cash, less the amount of the escrow deposit. After
closing, the cash purchase price will be increased by an amount that net working
capital acquired exceeds $100 million or reduced by an amount that the net
working capital acquired is less than $100 million. In addition, Tesoro will
issue an unsecured, non-interest bearing, promissory note for the purchase in
the amount of $50 million, payable in five equal annual installments of $10
million each, beginning in 2009. The note will provide for early payment to the
extent of one-half of the amount by which earnings from the acquired assets,
before interest expense, income taxes and depreciation, depletion and
amortization, as specified in the note, exceed $50 million in any calendar year.
The Hawaii Acquisition will be accounted for as a purchase whereby the purchase
price will be allocated to the assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition.
6
<PAGE> 7
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Washington State Refinery Acquisition
On May 1, 1998, the Company entered into a stock purchase agreement
("Anacortes Stock Purchase Agreement") with Shell Refining Holding Company
("Seller") and Shell Anacortes Refining Company ("SARC"), both subsidiaries of
Shell Oil Company ("Shell"), whereby Tesoro will purchase (the "Washington
Acquisition") all of the outstanding stock of SARC. SARC owns and operates a
108,000-barrel per day refinery in Anacortes, Washington ("Washington
Refinery"). The Washington Acquisition, which is subject to approval by the
Federal Trade Commission and the offices of the attorneys general of the States
of Oregon and Washington as well as other customary conditions, is anticipated
to close in mid to late summer. Under the terms of the Anacortes Stock Purchase
Agreement, the Company paid a $5 million deposit in May 1998 and has agreed to
pay the balance of the purchase price into an escrow by June 30, 1998, if the
stock purchase has not closed by that date.
At closing, the Company will pay the Seller a cash purchase price of $237
million, less the deposit and any escrowed amounts, for the stock of SARC, and
will also pay an additional amount for net working capital of SARC which has
historically averaged approximately $60 million.
See Note C for information related to financings of the proposed Hawaii
Acquisition and Washington Acquisition (collectively, the "Acquisitions") and
Note D for related environmental matters.
NOTE C -- FINANCINGS
The Acquisitions, as discussed in Note B, will be funded using revolving
credit and term loans, which have been fully underwritten by Lehman Brothers,
and a combination of senior subordinated debt, common stock and preferred stock.
In addition to funding the cash consideration of the Acquisitions, the
financings will provide the Company with increased letter of credit capacity,
funds to refinance substantially all of its existing indebtedness and funds for
future working capital needs and general corporate purposes, including the
Company's 1998 capital budget. The Company is currently in the documentation
stage of negotiations for the revolving credit and term loans.
On May 4, 1998, the Company filed a universal shelf registration statement
("Registration Statement") with the SEC for $600 million of debt or equity
securities for acquisitions or general corporate purposes. Tesoro will determine
the specific type and number of securities to be issued in the course of the
financing process. The Registration Statement was declared effective by the SEC
on May 14, 1998.
In connection with filing the Registration Statement, the Company's Board
of Directors approved terminating the repurchase of Tesoro's Common Stock under
a repurchase program that was initiated in May 1997. The repurchase program,
which was scheduled to conclude at the end of 1998, is inconsistent with the
shelf registration and the Company's growth strategies.
NOTE D -- COMMITMENTS AND CONTINGENCIES
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which change frequently, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites or install additional controls
or other modifications or changes in use for certain emission sources. The
Company is currently involved with a waste disposal site near Abbeville,
Louisiana, at which it has been named a potentially responsible party under the
Federal Superfund law. Although this law might impose joint and several
liability upon each party at the site, the extent of the Company's allocated
financial contributions to the cleanup of the site is expected to be limited
based upon the number of companies, volumes of waste involved and an estimated
total cost of approximately $500,000 among all of the parties to close the site.
The Company is currently involved in settlement discussions with the
Environmental Protection Agency and other potentially responsible parties at the
Abbeville, Louisiana site. The Company expects, based on these discussions, that
its liability will not exceed $25,000. The Company is also involved in
7
<PAGE> 8
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remedial responses and has incurred cleanup expenditures associated with
environmental matters at a number of sites, including certain of its current and
prior-owned properties.
At March 31, 1998, the Company's accruals for environmental expenses
amounted to $8.7 million, which included a noncurrent liability of approximately
$2.5 million for remediation of the Kenai Pipe Line Company's ("KPL") properties
that has been funded by the former owners of KPL through a restricted escrow
deposit. Based on currently available information, including the participation
of other parties or former owners in remediation actions, the Company believes
these accruals are adequate. To comply with environmental laws and regulations,
the Company currently anticipates that it will make capital improvements of
approximately $7 million in 1998 and $2 million in 1999 related to its current
operations. In addition, capital expenditures for alternative secondary
containment systems for existing storage tank facilities are estimated to be $2
million in 1998 and $2 million in 1999 with a remaining $5 million to be spent
by 2002.
Conditions that require additional expenditures may exist for various
Company sites, including, but not limited to, the Company's refinery, retail
gasoline outlets (current and closed locations) and petroleum product terminals,
and for compliance with the Clean Air Act. The amount of such future
expenditures cannot currently be determined by the Company.
In connection with the Hawaii Acquisition discussed in Note B, certain
subsidiaries of BHP (the "BHP Sellers") and the Company will execute a separate
environmental agreement at closing, whereby the BHP Sellers will indemnify
Tesoro and BHP Refining and BHP South Pacific for environmental costs arising
out of conditions which exist at, or existed prior to, closing subject to a
maximum limit of $9.5 million. Under the environmental agreement, the first $5
million of these liabilities will be the responsibility of the BHP Sellers and
the next $6 million will be shared on the basis of 75% by the BHP Sellers and
25% by Tesoro. The environmental indemnity will survive for a ten-year period.
Certain environmental claims arising out of prior operations will not be subject
to the $9.5 million limit or the ten-year time limit for claims made.
Under the agreement related to the Washington Acquisition, Shell Refining
Holding Company, a subsidiary of Shell, generally has agreed to indemnify the
Company for environmental liabilities at the Washington Refinery arising out of
conditions which existed at or prior to the closing date. However, the Company
is responsible for the first $0.5 million in environmental costs in each year
and 50% of environmental costs over $1 million in each year, subject to a
maximum aggregate liability of $5 million.
NOTE E -- INCENTIVE COMPENSATION STRATEGY
In June 1996, the Company's Board of Directors unanimously approved a
special incentive compensation strategy in order to encourage a longer-term
focus for all employees to perform at an outstanding level. The strategy
provided eligible employees with incentives to achieve a significant increase in
the market price of the Company's Common Stock. Under the strategy, awards would
be earned only if the market price of the Company's Common Stock reaches an
average price per share of $20 or higher over any 20 consecutive trading days
after June 30, 1997 and before December 31, 1998 (the "Performance Target"). In
connection with this strategy, non-executive employees will be able to earn cash
bonuses equal to 25% of their individual payroll amounts for the previous twelve
complete months and certain executives have been granted, from the Company's
Amended and Restated Executive Long-Term Incentive Plan ("Plan"), a total of
340,000 stock options at an exercise price of $11.375 per share, the fair market
value (as defined in the Plan) of a share of the Company's Common Stock on the
date of grant, and 350,000 shares of restricted Common Stock, all of which vest
only upon achieving the Performance Target.
On May 12, 1998, the Performance Target was achieved which will result in a
pretax charge of approximately $23 million ($13 million in cash and $10 million
related to the vesting of restricted stock awards and stock options) in the
second quarter of 1998. On an aftertax basis, the charge will be approximately
$15 million ($0.57 per share), representing 6% of the total aggregate increase
in shareholder value since approval of the special incentive strategy in 1996.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Those statements in the Management's Discussion and Analysis that are not
historical in nature should be deemed forward-looking statements that are
inherently uncertain. See "Forward-Looking Statements" on page 18 for discussion
of the factors which could cause actual results to differ materially from those
projected in such statements.
GENERAL
The Company is focused on its long-term strategy to maximize returns and
develop full value of its assets through strategic growth, including
acquisitions and diversifications in all of its operating segments. In this
regard, the Company has entered into two agreements whereby Tesoro's annual
revenues and scope of its refining and marketing operations will be
significantly increased, if the proposed acquisitions are consummated. On May 1,
1998, the Company entered into an agreement to acquire the capital stock of
Shell Anacortes Refining Company, an affiliate of Shell Oil Company (the
"Washington Acquisition"), which owns and operates a 108,000-barrel per day
refinery near Anacortes, Washington. Combined with Tesoro's agreement entered
into on March 18, 1998, to purchase The Broken Hill Proprietary Company
Limited's ("BHP") Hawaii refinery and related operating assets ("Hawaii
Acquisition"), Tesoro will own and operate three West Coast refineries with a
combined throughput capacity of approximately 280,000 barrels per day. Tesoro
expects the cumulative effects of the two acquisitions, if consummated, to be
accretive to 1999 earnings and cash flows. The results may be neutral in 1998
primarily due to the mid-year timing of the proposed acquisitions and a
maintenance turnaround at the Hawaii facility this summer. Annual synergies and
cost savings from integration of the operations are estimated to be $25 million
beginning in 1999. Identified synergies between the Washington, Alaska and
Hawaii refineries include logistical savings, transportation of excess feedstock
or products to areas that are short in supply, further processing of
intermediate products, as well as marketing and operational savings resulting
from having refineries close to retail operations. For further information
regarding the Washington Acquisition and Hawaii Acquisition (collectively, the
"Acquisitions") and related financing, see Notes B and C of Notes to Condensed
Consolidated Financial Statements.
The Company operates in an environment where its results and cash flows are
sensitive to volatile changes in energy prices. Major shifts in the cost of
crude oil used for refinery feedstocks and the price of refined products can
result in a change in margin from the Refining and Marketing operations, as
prices received for refined products may or may not keep pace with changes in
crude oil costs. These energy prices, together with volume levels, also
determine the carrying value of crude oil and refined product inventory. The
Company uses the last-in, first-out ("LIFO") method of accounting for
inventories of crude oil and U.S. wholesale refined products in its Refining and
Marketing segment. This method results in inventory carrying amounts that are
less likely to represent current values and in costs of sales which more closely
represent current costs. Likewise, changes in natural gas, condensate and oil
prices impact revenues and the present value of estimated future net revenues
and cash flows from the Company's Exploration and Production operations. The
Company may increase or decrease its natural gas production in response to
market conditions. The carrying value of oil and gas assets may be subject to
noncash write-downs based on changes in natural gas prices and other determining
factors. Changes in natural gas prices also influence the level of drilling
activity in the Gulf of Mexico. The Company's Marine Services operation, whose
customers include offshore drilling contractors and related industries, could be
impacted by significant fluctuations in natural gas prices. The Company's Marine
Services segment uses the first-in, first-out ("FIFO") method of accounting for
inventories of fuels. Changes in fuel prices can significantly impact inventory
valuations and costs of sales in this segment.
9
<PAGE> 10
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1997
SUMMARY
Tesoro's net earnings of $6.1 million, or $0.23 per share, for the three
months ended March 31, 1998 ("1998 Quarter") compare with net earnings of $6.1
million, or $0.23 per share, for the three months ended March 31, 1997 ("1997
Quarter"). Improved refined product margins combined with higher sales volumes
in the Company's Refining and Marketing segment and Marine Services segment
during the 1998 Quarter were offset by lower natural gas prices in the Company's
Exploration and Production segment. A discussion and analysis of the factors
contributing to these results are presented below.
REFINING AND MARKETING
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
(DOLLARS IN MILLIONS
EXCEPT PER BARREL
AMOUNTS)
<S> <C> <C>
Gross Operating Revenues:
Refined products.......................................... $ 122.7 $ 155.8
Other, primarily crude oil resales and merchandise........ 17.5 18.6
------- -------
Gross Operating Revenues............................... $ 140.2 $ 174.4
======= =======
Total Operating Profit:
Gross margin:
Refinery(a)............................................ $ 24.0 $ 18.3
Non-refinery(b)(c)..................................... 9.7 6.4
------- -------
Total gross margins............................... 33.7 24.7
Operating expenses........................................ 24.2 21.5
Depreciation and amortization............................. 3.0 3.1
------- -------
Operating Profit....................................... $ 6.5 $ 0.1
======= =======
Capital Expenditures........................................ $ 2.0 $ 2.9
======= =======
Kenai Refinery Throughput:
Barrels per day........................................... 56,148 49,140
% Alaska North Slope ("ANS") crude oil.................... 42% 79%
Refined Products Manufactured (average daily barrels):
Gasoline and gasoline blend stocks........................ 15,211 12,887
Middle distillates, including jet fuel and diesel fuel.... 25,156 20,829
Heavy oils and residual products.......................... 15,128 14,539
Other..................................................... 2,173 2,647
------- -------
Total Refined Products Manufactured............... 57,668 50,902
======= =======
Refinery Product Spread ($/barrel)(c)....................... $ 4.75 $ 4.13
======= =======
Total Segment Product Sales (average daily barrels)(c):
Gasoline.................................................. 14,495 16,738
Middle distillates........................................ 32,875 26,253
Heavy oils and residual products.......................... 18,308 17,890
------- -------
Total Product Sales............................... 65,678 60,881
======= =======
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
(DOLLARS IN MILLIONS
EXCEPT PER BARREL
AMOUNTS)
<S> <C> <C>
Total Segment Product Sales Prices ($/barrel):
Gasoline.................................................. $ 28.52 $ 33.64
Middle distillates........................................ $ 22.33 $ 32.09
Heavy oils and residual products.......................... $ 11.32 $ 18.19
Total Segment Gross Margins on Product Sales ($/barrel) (e):
Average sales price....................................... $ 20.65 $ 28.43
Average costs of sales.................................... 15.58 24.63
------- -------
Gross Margin........................................... $ 5.07 $ 3.80
======= =======
</TABLE>
- ---------------
(a) Represents throughput at the Company's refinery ("Kenai Refinery") times
refinery product spread.
(b) Non-refinery margin includes margins on products purchased and resold,
margins on products sold in markets outside of Alaska, intrasegment
pipeline revenues, retail margins, and adjustments due to selling a volume
and mix of products that is different than actual volumes manufactured.
(c) Amounts reported in the prior period have been reclassified to conform with
current presentation.
(d) Sources of total products sales include products manufactured at the Kenai
Refinery, products drawn from inventory balances and products purchased
from third parties. The Company's purchases of refined products for resale
averaged approximately 11,700 and 11,500 barrels per day for the three
months ended March 31, 1998 and 1997, respectively.
(e) Gross margins on total product sales include margins on sales of purchased
products, together with the effect of changes in inventories.
The Refining and Marketing segment's operating profit of $6.5 million in
the 1998 Quarter increased $6.4 million from operating profit of $0.1 million in
the 1997 Quarter. The improvement in results from Refining and Marketing was due
to a combination of factors, including improved refined product yields, higher
throughput volumes at the refinery and increased sales within the segment's core
Alaska market, all of which contributed to improved refinery margins. The 1998
Quarter benefited from an expansion completed in October 1997 of the Kenai
Refinery's hydrocracker unit, which increased the unit's capacity by
approximately 25% and enables the Company to produce more jet fuel, a product in
short supply in Alaska. The expansion, together with the addition of a new,
high-yield jet fuel hydrocracker catalyst, began to favorably impact this
segment's results in the fourth quarter of 1997.
During the 1998 Quarter, throughput at the Kenai Refinery increased by
7,000 barrels per day, a 14% increase over the 1997 Quarter. Production of
middle distillates increased by 4,300 barrels per day (a 21% increase over the
1997 Quarter) and production of gasoline increased by 2,300 barrels per day (an
18% increase over the 1997 Quarter). Product sales volumes increased by 8% over
the 1997 Quarter, which included a 15% increase within the core Alaska market.
The increase in sales in Alaska was mainly due to a long-term retail capital
spending program, primarily focused in the Anchorage area, which was initiated
in 1997. The improved product slate and marketing efforts contributed to an
increase in the Company's refinery product spread to $4.75 per barrel in 1998,
compared to $4.13 per barrel in 1997, reflecting a 39% decrease in the Company's
per barrel feedstock cost with a 30% decline in per barrel yield value.
Revenues from sales of refined products in the Company's Refining and
Marketing segment decreased during the 1998 Quarter due to a 27% decline in
average sales prices partly offset by the 8% increase in sales volumes. Other
revenues included crude oil resales of $10.5 million in the 1998 Quarter and
$10.7 million in the 1997 Quarter. Costs of sales decreased in the 1998 Quarter
due to lower feedstock prices. Margins from non-refinery activities increased to
$9.7 million in the 1998 Quarter due primarily to a 14% increase in retail
11
<PAGE> 12
volumes and improved margins on products sold outside of Alaska. Operating
expenses were higher in the 1998 Quarter due to increased marketing costs.
The Company's initiatives to enhance its product slate and sell more
product within Alaska, as discussed above, have improved the fundamental
earnings potential of this segment. Certain of these initiatives, such as the
hydrocracker expansion, were completed in the fourth quarter of 1997. Future
quarters will continue to benefit from the impact of these initiatives. Future
profitability of this segment, however, will continue to be influenced by market
conditions, particularly as these conditions influence costs of crude oil
relative to prices received for sales of refined products, and other additional
factors that are beyond the control of the Company. As previously discussed, the
revenues and scope of the Refining and Marketing segment will be significantly
increased upon the consummations of the Hawaii Acquisition and Washington
Acquisition (see Note B of Notes to Condensed Consolidated Financial
Statements).
12
<PAGE> 13
EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
-------- -------
(DOLLARS IN MILLIONS
EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C>
U.S. (a):
Gross operating revenues.................................. $ 19.1 $ 21.5
Other income.............................................. 0.6 1.6
Production costs.......................................... 2.5 1.7
Administrative support and other operating expenses....... 0.4 0.5
Depreciation, depletion and amortization.................. 8.9 7.9
-------- -------
Operating Profit -- U.S. .............................. 7.9 13.0
-------- -------
BOLIVIA:
Gross operating revenues.................................. 3.1 1.9
Production costs.......................................... 0.3 0.2
Administrative support and other operating expenses....... 0.6 0.5
Depreciation, depletion and amortization.................. 0.5 0.2
-------
Operating Profit -- Bolivia............................ 1.7 1.0
-------- -------
TOTAL OPERATING PROFIT -- EXPLORATION AND
PRODUCTION...................................... $ 9.6 $ 14.0
======== =======
U.S.:
Average Daily Net Production:
Natural gas (thousand cubic feet, "Mcf")............... 99,135 94,103
Oil (barrels).......................................... 173 145
Total (thousand cubic feet equivalent, "Mcfe").... 100,173 94,973
Average Prices:
Natural gas ($/Mcf)(b)................................. $ 2.01 $ 2.34
Oil ($/barrel)......................................... $ 14.13 $ 21.14
Average Operating Expenses ($/Mcfe):
Lease operating expenses............................... $ 0.21 $ 0.16
Severance taxes........................................ 0.06 0.04
-------- -------
Total production costs............................ 0.27 0.20
Administrative support and other....................... 0.05 0.05
-------- -------
Total Operating Expenses.......................... $ 0.32 $ 0.25
======== =======
Depletion ($/Mcfe)........................................ $ 0.97 $ 0.91
======== =======
Capital Expenditures...................................... $ 18.2 $ 7.0
======== =======
BOLIVIA:
Average Daily Net Production:
Natural gas (Mcf)...................................... 22,769 10,999
Condensate (barrels)................................... 816 316
Total (Mcfe)...................................... 27,665 12,895
Average Prices:
Natural gas ($/Mcf).................................... $ 0.97 $ 1.32
Condensate ($/barrel).................................. $ 15.78 $ 19.28
Average Operating Expenses ($/Mcfe):
Production costs....................................... $ 0.11 $ 0.16
Administrative support and other....................... 0.29 0.41
-------- -------
Total Operating Expenses.......................... $ 0.40 $ 0.57
======== =======
Depletion ($/Mcfe)........................................ $ 0.21 $ 0.15
======== =======
Capital Expenditures...................................... $ 2.3 $ 4.0
======== =======
</TABLE>
- ---------------
(a) Represents the Company's U.S. oil and gas operations combined with gas
transportation activities.
(b) Includes effects of the Company's natural gas commodity price agreements
which amounted to a loss of $.19 per Mcf for the three months ended March
31, 1997. There were no such agreements during the three months ended March
31, 1998.
13
<PAGE> 14
EXPLORATION AND PRODUCTION
U.S. Operating profit from the Company's U.S. exploration and production
operations was $7.9 million in the 1998 Quarter compared with $13.0 million in
the 1997 Quarter. While the Company's production increased by 5%, natural gas
prices declined by $0.33 per Mcf, or 14%, to $2.01 per Mcf in the 1998 Quarter
compared to $2.34 per Mcf in the 1997 Quarter. The 1997 Quarter also benefited
from income of $1.6 million for retroactive severance tax refunds for production
in prior years, with no substantial refunds received in the 1998 Quarter.
The Company's production volumes averaged 100.2 million cubic feet
equivalents ("Mmcfe") per day in the 1998 Quarter compared to 95.0 Mmcfe per day
in the 1997 Quarter. This increase in the Company's production consisted of a
30.4 million cubic feet ("Mmcf") per day decline from the Bob West Field offset
by a 35.6 Mmcfe per day production increase from other U.S. fields. The
Company's production outside of the Bob West Field rose to 51% of total
production during the 1998 Quarter, as compared to 17% in the 1997 Quarter.
Gross operating revenues from the Company's U.S. operations decreased by
$2.4 million, primarily due to lower spot market prices for sales of natural
gas. Other income was lower in the 1998 Quarter due to fewer refunds of
severance taxes. Production costs were higher by $0.8 million ($0.07 per Mcfe)
primarily due to higher lease operating expenses. Lease operating costs in the
aggregate for the Bob West Field remained relatively flat, while production
volumes have declined, resulting in an increase in per unit lease operating
expense from $0.13 per Mcf in the 1997 Quarter to $0.22 per Mcf in the 1998
Quarter. Lease operating costs in the aggregate for other fields have doubled,
while production volumes have tripled, resulting in a decrease in per unit lease
operating cost from $0.29 per Mcfe to $0.19 per Mcfe. Depreciation, depletion
and amortization increased by $1.0 million, or 13%, due to a higher depletion
rate and increased volumes.
From time to time, the Company enters into commodity price agreements to
reduce the risk caused by fluctuation in the prices of natural gas in the spot
market. During the 1997 Quarter, the Company used such agreements to set the
price of 34% of the natural gas production that it sold in the spot market and
recognized a loss of $1.6 million ($.19 per Mcf) related to these price
agreements. The Company did not have any such transactions during the 1998
Quarter.
BOLIVIA. Operating profit from the Company's Bolivian operations increased
to $1.7 million in the 1998 Quarter, from $1.0 million operating profit in the
1997 Quarter. Although Bolivian natural gas prices fell to $0.97 per Mcf from
$1.32 per Mcf realized in the 1997 Quarter, net production volumes more than
doubled to 27.7 Mmcfe per day from 12.9 Mmcfe per day in the 1997 Quarter.
Production in the 1997 Quarter was affected by lower contractual purchases made
to balance prior over-production in 1996 and also by constraints from repairs to
a non-Company-owned pipeline that transports gas from Bolivia to Argentina.
Additionally, production in the 1998 Quarter reflects an increase resulting from
the Company's purchase of interests held by its former joint venture participant
in July 1997.
A lack of market access has constrained natural gas production in Bolivia.
The Company believes that the completion of a 1,900-mile pipeline from Bolivia
to Brazil will provide access to larger gas-consuming markets. Upon completion
of this pipeline, the Company will face intense competition from major and
independent natural gas companies operating in Bolivia for a share of the
contractual volumes to be exported to Brazil. It is anticipated that each
producer's share of the contractual volumes will be allocated by a Bolivian
governmental agency according to a number of factors, including the producer's
reserve volumes and production capacity. Although the Company expects gas
deliveries on the pipeline to begin in early 1999, there can be no assurance
that the pipeline will be operational by such date. With the exception of the
volumes currently under contract with the Bolivian government, the Company
cannot be assured of the amount of additional volumes that will be exported to
Brazil upon completion of the pipeline.
14
<PAGE> 15
The productive capacity of the Company's wells in Bolivia, including
shut-in wells, is approximately 120 Mmcf per day gross. In addition, two wells
have been spudded during the second quarter of 1998 as part of a five-well
program designed to increase proved reserves.
MARINE SERVICES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Gross Operating Revenues:
Fuels..................................................... $25.8 $28.2
Lubricants and other...................................... 4.1 4.3
Services.................................................. 2.9 3.0
----- -----
Gross Operating Revenues............................... 32.8 35.5
Costs of Sales.............................................. 23.6 27.3
----- -----
Gross Profit........................................... 9.2 8.2
Operating Expenses and Other................................ 6.8 6.9
Depreciation and Amortization............................... 0.6 0.4
----- -----
Operating Profit.................................. $ 1.8 $ 0.9
===== =====
Sales Volumes (millions of gallons):
Fuels, primarily diesel................................... 47.9 39.6
Lubricants................................................ 1.7 0.7
Capital Expenditures........................................ $ 1.2 $ 2.2
</TABLE>
Gross operating revenues declined by $2.7 million during the 1998 Quarter
due primarily to lower fuel sales prices partly offset by increased volumes.
Cost of sales decreased by $3.7 million, which also reflects the lower fuel
prices. In total, operating profit improved by $0.9 million largely due to
increased margins.
The Marine Services segment's business is largely dependent upon the volume
of oil and gas drilling, workover, construction and seismic activity in the Gulf
of Mexico.
INTEREST EXPENSE
Interest expense of $2.7 million for the 1998 Quarter compares with $1.6
million in the 1997 Quarter. The increase was primarily due to higher borrowings
under the Company's revolving credit facility to fund net working capital
requirements, arising primarily from higher crude oil levels at the Kenai
Refinery, and to fund capital expenditures.
INCOME TAX PROVISION
The income tax provision was $4.8 million in the 1998 Quarter and $3.5
million in the 1997 quarter, representing effective tax rates of 44% and 36%,
respectively. The increase in the effective tax rate was primarily due to
foreign taxes on the Company's increased Bolivian revenues.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
The Company's primary sources of liquidity are its internal cash generation
and external financing. During the 1998 Quarter, the Company made capital
expenditures of $24 million, which were funded through a combination of cash
flows from operations and external borrowings. At March 31, 1998, the Company's
debt-to-capitalization ratio was 29% which will enable the Company to access
capital markets (see Note C of Notes to Condensed Consolidated Financial
Statements).
15
<PAGE> 16
The Company operates in an environment where its liquidity and capital
resources are impacted by changes in the supply of and demand for crude oil,
natural gas and refined petroleum products, market uncertainty and a variety of
additional risks that are beyond the control of the Company. These risks
include, among others, the level of consumer product demand, weather conditions,
the proximity of the Company's natural gas reserves to pipelines, the capacities
of such pipelines, fluctuations in seasonal demand, governmental regulations,
the price and availability of alternative fuels and overall market and economic
conditions. The Company's future capital expenditures as well as borrowings
under its credit arrangements and other sources of capital will be affected by
these conditions.
RECENT DEVELOPMENTS
The Acquisitions, as discussed in Note B, will be funded using revolving
credit and term loans, which have been fully underwritten by Lehman Brothers,
and a combination of senior subordinated debt, common stock and preferred stock.
In addition to funding the cash consideration of the Acquisitions, the
financings will provide the Company with increased letter of credit capacity,
funds to refinance substantially all of its existing indebtedness and funds for
future working capital needs and general corporate purposes, including the
Company's 1998 capital budget. The Company is currently in the documentation
stage of negotiations for the revolving credit and term loans.
On May 4, 1998, the Company filed a universal shelf registration statement
("Registration Statement") with the SEC for $600 million of debt or equity
securities for acquisitions or general corporate purposes. Tesoro will determine
the specific type and number of securities to be issued during the course of the
financing process. The Registration Statement was declared effective by the
Securities and Exchange Commission on May 14, 1998.
In connection with filing the Registration Statement, the Company's Board
of Directors approved terminating the repurchase of Tesoro's Common Stock under
a repurchase program that was initiated in May 1997. The repurchase program,
which was scheduled to conclude at the end of 1998, is inconsistent with the
shelf registration and the Company's growth strategies.
On May 12, 1998, employee incentive payments were triggered when the high
and low trading price of the Company's Common Stock averaged $20 per share over
a 20 consecutive trading day period under an incentive strategy approved by the
Company's Board of Directors in June 1996. The triggering of those awards
reflects an aggregate increase of more than $250 million in the market value of
the Company's Common Stock since June 1996. The triggering of the incentive
program will result in a pretax charge of approximately $23 million (of which
approximately $10 million is non-cash) during the second quarter of 1998. On an
aftertax basis, the charge will be approximately $15 million ($0.57 per share)
which represents approximately 6% of the increase in Tesoro's market value since
June 1996. For further information related to the incentive strategy, see Note E
of Notes to Condensed Consolidated Financial Statements.
EXISTING CREDIT ARRANGEMENTS
The Company's amended and restated corporate revolving credit agreement
("Credit Facility"), which expires in April 2000, provides total commitments of
$150 million from a consortium of nine banks. The Company, at its option, has
currently activated $100 million of these commitments. The Credit Facility
provides for the issuance of letters of credit, and for cash borrowings up to
$100 million, with the aggregate subject to a borrowing base (which was
approximately $136 million at March 31, 1998). At March 31, 1998, the Company
had outstanding cash borrowings of $51 million under the Credit Facility. Cash
borrowings under the Credit Facility are generally used on a short-term basis to
finance working capital requirements and capital expenditures. Under the Credit
Facility, at March 31, 1998, the Company had outstanding letters of credit of
$24 million, primarily for royalty crude oil purchases from the State of Alaska.
Unused availability, including unactivated commitments, under the Credit
Facility at March 31, 1998 for additional borrowings and letters of credit
totaled $75 million. The Company is also permitted to utilize unsecured letters
of credit outside of the Credit Facility up to $40 million (none outstanding at
March 31, 1998).
16
<PAGE> 17
CAPITAL SPENDING
For the year 1998, the Company has a total capital budget of approximately
$195 million, excluding amounts required to fund the Acquisitions and capital
expenditures for operations related to the Acquisitions. Capital expenditures
for 1998 are expected to be financed through a combination of cash flows from
operations, available cash reserves and additional borrowings under credit
arrangements. Actual capital expenditures may vary from these projections due to
a number of factors, including the timing of drilling projects and the extent to
which properties are acquired. During the 1998 Quarter, the Company's capital
expenditures totaled $24 million which were financed primarily with external
financing and internally-generated cash flows.
The Exploration and Production segment accounts for $139 million, or 71%,
of the budget with $82 million planned for U.S. activities and $57 million for
Bolivia. Planned U.S. expenditures include $25 million for acquisitions, $21
million for development drilling (participation in 30 wells), $17 million for
leasehold, geological and geophysical, and $17 million for exploratory drilling
(participation in 20 wells). In Bolivia, the drilling program is budgeted at $14
million for development drilling (three wells) and $12 million for exploratory
drilling (two wells), with the remainder planned for upgrading a gas processing
plant, laying gathering lines to shut-in wells, workovers and three-dimensional
seismic activity. For the 1998 Quarter, actual U.S. expenditures in the
Exploration and Production segment were $18 million, principally for the
participation in the drilling of three development wells (three completed) and
seven exploratory wells (three completed). In Bolivia, capital spending for the
1998 Quarter totaled $2 million, primarily for exploratory costs.
Capital spending, other than the Acquisitions, for the Refining and
Marketing segment is planned at $39 million, which includes $20 million towards
the retail marketing expansion program in Alaska started in 1997, $8 million for
environmental and $8 million for refinery improvements. The Refining and
Marketing segment spent approximately $2 million towards these projects during
the 1998 Quarter.
The Marine Services capital budget is $9 million, of which $1 million was
spent during the 1998 Quarter. The capital budget is primarily directed towards
equipment and facility upgrades together with potential acquisitions.
CASH FLOWS
Components of the Company's cash flows are set forth below (in millions):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
1998 1997
------ ------
<S> <C> <C>
Cash Flows From (Used In):
Operating Activities...................................... $ 6.4 $ 23.8
Investing Activities...................................... (29.5) (16.8)
Financing Activities...................................... 17.0 1.6
------ ------
Increase (Decrease) in Cash and Cash Equivalents............ $ (6.1) $ 8.6
====== ======
</TABLE>
Net cash from operating activities during the 1998 Quarter totaled $6
million, compared to $24 million in the 1997 Quarter. Although the level of
earnings during both quarters was relatively the same, working capital
components were higher during the 1998 quarter. Net cash used in investing
activities of $29 million during the 1998 Quarter included capital expenditures
of $24 million, primarily in the Company's exploration and production segment,
and an escrow deposit of $5 million for the Hawaii Acquisition. Net cash from
financing activities of $17 million during the 1998 Quarter included additional
borrowings of $23 million under the Credit Facility, partially offset by
payments of other long-term debt, including repayment and termination of a
marine services loan. During the 1998 Quarter, gross borrowings under revolving
credit lines were $110 million, with $92 million of repayments. At March 31,
1998, the Company's outstanding borrowings under the
17
<PAGE> 18
Credit Facility were $51 million and net working capital totaled $87 million,
which included cash and cash equivalents of $2.3 million.
ENVIRONMENTAL
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which change frequently, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites or install additional controls
or other modifications or changes in use for certain emission sources. The
Company is currently involved in remedial responses and has incurred cleanup
expenditures associated with environmental matters at a number of sites,
including certain of its current and prior-owned properties. At March 31, 1998,
the Company's accruals for environmental expenses amounted to $8.7 million,
which included a noncurrent liability of $2.5 million for remediation of KPL's
properties that has been funded by the former owners of KPL through a restricted
escrow deposit. Based on currently available information, including the
participation of other parties or former owners in remediation actions, the
Company believes these accruals are adequate. To comply with environmental laws
and regulations, the Company anticipates that it will make capital improvements
of approximately $7 million in 1998 and $2 million in 1999. In addition, capital
expenditures for alternative secondary containment systems for existing storage
tank facilities are estimated to be $2 million in 1998 and $2 million in 1999
with a remaining $5 million to be spent by 2002.
Conditions that require additional expenditures may exist for various
Company sites, including, but not limited to, the Kenai Refinery, retail
gasoline outlets (current and closed locations) and petroleum product terminals,
and for compliance with the Clean Air Act. The amount of such future
expenditures cannot currently be determined by the Company.
For further information on environmental contingencies, including
environmental matters related to the Acquisitions, see Note D of Notes to
Condensed Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q, including those contained
in the foregoing discussion and other items herein, concerning the Company which
are (a) projections of revenues, earnings, earnings per share, capital
expenditures or other financial items, (b) statements of plans and objectives
for future operations, including acquisitions, (c) statements of future economic
performance, or (d) statements of assumptions or estimates underlying or
supporting the foregoing are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The ultimate accuracy of forward-looking statements is
subject to a wide range of business risks and changes in circumstances, and
actual results and outcomes often differ from expectations. Any number of
important factors could cause actual results to differ materially from those in
the forward-looking statements herein, including the following: the timing and
extent of changes in commodity prices and underlying demand and availability of
crude oil and other refinery feedstocks, refined products, and natural gas;
actions of customers and competitors; changes in the cost or availability of
third-party vessels, pipelines and other means of transporting feedstocks and
products; state and federal environmental, economic, safety and other policies
and regulations, any changes therein, and any legal or regulatory delays or
other factors beyond the Company's control; execution of planned capital
projects; weather conditions affecting the Company's operations or the areas in
which the Company's products are marketed; future well performance; the extent
of Tesoro's success in acquiring oil and gas properties and in discovering,
developing and producing reserves; political developments in foreign countries;
the conditions of the capital markets and equity markets during the periods
covered by the forward-looking statements; earthquakes or other natural
disasters affecting operations; adverse rulings, judgments, or settlements in
litigation or other legal matters, including unexpected environmental
remediation costs in excess of any reserves; and adverse changes in the credit
ratings assigned to the Company's trade credit. For more information with
respect to the foregoing, see the Company's Annual Report on Form 10-K. The
Company undertakes no obligation to publicly release the result of any revisions
to any such forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
18
<PAGE> 19
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index immediately preceding the exhibits filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K was filed on May 13, 1998, reporting information under
Item 5 related to the Company's proposed acquisition of all of the outstanding
stock of BHP Petroleum Americas Refining Inc. and BHP Petroleum South Pacific
Inc. (collectively, "BHP Hawaii") and filing financial statements of BHP Hawaii
and related pro forma financial information under Item 7. Financial statements
included in the Form 8-K were as follows: (i) Audited Combined Financial
Statements of BHP Petroleum Americas Refining Inc. and BHP Petroleum South
Pacific Inc. as of May 31, 1997 and 1996; and (ii) Unaudited Combined Financial
Statements of BHP Petroleum Americas Refining Inc. and BHP Petroleum South
Pacific Inc. as of December 31, 1997 and 1996. Pro Forma Combined Condensed
Financial Statements of the Company, BHP Petroleum Americas Refining Inc. and
BHP Petroleum South Pacific Inc. as of and for the year ended December 31, 1997
were also filed.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TESORO PETROLEUM CORPORATION
REGISTRANT
Date: May 15, 1998 /s/ BRUCE A. SMITH
------------------------------------
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive
Officer
Date: May 15, 1998 /s/ DON E. BEERE
------------------------------------
Don E. Beere
Vice President, Controller
(Chief Accounting Officer)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
2.1 Stock Purchase Agreement, dated May 1, 1998, among Shell
Refining Holding Company, Shell Anacortes Refining Company
and the Company.
27.1 Financial Data Schedule (March 31, 1998).
27.2 Restated Financial Data Schedule (March 31, 1997).
27.3 Restated Financial Data Schedule (June 30, 1997).
27.4 Restated Financial Data Schedule (September 30, 1997).
27.5 Restated Financial Data Schedule (March 31, 1996).
27.6 Restated Financial Data Schedule (June 30, 1996).
27.7 Restated Financial Data Schedule (September 30, 1996).
</TABLE>
21
<PAGE> 1
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
(ANACORTES REFINERY)
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<S> <C>
ARTICLE I DEFINITIONS AND REFERENCES..............................................................................2
1.01 Acquired Affiliate Company Employee.............................................................2
1.02 Affiliate.......................................................................................2
1.03 Affiliate Company Employee......................................................................2
1.04 Applicable Law..................................................................................3
1.05 Assets..........................................................................................3
1.06 Audited Closing Balance Sheet...................................................................3
1.07 Base Rate.......................................................................................3
1.08 Claim Notice....................................................................................3
1.09 Closing.........................................................................................3
1.10 Closing Date....................................................................................3
1.11 Company Employees...............................................................................4
1.12 Consent Order...................................................................................4
1.13 Contracts.......................................................................................4
1.14 Damages.........................................................................................4
1.15 Effective Time..................................................................................5
1.16 Environmental Liability.........................................................................5
1.17 Equilon.........................................................................................5
1.18 Equipment.......................................................................................6
1.19 Exchange Inventory..............................................................................6
1.20 Extraordinary Adverse Change....................................................................6
1.21 Feedstock Inventory.............................................................................6
1.22 Force Majeure Event.............................................................................7
1.23 Hazardous Substance.............................................................................7
1.24 Improvements....................................................................................7
1.25 Indemnitee......................................................................................7
1.26 Indemnitor......................................................................................7
1.27 Intangible Property.............................................................................8
1.28 Intellectual Property...........................................................................8
1.29 Inventory in Transit............................................................................8
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
1.30 Judgments.......................................................................................8
1.31 "Known, or Knowledge" or "To the knowledge of" or "Within the knowledge of a Party as
used herein"....................................................................................9
1.32 Late Payment Rate...............................................................................9
1.33 Leased Real Property............................................................................9
1.34 Leases and Easements...........................................................................10
1.35 Legal Requirements.............................................................................10
1.36 Liens..........................................................................................10
1.37 Material Adverse Effect........................................................................10
1.38 Net Working Capital Adjustment.................................................................11
1.39 Operations.....................................................................................11
1.40 Other Company Assets...........................................................................11
1.41 Other Inventory................................................................................11
1.42 Other Post Employment Benefits.................................................................11
1.43 Owned Real Property............................................................................11
1.44 Party..........................................................................................11
1.45 Permits........................................................................................11
1.46 Permitted Encumbrances.........................................................................12
1.47 Person.........................................................................................12
1.48 Prepaid Expenses and Deposits..................................................................12
1.49 Product Inventory..............................................................................12
1.50 Real Property..................................................................................13
1.51 Related Agreements.............................................................................13
1.52 Release........................................................................................13
1.53 Seller Retained Assets.........................................................................13
1.54 SH&E Condition.................................................................................14
1.55 SH&E Law.......................................................................................14
1.56 Shell..........................................................................................14
1.57 Subsidiary.....................................................................................14
1.58 Surplus Company Property.......................................................................15
1.59 Taxes..........................................................................................15
1.60 Third Party Property...........................................................................15
1.61 Threshold Amount...............................................................................15
1.62 Trademarks.....................................................................................15
</TABLE>
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<TABLE>
<S> <C> <C>
1.63 Unaudited Closing Balance Sheet................................................................16
ARTICLE 2 SALE AND PURCHASE OF SHARES; RETENTION OF CERTAIN LIABILITIES..........................................16
2.01 Sale and Purchase..............................................................................16
2.02 Purchase Price.................................................................................16
2.03 Method of Payment..............................................................................16
2.04 Limited Retention of Liabilities...............................................................16
ARTICLE 3 CLOSING................................................................................................18
3.01 Place and Time.................................................................................18
3.02 Transactions and Deliveries at or Prior to Closing.............................................18
3.03 Adjustments as of Closing......................................................................20
3.04 Other Transactions.............................................................................24
ARTICLE 4 COMPANY'S EMPLOYEES, EMPLOYMENT AND EMPLOYEE BENEFITS..................................................25
4.01 Employees in General...........................................................................25
4.02 Represented Employees..........................................................................25
4.03 Nonrepresented Employees.......................................................................26
4.04 Employee Benefits for Continuing Nonrepresented Employees......................................28
4.05 Liabilities and Indemnities....................................................................35
ARTICLE 5 SELLER'S REPRESENTATIONS AND WARRANTIES................................................................35
5.01 Title to Shares................................................................................36
5.02 Directors and Officers.........................................................................36
5.03 Shareholders Agreements........................................................................36
5.04 Organization and Standing......................................................................36
5.05 Authorization; Binding Obligation..............................................................37
5.06 Consents; Non-Contravention....................................................................37
5.07 Litigation.....................................................................................38
5.08 Compliance with Laws...........................................................................38
5.09 Financial Statements...........................................................................39
5.10 Liabilities....................................................................................39
5.11 Absence of Certain Changes.....................................................................40
5.12 Assets Necessary to the Business...............................................................41
5.13 Condition of Improvements and Equipment........................................................41
5.14 Contracts and Commitments......................................................................41
</TABLE>
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<TABLE>
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5.15 Real and Tangible Property.....................................................................43
5.16 Intellectual Property..........................................................................44
5.17 Labor Matters..................................................................................45
5.18 Employee Benefit Matters.......................................................................45
5.19 Taxes..........................................................................................46
5.20 Permits and Other Operating Rights.............................................................49
5.21 No Knowledge of Breaches.......................................................................50
ARTICLE 6 BUYER'S REPRESENTATIONS AND WARRANTIES.................................................................50
6.01 Organization and Standing......................................................................50
6.02 Authorization; Binding Obligation..............................................................50
6.03 Consents; Non-Contravention....................................................................51
6.04 Litigation.....................................................................................52
6.05 Actions and Proceedings........................................................................52
6.06 Independent Decision...........................................................................52
6.07 No Knowledge of Breaches.......................................................................52
ARTICLE 7 CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE....................................................53
7.01 Taking of Assets...............................................................................53
7.02 Extraordinary Adverse Change...................................................................53
7.03 Representations and Warranties True; Covenants Performed.......................................54
7.04 Shell Oil Company Guarantee....................................................................54
ARTICLE 8 CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE...................................................55
8.01 Representations and Warranties True; Covenants Performed.......................................55
8.02 Buyer's Notice.................................................................................55
ARTICLE 9 JOINT CONDITIONS PRECEDENT TO CLOSING OBLIGATIONS......................................................56
9.01 FTC and State Approval.........................................................................56
9.02 Required Consents and Authorizations...........................................................56
9.03 Litigation.....................................................................................56
9.04 Agreements Finalized...........................................................................56
ARTICLE 10 COVENANTS AND AGREEMENTS OF SELLER...................................................................57
10.01 Conduct of Business............................................................................57
10.02 Access to Information..........................................................................59
10.03 No Solicitation of Transactions................................................................59
10.04 Authorizations.................................................................................60
</TABLE>
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<TABLE>
<S> <C> <C>
10.05 Financial Statements...........................................................................61
10.06 Other Confidentiality Agreements...............................................................61
ARTICLE 11 COVENANTS AND AGREEMENT OF BUYER......................................................................62
11.01 Access.........................................................................................62
11.02 Change of Name; Using of Trademarks, Shell Marks...............................................62
11.03 No Registration; Transferability...............................................................63
11.04 FTC and State Orders...........................................................................63
11.05 Continuing and Cut Off of Grant of Intellectual Property Rights................................64
11.06 Buyer's Notice.................................................................................64
ARTICLE 12 COVENANTS OF BUYER AND SELLER.........................................................................64
12.01 Antitrust Compliance...........................................................................64
12.02 Efforts to Satisfy Conditions..................................................................65
12.03 Payment of Transfer Taxes......................................................................65
12.04 Casualty Repair................................................................................65
12.05 Books and Records..............................................................................65
12.06 Public Announcements...........................................................................66
12.07 Other Tax Matters..............................................................................67
ARTICLE 13 ENVIRONMENTAL LIABILITIES.............................................................................71
13.01 Environmental Liabilities......................................................................71
13.02 Waste Sites....................................................................................72
ARTICLE 14 INDEMNIFICATION; SURVIVAL.............................................................................73
14.01 Indemnification................................................................................73
14.02 Actions........................................................................................76
14.03 Notification...................................................................................76
14.04 Defense of Actions.............................................................................77
14.05 Coordination of Indemnification Rights.........................................................78
14.06 Right to Cure..................................................................................79
14.07 Indemnification for Taxes......................................................................80
ARTICLE 15 ARBITRATION...........................................................................................82
15.01 Dispute Resolution.............................................................................82
15.02 Place..........................................................................................82
15.03 Arbitrators....................................................................................83
15.04 Statute of Limitations.........................................................................83
</TABLE>
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<TABLE>
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15.05 Discovery......................................................................................83
15.06 Costs..........................................................................................83
15.07 Breach.........................................................................................84
15.08 Consent to Jurisdiction........................................................................84
ARTICLE 16 EARNEST MONEY AND ESCROW..............................................................................84
16.01 Earnest Money..................................................................................84
16.02 Escrow Account.................................................................................85
ARTICLE 17 RISK OF LOSS..........................................................................................86
ARTICLE 18 COMMISSIONS AND FINDER'S FEES.........................................................................86
ARTICLE 19 TRANSITIONAL SERVICES.................................................................................87
ARTICLE 20 ENVIRONMENTAL AUDIT...................................................................................87
ARTICLE 21 MISCELLANEOUS.........................................................................................87
21.01 Entire Agreement; Amendments...................................................................87
21.02 Invalidity.....................................................................................88
21.03 Effect of Waiver or Consent....................................................................88
21.04 Headings.......................................................................................89
21.05 Limitation on Benefits of This Agreement.......................................................89
21.06 Notices........................................................................................89
21.07 Binding Effect.................................................................................90
21.08 Additional Actions and Documents...............................................................90
21.09 Pronouns.......................................................................................91
21.10 Place of Transfer of Title and Possession......................................................91
21.11 Execution in Counterparts......................................................................91
21.12 Choice of Law..................................................................................91
21.13 Confidentiality................................................................................91
21.14 Costs and Expenses.............................................................................93
21.15 Assignment.....................................................................................94
</TABLE>
SCHEDULES AND EXHIBITS:
Schedule 1.48 - Prepaid Expenses and Deposits
Schedule 1.53 - Seller Retained Assets
Schedule 2.04(b) - Rejected Contracts
Schedule 3.02(a)(v) - Opinion of Counsel (Seller)
Schedule 3.02(b)(iv) - Opinion of Counsel (Buyer)
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<PAGE> 8
Schedule 3.03(a)(i) - Process of Determination of Values of Inventory
Schedule 4.01 - Employees in General
Schedule 4.02(a) - Collective Bargaining Agreement
Schedule 5.01 - Title to Shares
Schedule 5.04 - Subsidiaries
Schedule 5.06(a) - Seller/Company Consents
Schedule 5.06(b) - Seller/Company Conflicts
Schedule 5.07 - Litigation/Administrative Proceedings/Liabilities Threatened
Schedule 5.09 - Financial Statements
Schedule 5.11 - Certain Changes
Schedule 5.12 - Assets Necessary to the Business
Schedule 5.14 - Contracts and Commitments
Schedule 5.15 - Real and Tangible Property
Schedule 5.16 - Software Applications
Schedule 5.18 - Employee Benefit Matters
Schedule 5.19 - Taxes
Schedule 5.20 - Permits
Schedule 6.03 - Buyer Consents
Schedule 6.05 - Actions and Proceedings
Exhibit 3.04(a) - Framework of Offtake Agreements
Exhibit 3.04(b) - Framework for Modifications to Existing Supply Agreements
Exhibit 3.04(c) - Framework of Reimbursement Agreement
Exhibit 3.04(d) - Framework of Transition Services Agreement
Exhibit 4.04(d) - Pension Benefit Calculation Examples
Exhibit 11.05 - Technology, Trademark & Equipment License Agreement (SOC/SARC)
Exhibit 12.07(i) - Form of Tax Certificate
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<PAGE> 9
STOCK PURCHASE AGREEMENT
(ANACORTES REFINERY)
THIS STOCK PURCHASE AGREEMENT ("Agreement") is made and entered into as
of the 1st day of May, 1998, by and between SHELL REFINING HOLDING COMPANY, a
Delaware corporation ("SRHC"), hereinafter referred to as "Seller," Shell
Anacortes Refining Company, a Delaware corporation (the "Company"), and TESORO
PETROLEUM CORPORATION, a Delaware corporation, hereinafter referred to as
"Buyer."
W I T N E S S E T H:
WHEREAS, Seller is the legal and beneficial holder of all of the issued
and outstanding shares of stock ("Shares") of the Company;
WHEREAS, the Company is in the business of refining crude oil at what
is commonly known as the Shell Anacortes Refinery in Anacortes, Skagit County,
Washington;
WHEREAS, Seller desires to sell, and Buyer desires to purchase, all
Shares of the Company on the terms and conditions contained in this Agreement;
WHEREAS, Buyer and a company related to Seller desire to enter into
certain other transactions.
NOW, THEREFORE, in consideration of Ten Dollars U.S. ($10.00), the
mutual covenants and agreements hereinafter set forth and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Seller, Buyer and the Company agree as follows:
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<PAGE> 10
ARTICLE I
DEFINITIONS AND REFERENCES
Terms which are defined in Sections other than Article 1 of this
Agreement shall have the meanings attributed to them where defined. All
references herein to Sections, Exhibits, and Schedules are to the Sections of
and Exhibits and Schedules attached to and forming part of this Agreement,
unless the contrary is specifically stated.
As used in this Agreement, the following terms shall have the meanings
set forth below, unless the context otherwise requires:
1.01 ACQUIRED AFFILIATE COMPANY EMPLOYEE
"Acquired Affiliate Company Employee" shall mean each Affiliate Company
Employee who accepts an offer of employment from the Company and who completes
his or her first hour of service with the Company after the Effective Time.
1.02 AFFILIATE
"Affiliate" shall mean, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with,
such Person; for purposes of this definition, "control" shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of an entity, whether through the
ownership of voting securities or otherwise.
1.03 AFFILIATE COMPANY EMPLOYEE
"Affiliate Company Employee" shall mean each regular, full-time
nonrepresented employee of each Affiliate of the Company transferred to the
Company for the duration of the Hold Separate Period, including employees
working in refinery management, production, supply and trading, sales,
marketing, and finance areas (except for any such transferred employee who has
been or will be replaced in accordance with the terms of the Hold Separate
Agreement.).
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1.04 APPLICABLE LAW
"Applicable Law" means any applicable statute, law, ordinance, rule or
regulation.
1.05 ASSETS
"Assets" shall mean Real Property, Equipment, Improvements, Feedstock
Inventory, Product Inventory, Inventory in Transit, Exchange Inventory, Other
Inventory, Prepaid Expenses and Deposits, Surplus Company Property and Other
Company Assets, but shall exclude (i) the Seller Retained Assets, (ii) all of
those Assets now owned by Seller or hereafter acquired by Company and which are
transferred, used or otherwise disposed of prior to Closing in the ordinary
course of business, and (iii) assets that are Third Party Property.
1.06 AUDITED CLOSING BALANCE SHEET
"Audited Closing Balance Sheet" shall have the meaning specified in
Section 3.03(c).
1.07 BASE RATE
"Base Rate" shall mean the lesser of (i) the per annum rate of interest
calculated on a daily basis using the 3-month Treasury Bill rate published in
The Wall Street Journal for the applicable day (with the rate for any day for
which such rate is not published being the rate most recently published) plus
two hundred (200) basis points, and (ii) the maximum nonusurious rate of
interest permitted by Applicable Law, such Base Rate to be adjusted
automatically as and to the extent that either (i) or (ii) immediately above
changes from time to time.
1.08 CLAIM NOTICE
"Claim Notice" shall have the meaning set forth in Section 14.03.
1.09 CLOSING
"Closing" means the closing of the purchase and sale of the Shares as
contemplated hereunder.
1.10 CLOSING DATE
Closing Date" means the time and date the Closing occurs.
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<PAGE> 12
1.11 COMPANY EMPLOYEES
"Company Employees" shall have the meaning specified in Section 4.01.
1.12 CONSENT ORDER
"Consent Order" shall mean the order issued by the Federal Trade
Commission in the matter of Shell Oil Company and Texaco Inc. under File No.
971-0026 and the consent decree issued by the United States District Court of
the Western District of Washington in the matter of State of Washington and
State of Oregon v. Texaco Inc., a Delaware corporation and Shell Oil Company, a
Delaware corporation, as they may be amended and supplemented from time to time.
1.13 CONTRACTS
"Contracts" means those contracts or agreements listed on Schedule 5.14
hereto.
1.14 DAMAGES
"Damages" shall mean (a) any and all obligations, liabilities, damages
(but excluding any indirect, special, punitive, exemplary and consequential
damages other than such damages awarded to a third party against an Indemnitee
pursuant to this Agreement), penalties, deficiencies, losses (but excluding lost
profits), judgments, settlements, costs and reasonably incurred expenses,
interest, bonding and appellate costs and attorneys', accountants', engineers',
consultants' and investigators' reasonable fees and disbursements, in each case
after the application of any and all amounts recovered (net of costs of
recovery) under insurance contracts or similar arrangements (but excluding
self-insurance arrangements) and from third parties by the Indemnitee and (b)
interest on such aforesaid items at (i) the Base Rate as set forth in Section
1.07 beginning thirty (30) days after the date on which the Indemnitee makes a
payment in respect of a claim or demand asserted by a third party against the
Indemnitee for which the Indemnitee is entitled to indemnification hereunder or
(ii) the Late Payment Rate beginning on the date a final and non-appealable
judgment or award is entered in favor of the
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<PAGE> 13
Indemnitee, if such claim does not arise out of a claim or demand asserted by a
third party against the Indemnitee.
1.15 EFFECTIVE TIME
"Effective Time" shall mean 12:01 A.M. Pacific Time on the Closing
Date.
1.16 ENVIRONMENTAL LIABILITY
"Environmental Liability" shall mean any direct cost or expense of any
nature whatsoever reasonably necessary to be in compliance with any SH&E Law to
contain, remove, remedy, respond to, clean up or abate any known or unknown
on-site Release or offsite migration of a Release, an SH&E Condition which
exists and which is not in compliance with or is subject to remedy under SH&E
Law, or other contamination of surface water, groundwater, land surface or
subsurface strata arising out of, resulting from or relating to the Operations
or any activities involving the Assets prior to the Closing Date. Environmental
Liability includes, without limitation, any Damage reasonably incurred with
respect to (a) any investigation, study, assessment, legal representation, cost
recovery by governmental agency, or monitoring or testing in connection
therewith (but excluding general corporate overhead), (b) any of the Assets as a
result of actions or measures necessary to implement or effectuate any such
containment, removal, remediation, response, cleanup or abatement of any
Hazardous Substance, and (c) the resolution of such liabilities. Environmental
Liability shall not include the expense of sludge removal, consistent with past
practice, from the wastewater pond located on the Real Property.
1.17 EQUILON
"Equilon" shall mean Equilon Enterprises LLC, a Delaware limited
liability company. To the extent certain rights or obligations are planned to be
but have not yet been transferred to Equilon by Shell Oil Company, Texaco Inc.
or their respective Subsidiaries, references to Equilon shall also refer to such
other entities.
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1.18 EQUIPMENT
"Equipment" shall mean all furnishings, furniture, fittings, equipment,
machinery, apparatus, tanks, pumping stations, pipelines, sewers, appliances,
trucks, automobiles, other vehicles, signs and other articles of Company
personal property of every kind whatsoever and wherever located, but excluding
Intangible Property.
1.19 EXCHANGE INVENTORY
"Exchange Inventory" shall mean amounts carried on Company's books
representing inventory due to or from third parties.
1.20 EXTRAORDINARY ADVERSE CHANGE
"Extraordinary Adverse Change" shall mean the result of any act(s),
omission(s), conduct, occurrence(s), condition(s) or situation(s), or any
combination thereof if the same have or could reasonably result (either
individually or in the aggregate) in actual adverse effect in excess of five
million dollars ($5,000,000.00) annually with respect to cash flow before tax
derived from Operations on a recurring basis for a period of at least three (3)
years or fifty million dollars ($50,000,000.00) with respect to the value of any
of the Assets (for the types of purposes to which the same have been or could
lawfully have been devoted at any time during the 6-month period immediately
prior to the date of this Agreement).
1.21 FEEDSTOCK INVENTORY
"Feedstock Inventory" shall mean that crude oil, feedstock and
intermediate petroleum product, less water and sludge, owned by the Company and
(1) located on Real Property; (2) located in pipelines or terminals belonging to
third parties; and (3) crude oil purchased from third parties but in transit and
not yet located on Real Property.
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<PAGE> 15
1.22 FORCE MAJEURE EVENT
"Force Majeure Event" means any (1) fire, explosion, strike, lock-out,
casualty or accident; (2) act of God, including, without limitation, epidemic,
hurricane, typhoon, earthquake, cyclone or flood; (3) war, revolution, civil
commotion, act of enemies, blockade, or embargo; or (4) other similar
occurrences or acts beyond the reasonable control of a party hereto, which act
or occurrence shall make it impossible for the party concerned to carry out the
obligations of such party under this Agreement (but lack of financial ability
shall not be a Force Majeure Event). Those provisions in this Agreement
regarding Force Majeure Event shall only be applicable in the specific
situation(s) in which this Agreement expressly provides they shall apply and in
no other situations.
1.23 HAZARDOUS SUBSTANCE
"Hazardous Substance" is defined as the terms "Hazardous Substance,"
"Regulated Substance," and "Oil and Hazardous Substance" or similar terms, are
respectively defined as of the Effective Time under any SH&E Law, including but
not limited to the U.S. Comprehensive Environmental Response, Compensation, and
Liability Act, as amended, the Resource Conservation and Recovery Act of 1976,
as amended, and the Federal Water Pollution Control Act, as amended.
1.24 IMPROVEMENTS
"Improvements" shall mean any and all buildings or other improvements
attached or affixed to the Real Property.
1.25 INDEMNITEE
"Indemnitee" shall refer to the Person or Persons indemnified, or
entitled, or claiming to be entitled, to be indemnified, pursuant to this
Agreement.
1.26 INDEMNITOR
"Indemnitor" shall refer to the Person having the obligation to
indemnify pursuant to this Agreement.
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1.27 INTANGIBLE PROPERTY
"Intangible Property" shall mean (i) any and all business trade
secrets, including, but not limited to, sales tools, customer lists and supplier
lists and (ii) other intangible properties, including, but not limited to, any
goodwill or going concern value associated with any of the foregoing, but
excluding in each case all Intellectual Property and Trademarks held by Company
or used in its operations.
1.28 INTELLECTUAL PROPERTY
"Intellectual Property" shall mean intellectual and similar property of
every kind and nature (except "Intangible Property") used in the Operations of
the Anacortes Refinery which is in existence on the date of this Agreement
including, without limitation, patents, patent applications, inventions,
invention disclosures, copyrights including registrations and applications to
register copyrights, formulae, processes, engineering data, designs, know-how,
show-how, confidential or proprietary technical information and trade secrets or
other similar data or information, and computer software, computer applications,
but specifically excluding "Trademarks" as hereinafter defined.
1.29 INVENTORY IN TRANSIT
"Inventory in Transit" shall mean Company-owned inventory (excluding
Feedstock Inventory) that is in transit to or from the Company via tank truck,
barge, tank car, tanker or other modes of transportation (excluding inventory in
pipelines and terminals otherwise covered).
1.30 JUDGMENTS
"Judgments" shall mean all judgments, orders, decisions, injunctions,
decrees or awards of any federal, state, local or foreign court, arbiter or
administrative or governmental authority, bureau or agency.
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1.31 "KNOWN, OR KNOWLEDGE" OR "TO THE KNOWLEDGE OF" OR "WITHIN THE
KNOWLEDGE OF A PARTY AS USED HEREIN"
"Known, or Knowledge" or "To the knowledge of" or "Within the knowledge
of a Party as used herein" shall mean those facts, events or circumstances, if
actually known to an officer, a manager or any supervisory employee of a party
to whom such phrase is applied. In applying the preceding clause to Seller or
Company the Parties agree that the only officers, managers or supervising
employees of Company who shall be considered or to whom any such Knowledge
standard applies are the President and the respective managers of Projects and
Turnaround Resources, Hydrocarbon Processing, Process Engineering, Regulatory
Resources, Engineering and Maintenance Resources and Business Management
Resources, and in applying the preceding clause to Buyer the Parties agree that
the only officers, managers or supervising employees of Buyer who shall be
considered or to whom any such Knowledge standard applies are the Chairman of
the Board, Chief Executive Officer and President; Executive Vice President;
Executive Vice President, General Counsel and Secretary; President of Tesoro
Alaska Petroleum Company; Manager Corporate Environmental Affairs; Vice
President Human Resources and Environmental Affairs; and Director of Corporate
Planning and Development.
1.32 LATE PAYMENT RATE
"Late Payment Rate" shall mean the lesser of (i) the Base Rate, plus
five hundred (500) basis points per annum, or (ii) the maximum rate of interest
permitted by Applicable Law, such rate to be adjusted automatically as and to
the extent that either (i) or (ii) immediately above changes from time to time.
1.33 LEASED REAL PROPERTY
"Leased Real Property" shall mean each parcel of real property leased
or subleased to the Company.
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<PAGE> 18
1.34 LEASES AND EASEMENTS
"Leases and Easements" shall mean, collectively, those matters
described under the heading Leases, Easements and Permitted Encumbrances on
Schedule 5.15 attached hereto.
1.35 LEGAL REQUIREMENTS
"Legal Requirements" shall mean requirements as of the Closing Date
arising under any and all (i) applicable federal, state, local and foreign laws
(statutory, judicial or otherwise), ordinances and regulations, (ii) applicable
final and nonappealable Judgments, (iii) contracts with any federal, state,
local or foreign court, arbitrators or administrative or governmental authority,
bureau or agency relating to compliance with matters described in (i) or (ii)
above, and (iv) Permits; and as any of the foregoing matters described in (i)
through (iv) above may have been waived, amended, varied or otherwise modified
by any Permit or Permit-related proceedings or other applicable proceedings
prior to the Closing Date.
1.36 LIENS
"Liens" shall mean any and all liens, mortgages, charges, pledges,
security interests, burdens, easements, rights of way, zoning ordinances,
mineral exceptions or other encumbrances of any nature whatsoever, including,
but not limited to, such as may arise under any contracts or Judgments.
1.37 MATERIAL ADVERSE EFFECT
"Material Adverse Effect" shall mean the result of any act(s),
omission(s), conduct, occurrence(s), condition(s) or situation(s), or any
combination thereof if the same have or could reasonably result (either
individually or in the aggregate) in actual adverse effect in excess of two
million dollars ($2,000,000.00) annually with respect to cash flow before tax
derived from the Operations on a recurring basis for a period of at least three
(3) years or five million dollars ($5,000,000.00) with respect to the value of
any of the Assets (for the types of purposes to which the
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<PAGE> 19
same have been or could lawfully have been devoted at any time during the
6-month period immediately prior to the date of this Agreement).
1.38 NET WORKING CAPITAL ADJUSTMENT
"Net Working Capital Adjustment" shall have the meaning described in
Section 3.03.
1.39 OPERATIONS
"Operations" shall mean those activities conducted by Company or its
predecessors prior to the Effective Time utilizing the Assets.
1.40 OTHER COMPANY ASSETS
"Other Company Assets" shall mean any and all Intangible Property,
Contracts, Permits, and Intellectual Property.
1.41 OTHER INVENTORY
"Other Inventory" shall mean the catalyst, spare parts, store stock,
supplies that may be used and consumed in the Operations and that is located on
the Real Property, on order or in transit.
1.42 OTHER POST EMPLOYMENT BENEFITS
"Other Post Employment Benefits" shall mean the other post employment
benefits portion of "Long Term Liabilities" category as appearing in a balance
sheet as it pertains to Continuing Employees.
1.43 OWNED REAL PROPERTY
"Owned Real Property" shall mean each parcel of real property which the
Company owns.
1.44 PARTY
"Party" means each of Seller and Buyer and where the context requires,
the Company.
1.45 PERMITS
"Permits" shall mean any and all Permits, temporary Permits to
construct or operate, authorizations, approvals, registrations, rights of way,
orders, waivers, variances or other licenses
11
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issued or granted by any federal, state or local administrative or governmental
authority, bureau or agency (i) under any Legal Requirement, including, but not
limited to, SH&E Law, or (ii) under or pursuant to any final Judgment or any
Contract with any such administrative or governmental authority, bureau or
agency relating in each case to compliance with any Legal Requirement.
1.46 PERMITTED ENCUMBRANCES
"Permitted Encumbrances" shall mean any Liens that (i) are listed on
Schedule 5.15, (ii) liens not securing monetary obligations and which do not
interfere with the use of the property, (iii) are of record as indicated in the
title report dated January 28, 1998 or are shown on the survey dated March 15,
1996 which Seller has supplied to Buyer, (iv) are caused or created by Buyer or
(v) mechanic and materialmen's liens not delinquent and included in Other
Current Liabilities for purposes of determining the Net Working Capital
Adjustment; provided, however, that unless Buyer has expressly agreed herein to
assume liability for a specific indebtedness, Permitted Encumbrances shall not
include any indebtedness, whether or not of record, which exist to Seller's
Knowledge and are not disclosed to Buyer.
1.47 PERSON
"Person" means an individual, corporation, partnership, association,
trust, limited liability company or any other entity or organization, including
a government or political subdivision or agency, unit or instrumentality
thereof.
1.48 PREPAID EXPENSES AND DEPOSITS
"Prepaid Expenses and Deposits" shall mean those expenses and deposits
listed on Schedule 1.48 attached hereto.
1.49 PRODUCT INVENTORY
"Product Inventory" shall mean that certain refined product owned by
the Seller and located on the Real Property or in pipelines or terminals
belonging to third parties and specified to be sold.
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1.50 REAL PROPERTY
"Real Property" shall mean the Owned Real Property, the Leased Real
Property and Easements.
1.51 RELATED AGREEMENTS
"Related Agreements" shall mean any agreements or documents executed in
connection with or as required under this Agreement.
1.52 RELEASE
"Release" shall mean any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping or disposing of
any kind whatsoever of any Hazardous Substances into the environment (including
the abandonment or discarding of barrels, containers, tanks or other receptacles
containing or previously containing any Hazardous Substance).
1.53 SELLER RETAINED ASSETS
"Seller Retained Assets" means (i) all of Company's cash and bank
accounts except to the extent accounted for in the Net Working Capital
Adjustment; (ii) all excess insurance proceeds under Section 12.04 hereof; (iii)
copies of the financial books and records of Company or its Affiliates and the
personnel, employment and other records of Company as to their former employees;
(iv) any claims or other rights to receive monies arising prior to or after the
date of execution hereof which Seller has or may have which are attributable to
its ownership of the Assets prior to the Closing Date except to the extent
accounted for, or representing a claim for reduction in the value of Assets
accounted for, in the Net Working Capital Adjustment; (v) copies of all
corporate minute books and similar materials related to maintenance of corporate
records; (vi) all Trademarks; (vi) prepaid pension amounts included in the Other
Non-Current Assets category shown on the Audited Closing Balance Sheet; and
(viii) those assets described on Schedule 1.53 hereto.
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1.54 SH&E CONDITION
"SH&E Condition" means a condition or circumstance resulting from one
or more related actions, omissions, or events with respect to any land or
facility or location now or heretofore owned by the Company that exists or is
alleged to exist with respect to air, land, groundwater, or surface water or
plant facilities, procedures, practices, or equipment (whether occurring on-site
or off-site or having off-site effects, including off-site waste disposal,
spills, surface water discharge, migration of groundwater contamination, and
release to the air) which is not or is alleged to be not in compliance with or
which is subject to remedy under any SH&E Law. Soil, surface water, or
groundwater contamination arising from several sources, pieces of equipment, or
events (for example, one or more spills or leaks from a tank or product loading
or unloading apparatus) shall be considered a single SH&E Condition only if such
contamination is commingled. Contamination of more than one environmental media
(e.g., soil and groundwater) caused by the same actions, omissions or events
shall be considered a single SH&E Condition.
1.55 SH&E LAW
"SH&E Law" means any Applicable Law as of the Effective Time, relating
to pollution, the protection of the environment, release, emission, discharge,
or disposal of any material or substance, or to the safety, health or
environmental aspects of property transfer, natural resource damage, pipeline
closure, production registration, hazard communication, or human health or
safety.
1.56 SHELL
"Shell" means Shell Oil Company, a Delaware corporation.
1.57 SUBSIDIARY
"Subsidiary" shall mean, with respect to any Person, any other Person
directly or indirectly under its control, for purposes of this definition,
"control" shall mean the possession, directly or
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indirectly, of the power to direct or cause the direction of the management and
policies of an entity, whether through the ownership of voting securities or
otherwise
1.58 SURPLUS COMPANY PROPERTY
"Surplus Company Property" shall mean the real property and equipment
retired in place and not currently used in connection with the Operations.
1.59 TAXES
"Taxes" shall mean all taxes, charges, fees, imposts, duties, levies,
withholdings or other assessments imposed by any governmental entity, including
environmental taxes imposed pursuant to Chapter 38 of the Internal Revenue Code
of 1986, as amended, and similar state laws, excise taxes, customs duties,
utility, property, sales, use, value added, transfer and fuel taxes, and any
interest, fines, penalties or additions to tax attributable to or imposed on or
with respect to any such assessment, including all applicable sales, use,
excise, business, occupation or other tax, if any, relating to this or any other
service, supply or operating agreement.
1.60 THIRD PARTY PROPERTY
"Third Party Property" shall mean all Improvements, Equipment and
inventory owned by Persons not a Party that are not leased to Company.
1.61 THRESHOLD AMOUNT
"Threshold Amount" shall mean five hundred thousand dollars
($500,000.00).
1.62 TRADEMARKS
"Trademarks" shall mean with regard to Seller and Company (i) any and
all trademarks, service marks, trademark and service mark registrations,
trademark and service mark applications, and trade name or trade names,
including, without limitation, the names Shell, Shell Refining Holding Company,
Shell Anacortes Refining Company, Shell Oil Company, and the Pecten logo design
of Shell Oil Company licensed, used or owned by Seller, Company or its
Affiliates in connection with any of the
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Company's Operations, and (ii) the goodwill associated with the Operations in
connection with which such trade names, trade dress, trademarks and service
marks and their registrations or applications.
1.63 UNAUDITED CLOSING BALANCE SHEET
"Unaudited Closing Balance Sheet" shall have the meaning specified in
Section 3.03(c).
ARTICLE 2
SALE AND PURCHASE OF SHARES; RETENTION OF CERTAIN LIABILITIES
2.01 SALE AND PURCHASE.
Subject to the conditions hereof, Seller agrees to sell, assign,
transfer, convey and deliver to Buyer, and Buyer agrees to purchase and accept
from Seller, the Shares at the Closing, with all rights and benefits attaching
thereto.
2.02 PURCHASE PRICE.
For and in consideration of the respective conveyances, assignments,
representations, warranties and covenants described herein, Buyer agrees to pay
to Seller, and Seller agrees to accept from Buyer, a purchase price of two
hundred thirty-seven million dollars, ($237,000,000.00), plus or minus the Net
Working Capital Adjustment provided for in Section 3.03.
2.03 METHOD OF PAYMENT.
All amounts to be disbursed at the Closing or paid after Closing based
on adjustments as provided in this Article shall be made in immediately
available U.S. funds, by wire transfer to a U.S. bank account designated by
Seller or Buyer as the case may be or by any other means agreed to by Seller and
Buyer.
2.04 LIMITED RETENTION OF LIABILITIES.
(a) Buyer acknowledges that the Company will retain all of its
liabilities after the Effective Time and that Seller will have no
responsibility with respect to such liabilities except as provided in
this Agreement.
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(b) Seller shall be liable for liabilities and obligations of the
Company and of its Affiliates related to or arising from the ownership
or operation of the Assets prior to the Effective Time except:
(i) Damages for Environmental Liability (other than that
portion of such Damages expressly assumed by Seller pursuant to
Section 13.01) or risk of all open and closed off-site waste
sites described in Section 13.01 (other than that portion of such
risk expressly assumed by Seller pursuant to Section 13.02),
(ii) Accounts payable, Taxes payable, other current
liabilities and the Other Post-Employment Benefits pertaining to
the Continuing Employees and Reserve for Manufacturing Property
Restoration portions of the Long-Term Liabilities category on the
Audited Closing Balance Sheet which are included in the Net
Working Capital Adjustment described Section 3.03.
(iii) Obligations to be performed after the Effective Time
under the Contracts (except as provided in the next succeeding
sentence), Leases, Easements and Permits. For the avoidance of
doubt, Seller shall not be liable for obligations of the Company
under Contracts, Leases, Easements or Permits that are to be
performed after the Effective Time, provided however, the Company
shall assign to Seller or its assignee and Seller shall assume
responsibility under the Contracts which have been rejected by
Buyer and which are listed on Schedule 2.04(b) and shall perform
obligations that are to be performed pursuant thereto.
(c) Buyer agrees to cause the Company to discharge all
liabilities and obligations with respect to the Assets that are
incurred by the operation of the Assets after the Effective Time.
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ARTICLE 3
CLOSING
3.01 PLACE AND TIME.
The Closing shall take place at the offices of Shell Oil Company, One
Shell Plaza, Houston, TX 77002, on the later of August 1, 1998, or the first day
of the month following the month in which the material conditions to Closing
having been satisfied or waived, or on such other date as Buyer and Seller may
mutually agree, but in no event later than October 22, 1998 or such later day as
permitted by the Consent Order.
3.02 TRANSACTIONS AND DELIVERIES AT OR PRIOR TO CLOSING.
(a) At or prior to the Closing, Seller shall deliver to Buyer:
(i) share certificate(s), which will bear a legend that the
Shares have not been registered under applicable federal and
state securities laws, representing the Shares, duly endorsed for
transfer to the Buyer or as otherwise may be directed in writing
by Buyer;
(ii) copies of resolutions of Seller's board of directors
(and, if such authorization is necessary, of Sellers'
shareholders, and, if further necessary, of their or its
shareholders), certified as being correct and complete and then
in full force and effect, authorizing the execution of this
Agreement and of the agreements and instruments called for
hereunder, and the consummation of the transactions contemplated
under this Agreement and under such agreements and instruments
called for hereunder;
(iii) certificates of incumbency and specimen signatures of
the signatory officers of Seller and the Company;
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(iv) a certificate of existence and good standing issued by
the State of Delaware and copies of Company's certificate of
registration to do business in the State of Washington as a
foreign corporation, and copies of Company's "retailer" and
"wholesaler" licenses under Washington law certified by a duly
authorized officer of Company;
(v) a written opinion of counsel to Seller, covering, in the
aggregate, Seller's due organization, valid existence and good
standing as a corporation in Delaware, registration and good
standing in Washington, the due authorization, execution and
delivery by Seller of this Agreement and the other agreements and
instruments called for hereunder and the validity and binding
effect of this Agreement and such other agreements and
instruments, which opinion shall be in the form attached hereto
as Schedule 3.02(a)(v);
(vi) such other instruments or documents as Buyer may
reasonably request to effect the transfers and other agreements
contemplated hereunder;
(vii) a list of Company employees as current as possible to
the Closing Date as described in Section 5.18; and
(viii) certificate required by Section 12.07(i).
(b) At or prior to the Closing, Buyer shall deliver to Seller:
(i) the purchase price, adjusted as provided in Section 3.03
for the Net Working Capital Estimate, minus the earnest money
previously deposited with Seller pursuant to Section 16.01
together with interest thereon;
(ii) copies of resolutions of Buyer's board of directors
(and, if such authorization is necessary, of Buyer's shareholders
and, if further necessary, of their or its shareholders),
certified as being correct and complete and then in full force
and
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effect, authorizing the execution of this Agreement and of the
agreements and instruments called for hereunder, and the
consummation of the transactions contemplated under this
Agreement and under such agreements and instruments called for
hereunder;
(iii) certificates of incumbency and specimen signatures of
the signatory officers of Buyer;
(iv) a written opinion of counsel to Buyer, as to Buyer's due
organization, valid existence and good standing, the due
authorization, execution and delivery by Buyer of this Agreement
and the other agreements and instruments called for hereunder and
the validity and binding effect of this Agreement and such other
agreements and instruments, which opinion shall be in the form
and attached hereto as Schedule 3.02(b)(iv);
(v) such other documents as required or contemplated to be
delivered by the Buyer pursuant to this agreement.
(c) Immediately prior to Closing, the Company shall distribute
all Seller Retained Assets not already in possession of Seller to
Seller.
3.03 ADJUSTMENTS AS OF CLOSING
(a) Calculation. The Net Working Capital Adjustment to the
purchase price shall be calculated as follows:
(i) The value of Feedstock Inventory, Product Inventory,
Exchange Inventory, and Inventory in Transit calculated by
multiplying the quantities or volumes thereof determined as of
the Effective Time using the method of determination described in
Section 3.03(b) by the values determined as described on Schedule
3.03(a)(i); plus
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(ii) The net balances as of the Effective Time in the
accounts marked as "Include in Net WC Adj" on Schedule
3.03(a)(ii) as included on the Audited Closing Balance Sheet.
The amount of the Net Working Capital Adjustment to be included
in the purchase price paid at Closing ("Net Working Capital
Estimate") shall be estimated by Seller and provided to Buyer at
least five (5) business days in advance of the Closing Date using
the inventory estimates described in Section 3.03(b)(iii) applied
to the most currently available values calculated in accordance
with Schedule 3.03(a)(i) and the amounts in accordance with
Section 3.03(a)(ii) above appearing on the Company's last
available monthly unaudited balance sheet. Seller and/or Buyer
shall make adjustment payments with respect to the Net Working
Capital Adjustment as follows:
(w) Not later than thirty (30) days after the Effective Time,
an adjustment payment shall be made based on the differences
between the inventory estimates described in Section 3.03(b)(iii)
and the amounts of inventory determined by the Testing Agents as
described in Section 3.03(b)(i) and any differences in value
based on actual data for the Closing Date calculated in
accordance with Schedule 3.03(a)(i);
(x) Not later than five (5) days after the Unaudited Closing
Balance Sheet is delivered to Buyer and Seller pursuant to
Section 3.03(c), an adjustment payment shall be made based on the
differences in the amounts in accordance with Section 3.03(a)(ii)
above appearing on the Unaudited Closing Balance Sheet compared
to the amount of such categories used in the Net Working Capital
Estimate;
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(y) Not later than five (5) days after the Audited Closing
Balance Sheet becomes final, an adjustment payment shall be made
based on differences in the amounts in accordance with Section
3.03(a)(ii) above appearing on the Audited Closing Balance Sheet
compared to the amount in such categories used in the Unaudited
Closing Balance Sheet;
(z) Not later than one hundred (100) days after the Effective
Time, Seller shall pay the Company the amount of any Accounts
Receivable accrued prior to the Closing Date which are ninety
(90) days past due and such Accounts Receivable shall be
transferred by the Company to Seller. Each adjustment payment
shall be paid in immediately available funds. Any amount not paid
when due shall bear interest at the Late Payment Rate for the
period past due.
(b) Method of Inventory Determination.
(i) For purposes of this Agreement, determination of any
volumes of Feedstock Inventory, Product Inventory, Exchange
Inventory, and Inventory in Transit required shall be made by two
independent inspectors ("Testing Agents") appointed by Buyer and
Seller and mutually acceptable to both Parties. The volumes
determined by the Testing Agents shall be adjusted in accordance
with normal industry practice, based upon testing by the Testing
Agents, for water, contaminants, and sediment using standard
industry guidelines, including ones relating to temperature,
pressure and specific gravity. The Testing Agents shall issue a
joint written report within twenty (20) days after the Effective
Time, setting forth the volumes and quantities. In the event the
Testing Agents initially are unable to agree upon any volumes of
any inventory, then the Testing Agents shall retest and remeasure
until the Testing Agents are in agreement.
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(ii) Presence at Inventory Determination. In addition
to the presence of such employees as is normal to the Operations,
and subject to the right of Company to conduct the Operations,
each Party shall be entitled, at its own expense, to have any
employee, agent, consultant or other authorized representative
present for any inventory determination so long as such employee,
agent, consultant or other authorized representative does not
interfere with the tasks or responsibilities of the Testing
Agents.
(iii) Estimate. At least five (5) business days in
advance of the Closing Date, Seller shall make a good faith
estimate of the Company's inventories and provide a copy thereof
to Buyer setting forth (A) the ownership, types, characteristics
and volumes, on a tank, vessel or location basis, of Feedstock
Inventory, Product Inventory, and Inventory in Transit, and (B)
the amounts shown as Exchange Inventory on the Company's
accounting records along with the ownership, types,
characteristics and volumes thereof.
(c) Preparation of Balance Sheet as of the Closing Date. As
promptly as practicable but no later than thirty (30) days after the
Effective Time, the Company will prepare and deliver to Seller and
Buyer an unaudited balance sheet for the Company as of the Effective
Time ("Unaudited Closing Balance Sheet"). The Company shall cause an
audit of the Unaudited Closing Balance Sheet to be completed by Price
Waterhouse LLP within forty-five (45) days of the delivery of the
Unaudited Closing Balance Sheet. The "Audited Closing Balance Sheet"
shall present fairly the financial position of the Company at the
Effective Time in accordance with generally accepted accounted
principles ("GAAP") consistent with past practices. If Seller or Buyer
disagrees with the Audited Closing Balance Sheet, it may, within
fifteen (15) days after receipt of the Audited Closing Balance Sheet,
deliver a notice to the
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Company disagreeing with such calculation and setting forth its
calculation of such amount. If no notice is delivered within the
specified time period, the Audited Closing Balance Sheet shall be
deemed final. If a notice of disagreement has been delivered within the
specified time period, the Seller, Buyer and the Company shall, within
sixty (60) days of the notice of disagreement, use their respective
best efforts to reach agreement on the disputed items or amounts. If
they are unable to reach agreement, the Parties shall refer the matter
to a mutually acceptable independent certified public accounting firm
("Accounting Firm"). The Accounting Firm shall promptly review this
Agreement and the disputed items or amounts subject to any scope that
the Parties jointly agree upon. In making such calculation, the
Accounting Firm shall consider only those items or amounts on which the
Parties have disagreed. The Accounting Firm shall deliver to the
Parties, as promptly as practicable, a report setting forth such
calculation. Such report shall be final and binding upon each Party,
and the Audited Closing Balance Sheet shall be deemed final. The cost
of such review and report shall be borne equally by Seller and Buyer.
3.04 OTHER TRANSACTIONS.
At the Closing, Buyer and Equilon shall enter into the following
agreements:
(a) Offtake agreements (not to exceed the limits of the Consent
Order) consistent with the framework attached as Exhibit 3.04(a).
(b) A supply agreement consistent with the framework attached as
Exhibit 3.04(b) under which Buyer or a subsidiary of Buyer will supply
certain gasoline and diesel requirements of Equilon in Alaska and
Hawaii.
(c) A reimbursement agreement consistent with the framework
attached as Exhibit 3.04(c) under which Buyer or the Company agree to
reimburse Equilon for certain amounts owed Equilon by Shell-branded
jobbers in Washington and Oregon which elect to use Buyer's brand as
more fully described in Section 11.04.
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(d) Transaction Services Agreement under which the Seller, its
Affiliates or Equilon may provide services to the Company consistent
with the framework attached as Exhibit 3.04(d).
The Parties shall agree upon the forms of the agreements not later than sixty
(60) days after the date of this Agreement.
ARTICLE 4
COMPANY'S EMPLOYEES, EMPLOYMENT AND EMPLOYEE BENEFITS
4.01 EMPLOYEES IN GENERAL.
Schedule 4.01 contains a true and complete list of:
(a) Each represented employee of Company as of the date of this
Agreement (each, a "Company Represented Employee"), and
(b) Each regular, full-time nonrepresented employee of Company as
of April 24, 1998 (each, a "Company Nonrepresented Employee"), and
(c) each Affiliate Company Employee (collectively, the "Company
Employees").
4.02 REPRESENTED EMPLOYEES.
The Company agrees, and the Buyer acknowledges, that the Company is
bound by the Collective Bargaining Agreement and all existing Memoranda of
Agreement or Understanding, which are listed on Schedule 4.02(a) ("Collective
Bargaining Agreement"), between the Company and Oil Chemical and Atomic Workers
International Union, AFL-CIO and its Local 1-591 (the "Union"). Buyer and the
Company agree that the Company will keep the Collective Bargaining Agreement in
full force and effect for their duration, except for changes mutually agreed to
between the Company and
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the Union. Seller shall cause the Shell Pension Plan to vest all Company
Represented Employees not already vested upon Closing.
4.03 COMPANY EMPLOYEES.
(a) Continued Employment with the Company. The Company shall
continue to employ each Company Represented Employee in accordance with
the terms of the Collective Bargaining Agreement. The Company shall
continue to employ each Company Nonrepresented Employee who elects to
continue employment with the Company, provided he or she is actively at
work, or on an authorized vacation or authorized non-medical leave of
absence, on the Closing Date. The Company shall also continue to employ
any Company Nonrepresented Employee who provides the Company with a
medical release to report to work within six (6) months after the
Closing Date, from a physician appointed by the Company.
(b) Offers of Employment to Affiliate Company Employees. The
Company shall offer regular employment with such responsibilities as
shall be determined by the Company, to each Affiliate Company Employee
that the Buyer wishes the Company to employ, provided that any such
offer:
(i) is made prior to the Closing;
(ii) is contingent upon Closing having occurred.
Any such offer of employment shall be upon such terms, including but
not limited to, position, title, level of responsibility, and base rate
of compensation at the Employment Commencement Date as the Affiliate
Company Employee had with the employing company as of the last
regularly scheduled workday immediately prior to the Employment
Commencement Date. Seller shall cause its Affiliates to provide the
Buyer and the Company with such information as either shall reasonably
need to effect the terms of this Agreement as they relate to Affiliate
Company Employees.
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(c) Notice of Election or Rejection. The Company shall notify
Seller of each election not to continue employment with the Company by
a Company Nonrepresented Employee and of each rejection of any
employment offer made by the Company to an Affiliate Company Employee,
within two (2) business days of such election or rejection.
(d) Orderly Transition. The Company shall employ each Affiliate
Company Employee who accepts the offer of employment from the Company.
Seller shall use its best efforts to assist Buyer and the Company in
the orderly transition to the Company of any such Affiliate Company
Employees. Each Acquired Affiliate Company Employee together with each
continuing Company Represented and each continuing Company
Nonrepresented Employee shall, from his or her first hour of service
with the Company after the Effective Time (the "Employment Commencement
Date"), be known as a "Continuing Employee."
(d) Transition Services. For a period of not longer than twelve
(12) months following the Closing Date, Seller agrees to loan to the
Company pursuant to a services agreement, such employees of Seller and
Seller's Affiliates as the Company shall reasonably need to operate the
facilities. Such employees shall remain employees of Seller or
Affiliates of the Seller. The Company shall reimburse the Seller for
the provision of such services in accordance with Exhibit 3.04(d). In
the event the Company or the Buyer hires a transition services
employee, the Company and the Buyer shall extend all of the rights and
privileges of this Article 4 to such transition services employee
effective as of his or her first hour of service as an employee with
the Buyer or the Company, as the case may be.
(f) Employment Assurances. For a period of one (1) year following
the Employment Commencement Date, the Company shall not reduce the
salary of any Acquired Affiliate Company Employee or any Company
Nonrepresented Employee (each a "Continuing
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Nonrepresented Employee") or terminate any Continuing Nonrepresented
Employee's employment except for "cause."
4.04 EMPLOYEE BENEFITS FOR CONTINUING NONREPRESENTED EMPLOYEES.
(a) Benefits Plans in General. The Company shall permit the
Continuing Nonrepresented Employees ("Continuing Nonrepresented
Employees") to participate in all of the Company's employee pension
benefit plans, employee welfare benefit plans, and other benefit plans,
programs, policies, and practices that are generally available to the
Company's similarly situated salaried employees.
(b) Welfare Plan Coverage. The Company shall continue the Skagit
County Medical Bureau Plan for the Continuing Nonrepresented Employees.
Seller shall enroll persons who are participants in that plan (other
than Continuing Employees and their dependents and beneficiaries) in a
medical plan sponsored by Seller or one of its Affiliates. With respect
to each Continuing Nonrepresented Employee who elects to participate in
the Company's welfare plans, the Company shall waive any
pre-existing-condition exclusions to coverage, any
evidence-of-insurability provisions, and any waiting-period
requirements under its welfare plans to the extent waived or otherwise
satisfied under comparable welfare plans sponsored by Affiliates of the
Company in which the Continuing Nonrepresented Employee participated
prior to the Employment Commencement Date, provided the Continuing
Nonrepresented Employee enrolls within thirty-one (31) days of his or
her Employment Commencement Date. For each Continuing Nonrepresented
Employee, the Company shall apply towards any deductible requirements
and out-of-pocket maximum limits under its welfare plans applicable to
the year of such Continuing Nonrepresented Employee's Employment
Commencement Date, any amounts paid by such Continuing Nonrepresented
Employee toward such requirements and limits under employment-related
plans in which he or she participated during
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such year provided the employee enrolls within thirty-one (31) days of
the Employment Commencement Date. The Company shall notify Seller if a
Continuing Nonrepresented Employee fails to enroll in one of the
Company's health plans within the thirty-one (31) day enrollment
period. If a Continuing Nonrepresented Employee enrolls in one of the
Company's health plans within eighteen (18) months of the Employment
Commencement Date, the Company shall notify Seller or cause the
Continuing Nonrepresented Employee to notify Seller as soon as
reasonably practicable after such initial enrollment.
(c) Pension Plan Coverage.
(i) The Buyer acknowledges and the Company agrees that the
Company shall withdraw as a Participating Company from the Shell
Pension Plan, the Shell Provident Fund, the Shell Pay Deferral
Investment Fund, and certain other benefit plans and arrangements
sponsored by Shell and its Affiliates, immediately prior to the
Closing Date. Effective as of the Closing Date, the Buyer shall
as soon as practical amend the Tesoro Petroleum Corporation
Thrift Plan to add the Company as a sponsor, and to permit
Continuing Nonrepresented Employees to participate therein
effective as of their Employment Commencement Dates. The Buyer
shall enhance the Tesoro Petroleum Corporation Thrift Plan to
make it more comparable to the Shell Provident Fund by increasing
the dollar-for-dollar match to a maximum of six (6) percent of
"compensation" within the meaning of the Tesoro Petroleum
Corporation Thrift Plan ("Buyer Compensation") and contributing
for the account of each Continuing Nonrepresented Employee from
the Employment Commencement Date until December 31, 2001, (the
"Supplemental Period") an additional contribution equal to four
(4) percent of his or her Buyer Compensation in a supplemental
defined
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contribution arrangement during such portion of the Supplemental
Period that such Continuing Nonrepresented Employee would have
been eligible to receive a ten (10) percent contribution under
the Shell Provident Fund had such Continuing Nonrepresented
Employee remained an employee of Shell or one or more of its
Affiliates. Effective as of the Employment Commencement Date, the
Buyer shall enroll Continuing Nonrepresented Employees in the
Tesoro Petroleum Corporation Retirement Plan to provide benefits
for the Continuing Nonrepresented Employees from and after the
Closing Date.
(ii) As soon as practicable following the Closing Date but no
later than three (3) months following the Closing Date, to the
extent permitted by section 401(k)(10)(A)(iii) of the Internal
Revenue Code of 1986, as amended, and to the extent directed by
an Continuing Nonrepresented Employee, the Seller shall cause the
Shell Pay Deferral Investment Fund to make direct rollovers
(including rollovers of participant loans) to the Tesoro
Petroleum Corporation Thrift Plan, provided the Buyer provides
the Seller with satisfactory evidence of such plan's then
qualified status and provided further that such plan shall be
amenable to accepting such rollover.
(d) Past Service Credit.
(i) Buyer and the Company shall cause all those employee
welfare benefit plans, programs, policies, and practices in which the
Continuing Nonrepresented Employees participate, including the
Company's vacation program, to recognize past service as recognized by
the employee welfare benefit plans of Shell or its Affiliates, for
purposes of eligibility to participate, eligibility for enrollment,
eligibility for the commencement of benefits, and eligibility for the
levels of benefits where there are service-related benefit schedules.
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(ii) With respect to each Continuing Nonrepresented Employee,
Buyer shall cause the Tesoro Petroleum Corporation Retirement
Plan and the Tesoro Petroleum Corporation Thrift Plan to
recognize past service as recognized by the Company or the Shell
Pension Plan for purposes of eligibility to participate,
eligibility for enrollment, eligibility for vesting, eligibility
for the commencement of benefits and eligibility for the forms of
benefits where contributions to the plan or payments from the
plan depend in whole or in part on service, but not for purposes
of benefit accrual except as set forth below.
(iii) At least thirty (30) days prior to the Closing Date,
Buyer shall provide to Seller, the Summary Plan Description
("Summary") of the Tesoro Petroleum Corporation Retirement Plan.
All terms, conditions, benefit formulas and calculations, benefit
eligibilities, and other related matters stated in the Summary
will fairly represent those terms in the Tesoro Petroleum
Corporation Retirement Plan as of the Closing Date. Seller shall
cause the Shell Pension Plan to provide to each Continuing
Nonrepresented Employee the benefit to which such Continuing
Nonrepresented Employee is entitled under the Shell Pension Plan
based on service and earnings to the date of his or her
termination from a then "Participating Company" as defined in the
Shell Pension Plan or the date of the withdrawal of his or her
employing Participating Company, whichever first occurs (the
"Participation Termination Date"), and age as of the date the
Shell Pension Plan pension benefits commence, except that the
Shell Pension Plan shall vest all Continuing Nonrepresented
Employees not already vested upon Closing. Effective as of the
Closing Date, the Buyer shall amend the Tesoro Petroleum
Corporation Retirement Plan to mirror the rights, benefits, and
features of the Shell Pension Plan (with the exception of the
Disability Pension, the Old Formula Pensions and the pension
equity plan alternative formula) (the "Mirror Plan"). The benefit
provided under the Mirror Plan with
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respect to each Continuing Nonrepresented Employee with five (5)
years or more of service who defers the commencement of his or
her pension under the Shell Pension Plan until after the Closing
Date shall be offset by the benefit payable under the Shell
Pension Plan and the benefit payable under the Tesoro Petroleum
Corporation Retirement Plan without regard to the Mirror Plan
feature (the "Tesoro Pension Benefit"), according to the
following wraparound-offset:
(1) The accrued benefit payable under the Mirror Plan at age
sixty-five (65) or date of retirement whichever is earlier, based
on compensation paid by a Participating Company under the Shell
Pension Plan prior to the Participation Termination Date as well
as compensation paid by the Company and/or the Buyer after the
Closing Date but prior to the commencement of benefits under the
Shell Pension Plan, and past service credit of five (5) years or
more as of the Employment Commencement Date with the Company, the
Seller, and Affiliates of the Seller as of the Participation
Termination Date together with service with the Company and the
Buyer from and after the Employment Commencement Date until the
commencement of the Shell Pension Plan benefit, shall be reduced
by
(A) the accrued benefit payable under the Tesoro Pension
Benefit
(w) at age sixty-five (65) in the case of a deferred
vested pension or early deferred vested pension, or
(x) at the earliest retirement date permissible
under the Tesoro Pension Benefit in the case of all
other pension-eligible persons, and
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(B) the accrued benefit payable under the Shell Pension Plan
based on service and salary recognized under the Shell Pension Plan as of
the Participation Termination Date
(y) at age sixty-five (65) in the case of a Deferred Vested
Pension or Early Deferred Vested Pension (as those terms are
defined in the Shell Pension Plan), or
(z) at the earliest retirement date permissible under the
Shell Pension Plan in the case of all other pension-eligible
persons.
For purposes of applying this wraparound-offset, the benefit under the
Mirror Plan, the Shell Pension Plan, and the Tesoro Pension Benefit shall
be deemed to be the normal form of benefit, prior to reduction for any
optional forms of benefits, with the Social Security offset applied
whenever effective.
(2) The calculation of the wraparound-offset under this Article 4 are
illustrated by examples set forth in Exhibit 4.04(d) attached hereto and by
this reference made a part hereof, and the Parties agree that the
principles applied, methods of calculation, and timing of applying the
offset in these examples accurately represent the intention of the Parties.
(3) The Buyer and the Company shall use their best efforts to obtain
governmental approval for the grants of past service credit for benefit
accrual purposes and the wraparound-offset set forth in this Article
4.04(d)(iii). In the event the Buyer and the Company are not able to obtain
such governmental approvals, the Buyer, the
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Company, and the Seller shall negotiate in good faith to achieve, within
two (2) years of the commencement of negotiations, a mutually agreeable
alternative means of accomplishing the purposes of this Article 4.04(d),
failing which the Buyer shall promptly refund at the end of such two-year
negotiating period five million dollars ($5,000,000.00), together with
interest calculated in the same manner as interest is calculated in Section
16.01 from the Closing Date to the date of the refund.
In the event the Company negotiates a wraparound-offset or another pension
benefit arrangement with the Union, the costs of such an arrangement shall be
for the Company's account. The Seller agrees to cooperate with the Buyer and the
Company to provide such data as the Company shall reasonably need to effect any
such arrangement.
(e) Vacation. All vacation accrued by an Acquired Affiliate
Company Employee but not taken before his or her Employment Commencement
Date, shall be credited to the Acquired Affiliate Company Employee's
account under the Company's vacation plan. Seller shall pay the Company for
the dollar amount of such accrued vacation. The Company and the Buyer, as
appropriate, shall amend their respective vacation policies to provide that
each Continuing Nonrepresented Employee shall continue to be entitled
through December 31, 2001, to enjoy annual paid vacation at least equal to
the annual paid vacation which the Continuing Nonrepresented Employee had
earned or accrued as of his or her Employment Commencement Date. In the
event the Company amends its vacation policy to place a lower cap than
presently in effect on deferring vacation entitlements, the Company shall
pay each Continuing Nonrepresented Employee for the amount of his or her
banked or deferred vacation
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and the accrued but unused then current year's entitlement which is in
excess of that which the amended policy would permit to be rolled into
future years.
4.05 LIABILITIES AND INDEMNITIES.
(a) Indemnities.
(i) To the maximum extent permitted by Applicable Law, Seller
shall defend, indemnify, and hold harmless Buyer and the Company
from and against any Damages, and any fines, penalties and
assessments, arising out of claims by Company Employees and that
arise out of, or relate to their employment with, or the termination
of their employment from the Company or any Affiliates of the
Company prior to the Employment Commencement Date.
(ii) To the maximum extent permitted by Applicable Law, Buyer
and the Company shall defend, indemnify, and hold harmless Seller
and Affiliates of Seller from and against any Damages, and any
fines, penalties and assessments arising out of claims by the
Continuing Employees that arise out of or relate to their employment
with, or the termination of their employment from, the Company or
the Buyer after the Employment Commencement Date.
ARTICLE 5
SELLER'S REPRESENTATIONS AND WARRANTIES.
Seller represents and warrants to Buyer to the Knowledge of Seller and
the Company except with respect to Sections 5.01 and 5.15(a) and (b) which shall
not be limited to the Knowledge of Seller or Company as follows:
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5.01 TITLE TO SHARES.
All of the issued and outstanding shares of capital stock of the
Company, which consists only of the Shares listed on Schedule 5.01, are owned of
record and beneficially by Seller, free and clear of any Lien. Upon delivery to
Buyer of the certificates for the Shares in accordance with this Agreement,
assuming that Buyer pays the consideration contemplated by this Agreement and
has no notice of any adverse claim, good and valid title to the Shares
represented by such certificate will have been transferred to Buyer, free and
clear of any Liens. Neither the Company nor any Affiliate thereof has received
any notice of any adverse claim to Seller's title to the Shares.
5.02 DIRECTORS AND OFFICERS.
The directors and officers of the Company are as follows:
Directors: T. C. Moody, F. A. Bulawa, M. S. Genter, J. P.
Pope
Officers: T. C. Moody, President and Chief Executive
Officer; F. A. Bulawa, Vice President--Tax,
Vice President--Regulatory Resources; M. S.
Genter, Vice President--Finance, Secretary,
Treasurer; J. P. Pope, Vice
President--Engineering, Assistant Secretary;
5.03 SHAREHOLDERS AGREEMENTS.
There is no shareholder agreement, unanimous shareholder agreement,
voting trust, pooling, or any other similar agreement to which Seller or Company
is a party.
5.04 ORGANIZATION AND STANDING.
Seller and the Company are corporations duly organized, validly
existing, and in good standing under the laws of the State of Delaware. Except
as set forth in Schedule 5.04, the Company has not had any wholly or partially
owned Subsidiaries or any equity investment in any Person. Seller has full
corporate power and authority to own the Company, and Company has full corporate
power and authority to own the Assets. Company and Seller have full corporate
power and authority to enter into
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and perform the terms of this Agreement and all agreements and instruments
called for hereunder and the transactions contemplated hereby. Company is duly
qualified to do business in the State of Washington as a foreign corporation, is
duly qualified as a licensed wholesaler under Washington law and possesses all
necessary Permits, licenses and qualifications under Washington law to carry on
the business in which it is engaged.
5.05 AUTHORIZATION; BINDING OBLIGATION.
The execution, delivery, and performance of this Agreement and of the
agreements and instruments called for hereunder, have been duly and validly
authorized by all necessary corporate action on the part of Seller and by all
necessary action on the part of Seller's shareholders, and this Agreement has
been duly executed and delivered by Seller. This Agreement constitutes a legal,
valid and binding obligation of Seller, enforceable against Seller in accordance
with its terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and general principles
of equity (regardless of whether enforceability is considered in a proceeding at
law or in equity).
5.06 CONSENTS; NON-CONTRAVENTION.
(a) Except (i) for compliance with the Consent Order or (ii)
as otherwise set forth in Schedule 5.06(a), no consent, waiver,
approval, order or authorization of, notice to, or registration,
declaration, designation, qualification or filing with, any Person is
or has been or will be required on the part of the Company or any
Affiliate of the Company in connection with the execution and delivery
of this Agreement or the transfer of the Shares contemplated hereby or
the enforceability of the indemnification provisions contained herein.
(b) Except as set forth in Schedule 5.06(b), neither the
execution and delivery of this Agreement by Seller, nor the
consummation of the transactions contemplated hereby will violate or
conflict with, or result in the acceleration of rights, benefits or
payments under,
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(a) any provision of the Seller's or the Company's Charter or By-laws,
(b) any statute, law, regulation or governmental order to which the
Company or any Affiliate of the Company or the assets and properties of
any thereof are bound or subject, (c) any commitment to which the
Seller or the Company is a party or by which it or any of its
properties may be bound or subject or (d) any agreement, contract or
commitment of the Seller or the Company or to which either of them is a
party or by which it or any of its properties may be bound or subject,
except, with respect to clauses (b), (c) and (d), for such violations
and conflicts which will not (i) prevent or materially delay
consummation of the transactions contemplated by this Agreement, (ii)
prevent Seller from performing its obligations under this Agreement or
(iii) result in a Material Adverse Effect.
5.07 LITIGATION.
Except as set forth in Schedule 5.07 attached hereto, there are no
actions, suits, claims, arbitrations, or proceedings pending before or by any
court, tribunal, arbitrators or other governmental authority, against or
involving Seller, the Company or any of the Assets which might, if adversely
determined, have a Material Adverse Effect or which would prohibit any of the
transactions contemplated by this Agreement; and there are no actions, suits,
claims, arbitrations, proceedings or investigations threatened against or
involving Seller or the Company which might, if adversely determined, have a
Material Adverse Effect or which would prohibit any of the transactions
contemplated by this Agreement.
5.08 COMPLIANCE WITH LAWS.
The Company has not violated any law, statute or regulation which has
subjected it to fines or penalties in excess of five hundred thousand dollars
($500,000.00) in the aggregate. As of the date of this Agreement, the Company is
in compliance with all laws, statutes or regulations
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<PAGE> 47
applicable to the Company, except where the noncompliance with which would not,
in the aggregate, result in a Material Adverse Effect.
5.09 FINANCIAL STATEMENTS.
Seller has previously made available to Buyer certain corporate
financial information and Company financial information. Any projections
(whether financial, technical or otherwise) made by Seller or information
relating to anticipated results or needs after the date of the financial
information are merely projections and shall not be relied upon by Buyer in its
evaluation and no warranties are made by Seller as to the accuracy of such
projections. Schedule 5.09 sets forth the unaudited balance sheet for the
Company as at March 31, 1998 (the "Balance Sheet"), the unaudited statements of
income of the Company for the twelve (12) months ended December 31, 1997, and
the nine (9) months ended December 31, 1996 and the unaudited statement of
income of the Company for the quarter ended March 31, 1998 (collectively, the
"Financial Statements"). Except as set forth in Schedule 5.09, the Financial
Statements have been prepared in accordance with GAAP applied on a basis
consistent with prior periods, except as described in the notes thereto. Except
as set forth in Schedule 5.09, the Balance Sheet presents fairly, in all
material respects, the financial condition of the Company as at March 31, 1998,
and the income statements included in the Financial Statements present fairly,
in all material respects, the results of operations of the Company for the
periods covered thereby. The books and records of the Company from which the
Financial Statements were prepared, were complete and accurate in all material
respects at the time of such preparation.
5.10 LIABILITIES.
With the exception of liabilities described in or arising under this
Agreement or described in the Exhibits or Schedules hereto or accounted for in
the Financial Statements, there are no actual or asserted, or threatened claims
or liabilities of the Company which could, individually or in the
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aggregate, have a Material Adverse Effect on the Company, any of its Assets, any
of the business, Operations, or financial condition of the Company, or Seller's
ability to convey the Company or otherwise perform in accordance with this
Agreement.
5.11 ABSENCE OF CERTAIN CHANGES.
Except as set forth in Schedule 5.11, since the date of the Balance
Sheet dated as of March 31, 1998 through the Agreement Date:
(a) The Company has not suffered any damage or destruction
adversely affecting the Operations or the tangible Assets owned or
leased by Company that has had or is reasonably likely to result in a
Material Adverse Effect;
(b) The Company has not, other than in the ordinary course of
business from one or more of its Affiliates and consistent with past
practices, incurred, assumed or become subject to any additional
indebtedness for money borrowed or purchase money indebtedness,
including capitalized leases;
(c) The Company has not made any change in the compensation
levels of the senior executives of the Company (i.e., vice presidents
and above), any change in the manner in which other employees of the
Company generally are compensated, or any provision of additional or
supplemental benefits for employees of the Company generally, except
normal periodic increases or promotions effected in the ordinary course
of business and consistent with past practices;
(d) The Company has not entered into any transaction not in the
ordinary course of business, except as contemplated by this Agreement;
(e) The Company has not amended or modified any contract, other
than in the ordinary course of business and consistent with past
practices;
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(f) There have been no encumbrances on the assets of the Company
other than Permitted Encumbrances; and
(g) The Company has not agreed, whether in writing or otherwise,
to take any action described in this Section 5.11.
5.12 ASSETS NECESSARY TO THE BUSINESS.
Except as set forth in Schedule 5.12, immediately before the Effective
Time the Company will hold or have the right to use in the Operations all of the
assets and properties (including all licenses and agreements) currently being
used (except those disposed of in the ordinary course of business or otherwise
as contemplated or permitted by this Agreement or the failure of which to hold
or have the right to use would not result in a Material Adverse Effect) or which
are reasonably necessary to permit the conduct of Operations in the manner
currently conducted. The Company has conducted no business material to its
results other than the Operations and has owned no interest in real property
except for (i) the Owned Real Property and the Leased Real Property, (ii)
properties listed on Schedule 5.12 and (iii) properties, the ownership of which,
will not give rise to obligations (other than obligations referred to in
Sections 2.01, 14.01(a)(ii) or 14.01(b)(iii)) of the Company in the future in
excess of five hundred thousand dollars ($500,000.00) in the aggregate.
5.13 CONDITION OF IMPROVEMENTS AND EQUIPMENT.
The Improvements and the Equipment, which comprise a part of the Assets
other than the Surplus Company Property, are in substantially the same condition
and repair, ordinary wear and tear excepted, as on March 4, 1998. There are no
defects to any such Improvements or Equipment that will have or reasonably could
have a Material Adverse Effect.
5.14 CONTRACTS AND COMMITMENTS.
Schedule 5.14 contains an accurate and complete list of:
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(a) each contract, agreement or commitment of the Company not
otherwise listed in Schedule 5.15 to which the Company or any of its
assets or properties is bound and which requires total payments to or
by the Company of at least two hundred fifty thousand dollars
($250,000.00) annually (other than spot crude and spot product
contracts);
(b) to which the Company or any of its Assets is bound and which
has a remaining term longer than one (1) year, which requires total
payments by the Company of at least two hundred fifty thousand dollars
($250,000.00) during such terms and which is not terminable on thirty
(30) or fewer days' notice without penalty;
(c) containing covenants limiting the freedom of the Company to
compete in any line of business or with any Person in any geographical
area;
(d) calling for the proposed acquisition of any operating
business or any assets outside the ordinary course of business and with
a purchase price in excess of two hundred fifty thousand dollars
($250,000.00);
(e) to which the Company is a party or by which any of its Assets
are bound relating to indebtedness for borrowed money, including
capital leases, security agreements relating thereto and any amendment
or waiver thereof;
(f) constituting vehicle leases;
(g) to provide capital or funds by way of a loan or guaranty of a
loan or any other form of guaranty, assurance, funding
agreement or other arrangement intended to assure the payment
or performance of any obligation by a third party in excess
of two hundred fifty thousand dollars ($250,000.00); and
(h) with Seller or any Affiliate of Seller, other than spot crude
and spot product contracts (collectively items (a) through
(h), other than contracts,
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agreements or commitments of the Company with Seller or any
Affiliate of Seller which will be terminated at or prior to
the Effective Time, the "Commitments"). Each Commitment is a
legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms,
except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights
generally and general principles of equity (regardless of
whether enforceability is considered in a proceeding at law
or in equity). Except as set forth in Schedule 5.14, the
Company is not, nor is any other party thereto, in default
under any of the Commitments where such defaults would
result, in the aggregate, in a Material Adverse Effect.
Except as set forth in Schedule 5.14, since December 31,
1997, neither Seller nor the Company has received written
notice of cancellation or termination of any Commitment from
any other party thereto.
5.15 REAL AND TANGIBLE PROPERTY.
(a) Schedule 5.15 lists the Real Property.
(b) Except as set forth in Schedule 5.15, the Company has good
and marketable title to all of the Owned Real Property, Feedstock
Inventory, Product Inventory, Inventory in Transit, Exchange Inventory,
Equipment and Improvements except for Assets sold, consumed or
otherwise disposed of in the ordinary course of business and consistent
with past practices since the date of the Balance Sheet, free and clear
of any Liens, other than Permitted Encumbrances.
(c) Except for Easements and Leases, the failure of which to
possess or hold would not in the aggregate have a Material Adverse
Effect, Schedule 5.15 contains an
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accurate and complete list of all (i) Easements held by the Company and
(ii) Leases of Leased Real Property. All Easements and Leases of Leased
Real Property are legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, except
as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and general principles of
equity (regardless of whether enforceability is considered in a
proceeding at law or in equity), and are in full force and effect.
Originals or copies of all Easement rights and Leases of Leased Real
Property, that were accurate and complete as of the date provided, have
been made available to Buyer for review. Except for matters that do not
materially interfere with the Company's rights, the Company enjoys
peaceful and undisturbed possession under all Easements and Leases of
Leased Real Property, and all grantors under any Easement and all
lessors under any Lease of Leased Real Property (1) are not (with or
without notice or the lapse of time, or both) in material breach or
default thereunder, (2) have performed all material obligations
required to be performed by it thereunder, and (3) have not given
written notice to the Company or any Affiliate of the Company of their
intent to terminate such Easement or Lease of Leased Real Property.
(d) Except as disclosed in Schedule 5.15, the Company does not
own or operate, and has not owned or operated, and no Affiliate of the
Company has owned or operated in connection with the Operations any
opened or closed waste site off of the Real Property.
5.16 INTELLECTUAL PROPERTY.
Schedule 5.16 contains an accurate and complete list of software
applications and computer programs issued to or used or needed to be used by
Company in the Operations.
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Company or its Affiliates is the owner of the applications and programs or the
Company or Shell enjoys a license to use the applications and programs set forth
in Schedule 5.16, free and clear of any Liens. Use of the Intellectual Property
in the Operations does not violate any rights of any third party where the
violation could reasonably be expected to have a Material Adverse Effect. Except
as set forth in Schedule 5.07, neither Seller nor Company has received written
notice that use of any Intellectual Property licensed to the Company at the
Closing Date in the conduct of the Operations as presently conducted violates
any rights of any third Person, the violation of which could reasonably be
expected to have a Material Adverse Effect.
5.17 LABOR MATTERS.
The Company is a Party to and bound by the Collective Bargaining
Agreement affecting approximately two-thirds of Company employees as set forth
on Schedule 4.01 attached hereto. No strike or material labor dispute has
occurred during the last three (3) years or is threatened.
5.18 EMPLOYEE BENEFIT MATTERS.
Seller has previously provided to Buyer an accurate and complete list
as of March 31, 1998, of the name, 1997 total compensation (including 1997
bonuses and commissions), title, current base salary rate, 1997 bonus,
commissions and accrued unused vacation benefits as of March 31, 1998, of each
of the then Company Employees. At the Closing, Seller shall deliver to Buyer an
updated list which shall provide all of the information required under the
preceding sentence as of the most recent practicable date prior to the Closing.
Schedule 5.18 sets forth an accurate and complete list of (i) each "Employee
Benefit Plan," as such term is defined in Section 3(3) of ERISA, which is
maintained by the Company or any if its Affiliates for the benefit of the
Company Employees; (ii) to the extent not disclosed in the preceding clause (i),
each plan, contract, program or policy, whether written or oral, funded or
unfunded, providing stock options, stock ownership, stock purchase or award,
phantom stock, stock appreciation rights,
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deferred compensation, retirement, insurance, flexible spending, dependent care,
vacation pay, holiday pay, sick pay, workers compensation, severance or
termination pay, supplemental unemployment benefits, employee loans, educational
assistance, incentive, bonus, or other profit-sharing arrangements for the
benefit of Company Employees (all in the preceding clauses (i) and (ii), other
than plans which will not be maintained by the Company after the Closing, being
collectively referred to as "Employee Plans"); and (iii) an accurate and
complete list of all employment, managerial, advisory, and consulting
agreements, employee confidentiality agreements, employee severance agreements
and all other material agreements, policies, or arrangements maintained by the
Company or any of its Affiliates for Company Employees. Seller has delivered or
made available to Buyer copies, which were accurate and complete as of the date
so delivered, of all such documents and (if applicable) summary plans
descriptions with respect to such plans, agreements and arrangements, or summary
description(s) of any such plans, agreements or arrangements not otherwise in
writing and, except as described in Schedule 5.18, there have been no
significant changes to such documents as of the date of this Agreement.
5.19 TAXES.
(a) Except as set forth in Schedule 5.19, (i) Seller and the
Company have timely filed or caused to be timely filed (or will timely
file or cause to be filed) with the appropriate taxing authorities all
tax returns required to be filed on or prior to the Closing Date
(taking into account all extensions of due dates) by or with respect to
the Company and has timely paid or adequately provided for (or will
timely pay or adequately provide for) all Taxes shown thereon as owing,
except where the failure to file such tax returns or pay any such Taxes
would not, or could not reasonably be expected to, in the aggregate,
result in a Material Adverse Effect, (ii) all such tax returns were or
will be correct and complete in all material respects, and (iii) all
withholding Tax requirements imposed on or
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with respect to the Company have been or will be satisfied in full in
all respects. No written claim has been made to the Company or any of
its Affiliates by any taxing authority in any jurisdiction where the
Company does not file tax returns asserting that it is required to file
a tax return.
(b) The Company is a member of an affiliated group of
corporations which will file consolidated federal income tax returns
(the "Group") with Shell Refining Asset Company, as the common parent
("Parent") and is a member of one or more groups which file
consolidated state income tax returns (the "State Groups"). The Group
and the State Groups have been subject to normal and routine audits
examinations and adjustments of Taxes from time to time, but there are
no current audits or audits for which written notification has been
received (in either case, with respect to or which include the
Company), other than those set forth in Schedule 5.19. There are no
written agreements with any taxing authority with respect to or
including the Company which will in any way affect the Company's
liability for Taxes after the Closing Date. The Company is not a party
to any closing agreement as defined in Section 7121 of the Internal
Revenue Code.
(c) Except as set forth in Schedule 5.19, no material assessment,
deficiency or adjustment for any Taxes has been asserted in writing or
is proposed with respect to any tax return of, or which includes, the
Company.
(d) Except as set forth in Schedule 5.19, there is not in force
any extension of time with respect to the due date for the filing of
any tax return of or with respect to or which includes the Company or
any waiver or agreement for any extension of time for the assessment or
payment of any Tax of or with respect to or which includes the Company.
(e) Except for Taxes due with respect to tax returns that will be
paid by the Company or the Parent of the Group (and not subject to
reimbursement by the Company),
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the accounting records of the Company will include immediately prior to
the Closing Date adequate provisions for the payment of all Taxes of
the Company for all taxable periods or portions thereof through the
Closing Date.
(f) All such Tax allocation or sharing agreements or arrangements
have been or will be canceled on or prior to the Closing Date. No
payments are or will become due by the Company after the Closing Date
pursuant to any such agreement or arrangement.
(g) Except as set forth in Schedule 5.19, none of the property of
the Company is held in an arrangement for which partnership tax returns
are being filed, the Company does not own an interest in a partnership,
joint venture or other similar arrangement which provides for the pass
through of tax attributes and the Company does not own any interest in
any controlled foreign corporation (as defined in Section 957 of the
Code) or passive foreign investment company (as defined in Section 1296
of the Code).
(h) Except as set forth in Schedule 5.19, none of the property of
the Company is subject to a safe-harbor lease (pursuant to Section
168(f)(8) of the Internal Revenue Code of 1954 as in effect after the
Economic Recovery Act of 1981 and before the Tax Reform Act of 1986) or
is "tax-exempt use property" (within the meaning of Section 168(h) of
the Code) or "tax-exempt bond financed property" (within the meaning of
Section 168 (g)(5) of the Code).
(i) Except as set forth in Schedule 5.19, the Company will not be
required to include any amount in income for any taxable period
beginning after the Closing Date as a result of a change in accounting
method for any taxable period ending on or before the Closing Date or
pursuant to any agreement with any taxing authority with respect to any
such taxable period. Since its inception, the Company has not made any
change in its tax or book accounting methods.
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(k) The Company has not consented to have the provisions of
Section 341(f)(2) of the Code apply with respect to a sale of its
stock.
(l) None of the Company or its Affiliates will, as a result of
the transactions contemplated by this Agreement, be obligated to make a
payment to an individual that would be a "parachute payment" as defined
in Section 280G of the Code without regard to whether such payment is
reasonable compensation for personal services performed or to be
performed in the future.
(m) The Company has not participated in or cooperated with an
international boycott within the meaning of Section 999 of the Code.
(n) Seller is not a "foreign person" within the meaning of
Section 1445 of the Code.
(o) No power of attorney has been granted with respect to any
matter relating to Taxes of the Company which is currently in force.
5.20 PERMITS AND OTHER OPERATING RIGHTS.
Schedule 5.20 attached hereto contains a true and complete list of all
of Permits used in connection with the Company's Assets, its Operations, or the
sale of refined product. Except as set forth in Schedule 5.20 or Schedule 5.15,
the Company possesses all Permits, licenses, orders, approvals and
authorizations required by the property and contract rights of third Persons,
reasonably necessary to permit the Operations in the manner currently conducted
by the Company and to permit the current occupancy and use of the Real Property
by the Company, except where the failure to possess such Permit, license, order,
approval, authorization or rights would not result in the aggregate, in a
Material Adverse Effect. None of the Company or its Affiliates has received
written notice from any governmental authority that any such Permit, license,
order, approval or authorization has been, or will be, revoked or terminated.
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5.21 NO BREACHES.
As of the date of the Agreement there are no breaches of any
representation or warranties or covenants herein by Buyer.
NOTWITHSTANDING ANY OF THE FOREGOING REPRESENTATIONS, IN NO EVENT SHALL
ANY PROJECTION AS TO FINANCIAL CONDITION, FINANCIAL RESULTS, STATUS OF ASSETS,
PROJECTS, AVAILABILITY OF FEEDSTOCK OR MARKETS OR ANY OTHER PROJECTIONS MADE BY
SELLER OR THE COMPANY TO BUYER BE RELIED UPON BY BUYER OR THE COMPANY, AND
SELLER MAKES NO REPRESENTATION OR WARRANTY AND SPECIFICALLY DISCLAIMS ANY
REPRESENTATION OR WARRANTY WITH REGARD TO SAME. EXCEPT AS SPECIFICALLY PROVIDED
ABOVE, THERE ARE NO EXPRESS WARRANTIES AND NO WARRANTY IS IMPLIED (INCLUDING
MERCHANTABILITY OR FITNESS FOR PURPOSE) REGARDING THE EQUIPMENT OR IMPROVEMENTS.
ARTICLE 6
BUYER'S REPRESENTATIONS AND WARRANTIES
Buyer represents and warrants to Seller to Buyer's Knowledge as
follows:
6.01 ORGANIZATION AND STANDING.
Buyer is a corporation duly organized, validly existing, and in good
standing under the laws of the Delaware. Buyer has full corporate power and
authority to enter into and perform the terms of this Agreement and the
transactions contemplated hereby.
6.02 AUTHORIZATION; BINDING OBLIGATION.
The execution, delivery, and performance of this Agreement and of the
agreements and instruments called for hereunder, have been duly and validly
authorized by all necessary corporate
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action on the part of Buyer and by all necessary action on the part of Buyer's
shareholders, and this Agreement has been duly executed and delivered by Buyer.
This Agreement constitutes a legal, valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally and general principles of equity (regardless of whether enforceability
is considered in a proceeding at law or in equity).
6.03 CONSENTS; NON-CONTRAVENTION.
(a) Except (i) for compliance with the Consent Order or (ii) as
otherwise set forth in Schedule 6.03, no consent, waiver, approval,
order or authorization of, notice to, or registration, declaration,
designation, qualification or filing with, any Person is or has been or
will be required on the part of Seller or any Affiliate of the Seller
in connection with the execution and delivery of this Agreement or the
transfer of the Shares contemplated hereby or the enforceability of the
indemnification provisions contained herein.
(b) Except as set forth in Schedule 6.03, neither the execution
and delivery of this Agreement by Buyer, nor the consummation of the
transactions contemplated hereby will violate or conflict with, or
result in the acceleration of rights, benefits or payments under, (a)
any provision of the Buyer's Charter or Bylaws, (b) any statute, law,
regulation or governmental order to which the Buyer or the assets and
properties of any thereof are bound or subject, (c) any commitment to
which the Buyer is a party or by which it or any of its properties may
be bound or subject or (d) any agreement, contract or commitment of the
Buyer or to which either of them is a party or by which it or any of
its properties may be bound or subject, except, with respect to clauses
(b), (c) and (d), for such violations and conflicts which will not (i)
prevent or materially delay consummation of the transactions
contemplated
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by this Agreement, (ii) prevent Buyer from performing its obligations
under this Agreement or (iii) result in a Material Adverse Effect.
6.04 LITIGATION.
There are no actions, suits, claims, arbitrations, or proceedings
pending or threatened, against or involving Buyer which might have a Material
Adverse Effect on any of the transactions contemplated by this Agreement, at law
or in equity or admiralty, before or by any court, tribunal, arbitrators or
other governmental authority.
6.05 ACTIONS AND PROCEEDINGS.
Except as set forth in Schedule 6.05, no proceeding or investigation is
pending or threatened before any court, arbitrators or administrator or
governmental authority, bureau or agency to restrain or prohibit, or to obtain
damages, a discovery order or other relief in connection with this Agreement or
any of the Related Agreements or any material part of the transactions
contemplated hereby or thereby.
6.06 INDEPENDENT DECISION.
Buyer has made its own independent judgment of the commercial
potential, condition and usefulness of the Company and its Assets, taking into
consideration all current SH&E Laws and Legal Requirements and assuming all
risks associated with the likelihood that such laws and requirements will change
in the future. Buyer has such experience in business and financial affairs in
general, and of the oil refining business as conducted and regulated in
Washington in particular, as to be capable of evaluating the merits and risks of
this transaction.
6.07 NO BREACHES.
As of the date of this Agreement there are no breaches of any
representations or warranties or covenants herein by Seller.
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ARTICLE 7
CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
The obligations of Buyer to purchase the Shares are subject to the
satisfaction by Buyer on or prior to the Closing Date, unless waived, of the
conditions set forth in this Article. If Buyer actually knows at the time of
Closing of facts that in and of themselves cause a failure of a condition to be
satisfied which are not identified in the notice provided pursuant to Section
11.06, to such an extent that Buyer is not obligated to close, and if Buyer
nevertheless elects to close the transactions contemplated hereby, then Buyer
shall be deemed to have waived such unsatisfied condition which are not
identified in the notice provided pursuant to Section 11.06 and shall not be
entitled to make a claim against Seller based on such unsatisfied condition.
The conditions precedent to Buyer's obligation to close are as follows:
7.01 TAKING OF ASSETS.
In the event that prior to Closing there shall be instituted or
threatened any proceeding or other action, including, without limitation,
eminent domain, condemnation or other governmental proceeding, that could
reasonably have an Extraordinary Adverse Effect, or a Material Adverse Effect as
to which Seller cannot provide Buyer the economic equivalent such that, taking
into account the economic equivalent provided, Buyer will not suffer a Material
Adverse Effect, Seller shall immediately notify Buyer and Buyer shall have the
right to terminate this Agreement within ten (10) days from the date of such
notice, by giving notice to Seller of its election to terminate.
7.02 EXTRAORDINARY ADVERSE CHANGE.
Prior to the Closing, there shall not have been any change, other than
changes affecting the economy generally or affecting the petroleum refining
industry generally or regionally, that has or could reasonably have an
Extraordinary Adverse Change on the Company (the parties agreeing, however, that
Seller shall have the right, but not the obligation, to correct or cure any such
change at its sole
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option and cost prior to Closing), including, but not limited to, changes due to
a Force Majeure Event. Seller shall have the right but not the obligation, to
extend the Closing Date for up to thirty (30) days within which to use
reasonable business efforts to cure or correct any such adverse change. If
Seller after the date of execution hereof becomes entitled to receive any
insurance proceeds with respect to changes in the Company that have not been
corrected or cured to the same or a better condition as prior to such change,
Seller at Closing shall assign such insurance proceeds to Buyer less the amount,
if any, that Seller has incurred to correct or cure the change in the Assets.
7.03 REPRESENTATIONS AND WARRANTIES TRUE; COVENANTS PERFORMED.
The representations and warranties of Seller shall have been true and
correct in all material respects as of the date of this Agreement (and such
other date as may be specified in the respective representation or warranty) and
shall be true and correct in all material respects on the Closing Date as if
made on such date or if changed, such change shall not have resulted in an
Extraordinary Adverse Effect or a Material Adverse Effect as to which Seller
cannot provide to Buyer such protections such that Buyer would not, taking into
account such protections, suffer a Material Adverse Effect. Seller has performed
its covenants under this Agreement which are due to be performed before Closing,
except for failure to perform covenants contained in Section 10.02 which would
not result in a Material Adverse Effect; provided that Seller may provide Buyer
with consideration with respect to any failure to perform to place Buyer in the
same economic position as if such covenant had been performed.
7.04 SHELL OIL COMPANY GUARANTEE.
Seller shall provide Buyer a guarantee of Seller's obligations under
this Agreement by Shell.
7.05 MINERAL RIGHTS.
Seller shall, or shall have caused, all mineral rights relating to the
Owned Real Property held by Seller or any of its Affiliates to be
conveyed to the Company.
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ARTICLE 8
CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE
The obligations of Seller to sell, transfer, convey, and deliver the
Shares are subject to the satisfaction on or prior to the Closing Date, unless
waived, of the conditions set forth in this Article 8. If Seller actually knows
at the time of Closing of facts that in and of themselves cause a failure of a
condition to be satisfied, to such an extent that Seller is not obligated to
close, and if Seller nevertheless elects to close the transactions contemplated
hereby, then Seller shall be deemed to have waived such unsatisfied condition
and shall not be entitled to make a claim against Buyer based on such
unsatisfied conditions.
The conditions precedent to Seller's obligation to close are as
follows:
8.01 REPRESENTATIONS AND WARRANTIES TRUE; COVENANTS PERFORMED.
The representations and warranties of Buyer shall have been true and
correct in all material respects as of the date of this Agreement and shall be
true and correct in all material respects on the Closing Date as if made on such
date, and Buyer shall have performed and complied in all material respects with
all covenants and agreements by Buyer hereunder required to be performed or
complied with on or prior to the Closing Date. Buyer has performed its covenants
under this Agreement which are due to be performed before Closing.
8.02 BUYER'S NOTICE.
The alleged breaches of representations and covenants which Buyer has
notified Seller pursuant to Section 11.06 shall not, in Seller's reasonable
judgment, expose Seller to Damages in excess of twenty million dollars
($20,000,000.00). If Closing does not occur because this condition cannot be
satisfied, neither Party shall be considered in default.
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ARTICLE 9
JOINT CONDITIONS PRECEDENT TO CLOSING OBLIGATIONS
The obligations of Buyer and Seller to close shall be subject to the
satisfaction on or prior to the Closing Date of the following conditions:
9.01 FTC AND STATE APPROVAL.
All requisite approvals shall have been obtained pursuant to the
Consent Order.
9.02 REQUIRED CONSENTS AND AUTHORIZATIONS.
Seller shall have received and furnished to Buyer copies of all
consents and authorizations of third parties required to conduct Company
Operations upon sale of the Shares to Buyer for which consent is required;
provided, however, if such consents are not obtained, Seller may elect to
provide to Buyer the economic benefits of such Contracts, Leases, Licenses and
Easements and Permits until Buyer obtains the consents.
9.03 LITIGATION.
No order of any court or order or action of any government agency
purporting to restrain or prohibit the transactions contemplated hereby shall be
threatened or in effect, and no action, suit, claim, arbitration, or proceeding
shall be pending by any government agency or other governmental authority, and
no new Applicable Law or regulation shall have been enacted or taken effect
which seeks to restrain or prohibit the transactions contemplated hereby, or
which has or reasonably could have an Extraordinary Adverse Effect or a Material
Adverse Effect as to which Seller cannot provide Buyer such protections such
that Buyer would not, taking into account such protections, suffer a Material
Adverse Effect.
9.04 AGREEMENTS FINALIZED.
The agreements listed in Section 3.04 have been executed and delivered
by the parties thereto.
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ARTICLE 10
COVENANTS AND AGREEMENTS OF SELLER
Seller covenants and agrees as follows:
10.01 CONDUCT OF BUSINESS.
Prior to the Closing, unless the prior written consent of Buyer to a
contrary action is obtained (which consent shall not be unreasonably delayed or
withheld), and except as expressly permitted under this Agreement:
(a) Seller shall cause the Company to operate the Operations
only in its usual, regular and ordinary manner and substantially in the
same manner as heretofore conducted. Seller shall cause the Company to
use commercially reasonable efforts to (i) preserve the Operations;
(ii) maintain the assets of the Operations in their current state of
repair, order and condition, usual and ordinary wear and tear excepted
and subject to requirements in the ordinary course of business; and
(iii) maintain in effect insurance upon the assets of the Company and
with respect to the conduct of the Operations in such amounts and of
such kinds comparable in all material respects to that in effect on the
date of this Agreement.
(b) Seller shall cause the Company not to:
(i) amend its Charter or By-Laws;
(ii) incur or assume or become subject to any additional
indebtedness for money borrowed or purchase money
indebtedness, except in the ordinary course of business from
one or more Affiliates and consistent with past practices;
(iii) redeem or otherwise acquire any shares of capital
stock of the Company or issue any capital stock of the Company
or any option, warrant or right relating thereto or any
securities exchangeable for or convertible into any such
shares;
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(iv) permit or allow the Company's assets or properties to
be subject to any additional Liens other than Permitted
Encumbrances or sell, transfer, lease or otherwise dispose of
any such assets or properties, in each case except in the
ordinary course of business and consistent with past
practices.
(v) grant any increase in salaries or commissions payable
or to become payable to any employee of the Company, or to any
sales agent or representative of the Company, except normal
periodic increases in salaries and commissions in accordance
with the Company's existing compensation practices;
(vi) make any capital expenditure or commitment therefor
for additions to property, equipment or facilities in excess
of one million dollars ($1,000,000.00) in the aggregate per
month except as provided in the Company's capital budget;
(vii) exclusively license, sell, transfer, pledge, modify,
disclose or dispose of, any material Intellectual Property
needed for the continuation of Operations;
(viii) subject to the provisions of the Hold Separate
Agreement, hire any new employee unless such employee is a
bona fide replacement for a vacancy in a budgeted, authorized
position with the Operations as of the date of this Agreement
and necessary to continue the Operations;
(ix) terminate, renew, enter into or amend any Commitment
or Contract (other than any spot crude and product contracts);
(x) establish or adopt any severance pay plan or
arrangement with respect to, or for the benefit of, Continuing
Employees;
(xi) make any changes in any method of accounting or
accounting practice or policy, other than those required by
GAAP;
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(xii) engage in any transactions with an Affiliate of the
Company, other than transactions in the ordinary course and
consistent with past practices;
(xiii) make any changes in the method of acquiring
feedstock or in the type of feedstock which is not consistent
with past practices;
(xiv) make any changes in any employee benefit plan or
agreement; or
(xv) agree, whether in writing or otherwise, to do any of
the foregoing.
10.02 ACCESS TO INFORMATION.
From the date of this Agreement through the Closing Date, upon
reasonable notice, Seller will, and will cause the Company to, (i) afford the
officers, employees and authorized agents and representatives of Buyer
reasonable access during normal business hours to the offices, properties and
books and records of the Company and (ii) furnish to the officers, employees and
authorized agents and representatives of Buyer such additional financial and
operating data and other information regarding the assets and liabilities of the
Company and the Operations (or legible copies thereof) as Buyer may from time to
time reasonably request; provided, however, that such investigation shall not
unreasonably interfere with any of the businesses or operations of the Company.
Without limiting the generality of the foregoing, Seller shall, and shall cause
the Company to, cooperate fully with Buyer's investigation of the assets and
liabilities and the Operations and provide copies of such documents in its
possession as Buyer may reasonably request to confirm the title to any and all
assets owned or leased by the Company. All such information obtained by Buyer
shall be subject to the Confidentiality provisions in Section 21.13 subject to
the exceptions contained therein.
10.03 NO SOLICITATION OF TRANSACTIONS.
From the date of this Agreement through the Closing Date, none of the
Company or any of its Affiliates, directors, officers, employees, subsidiaries
or agents shall solicit, consider,
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encourage or accept any other offers to acquire any of the Shares or the Assets
(other than in the ordinary course of business) or assist any third Person in
preparing or soliciting such an offer. Seller and the Company shall not have,
and shall cause its Affiliates, directors, officers, employees, subsidiaries and
agents not to have, any discussions or negotiations with any Person(s)
expressing an interest in any such offer. Notwithstanding the preceding portions
of Section 10.03, the Company or any of its Affiliates, directors, officers,
employees, subsidiaries or agents may enter into discussions and negotiations
and may solicit, consider, encourage and accept offers to acquire the Shares or
the Assets which, in any case will be subject to Buyer's prior rights under this
Agreement for so long as this Agreement is in effect with respect to the sale of
the Shares provided that Seller shall have notified Buyer by letter executed by
the Chief Executive Officer of Shell or approved by the Chief Executive Officer
of Shell and executed by the Chief Financial Officer of Shell stating that Shell
has determined in good faith and no earlier than sixty (60) days after the date
of this Agreement that there is a significant probability that Buyer cannot
close this transaction.
10.04 AUTHORIZATIONS.
Each of Buyer, Seller and the Company, as promptly as practicable after
the date of this Agreement, shall (i) deliver, or cause to be delivered, all
notices and make, or cause to be made, all such declarations, designations,
registrations, filings and submissions under all statutes, laws, regulations and
governmental orders or Permits applicable to it as may be required for it to
consummate the sale of the Shares and the other transactions contemplated hereby
in accordance with the terms of this Agreement; (ii) use commercially reasonable
efforts, which shall not require payment of more than normal governmental fees
or transfer charges beyond those provided for in Contracts, to obtain, or cause
to be obtained, all authorizations, approvals, orders, consents and waivers from
all Persons necessary to consummate the foregoing; and (iii) use commercially
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reasonable efforts, which shall not require payment of more than normal
governmental fees or transfer charges beyond those provided for in Contracts, to
take or cause to be taken, all other actions necessary, proper or advisable in
order for it to fulfill its respective obligations hereunder and to carry out
the intentions of the Parties expressed herein. If any such authorizations,
approvals, orders, consents and waivers cannot be obtained, Seller shall either
provide Buyer with the economic benefits thereof or, unless Buyer waives this
condition, terminate this Agreement which shall be considered a termination
without default by either Party.
10.05 FINANCIAL STATEMENTS.
Seller shall cause to be prepared in accordance with GAAP, and shall
deliver to Buyer as soon as reasonably practicable after the Agreement Date, the
following audited financial statements of the Company: the balance sheets as of
December 31, 1997, and December 31, 1996, and the statements of cash flows and
income for the twelve months ended December 31, 1997 and for the nine months
ended December 31, 1996.
10.06 OTHER CONFIDENTIALITY AGREEMENTS
Seller shall notify all Persons not a Party who have signed
confidentiality agreements ("Third Party Confidentiality Agreements") relating
to the sale of the assets or stock of the Company to return or destroy all
"Confidential Information" as defined in such Third Party Confidentiality
Agreements. In addition Seller shall assign to the Company on the Closing Date
the right to enforce such Third Party Confidentiality Agreements and obtain the
benefit thereof.
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ARTICLE 11
COVENANTS AND AGREEMENT OF BUYER
Buyer covenants and agrees as follows:
11.01 ACCESS.
From and after the Closing Date, Buyer shall or shall cause Company to
afford to Seller and its authorized representatives reasonable access during
normal business hours to Company's properties which were transferred to Buyer or
retained by the Company as Seller may request for purposes of investigating
claims, or conducting litigation or administrative proceedings with third
parties or government agencies.
11.02 CHANGE OF NAME; USING OF TRADEMARKS, SHELL MARKS.
On the Closing Date the Buyer shall cause the Company to change its
name to a name that does not include, or is not similar to, the name "Shell." No
license to any Trademarks, trade names, trade dress or service marks is hereby
granted, and Buyer is precluded from any use of Trademarks on any of its
products or services as a means of corporate identity or in any of its
communications. Buyer acknowledges and agrees with Seller that Seller and its
Affiliates have the absolute and exclusive proprietary right to all Trademarks
incorporating "Shell," the "Shell Marks" and other marks owned by Seller or its
Affiliates, and all rights to which, and that the goodwill represented thereby
and pertaining thereto are being retained by Seller and its Affiliates. Within
sixty (60) days after the Closing Date, Buyer shall cease using any Shell Mark
and shall remove from all the Assets of the Company any and all Tradenames,
"Shell" and "Shell Marks." Thereafter, Buyer shall not use any Shell Mark or
Trademarks in connection with the sale of any products or services or otherwise
in the conduct of its business. In the event that Buyer breaches this Section
11.02, Seller shall be entitled to specific performance of this Section 11.02
and to injunctive relief against further violations, as well as any other
remedies at law or in equity
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available to Seller. For avoidance of doubt, Buyer shall be entitled to use the
tradename "Anacortes Refinery" with any other descriptor as a geographic trade
name indicator other than a Shell Mark or Trademark.
11.03 NO REGISTRATION; TRANSFERABILITY.
Buyer acknowledges that the Shares sold pursuant to this Agreement are
not registered under applicable federal or state securities laws and the Shares
are being offered and sold in reliance upon the exemptions from registration
provided in the Securities Act of 1933 and applicable exemptions under state
securities laws. Buyer agrees not to sell, transfer or otherwise dispose of any
of the Shares unless such sale, transfer or other disposition will not result in
a violation of applicable federal or state securities laws.
11.04 FTC AND STATE ORDERS.
Buyer shall not take any action materially inconsistent with the
Consent Order. Buyer shall supply Seller with Replacement Supply Contracts (as
defined in the Consent Order) acceptable to Buyer and authorize(s) Seller to
offer such contracts to each Northwest Branded Seller (as defined in the Consent
Order). The Company shall enter into the Replacement Supply Contracts with the
Northwest Branded Sellers which accept the contracts as of the Effective Time.
At the Effective Time, the Company shall assign to Seller or its designee, the
Existing Supply Agreement (as defined in the Consent Order) with respect to the
Northwest Branded Sellers which do not accept the Replacement Supply Contracts.
Buyer agrees it shall not resell the Shares or sell the Assets to the Atlantic
Richfield Company, Tosco Corporation or Chevron Corporation (or any entities
controlled by any of those companies) without prior approval of the States of
Washington and Oregon for ten (10) years after the Closing Date.
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11.05 CONTINUING AND CUT OFF OF GRANT OF INTELLECTUAL PROPERTY RIGHTS.
On the Closing Date, the Buyer shall be entitled to the same and
continuing non-exclusive, royalty free, irrevocable license in the United States
which was granted to the Shell Anacortes Refining Company by Shell Oil Company
to Technology (as defined in Exhibit 11.05, specifically as provided in Section
2.1(a) - (c) and 2.2 thereof) and a royalty free license from Shell with respect
to the other Intellectual Property (as defined herein) for the Operations. This
grant is specifically limited to the use of the Intellectual Property and
Technology in the Operations and is only for Intellectual Property and
Technology that existed prior to the Closing Date. For avoidance of doubt, no
other Technology or Intellectual Property rights subsequent to the Closing Date
are granted herein by Seller, Company or their Affiliates, and no rights of
sub-license whatsoever are provided to Buyer.
11.06 BUYER'S NOTICE.
Not later than ten (10) days prior to the Closing Date, and, again, on
the Closing Date prior to the Closing, Buyer shall notify Seller of any breaches
of representations or covenants herein by Seller or the Company of which Buyer
has Knowledge at the time of such notice and with respect to which a prior
notice has not been given pursuant to Section 11.06.
ARTICLE 12
COVENANTS OF BUYER AND SELLER
Buyer and Seller each covenant as follows:
12.01 ANTITRUST COMPLIANCE.
Notwithstanding any other provision of this Agreement, either party at
any time may terminate this Agreement upon notice to the other, without
liability to the other party, if the Federal Trade Commission, States of
Washington or Oregon, or the Department of Justice advise Seller of its
disapproval of the transactions contemplated by this Agreement. In the event of
Federal Trade
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Commission, States of Washington or Oregon, or Department of Justice
disapproval, all earnest monies contemplated pursuant to Article 16 shall be
returned to Buyer.
12.02 EFFORTS TO SATISFY CONDITIONS.
Each Party shall use its commercially reasonable efforts, which shall
not require payment of more than normal governmental fees or transfer charges
beyond those provided for in Contracts, to satisfy the conditions to Closing
applicable to it in Articles 7, 8 and 9 as soon as commercially practicable. If
such conditions cannot be so satisfied, the Parties will in good faith consider
alternatives.
12.03 PAYMENT OF TRANSFER TAXES.
Seller shall pay all Taxes, if any, which are assessed or imposed as a
result of the transfer of the Shares from Seller to Buyer.
12.04 CASUALTY REPAIR.
Seller agrees that if any Assets are destroyed or damaged, in whole or
in part, by fire or other casualty prior to the Effective Time, Seller shall, or
shall cause the Company to, repair or replace such Assets with reasonable
promptness, or at Seller's option, Seller may assign to the Company all proceeds
of any insurance net of expenses covering such Assets and shall thereafter be
relieved of any obligation to repair or replace such Assets. If the insurance
proceeds net of expenses do not equal the cost of repair of the damaged Asset,
Seller may elect to pay to Company an amount equal to the cost of repair of such
Asset less the insurance proceeds or terminate this Agreement. Any insurance
proceeds exceeding the cost of repair of the damaged Asset, shall be a Retained
Asset.
12.05 BOOKS AND RECORDS.
Buyer, the Company, Seller and Seller's Affiliates shall, at the
request of the other Party, make available to such other Party from time to time
on a reasonable basis the books and records relating to the Assets and the
Operations in their possession. Such books and records shall be held
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by the Party in possession thereof for seven (7) years after the Closing Date,
provided that books and records relating to Environmental Liabilities and title
shall either be held by the Company for ten (10) years after the Closing Date or
delivered to Seller and the other Party shall have the right, at its expense, to
inspect and make copies of such books and records upon such Party's request;
provided, however, that (i) all such access and copying shall be done in such a
manner so as not to unreasonably interfere with the normal conduct of the
operations of the Party requested to provide access to such books and records
and (ii) the Party requesting access to such books and records shall treat the
same and the contents thereof as confidential and not disclose such books and
records or the contents thereof to any Person, except as required by Applicable
Law. In addition, after the Closing Date, at Seller's request, Buyer shall make
available to Seller those employees of the Company requested by Seller in
connection with any action, including to provide testimony, to be deposed, to
act as witnesses and to assist counsel; provided, however, that (x) such access
to such employees shall not unreasonably interfere with the normal conduct of
the operations of Buyer and (y) Seller shall reimburse Buyer the out-of-pocket
costs reasonably incurred by Buyer in making such employees available to Seller.
Further, after the Closing Date, at Buyer's request, Seller shall make available
to Buyer those employees of Seller and Seller's Affiliates requested by Buyer in
connection with any action, including to provide testimony, to be deposed, to
act as witnesses and to assist counsel; provided, however, that (x) such access
to such employees shall not unreasonably interfere with the normal conduct of
the operations of Seller and Seller's Affiliates and (y) Buyer shall reimburse
Seller the out-of-pocket costs reasonably incurred by Seller and Seller's
Affiliates in making such employees available to Buyer.
12.06 PUBLIC ANNOUNCEMENTS.
Neither Buyer, Seller nor any representative of either of them shall
make any public announcement with respect to this Agreement or the transactions
contemplated hereby or thereby
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without the prior written consent of the other Party hereto. The foregoing
notwithstanding, any such public announcement may be made if required by
Applicable Law; provided that the Party required to make such public
announcement, to the extent reasonably possible, shall confer with the other
Party concerning the timing and content of such public announcement before the
same is made.
12.07 OTHER TAX MATTERS.
(a) All tax sharing agreements between the Company and any
other party hereby are terminated as of the Closing Date without cost
to the Company to the extent they may effect Taxes that are the
responsibility of the Buyer and all rights and obligations of the
Company with respect to Taxes shall be as provided herein.
(b) Tax returns (each a "Pre-Closing Return") which are
required to be or may electively be filed with respect to the Company
on a consolidated, unitary or other combined basis with Shell or the
appropriate parent for a taxable period which ends on or before the
Closing Date (a "Pre-Closing Period") shall be prepared and filed by
(or shall be the responsibility of) Seller, which shall include the
preparation and filing of the consolidated federal and state income tax
returns of the Group which includes the Company for the period up to
and including the Closing Date. The Pre-Closing Return shall be
prepared on a basis consistent with prior returns for the Company.
Seller or the appropriate parent of the Company shall timely pay or
cause to be paid all Taxes shown on such Pre-Closing Returns. All tax
returns which (i) are required to be filed by or with respect to the
Company for a taxable period that ends after the Closing Date,
including any tax return for a Bridge Period (as defined in Section
14.07(e) herein), shall be prepared and filed by Buyer, subject to the
rights to indemnification under Section 14.07(a) and Section 12.07(e),
and Buyer shall timely pay or cause to be paid all Taxes shown on such
tax returns.
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(c) Seller agrees to provide Buyer and Buyer agrees to provide
Seller with such cooperation and information as the other shall
reasonably request in connection with the preparation or filing of any
tax return required under this Agreement.
(d) With respect to any Bridge Period, to the extent permitted
by applicable law, the Company shall elect to treat the Closing Date as
the last day of the taxable period. If applicable law, regulation or
governmental order will not permit the Closing Date to be the last day
of a period, the Tax attributable to the Operations of the Company for
the portion of the period up to and including the Closing Date shall be
(i) in the case of real or personal property Taxes a flat minimum
dollar amount Tax, the total amount of such Taxes multiplied by a
fraction, the numerator of which is the number of days in the partial
period through and including the Closing Date and the denominator of
which is the total number of days in such Bridge Period, (ii) in the
case of all Taxes based on or in respect of income, the Tax computed on
the basis of the taxable income or loss of the Company for such partial
period as determined from its books and records, and (iii) in the case
of all other Taxes, on the basis of the actual activities of the
Company for such partial period as determined from its books and
records.
(e) With respect to any Post-Closing Return or Bridge Return,
Buyer shall deliver, at least forty-five (45) days prior to the due
date for filing such tax return (including any extension) to Seller a
statement setting forth the amount of Tax for which Seller owes
pursuant to Section 14.07(a), including the allocation of Taxes under
Section 12.07(d), and copies of such tax return. Seller shall have the
right to review such tax returns and the allocation of tax liability
and to suggest to Buyer any reasonable changes to such tax returns no
later than fifteen (15) days prior to the date for the filing of such
tax returns. Seller and Buyer agree to consult and to attempt to
resolve in good faith any issue arising as a, result of the review of
such tax returns and allocation of tax liability
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and mutually to consent to the filing as promptly as possible of such
tax returns. Not later than fifteen (15) days before the due date for
the payment of Taxes with respect to such tax returns, Seller shall pay
to Buyer an amount equal to the Taxes as agreed to by Buyer and Seller
as being owed by Seller, pursuant to Section 14.07(a). In the event
that Buyer and Seller cannot agree on the amount of Taxes owed by
Seller, with respect to a Bridge Return or a Post-Closing Return,
Seller shall pay to Buyer the amount of Taxes reasonably determined by
Buyer to be owed by them pursuant to Section 14.07(a). Within ten (10)
days following such payment, Seller and Buyer shall refer the matter to
an Accounting Firm agreed to by Buyer and Seller to arbitrate the
dispute. Seller and Buyer shall equally share the fees and expenses of
such Accounting Firm and its determination as to the amount owing by
Seller, pursuant to Section 14.07(a) with respect to a Bridge Return or
Post-Closing Return shall be binding on both Parties. Within five (5)
days of the determination by such Accounting Firm, if necessary, the
appropriate Party shall pay the other Party any amount which is
determined by such Accounting Firm to be owed. Seller shall be entitled
to reduce its obligation to pay Taxes with respect to a Bridge Return
or a Post-Closing Return by the amount of any estimated Taxes paid with
respect to such tax liabilities by or on behalf of the Company on or
before the Closing Date.
(f) Seller shall have the right to all refunds of Taxes
(including interest thereon), other than refunds which are reflected as
an asset in the calculation of Net Working Capital, which relate to
Taxes of the Company for Pre-Closing Periods and, to the extent
provided in the following sentence, for Bridge Periods. Buyer shall pay
over to Seller any such refunds within ten (10) days of receipt
thereof, net of any Tax imposed on Buyer or the Company by reason of
the receipt of such refund. To the extent any refund of Taxes, other
than refunds which are reflected as an asset in the calculation of Net
Working
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Capital, is made with respect to a Bridge Period, such refund shall be
apportioned between Buyer and Seller, based on the appropriate
allocation method set forth in clauses (i), (ii) or (iii) of Section
12.07(d).
(g) Buyer and Seller agree to consult and resolve in good
faith any issues arising in connection with the preparation or review
of any tax return or the calculation of any Tax described in this
Section 12.07.
(h) If, after the Closing Date, Seller or any Affiliate
receives or is credited with a refund of any Tax attributable to the
utilization or carryback of any Tax attribute (e.g., net operating
losses, Tax credits) of the Company arising after the Closing Date,
Seller shall pay to Buyer an amount equal to the amount of such refund
together with any interest received from or credited thereon by the
applicable taxing authority, net of any Taxes imposed upon Seller or
any Affiliate by reason of the receipt of such refund or credit.
(i) At the Closing, Seller shall deliver to Buyer certificates
signed under penalties of perjury (i) stating that it is not a foreign
corporation, foreign partnership, foreign trust or foreign estate, (ii)
providing its U.S. Employer Identification Number and (iii) providing
its address, all pursuant to Section 1445 of the Code, each such
certificate to be substantially in the form attached hereto as Exhibit
12.07(i).
(j) Survival. The obligations and agreements contained in this
Section 12.07 shall survive without limitation.
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ARTICLE 13
ENVIRONMENTAL LIABILITIES
13.01 ENVIRONMENTAL LIABILITIES
Except with respect to fines and penalties covered by Section
14.01(A)(ii):
A. Seller shall be liable for those Damages for Environmental
Liability in excess of the Threshold Amount and less than or equal to
one million dollars ($1,000,000.00) incurred each year and only after
Buyer or, after the Effective Time, the Company, has incurred and paid
annually the Threshold Amount.
B. Seller shall be liable for fifty (50) percent of those
Damages for Environmental Liability incurred in excess of one million
dollars ($1,000,000.00) per year until the Buyer and, after the
Effective Time, the Company have collectively incurred and paid an
aggregate of five million dollars ($5,000,000.00) of Damages for
Environmental Liability net of any amounts reimbursed by Seller under
this Section.
C. Seller shall be liable for all Damages for Environmental
Liability after Buyer and, after the Effective Time, the Company have
collectively incurred and paid an aggregate of five million dollars
($5,000,000.00) of Damages for Environmental Liability net of any
amounts reimbursed by Seller under this Section.
D. Any Seller liability and responsibility for Damages for
Environmental Liability incurred pursuant to this subparagraph shall
arise if, and only to the extent, that:
(1) Damages are incurred pursuant to Legal Requirements and
encompass only work reasonably necessary, as of the discovery
of any SH&E Condition, to meet the minimum requirements of
SH&E Laws applicable to the operation of a refinery;
(2) Buyer has given Seller written notice identifying the
SH&E Condition, or of any major site assessment or
investigation that could lead to the discovery of an
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SH&E Condition, so that Seller may participate, at its own
expense, in any discussions or negotiations with any
applicable governmental authority concerning the design and
implementation of any remediation plan or project where Seller
has, or is reasonably likely to have, any liability or
responsibility, and Buyer has not proposed, discussed or
agreed to any such plan or project without Seller's prior
written consent, which shall not be unreasonably withheld; and
(3) Seller's obligation under this Section relates to an
SH&E Condition identified pursuant to Section 13.01(D)(2)
within three (3) years after the Effective Time, regardless of
when such amounts must be paid.
Notwithstanding anything to the contrary, on or prior to the tenth
anniversary of the Effective Time, the Seller shall pay to the Company
a lump sum payment representing the present value (calculated using a
discount rate of eight (8) percent real) as of that date for all
identified, reasonably estimated and unpaid projected Damages for
Environmental Liability with respect to environmental projects which
are ongoing on that date and which are subject to indemnity hereunder.
Upon such lump sum payment, Seller shall have no further obligations to
Buyer or the Company for Damages for Environmental Liability.
13.02 WASTE SITES.
Buyer and Seller hereby agree to each bear the risk of all open and
closed off-site waste sites operated by third parties on a proportionate basis
according to the respective volume of Hazardous Substances deposited in such
waste sites by either Buyer or the Company after the Effective Time, which shall
be Buyer's risk, or by either Seller or the Company prior to the Effective Time,
which shall be Seller's risk.
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ARTICLE 14
INDEMNIFICATION; SURVIVAL
14.01 INDEMNIFICATION.
A. INDEMNIFICATION BY SELLER. SELLER AGREES TO PAY AND TO
INDEMNIFY FULLY, HOLD HARMLESS AND DEFEND BUYER AND ITS RESPECTIVE AFFILIATES,
AGENTS, OFFICERS, DIRECTORS, PARTNERS, EMPLOYEES, SERVANTS, CONSULTANTS,
REPRESENTATIVES, SUCCESSORS AND ASSIGNS (COLLECTIVELY CALLED "BUYER INDEMNIFIED
PARTIES") FROM AND AGAINST ANY AND ALL CLAIMS BASED UPON ALLEGATIONS OF AND/OR
DAMAGES (WHETHER BASED ON NEGLIGENT ACTS OR OMISSIONS, STATUTORY LIABILITY,
STRICT LIABILITY OR OTHERWISE) ARISING OUT OF THE FOLLOWING:
(i) TO THE EXTENT NOT KNOWN TO BUYER ON THE DATE OF THIS
AGREEMENT OR TO THE EXTENT NOT DISCLOSED BY SELLER TO BUYER IN THE DATA
ROOM MATERIAL, COPIES OF WHICH HAVE BEEN, IN THEIR ENTIRETY, BOXED,
MARKED FOR IDENTIFICATION AND DELIVERED TO BUYER PRIOR TO THE DATE OF
THIS AGREEMENT, ANY INACCURACY OR BREACH OF ANY REPRESENTATION OR
WARRANTY OF SELLER CONTAINED IN THIS AGREEMENT OR ANY CERTIFICATE
DELIVERED PURSUANT HERETO AND MADE AT OR AS OF THE EFFECTIVE TIME, OR
OF ANY COVENANT OR AGREEMENT OF SELLER CONTAINED IN THIS AGREEMENT;
(ii) ENVIRONMENTAL LIABILITY RETAINED BY SELLER, PURSUANT
TO THE TERMS OF ARTICLE 13, AND FINES AND PENALTIES OF
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ANY NATURE WHATSOEVER ASSESSED, LEVIED OR ASSERTED AGAINST BUYER OR ANY
BUYER INDEMNIFIED PARTY AT ANY TIME AS A RESULT OF ANY SH&E CONDITION
OR A VIOLATION OR ALLEGED VIOLATION OF ANY SH&E LAW WHICH OCCURRED
PRIOR TO THE EFFECTIVE TIME, TO THE EXTENT RESULTING FROM ANY ACTS OR
OMISSIONS OF COMPANY OR ITS AFFILIATES PRIOR TO THE EFFECTIVE TIME.
(iii) LIABILITIES ASSUMED BY SELLER IN SECTIONS 2.04(b)
AND 4.05(a).
B. INDEMNIFICATION BY BUYER. BUYER AGREES TO PAY AND TO
INDEMNIFY FULLY, HOLD HARMLESS AND DEFEND SELLER AND ITS RESPECTIVE AFFILIATES,
AGENTS, OFFICERS, DIRECTORS, PARTNERS, EMPLOYEES, SERVANTS, CONSULTANTS,
REPRESENTATIVES, SUCCESSORS AND ASSIGNS (COLLECTIVELY CALLED "SELLER INDEMNIFIED
PARTIES") FROM AND AGAINST ANY AND ALL CLAIMS BASED UPON ALLEGATIONS OF AND/OR
DAMAGES (WHETHER BASED ON NEGLIGENT ACTS OR OMISSIONS, STATUTORY LIABILITY,
STRICT LIABILITY OR OTHERWISE) ARISING OUT OF:
(i) ANY INACCURACY OR BREACH OF ANY REPRESENTATION OR
WARRANTY OF BUYER CONTAINED IN THIS AGREEMENT OR ANY CERTIFICATE
DELIVERED PURSUANT HERETO AND MADE ON OR AS OF THE EFFECTIVE TIME, OR
OF ANY COVENANT OR AGREEMENT OF BUYER CONTAINED IN THIS AGREEMENT;
(ii) ANY LIABILITY WHATSOEVER (WHETHER KNOWN, UNKNOWN,
ACCRUED, ABSOLUTE, CONTINGENT OR OTHERWISE) INCURRED AS THE RESULT OF
THE OWNERSHIP OF THE SHARES OR
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OPERATION OF THE COMPANY BY BUYER AND ITS SUBSIDIARIES AFTER THE
EFFECTIVE TIME;
(iii) ENVIRONMENTAL LIABILITY ASSUMED BY BUYER PURSUANT TO
ARTICLE 13; AND FINES AND PENALTIES OF ANY NATURE WHATSOEVER ASSESSED,
LEVIED OR ASSERTED AGAINST SELLER OR ANY SELLER INDEMNIFIED PARTY AT
ANY TIME AS A RESULT OF A VIOLATION OR ALLEGED VIOLATION OF ANY SH&E
CONDITION OR SH&E LAW WHICH OCCURRED AFTER THE EFFECTIVE TIME, TO THE
EXTENT RESULTING FROM ANY ACTS OR OMISSIONS OF BUYER OR ITS AFFILIATES
AFTER THE EFFECTIVE TIME.
C. Survival. The indemnification obligations as to any claim of which
written notice was given to the Indemnifying Party before the end of such time
period shall continue and be in effect for a period of two (2) years after the
Effective Date except:
(i) The obligations with respect to Sections 5.15 shall continue
and be in effect for a period of ten (10) years after the Effective
Date.
(ii) The obligations with respect to Section 5.19 shall continue
and be in effect until thirty (30) days after the expiration of the
applicable statute of limitations with respect to such Taxes.
(iii) As otherwise provided in Article 13.
It is understood that Seller shall have no liability or obligation for indemnity
after the respective anniversary dates of the Effective Time set forth above (or
as otherwise provided in Article 13 or Section 12.07(j)) unless notice has been
given as aforesaid.
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14.02 ACTIONS.
No Party to this Agreement shall bring any action, suit or proceeding
(whether under any Federal, state or local statute or law) against any other
Party, or seek to join any other Party to any pending action, suit or proceeding
which arises out of, relates to or is connected with any matter indemnified
under Article 14, except to enforce the provisions of this Article 14.
14.03 NOTIFICATION.
Within a reasonable time following the determination thereof, an
Indemnitee shall give the Indemnitor notice of any matter which an Indemnitee
has determined has given or could give rise to a right of indemnification under
this Agreement, stating the amount of the Damage, if known, and method of
computation thereof, all with reasonable particularity and containing a
reference to the provisions of this Agreement in respect of which such right of
indemnification is claimed or arises ("Claim Notice"). The obligations and
Liabilities of an Indemnitor under this Article 14 with respect to Damages
arising from claims of any third party that are subject to the indemnification
provided for in this Article 14 ("Third Party Claims") shall be governed by and
contingent upon the following additional terms and conditions: If an Indemnitee
shall receive notice of any Third Party Claim, the Indemnitee shall promptly
give the Indemnitor notice of such Third Party Claim and shall permit the
Indemnitor, at its option, to undertake the defense of such Third Party Claim by
counsel of its own choice and at its expense; provided, however, that the
failure of the Indemnitee to notify the Indemnitor during the required
notification period shall only relieve the Indemnitor from its obligation to
indemnify the Indemnitee pursuant to this Article 14 to the extent that the
Indemnitor is actually prejudiced by such failure (whether as a result of the
forfeiture of substantive rights or defenses or otherwise).
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14.04 DEFENSE OF ACTIONS.
If the Indemnitor acknowledges in writing its obligation to indemnify
the Indemnitee hereunder against any Damages that may result from such Third
Party Claims (subject to the limitations set forth herein), then the Indemnitor
shall be entitled, at its option, to assume and control the defense of such
Third Party Claim at its expense and through counsel of its reasonable choice if
it gives notice to the Indemnitee within twenty (20) calendar days of the
receipt of notice of such Third Party Claim from the Indemnitee of its intention
to do so. If the Indemnitor elects to assume and control the defense of any such
Third Party Claim, the Indemnitee shall have the right to employ separate
counsel and to participate in (but not control) the defense, compromise or
settlement of the Third Party Claim, but the fees and expenses of such counsel
will be at the expense of the Indemnitee, unless (i) the Indemnitor has agreed
to pay such fees and expenses or (ii) there are one or more defenses reasonably
available to the Indemnitee which are different from or additional to those
available to the Indemnitor and which can not be effectively raised by
Indemnitor, and in any such case that portion of the fees and expenses of such
separate counsel that are reasonably related to matters covered by the
indemnification provided by this Article 14 will be paid by the Indemnitor.
Expenses of counsel to the Indemnitee shall be reimbursed on a current basis by
the Indemnitor if there is no dispute as to the obligation of the Indemnitor to
pay such amounts pursuant to this Article 14. In the event the Indemnitor
exercises its right to undertake the defense against any such Third Party Claim
as provided above, the Indemnitee shall cooperate with the Indemnitor in such
defense and make available to the Indemnitor, at the Indemnitor's expense (other
than the compensation paid by Indemnitee or its Affiliates to employees), all
witnesses, pertinent records, materials and information in its possession or
under its control relating thereto as is reasonably required by the Indemnitor.
Similarly, in the event the Indemnitee is, directly or indirectly, conducting
the defense against any such Third Party Claim,
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the Indemnitor shall cooperate with the Indemnitee in such defense and make
available to it, at the Indemnitor's expense (other than the compensation paid
by Indemnitee or its affiliates to employees), all such witnesses, records,
materials and information in its possession or under its control relating
thereto as is reasonably required by the Indemnitee. No such Third Party Claim,
except the settlement thereof which involves the payment of money only (by a
party or parties other than the Indemnitee) and for which the Indemnitee is
released by the third party claimant and is totally indemnified by the
Indemnitor, may be settled by the Indemnitor without the written consent of the
Indemnitee. No Third Party Claim which is being defended in good faith by the
Indemnitor shall be settled by the Indemnitee without the written consent of the
Indemnitor.
14.05 COORDINATION OF INDEMNIFICATION RIGHTS.
(a) Except for any action seeking specific performance and/or
injunctive relief for the breach of any covenant contained in this Agreement,
the indemnification provided any Person pursuant to this Article 14 shall be
such Person's sole remedy for any breach by any Party hereto of any
representation, warranty or covenant contained in this Agreement, or in any
certificate or document (to the extent such certificates or documents relate to
matters covered by the representations, warranties or covenants contained
herein) required to be delivered in connection herewith, or in connection with
the consummation of the transactions provided for hereby.
(b) Notwithstanding any provisions to the contrary contained
in this Article 14, the right of any Person to be indemnified, defended and/or
held harmless in connection with any claim pursuant to any Section of this
Article 14 shall be reduced to the extent that such Person is or has been
indemnified, defended and/or held harmless, pursuant to any other provisions of
this Agreement or any of the Related Agreements. In the event that the same act,
omission or event could, disregarding thresholds or time limits, be subject to
indemnity under both Sections 14.01A(i) and 14.01A(ii), only the
indemnification, if any, under Section 14.01A(ii) shall be applicable.
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(c) In the event that an Indemnified Party has a right of
recovery against any third party with respect to any Damages in connection with
which a payment is made to such Indemnified Party by an Indemnifying Party, then
(i) such Indemnifying Party shall, to the extent of such payment, be subrogated
to all of the rights of recovery of such Indemnified Party against such third
party with respect to such Damages, and (ii) such Indemnified Party shall
execute all papers required and take all action necessary to secure such rights,
including, but not limited to, the execution of such documents as are necessary
to enable such Indemnifying Party to bring suit to enforce such rights.
(d) The Indemnifying Party, in its sole discretion and upon
notice to the Indemnified Party, may elect to set off any amount payable to the
Indemnified Party by the Indemnifying Party against any amount for which the
Indemnifying Party is entitled to indemnification under this Article 14, or any
other amount payable by the Indemnified Party to the indemnifying Party;
provided that the Indemnified Party shall be indemnified in the manner provided
in this Article 14 for any indemnifiable amount not covered by such set off.
(e) In the event of any conflict between this Article 14 and
any other provisions of this Agreement, this Article 14 shall prevail.
(f) Except as otherwise expressly provided to the contrary in
this Agreement, each of the Parties to this Agreement hereby releases the other
Party from any and all claims, whether known or unknown, seen or unseen, arising
out of or connected directly or indirectly with any Release, Environmental
Liability or the existence of any hydrocarbon substances on, in or under Assets
or the Seller Retained Assets.
14.06 RIGHT TO CURE.
Any Party that is obligated to indemnify, defend and/or hold harmless
any Person pursuant to any provision of this Article 14 shall have the right to
cure, within a reasonable time, not to exceed fifteen (15) days, and in a manner
reasonably satisfactory to such Person, any matter giving rise to such
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obligation; provided, however, that any such cure shall not relieve or reduce
any such obligation to the extent that such cure is inadequate.
14.07 INDEMNIFICATION FOR TAXES.
(a) Seller shall be responsible for, and shall indemnify Buyer
against, all Taxes imposed on the Company and all liabilities, losses, costs,
fines, penalties, damages (actual, punitive or other), reasonable attorneys'
fees, and expenses arising therefrom, relating to (i) taxable periods or
portions thereof ending on or before the Closing Date, (ii) Taxes resulting from
the application of Treas. Reg. ss. 1.1502-6 or any comparable state, local or
foreign tax law attributable to Shell or any corporation or entity which is or
has been affiliated with or been part of a combined, unitary or affiliated group
with Shell, and (iii) the portion of the Taxes for any Bridge Period (as defined
in subsection 14.07(e) allocable to any period ending on or before the Closing
Date under subsection 12.07(d); provided, that Seller shall not be responsible
for, and shall not be required to indemnify Buyer against, any Taxes to the
extent that such Taxes do not exceed the accrued liability for Taxes taken into
account in determining Net Working Capital under Section 3.03, if any.
(b) Buyer shall be responsible for and shall indemnify Seller
against all Taxes imposed on the Company and all liabilities, losses, costs,
fines, penalties, damages (actual, punitive, or other), reasonable attorneys'
fees and expenses arising therefrom, relating to (i) taxable periods beginning
after the Closing Date or (ii) the portion of the Taxes for any Bridge Period
which are allocable to any period beginning after the Closing Date under Section
12.07(d).
(c) Each Party shall promptly notify the other Party of the
commencement of any demand, claim, audit, examination, action or other proposed
change or adjustment by any taxing authority concerning any Tax which could give
rise to a claim for indemnity pursuant to subsection (a) or subsection (b), as
the case may be (each a "Tax Claim"). Such notice shall
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contain factual information describing the asserted Tax Claim in reasonable
detail and shall include copies of any notice or other document received from
any taxing authority in respect of any such asserted Tax Claim.
(d) Seller, at its own expense, shall have the sole right to
represent the Company's interests in any Tax Claim relating to any taxable
period of the Company ending on or prior to the Closing Date and to employ
counsel of its choice. Seller shall not consent to any settlement that
reasonably would be expected to have an adverse effect on the Taxes of the
Company in any period after the Closing Date without Buyer's consent, which
consent shall not be unreasonably withheld. Buyer's consent shall in no way
reduce any indemnification due to Buyer under subsection (a). If Seller elects
to control the defense, compromise or settlement of any Tax Claim, Seller shall
keep Buyer informed of the progress and disposition of such Tax Claim. Buyer
shall handle any Tax Claims of the Company for periods ending on or prior to the
Closing Date which Seller elects in writing not to control, and Buyer shall be
entitled to defend, compromise or settle such Tax Claims in its sole discretion
without in any way reducing its rights to indemnification under subsection (a).
(e) With respect to any taxable period of the Company
beginning before and ending after the Closing Date (a "Bridge Period"), Buyer
shall control, and Seller, at its own expense, shall have the right to
participate in, the defense and settlement of any Tax Claim and each Party shall
cooperate with the other Party and there shall be no settlement or closing or
other agreement with respect thereto without the consent of the other Party,
which consent shall not be unreasonably withheld; provided, that if either Party
shall refuse (the "Refusing Party") to consent to any settlement, closing or
other agreement agreed to by the relevant taxing authority with respect to any
such Tax Claim that the other Party (the "Accepting Party") proposed to accept
(a "Proposed Settlement"), then (i) the Accepting Party shall have all
liabilities with respect to the
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subject matter of the Proposed Settlement up to the amount that such liability
would have been if the Proposed Settlement had been accepted, and (ii) the
Refusing Party shall be responsible for all liabilities and expenses incurred or
imposed thereafter in connection with the contest of such Tax Claim to the
extent that the final settlement is more than the Accepting Party's liability.
ARTICLE 15
ARBITRATION
15.01 DISPUTE RESOLUTION.
Any controversy or claim ("Claim"), whether based on contract, tort,
statute or other legal or equitable theory (including but not limited to any
claim of fraud, misrepresentation or fraudulent inducement or any question of
validity or effect of this Agreement including this clause) arising out of or
related to this Agreement (including any amendments or extensions), or the
breach or termination thereof shall be settled by mediation and consultations
between the Parties initiated upon the Notice of any Party. In the event of
failure of such mediation and consultations to settle such Claim in a manner
acceptable to all Parties within thirty (30) days following the Notice, then any
such Claim shall be settled by binding arbitration in accordance with this
provision and the then current CPR Institute for Dispute Resolution Rules for
Non-Administered Arbitration of Business Disputes ("Arbitration Rules"). The
arbitration shall be governed by the United States Arbitration Act, 9 U.S.C.
ss.ss. 1-16, to the exclusion of any provision of state law inconsistent
therewith or which would produce a different result, and judgment upon the award
rendered by the arbitrators may be entered by any court having jurisdiction.
15.02 PLACE.
The arbitration shall be held in Houston, Texas.
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15.03 ARBITRATORS.
There shall be three (3) independent and impartial arbitrators of whom
Seller appoints one (1) and Buyer and the Company collectively appoint one (1)
and the third of which shall be appointed by the two (2) Party-appointed
arbitrators in accordance with the Arbitration Rules. The arbitrators shall
determine the Claims of the Parties and render a final award in accordance with
the substantive law of the State of Delaware, excluding the conflicts provisions
of such law. The arbitrators shall set forth the reasons for the award in
writing.
15.04 STATUTE OF LIMITATIONS.
Subject to Section 14, any Claim by a Party shall be time-barred if the
asserting Party commences arbitration with respect to such Claim later than two
(2) years after the cause of action accrues. All statutes of limitations and
defenses based upon passage of time applicable to any Claim of a defending Party
(including any counterclaim or setoff) shall be tolled while the arbitration is
pending.
15.05 DISCOVERY.
The arbitrators shall order the Parties to promptly exchange copies of
all exhibits and witness lists, and, if requested by a Party, to produce other
relevant documents, to answer up to ten (10) interrogatories (including
subparts), to respond to up to ten (10) requests for admissions (which shall be
deemed admitted if not denied) and to produce for deposition and, if requested,
at the hearing all witnesses that such Party has listed and up to four (4) other
persons within such Party's control. Any additional discovery shall only occur
by agreement of the Parties or as ordered by the arbitrators upon a finding of
good cause.
15.06 COSTS.
Each Party shall bear its own costs, expenses and attorney's fees;
provided that if court proceedings to stay litigation or compel arbitration are
necessary, the Party who unsuccessfully
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opposes such proceedings shall pay all reasonable associated costs, expenses,
and attorney's fees in connection with such court proceeding.
15.07 BREACH.
The Parties recognize that irreparable injury will result from a breach
of any provision of this Agreement and that money damages will be inadequate to
fully remedy the injury. In order to prevent such irreparable injury, the
arbitrators shall have the power to grant temporary or permanent injunctive or
other equitable relief. Prior to the appointment of the arbitrators, a Party
may, notwithstanding any other provision of this Agreement, seek temporary
injunctive relief from any court of competent jurisdiction; provided that the
Party seeking such relief shall (if arbitration has not already been commenced)
simultaneously commence arbitration. Such court ordered relief shall not
continue more than ten (10) days after the appointment of the arbitrators (or in
any event for longer than sixty (60) days).
15.08 CONSENT TO JURISDICTION
The Parties hereby consent to the nonexclusive jurisdiction of the
state or federal courts of Delaware for the enforcement of any award rendered by
the arbitrators.
ARTICLE 16
EARNEST MONEY AND ESCROW
16.01 EARNEST MONEY
As evidence of Buyer's ability to perform this Agreement and good faith
intent to comply with the terms hereof, Buyer has deposited with Seller the sum
of five million dollars ($5,000,000.00) as earnest money to secure the
performance of the obligations of Buyer herein. In the event Buyer terminates
this Agreement as permitted under Articles 7 or 12, the earnest money, along
with interest on such earnest money accrued at a per annum rate calculated on a
daily basis using a three-month
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<PAGE> 93
Treasury bill rate published in The Wall Street Journal for the applicable day
(with the rate for any day for which such rate is not published being the rate
most recently published), shall be paid and refunded to Buyer. Notwithstanding
the foregoing, in the event Seller defaults under the terms of this Agreement,
all earnest money shall be refunded to Buyer and Seller shall be relieved of all
liability except that Buyer shall have the right to specifically enforce the
terms of this Agreement. If for any reason Buyer defaults under the terms of
this Agreement, Seller shall be entitled to retain the earnest money including
accrued interest as liquidated damages and not as a penalty and Buyer shall be
relieved of all liability except that Seller shall have the right to
specifically enforce the terms of this Agreement.
16.02 ESCROW ACCOUNT
In the event Closing has not occurred within sixty (60) days of the
date of this Agreement, Buyer shall deposit the purchase price specified in
Section 2.02 adjusted by Seller's best estimate at that date of the Net Working
Capital Adjustment minus the amount deposited pursuant to Section 16.01 plus
interest earned thereon, (such net amount, the "Escrow Amount") in an escrow
account with a mutually-acceptable escrow agent. Buyer and Seller shall each
execute and deliver appropriate escrow instructions to such escrow agent at that
time, giving the escrow agent full authority to carry out the terms of such
instructions. Buyer and Seller shall subsequently deliver to the escrow agent
such further documents and do or cause to be done all other things as are
appropriate to either (a) achieve Closing and cause the escrow agent to disburse
the Escrow Amount to Seller on the Closing Date to the extent of the amount
required to be delivered by Buyer pursuant to Section 3.02(b)(i) and return any
remaining balance to Buyer or (b) cancel the escrow arrangements and return the
Escrow Amount to Buyer in the event this Agreement is terminated. Buyer and
Seller shall enter into further arrangements providing that each will pay one
half of (a) the difference between the interest income earned on the Escrow
Amount and the
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<PAGE> 94
direct interest expense incurred by Buyer in connection with borrowing such
Escrow Amount, in each case for the time period the Escrow Amount is held by the
escrow agent and (b) any fees charged by the escrow agent. If Buyer does not
deposit such Escrow Amount as provided, Buyer shall be in default.
ARTICLE 17
RISK OF LOSS
The risk of damage, destruction, or other loss to the Company shall
remain with Seller from and after the execution of this Agreement and until the
Effective Time; and from and after the Effective Time, all risks of damage,
destruction, or other casualty loss to or of the Assets (to the extent not
attributable to any breaches of a representation, warranty, covenant or
agreement of Seller hereunder) shall be borne solely by Buyer and Company.
ARTICLE 18
COMMISSIONS AND FINDER'S FEES
Seller represents and warrants to Buyer, and except with respect to
Lehman Brothers as to whom Buyer shall be fully responsible for all fees and
charges, Buyer represents and warrants to Seller, that it has not engaged any
broker, finder, or agent in connection with the transactions contemplated
hereunder and has not incurred any unpaid liability to any broker, finder, or
agent for any brokerage fees, finder's fees, or commissions with respect to such
transactions; and each agrees to indemnify the other against any claims asserted
against the other for any such fees or commissions by any person purporting to
act or to have acted for or on behalf of the Indemnifying Party.
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<PAGE> 95
ARTICLE 19
TRANSITIONAL SERVICES
Seller agrees to provide to Buyer transitional, consulting and other
services during the twelve-month period subsequent to the Closing Date, all as
described on the terms set forth in Exhibit 3.04(d).
ARTICLE 20
ENVIRONMENTAL AUDIT
Buyer shall have the right (on reasonable advance written notice to
Seller permitting Seller the opportunity to participate) to contact governmental
agencies with jurisdiction over Company's environmental activities and review
the pertinent files of those agencies.
Buyer shall have a right to make a preliminary engineering inspection
and investigation of the Assets for environmental purposes, but in no event
shall Buyer be entitled to drill or penetrate the surface of the ground to
investigate the condition of soil contamination or groundwater contamination,
Buyer being limited to the review of Company's records with regard to these
matters. All investigation for environmental purposes shall be at Buyer's sole
risk, cost and expense and Buyer agrees to indemnify Seller for all Damages
resulting from Buyer's environmental inspection or investigation.
ARTICLE 21
MISCELLANEOUS
21.01 ENTIRE AGREEMENT; AMENDMENTS.
This Agreement, including the Exhibits and Schedules hereto and other
writings referred to herein or delivered pursuant hereto which form a part
hereof, including, without limitation, the Confidentiality Agreement between
Shell, an affiliate of Seller, and Buyer dated December 1, 1997, contains the
entire understanding of the Parties with respect to the subject matter hereof.
There are no
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<PAGE> 96
restrictions, agreements, promises, warranties, covenants, or
undertakings other than those expressly set forth herein or therein. This
Agreement and other instruments supersede any and all prior agreements and
understandings between the Parties with respect to the subject matter hereof.
This Agreement shall not be amended, altered, or modified except by an
instrument in writing duly executed by the Parties hereto.
21.02 INVALIDITY.
If any provision of this Agreement is held to be illegal, invalid, or
unenforceable under any present or future laws, such provisions shall be fully
severable; this Agreement shall be construed and enforced as if such illegal,
invalid or unenforceable provisions had never comprised a part of this
Agreement; and the remaining provisions of this Agreement shall remain in full
force and effect, unaffected by the illegal, invalid or unenforceable provisions
or by its severance from this Agreement. In lieu of such illegal, invalid, or
unenforceable provision, there shall be added automatically as a part of this
Agreement a provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and enforceable.
21.03 EFFECT OF WAIVER OR CONSENT.
No waiver or consent, express or implied, by any Party to or of any
breach or default by any other Party in the performance by such other Party of
its obligations hereunder shall be deemed or construed to be a consent or waiver
to or of any other or subsequent breach or default in the performance by such
other Party of the same or any other obligations of such other Party hereunder.
Failure on the part of a Party to exercise its rights or to complain of any act
of the other Party or to declare the other Party in default, irrespective of how
long such failure continues, shall not constitute a waiver by such Party of its
rights hereunder until the applicable statute of limitation period has run.
88
<PAGE> 97
21.04 HEADINGS.
The headings of the Sections and subsections of this Agreement and the
headings contained in the Exhibits and Schedules hereto are inserted for
convenience of reference only and shall not in any way define or affect the
meaning, construction, or scope of any of the provisions hereof or thereof.
21.05 LIMITATION ON BENEFITS OF THIS AGREEMENT.
No person or entity other than the Parties hereto (or their respective
successors or assigns as permitted hereunder) is or shall be entitled to bring
any action to enforce any provision of this Agreement against either of the
Parties hereto, and that the covenants, undertakings, and agreements set forth
in this Agreement shall be solely for the benefit of, and shall be enforceable
only by, the Parties hereto (or their respective successors and assigns as
permitted hereunder).
21.06 NOTICES.
All notices, demands, requests, or other communications which may be or
are required to be given, served, or sent by either Party to the other Party
pursuant to this Agreement shall be in writing and shall be (i) mailed by
first-class, registered or certified mail, return receipt requested, postage
prepaid, (ii) transmitted by hand or courier delivery, or (iii) sent by
telegram, facsimile, or telex, addressed in each case as follows:
(i) If to Seller:
SHELL REFINING HOLDING COMPANY
c/o Shell Oil Products Company
Attn: B. S. Drake
910 Louisiana, One Shell Plaza 2825
Houston, TX 77002
Telecopy: 713/241-2147
With a copy (which shall not constitute notice) to:
Shell Oil Company
Attn: W. G. Hougland
910 Louisiana, One Shell Plaza 4798
Houston, TX 77002
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<PAGE> 98
Telecopy: 713/241-5362
(ii) If to Buyer:
Tesoro Petroleum Corporation
8700 Tesoro Drive
San Antonio, TX 78217
Attn: Corporate Secretary
Telecopy: 210/283-2400
With a copy (which shall not constitute notice) to:
Fulbright & Jaworski L.L.P.
1301 McKinney, 49th Floor
Houston, TX 77010-3095
Attn: Michael W. Conlon, Esq.
Telecopy: 713/651-5246
Each Party may designate by prior notice in writing a new address to which any
notice, demand, request, or communication may thereafter be so given, served, or
sent. Each notice, demand, request, or communication which shall be mailed,
delivered, or transmitted in the manner described above shall be deemed
sufficiently given, served, sent, and received for all purposes at such time as
it is actually delivered to the appropriate above listed or properly changed
address or at such time as delivery is refused upon actual presentation at such
address (with the return receipt, the delivery receipt, the affidavit of
messenger, or the facsimile answerback being deemed prima facie evidence of such
delivery).
21.07 BINDING EFFECT.
Subject to the provisions hereof restricting assignment, this Agreement
shall be binding upon and shall inure to the benefit of the Parties hereto and
their respective successors and permitted assigns.
21.08 ADDITIONAL ACTIONS AND DOCUMENTS.
Each of the Parties hereby agrees to take or cause to be taken such
further actions before, at, or after the Closing, to execute, deliver and file
or cause to be executed, delivered and filed such further
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<PAGE> 99
documents and instruments, and to use all reasonable efforts to obtain such
consents, as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Agreement.
21.09 PRONOUNS.
All pronouns and any variations thereof shall be deemed to refer to the
masculine, feminine, neuter, singular, or plural, as the context and the
identity of the person or entity may require.
21.10 PLACE OF TRANSFER OF TITLE AND POSSESSION.
Shares certificates will be provided by Seller at Closing and title
will transfer as directed by Buyer.
21.11 EXECUTION IN COUNTERPARTS.
This Agreement may be executed simultaneously in several counterparts,
each of which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
21.12 CHOICE OF LAW.
This Agreement shall be governed by and construed in accordance with
the laws of Delaware, without regard to the conflict of laws principles of
Delaware, and applicable United States federal law.
21.13 CONFIDENTIALITY.
(a) Each of Seller and Buyer (and their respective Affiliates)
acknowledges that the information and material, in whatever form, (collectively,
the Confidential Information) disclosed or made available to it by, and relating
to, the other (and its Affiliates) prior to the Closing Date or provided by
Seller or its Affiliates after the Effective Time pursuant to this Agreement is
confidential. Each of Seller and Buyer (and their respective Affiliates) further
agrees that it shall use reasonable efforts not to make disclosure of the
Confidential Information to any Person, other than officers, employees, advisers
and representatives to whom such disclosure is necessary or convenient for the
completion of the transactions contemplated by this Agreement, or any of the
Related Agreements, and
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<PAGE> 100
except in an arbitration proceeding as described in Article 15 or as may be
required by a court of competent jurisdiction. Each of Seller and Buyer (and
their respective Affiliates) shall appropriately notify each officer, employee,
adviser and representative to whom any such disclosure is made, that such
disclosure is made in confidence and shall be kept in confidence.
(b) Each of Seller and Buyer (and their respective Affiliates) agrees
to use diligent efforts in accordance with customary and reasonable commercial
practice, and at least with the same degree of skill and care that it would
manifest in protection of its own confidential information, to protect the
Confidential Information.
(c) Each of the Parties (and their respective Affiliates) agrees to
notify the other promptly, in the event that it becomes aware of the
unauthorized possession or use of the Confidential Information (or any part
thereof) by any third Person, including any of its officers, employees, advisers
or representatives. Each of Seller and Buyer (and their respective Affiliates)
agrees to cooperate with the other in connection with the other's efforts to
terminate or prevent such unauthorized Possession or use of its Confidential
Information. Each of Seller and Buyer (and their respective Affiliates) shall
pay the other's reasonable out-of-pocket expenses in so cooperating with the
payor in protecting its Confidential Information, unless the unauthorized
possession or use of the Confidential Information resulted from the willful
misconduct or gross negligence of the Party otherwise entitled to reimbursement
of its expenses.
(d) Each of Seller and Buyer (and their respective Affiliates)
acknowledges that the other will suffer injury for which the other will not have
an adequate remedy at law, in the event of a breach of the provisions of this
Section 21.13, and that the other shall be entitled to injunctive relief as is
reasonably necessary to prevent or curtail such breach, whether actual or
threatened; provided, that, in no event (including, but not limited to, a
willful breach of this Agreement by Seller or Buyer,
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<PAGE> 101
respectively) shall Seller or Buyer (or their respective Affiliates) be
prevented from exercising all of the rights granted to it hereunder.
(e) Notwithstanding any other provision of this Agreement, the
obligations of each of Seller and Buyer (and their respective Affiliates) to
maintain the confidentiality of the Confidential Information shall not apply to
any portion of the Confidential Information that:
(i) is or becomes generally available to the public through
no fault of Buyer or any of its Representatives, including information in the
public domain;
(ii) the Buyer receives from a source other than the Seller
without any requirement to keep such information secret;
(iii) the Buyer can prove was in its possession without any
obligation of secrecy at the time of its disclosure; or
(iv) the Buyer develops independently of and without reference
to or use of the Confidential Information.
(f) In the event of any inconsistency between the provisions of
this Section 21.13 and the confidentiality provisions of any Related Agreement,
the provisions of the Related Agreement shall control with respect to any
matters addressed by such Related Agreement.
(g) The provisions of this Section 21.13 shall remain in force
for a period of five (5) years from the Closing Date.
21.14 COSTS AND EXPENSES.
Seller and Buyer shall each bear its own expenses incurred in
connection with the negotiation, preparation, execution and Closing of this
Agreement, and any Related Agreements, and the transactions provided for hereby
and thereby.
93
<PAGE> 102
21.15 ASSIGNMENT.
Seller may upon notice to Buyer transfer or assign any of its rights
but not its obligations under this Agreement without the prior written consent
of Buyer; provided that, Seller may, upon notice to Buyer, assign its rights and
obligations under this Agreement to an Affiliate of Seller. Buyer may not
transfer or assign any of its rights or obligations under this Agreement except
to an Affiliate without the prior written consent of Seller except that rights
under this Agreement may be transferred to an Affiliate of Buyer. Even if
consent is obtained, no Party may make an assignment or delegation, above,
unless such Party delivers to the other Party hereto such written assumptions,
affirmations and/or legal opinions as such other Party may reasonably request to
preserve their rights and remedies hereunder. This Agreement shall inure to the
benefit of and will be binding upon the Parties hereto and their respective
legal representatives, successors and permitted assigns.
94
<PAGE> 103
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers or representatives of Seller, Company and Buyer
as of the day and year first above written.
SELLER:
SHELL REFINING HOLDING COMPANY
By: /s/ J.M. MORGAN
-----------------------------------
Name: J.M. Morgan
---------------------------------
Title: Agent
--------------------------------
COMPANY:
SHELL ANACORTES REFINING COMPANY
By: /s/ T.C. MOODY
-----------------------------------
Name: T.C. Moody
---------------------------------
Title: President
--------------------------------
BUYER:
TESORO PETROLEUM CORPORATION
By: /s/ BRUCE A. SMITH
-----------------------------------
Name: Bruce A. Smith
---------------------------------
Title: Chairman, President and CEO
--------------------------------
<PAGE> 104
The Schedules and Exhibits listed in the Table of Contents to the Stock
Purchase Agreement have been omitted. The Registrant will furnish a copy of any
omitted Schedules or Exhibits to the Securities and Exchange Commission upon
request.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TESORO
PETROLEUM CORPORATION'S FINANCIAL STATEMENTS AS OF AN FOR THE THREE MONTH PERIOD
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,274
<SECURITIES> 0
<RECEIVABLES> 65,810
<ALLOWANCES> 1,292
<INVENTORY> 97,793
<CURRENT-ASSETS> 172,569
<PP&E> 742,058
<DEPRECIATION> 317,645
<TOTAL-ASSETS> 635,429
<CURRENT-LIABILITIES> 85,956
<BONDS> 136,290
0
0
<COMMON> 4,419
<OTHER-SE> 334,940
<TOTAL-LIABILITY-AND-EQUITY> 635,429
<SALES> 195,253
<TOTAL-REVENUES> 196,039
<CGS> 165,242
<TOTAL-COSTS> 165,242
<OTHER-EXPENSES> 13,154
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,665
<INCOME-PRETAX> 10,890
<INCOME-TAX> 4,831
<INCOME-CONTINUING> 6,059
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,059
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 31,363
<SECURITIES> 0
<RECEIVABLES> 85,979
<ALLOWANCES> 1,499
<INVENTORY> 77,577
<CURRENT-ASSETS> 201,749
<PP&E> 589,182
<DEPRECIATION> 268,471
<TOTAL-ASSETS> 551,971
<CURRENT-LIABILITIES> 97,033
<BONDS> 79,063
0
0
<COMMON> 4,406
<OTHER-SE> 306,008
<TOTAL-LIABILITY-AND-EQUITY> 551,971
<SALES> 233,253
<TOTAL-REVENUES> 234,852
<CGS> 208,215
<TOTAL-COSTS> 208,215
<OTHER-EXPENSES> 11,747
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,570
<INCOME-PRETAX> 9,575
<INCOME-TAX> 3,444
<INCOME-CONTINUING> 6,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,131
<EPS-PRIMARY> 0.23<F1>
<EPS-DILUTED> 0.23<F1>
<FN>
<F1>Earnings per share have been restated to comply with SFAS No. 128
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 34,856
<SECURITIES> 0
<RECEIVABLES> 71,626
<ALLOWANCES> 1,466
<INVENTORY> 73,677
<CURRENT-ASSETS> 188,111
<PP&E> 617,941
<DEPRECIATION> 279,832
<TOTAL-ASSETS> 557,218
<CURRENT-LIABILITIES> 91,540
<BONDS> 77,987
0
0
<COMMON> 4,409
<OTHER-SE> 315,240
<TOTAL-LIABILITY-AND-EQUITY> 557,218
<SALES> 443,952
<TOTAL-REVENUES> 448,158
<CGS> 390,409
<TOTAL-COSTS> 390,409
<OTHER-EXPENSES> 23,140
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,153
<INCOME-PRETAX> 24,679
<INCOME-TAX> 8,910
<INCOME-CONTINUING> 15,769
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,769
<EPS-PRIMARY> 0.60<F1>
<EPS-DILUTED> 0.59<F1>
<FN>
<F1>Earnings per share have been restated to comply with SFAS No. 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,379
<SECURITIES> 0
<RECEIVABLES> 85,319
<ALLOWANCES> 1,420
<INVENTORY> 74,902
<CURRENT-ASSETS> 175,632
<PP&E> 667,918
<DEPRECIATION> 291,113
<TOTAL-ASSETS> 587,814
<CURRENT-LIABILITIES> 99,769
<BONDS> 90,104
0
0
<COMMON> 4,416
<OTHER-SE> 323,187
<TOTAL-LIABILITY-AND-EQUITY> 587,814
<SALES> 695,021
<TOTAL-REVENUES> 699,630
<CGS> 611,168
<TOTAL-COSTS> 611,168
<OTHER-EXPENSES> 34,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,634
<INCOME-PRETAX> 38,040
<INCOME-TAX> 14,292
<INCOME-CONTINUING> 23,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,748
<EPS-PRIMARY> 0.90<F1>
<EPS-DILUTED> 0.88<F1>
<FN>
<F1>Earnings per share have been restated to comply with SFAS No. 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 6,976
<SECURITIES> 0
<RECEIVABLES> 154,035
<ALLOWANCES> 2,434
<INVENTORY> 65,116
<CURRENT-ASSETS> 236,100
<PP&E> 507,248
<DEPRECIATION> 227,206
<TOTAL-ASSETS> 542,411
<CURRENT-LIABILITIES> 109,844
<BONDS> 154,653
0
0
<COMMON> 4,318
<OTHER-SE> 227,860
<TOTAL-LIABILITY-AND-EQUITY> 542,411
<SALES> 238,582
<TOTAL-REVENUES> 243,587
<CGS> 213,309
<TOTAL-COSTS> 213,309
<OTHER-EXPENSES> 9,979
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,945
<INCOME-PRETAX> 8,737
<INCOME-TAX> 2,767
<INCOME-CONTINUING> 5,970
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,970
<EPS-PRIMARY> 0.24<F1>
<EPS-DILUTED> 0.23<F1>
<FN>
<F1>Earnings per share have been restated to comply with SFAS No. 128
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,494
<SECURITIES> 0
<RECEIVABLES> 96,681
<ALLOWANCES> 2,156
<INVENTORY> 82,796
<CURRENT-ASSETS> 259,289
<PP&E> 522,265
<DEPRECIATION> 237,396
<TOTAL-ASSETS> 572,810
<CURRENT-LIABILITIES> 107,649
<BONDS> 168,599
0
0
<COMMON> 4,382
<OTHER-SE> 242,070
<TOTAL-LIABILITY-AND-EQUITY> 572,810
<SALES> 472,370
<TOTAL-REVENUES> 477,473
<CGS> 409,378
<TOTAL-COSTS> 409,378
<OTHER-EXPENSES> 20,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,000
<INCOME-PRETAX> 27,453
<INCOME-TAX> 9,473
<INCOME-CONTINUING> 17,980
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,980
<EPS-PRIMARY> 0.70<F1>
<EPS-DILUTED> 0.69<F1>
<FN>
<F1>Earnings per share have been restated to comply with SFAS No. 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 103,572
<SECURITIES> 0
<RECEIVABLES> 93,690
<ALLOWANCES> 1,990
<INVENTORY> 64,797
<CURRENT-ASSETS> 268,666
<PP&E> 538,609
<DEPRECIATION> 248,238
<TOTAL-ASSETS> 587,106
<CURRENT-LIABILITIES> 191,009
<BONDS> 80,020
0
0
<COMMON> 4,398
<OTHER-SE> 256,823
<TOTAL-LIABILITY-AND-EQUITY> 587,106
<SALES> 735,167
<TOTAL-REVENUES> 739,545
<CGS> 636,223
<TOTAL-COSTS> 636,223
<OTHER-EXPENSES> 30,386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,142
<INCOME-PRETAX> 51,302
<INCOME-TAX> 17,159
<INCOME-CONTINUING> 34,143
<DISCONTINUED> 0
<EXTRAORDINARY> (2,290)
<CHANGES> 0
<NET-INCOME> 31,853
<EPS-PRIMARY> 1.23<F1>
<EPS-DILUTED> 1.21<F1>
<FN>
<F1>Earnings per share have been restated to comply with SFAS No. 128. Earnings per
share is after a net extraordinary loss on extinguishment of debt of $0.09 per
basic and diluted share.
</FN>
</TABLE>
