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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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)
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DELAWARE 95-0862768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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300 CONCORD PLAZA DRIVE, SAN ANTONIO, TEXAS 78216-6999
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
210-828-8484
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.16 2/3 par value New York Stock Exchange
Pacific Stock Exchange
Premium Income Equity Securities New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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 [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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At March 20, 2000, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was approximately $313,091,488 based upon the
closing price of its Common Stock on the New York Stock Exchange Composite tape.
At March 20, 2000, there were 31,718,115 shares of the registrant's Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement pertaining to the 2000 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof. The
Company intends to file such Proxy Statement no later than 120 days after the
end of the fiscal year covered by this Form 10-K.
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TESORO PETROLEUM CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 3
Refining and Marketing...................................... 3
Marine Services............................................. 8
Competition and Other....................................... 9
Government Regulation and Legislation....................... 10
Employees................................................... 12
Executive Officers of the Registrant........................ 12
Risk Factors and Investment Considerations.................. 14
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 18
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Overview.................................................... 21
Business Environment........................................ 22
Results of Operations....................................... 22
Capital Resources and Liquidity............................. 30
Forward-Looking Statements.................................. 35
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 35
Item 8. Financial Statements and Supplementary Data................. 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 66
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 66
Item 11. Executive Compensation...................................... 66
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 66
Item 13. Certain Relationships and Related Transactions.............. 66
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 66
SIGNATURES............................................................. 73
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THIS ANNUAL REPORT ON FORM 10-K (INCLUDING DOCUMENTS INCORPORATED BY
REFERENCE HEREIN) CONTAINS STATEMENTS WITH RESPECT TO THE COMPANY'S EXPECTATIONS
OR BELIEFS AS TO FUTURE EVENTS. THESE TYPES OF STATEMENTS ARE "FORWARD-LOOKING"
AND SUBJECT TO UNCERTAINTIES. SEE "FORWARD-LOOKING STATEMENTS" ON PAGE 35.
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PART I
ITEM 1. BUSINESS
Tesoro Petroleum Corporation and its subsidiaries ("Tesoro" or the
"Company") is an independent refiner and marketer of petroleum products and
provider of marine logistics services. Tesoro operates three refineries in the
western U.S. with a combined capacity of 275,000 barrels per day. At the
beginning of 2000, Tesoro had a branded retail network comprised of
approximately 240 stations, of which more than 60 were Company-owned and
operated. The Company also operates a network of terminals along the Texas and
Louisiana Gulf Coast that provides fuel and logistical support services to the
marine and offshore exploration and production industries. The Company conducts
its operations through two business segments: Refining and Marketing and Marine
Services. For financial and statistical information relating to the Company's
operations, see Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 and Note C of Notes to Consolidated Financial
Statements in Item 8.
In December 1999, the Company completed the sales of its U.S. and Bolivian
exploration and production operations, receiving cash proceeds in excess of $300
million. For additional information on these transactions and discontinued
operations, see Note D of Notes to Consolidated Financial Statements in Item 8.
Tesoro was incorporated in Delaware in 1968 (a successor by merger to a
California corporation incorporated in 1939). Its principal executive offices
are located at 300 Concord Plaza Drive, San Antonio, Texas 78216-6999 and its
telephone number is (210) 828-8484.
REFINING AND MARKETING
OVERVIEW
The Company operates petroleum refineries in Alaska, Hawaii and Washington
and sells refined products to a wide variety of customers in Alaska, Hawaii,
along the U.S. West Coast, primarily in the Pacific Northwest, and in East Asian
markets. During 1999, products from the refineries accounted for approximately
83% of these sales volumes, with the remaining 17% purchased from other refiners
and suppliers. By comparison, in 1998 the Refining and Marketing segment
manufactured about 91% of its sales volume with 9% purchased from others.
In 2000, the Company has initiated an evaluation of its cost structure,
with specific emphasis on the Alaska operations. Concurrent with the broad-based
cost review, a full range of options relative to marketing products in Alaska,
such as supplying the Alaska market from other sources, will be evaluated as
well as a restructuring that could include the sale, or closure of part, or all,
of the Alaskan assets. Management expects to complete this review by April 30,
2000.
REFINERIES AND TERMINALS
The Company's three refineries have a combined rated crude oil throughput
capacity of 275,000 barrels per day ("bpd"). Capacity and actual 1999 throughput
(thousand bpd) by refinery are summarized below.
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1999
REFINERY CAPACITY THROUGHPUT
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Alaska...................................................... 72 49
Hawaii...................................................... 95 87
Washington.................................................. 108 98
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Total Throughput....................................... 275 234
=== ===
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The Company's refineries primarily manufacture gasoline and gasoline
blendstocks, jet fuel, diesel fuels and residual fuel oil. Other products
manufactured include liquefied petroleum gas and liquid asphalt. Refined
products manufactured are summarized below. Manufactured volumes include amounts
from the Hawaii and Washington refineries since their acquisition dates in
mid-1998, averaged over the entire year.
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1999 1998
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VOLUME % VOLUME %
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Refined Products Manufactured (thousand bpd):
Gasoline and gasoline blendstocks......................... 93 38 51 33
Jet fuel.................................................. 58 24 41 27
Diesel fuel............................................... 33 13 19 12
Heavy oils and residual products.......................... 43 18 33 21
Other..................................................... 17 7 10 7
--- --- --- ---
Total Refined Products Manufactured.................... 244 100 154 100
=== === === ===
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The Alaska refinery is located near Kenai, Alaska, approximately 70 miles
southwest of Anchorage, where it has access to multiple sources of crude oil.
The Alaska refinery is capable of producing liquefied petroleum gas, gasoline,
jet fuel, diesel fuel, heating oil, liquid asphalt, heavy oils and residual
products. In October 1997, the Company completed an expansion of the Alaska
refinery's hydrocracker unit, which increased the unit's capacity by
approximately 25% to 12,500 bpd and enables the Company to produce more jet
fuel. The expansion, together with the addition of a new, high-yield jet fuel
hydrocracker catalyst, began to improve the Alaska refinery's product slate
during the fourth quarter of 1997. The Alaska refinery completed a scheduled
maintenance turnaround of all major process units in May 1999, and the next
turnaround is scheduled for 2001.
The Hawaii refinery, located at Kapolei in an industrial park 22 miles west
of Honolulu, was acquired by the Company in May 1998. This acquisition added
volumes to the Company's existing slate of refined products. The Hawaii refinery
also produces light naphtha, which is sold to Hawaii's gas utility company as
feedstock for their manufacture of synthetic natural gas distributed through the
Honolulu gas utility pipeline system. The Hawaii refinery began operations in
1972 and has been expanded progressively in capacity and complexity. Major
product upgrade units include the distillate hydrocracker, vacuum distillation
and catalytic reformer units. All major process units were included in a 30-day
maintenance turnaround in June 1998, and the next turnaround is scheduled in
mid-2000 for the hydrocracker and hydrogen plant.
The Washington refinery, located in Anacortes on Puget Sound, about 60
miles north of Seattle, was acquired in August 1998. The Washington refinery
includes fluid catalytic cracking ("FCC"), alkylation, hydrotreating, vacuum
distillation and catalytic reformer units. The Washington refinery is the most
complex of the Company's refineries. The FCC and other product upgrade units
enable the Washington refinery to produce 85% of its output as gasoline, diesel
and jet fuel. The acquisition of the Washington refinery shifted the Company's
manufactured product mix by increasing gasoline yield and decreasing lower-value
heavy oil and residual products. The FCC can also upgrade heavy vacuum gas oils
from the Alaska and Hawaii refineries. In December 1999, the Washington refinery
completed the installation of a distillate treater which will increase
production of low-sulfur diesel and jet fuels. A maintenance turnaround of the
crude distillation and catalytic reformer units was completed in October 1999,
and the next turnaround is scheduled for the FCC in late 2001.
Tesoro's Board of Directors has approved funding for a heavy oil conversion
project at its Washington refinery. This project will modernize the FCC unit and
install a deasphalting technology that will allow increased recovery of
higher-value products from heavier, less expensive crude oil. Management
believes that this project, which has an estimated total cost of $75 million to
$80 million, will be completed in late 2001. Management expects to spend
approximately $28 million of the total cost in the year 2000.
The Refining and Marketing segment operates refined product terminals at
Kenai and Anchorage, Alaska, Vancouver, Washington, Stockton, California, and in
Hawaii on the islands of Maui, Hawaii and
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Kauai. In addition the Company distributes products through third-party
terminals and truck racks in its market areas. The Company-operated terminals
are supplied primarily by the Company's refineries, while fuel distributed
through third-party facilities is supplied primarily by the Company's refineries
or through exchange arrangements with other refiners.
CRUDE OIL SUPPLY
Crude oil feedstocks for the Company's refineries are supplied from several
sources, including Alaska, Canada, South America, Australia, Southeast Asia and
the Middle East. Purchases are made through term contracts and spot market
purchases. Prices under the term contracts fluctuate with market prices of the
crude oil. Throughput for the Company's refinery-system averaged 233,700 bpd
during 1999, which included 39% foreign crude oil, 28% Alaska North Slope crude
oil, 18% Canadian crude oil, 13% Alaska Cook Inlet crude oil and 2% intermediate
feedstocks.
Since early 1999, the Alaska refinery has run primarily Alaska Cook Inlet
crude oil purchased under term contracts and other crudes purchased in the spot
market. Cook Inlet crude oil is generally purchased from several suppliers under
annual contracts with renewal provisions. Crude oil is delivered by tanker to
the Alaska refinery through the Kenai Pipe Line Company ("KPL") marine terminal,
which is a Company-owned common carrier and marine dock facility, and by a
pipeline connected directly with some of the Cook Inlet producing fields.
The Hawaii refinery's crude oil supply is sourced primarily from Alaska,
Australia and Southeast Asia. In connection with the Hawaii acquisition, the
Company entered into a crude oil supply agreement pursuant to which an affiliate
of the seller assists the Company in acquiring crude oil feedstocks sourced
outside of North America and arranges for the transportation of such crude oil
to the Hawaii refinery. The supply agreement expires in May 2000. Crude oil for
the Hawaii refinery is received through a deep-water, offshore mooring and
pipeline system, which also can be used for receiving and loading refined
products.
The Washington refinery's crude oil is sourced primarily from Alaska,
Canada and South America under term contracts, as well as purchases of other
crudes under a term contract and in the spot market. Crude oil from Canada is
received at the Washington refinery through the Transmountain Pipeline system.
Other crudes are delivered by tanker at the Washington refinery's ship dock at
Anacortes. Both Alaskan and Canadian crudes are purchased from a variety of
producers under term contracts and in the spot market.
The Company continuously evaluates the economics of processing other crude
oils and feedstocks, and makes adjustments in the volumes and mix of feedstocks
processed at each refinery. Occasionally, a better economic opportunity
displaces a previous crude oil purchase commitment and results in the resale of
crude oil.
MARKETING
Gasoline. The Company sells gasoline in both the wholesale bulk and retail
markets in Alaska and Hawaii and on the U.S. West Coast. The demand for gasoline
is highly seasonal in Alaska and the Pacific Northwest, with lowest demand
during the winter months. The Company sells up to 35% of the Washington
refinery's gasoline production to Equilon, a major refiner on the West Coast,
through an off-take agreement which also includes all of Equilon's requirements
in Alaska and Hawaii. This agreement, which has a minimum term of two years,
began in August 1998. The Washington refinery sells about 30% of its gasoline
production to another major oil company on the West Coast under a term sales
agreement. In addition, the Company sells gasoline to wholesale customers and
bulk end-users under various supply contracts. Gasoline is also delivered to
refiners and marketers in exchange for product received at other locations on
the West Coast. Product is distributed through Company-owned terminals,
third-party terminals and truck racks. Gasoline and gasoline blendstocks
produced in excess of market demand in Alaska and Hawaii are shipped to the U.S.
West Coast or exported to other markets, principally in East Asia.
The Company sells gasoline to end-users by retail sales through 62
Company-operated stations in Alaska and Hawaii, which averaged monthly fuel
sales volumes of approximately 124,000 gallons per station and
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monthly merchandise sales of approximately $66,000 per station in 1999. The
Company also distributes gasoline to end-users through 182 branded dealer
stations in Alaska, Washington, Oregon, Idaho, Nevada, northern California and
Hawaii. The Company also sells, at wholesale, to unbranded jobbers and dealers.
In January 2000, the Company entered into an agreement with Wal-Mart
Stores, Inc., in which Wal-Mart has agreed to offer no less than 40 sites at
Wal-Mart stores in eleven states in the western U.S. at which the Company can
build and operate retail gasoline stations. Under the agreement, each site will
be subject to a lease with a ten-year primary term and an option, exercisable at
the Company's discretion, to extend a site for two additional terms of five
years each. On March 2, 2000, the Company accepted the first 14 sites offered by
Wal-Mart.
In 1998, the Company introduced its new "treasure-burst" logo and related
signage. All retail stations in Hawaii were re-imaged in conjunction with the
Hawaii acquisition. Renovation and re-imaging projects were completed at
Company-operated stations in Alaska in 1999, and 26 Alaska stations with
convenience stores were re-imaged with Tesoro's new "2GO Tesoro" program.
Jet Fuel. The Company is a major supplier of commercial jet fuel to
passenger and cargo airlines in Alaska and Hawaii and on the U.S. West Coast.
The Company estimates that it produces about 15% of the jet fuel manufactured in
the West Coast-Alaska-Hawaii area. Several marketers, including the Company,
import jet fuel into Alaska, Hawaii and the West Coast. The expansion of the
Alaska refinery's hydrocracker unit in 1997 increased the Company's jet fuel
production to supply the Alaska market. In December 1999, the Washington
refinery installed a distillate treater which will increase production of
low-sulfur diesel and jet fuels.
Diesel Fuel. The Company's diesel fuel production is sold primarily on a
wholesale basis for marine, transportation and industrial purposes, as well as
for home heating in Alaska. Lesser amounts are sold to end-users through marine
terminals and retail gas stations and for power generation in Hawaii. Generally,
the production of diesel fuel by refiners in Alaska, Hawaii and the Pacific
Northwest is in balance with demand. There are occasions when diesel fuel is
imported into or exported from Alaska and Hawaii because of the variability of
demand. See "Government Regulation and Legislation -- Environmental Controls"
for a discussion of the effect of governmental regulations on the production of
low-sulfur diesel fuel for on-highway use in Alaska.
Heavy Oils and Residual Products. All three of the Company's refineries
have vacuum units that use crude tower bottoms as a feedstock and further
process these volumes into light vacuum gas oil ("LVGO"), medium vacuum gas oil
("MVGO"), heavy vacuum gas oil ("HVGO") and vacuum tower bottoms ("VTBs"). LVGO
and MVGO are further processed in the Alaska and Hawaii hydrocrackers, where
they are converted into gasoline blendstocks, diesel and jet fuel. HVGO is used
primarily as an FCC feedstock at the Washington refinery. The VTBs are used to
produce liquid asphalt, fuel oil and marine bunker fuel. The Hawaii refinery
also supplies electric power producers in Hawaii with low-sulfur fuel oil. The
Company sells its liquid asphalt for paving materials in Alaska, Hawaii and
Washington. In Alaska and Washington, demand for liquid asphalt is seasonal
because mild weather conditions are needed for highway construction.
Sales of Purchased Products. The Company purchases refined products,
primarily gasoline, jet fuel and diesel fuel, manufactured by others. Sales of
these products represented approximately 17% of total volumes sold by the
Company in 1999. The gasoline and diesel fuel resale activity is primarily
undertaken on the U.S. West Coast. The jet fuel activity primarily consists of
imports into Alaska and Hawaii. The Company's gross margin from these activities
was $32.5 million in 1999, as compared to $3.8 million in 1998.
TRANSPORTATION
The Company charters two double-bottomed American flag vessels, the
Chesapeake Trader and the Potomac Trader, which are used to transport crude oil
and refined products. The Chesapeake Trader and Potomac Trader are chartered
under five-year agreements expiring in May 2000 and September 2000,
respectively. In 1999, the Company entered into a charter for a double-hull
tanker to be used for transporting crude oil and refined products. Under the
terms of the new charter, Tesoro will receive one of the new
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Lightship Class tankers. The new charter, which has a three-year primary term
beginning in May 2000 and two one-year options, will replace the Chesapeake
Trader. The Company also charters other tankers and ocean-going barges to
transport crude oil and petroleum products. For further information on marine
charters, see Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 and Note M of Notes to Consolidated Financial
Statements in Item 8.
The Company operates a common carrier petroleum products pipeline from the
Alaska refinery to its terminal facilities in Anchorage and to the Anchorage
airport. This ten-inch diameter pipeline has a capacity to transport
approximately 40,000 bpd of products and allows the Company to transport light
products to the terminal facilities throughout the year regardless of weather
conditions. The KPL facilities assure the Company of uninterrupted use of the
dock and pipeline for unloading crude oil feedstocks and loading product
inventory on tankers and barges.
Crude oil is transported to Hawaii by tankers and discharged through the
Company's single-point mooring terminal ("SPM") about 1.5 miles offshore from
the Hawaii refinery. Three underwater pipelines connect the SPM to the Hawaii
refinery to allow crude oil and products to be transferred to the Hawaii
refinery and to load products from the Hawaii refinery to ships and barges. The
Company distributes refined products to customers on the island of Oahu through
a pipeline system with connections to the military at several locations, to
commercial customers via third-party terminals at Honolulu International Airport
and Honolulu Harbor, and by barge to Company-owned and third-party terminal
facilities on the neighbor islands of Maui, Kauai and Hawaii. Product pipelines
connect the Hawaii refinery to Barbers Point Harbor which is 2.5 miles away. The
Barbers Point Harbor is able to accommodate barges and product tankers up to 800
feet in length and helps reduce traffic at the SPM.
The Washington refinery receives crude oil from Canada through the 24-inch
Transmountain Pipeline which originates in Edmonton, Canada. Other crudes are
received through the Washington refinery's ship dock. The pipeline and the ship
dock are each capable of providing 100% of the Washington refinery's feedstock
needs. Over 90% of the Washington refinery's clean products (gasoline, jet fuel
and diesel) leave via the Olympic Pipeline system. Olympic serves the Seattle
area with 16-inch and 20-inch lines and continues to Portland, Oregon with a
14-inch line. A small amount of gasoline is delivered through a neighboring
refinery's truck rack, and some diesel fuel is distributed through a truck rack
at the Washington refinery. Products are also shipped by barge and ship. The
Washington refinery has the capability to move significant volumes of products
over its ship dock. All of the fuel oil production is shipped by water. Propane
and asphalt are shipped by both truck and rail.
For further information on transportation, see "Government Regulation and
Legislation -- Environmental Controls."
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OPERATING STATISTICS
The following table summarizes the Company's refining and marketing
operations for the years ended December 31, 1999, 1998 and 1997:
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1999 1998 1997
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Refinery Throughput (thousand bpd)(a):
Alaska(b)................................................. 48.7 57.6 50.2
Hawaii.................................................... 86.9 48.3 --
Washington(b)............................................. 98.1 42.6 --
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Total Refinery Throughput............................ 233.7 148.5 50.2
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Refined Products Manufactured (thousand bpd)(a)(b):
Gasoline and gasoline blendstocks......................... 92.9 50.9 12.8
Jet fuel.................................................. 58.3 40.6 15.4
Diesel fuel............................................... 32.7 18.8 6.2
Heavy oils and residual products.......................... 42.9 33.5 14.8
Other..................................................... 17.0 9.7 2.3
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Total Refined Products Manufactured.................. 243.8 153.5 51.5
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Branded Retail Stations:
Alaska --
Company-operated....................................... 31 31 35
Dealer-operated........................................ 125 125 129
Pacific Northwest -- Dealer-operated...................... 54 44 30
Hawaii --
Company-operated....................................... 31 30 --
Dealer-operated........................................ 3 2 --
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Total Branded Retail Stations........................ 244 232 194
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(a) Volumes for 1999 and 1998 include amounts from the Hawaii operations
(acquired in May 1998) and the Washington refinery (acquired in August 1998)
averaged over the periods presented. Certain amounts have been reclassified
to conform with the current presentation.
(b) Throughput and manufactured volumes were reduced temporarily for scheduled
maintenance turnarounds at the Alaska refinery in May 1999 and the
Washington refinery in October 1999.
MARINE SERVICES
OVERVIEW
The Company's Marine Services segment markets and distributes a broad range
of petroleum products, chemicals and supplies and provides logistical support
services to the marine and offshore exploration and production industries
operating in the Gulf of Mexico. These operations are conducted through a
network of 16 terminals located on the Texas Gulf Coast in Freeport, Galveston,
Harbor Island, Houston, Port O'Connor and Sabine Pass, along the Louisiana Gulf
Coast in Amelia, Berwick, Cameron, Intracoastal City and Port Fourchon, and a
fleet of tugboats, barges and trucks.
In June 1999, the Company purchased the U.S. West Coast marine fuels
operations of BP Marine, a division of BP Amoco PLC. The purchase, which
included inventory and leased facilities at Port Angeles and Seattle,
Washington, and Portland, Oregon, expanded the Company's presence on the West
Coast. Marine Services also operates a terminal at Port Hueneme, California.
In March 2000, management commenced a realignment of its operational
organization which includes the transfer of the Marine Services segment's West
Coast operations to the Refining and Marketing segment.
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FUELS AND LUBRICANTS
The Company markets and distributes fuels and lubricants to offshore
drilling rigs, offshore production platforms, and various ships and equipment
engaged in seismic surveys. The Company also provides petroleum products to
tugboats and barges using the Intracoastal Canal System, as well as ships
entering various ports in Texas, Louisiana and the U.S. West Coast. The
Company's Marine Services segment obtains its supply of fuel from local area
refiners. The majority of fuel sold from the Company's Port Angeles, Seattle and
Portland operations is supplied by the Company's Washington and Alaska
refineries. Total gallons of fuel, primarily diesel fuel, sold by this segment
amounted to 291 million, 181 million and 156 million 1999, 1998 and 1997,
respectively.
The Company is a distributor of major brands of marine lubricants and
greases, offering a full spectrum of grades. Total gallons of lubricants sold by
the Company's Marine Services segment amounted to 2.0 million, 2.3 million and
2.7 million in 1999, 1998 and 1997, respectively.
LOGISTICAL SERVICES
Through many of its Gulf Coast terminals, the Company provides full-service
shore-based support for offshore drilling rigs and production platforms. These
services include cranes, forklifts and loading docks for supply boats serving
the offshore exploration and production industry. In addition, the Company
provides warehousing, office space, living quarters, helicopter landing pads,
and long-term parking for offshore workers. The Company's terminals also serve
as delivery points for drilling products, primarily drilling muds, by providing
warehousing, blending, inventory control and delivery services. In 1999, 1998
and 1997, revenues from these logistical services were $11.7 million, $11.6
million and $11.3 million, respectively.
COMPETITION AND OTHER
The petroleum industry is highly competitive in all phases, including the
refining of crude oil, the marketing of refined petroleum products, and the
marine services business. The industry also competes with other industries that
supply the energy and fuel requirements of industrial, commercial and individual
consumers. The Company competes with a substantial number of major integrated
oil companies and other companies having materially greater financial and other
resources than the Company. These competitors have a greater ability to bear the
economic risks inherent in all phases of the industry. In addition, unlike the
Company, many of its competitors produce large volumes of crude oil which can
then be used in connection with their refining operations. Other larger
competitors, although they do not produce crude oil, have a competitive
advantage as larger purchasers when negotiating with crude oil producers.
The refining and marketing businesses are highly competitive, with price
being the principal factor in competition. In the refining industry, the Alaska
refinery competes primarily with other refineries in Alaska and on the U.S. West
Coast. The Company's refining competition in Alaska includes two refineries
situated near Fairbanks and one refinery situated near Valdez. The Company
estimates that such other refineries have a combined capacity to process
approximately 270,000 bpd of crude oil. After processing the crude oil and
removing the higher-value products, these refiners are permitted, because of
their direct connection to the Trans Alaska Pipeline System ("TAPS"), to return
the remainder of the processed crude back into the pipeline system as "return
oil" in consideration for a fee, thereby eliminating their need to transport and
market lower-value products that are not in demand in Alaska. The Alaska
refinery is not directly connected to TAPS, and the Company, therefore, cannot
return its lower-value products to the TAPS. The Hawaii refinery competes
primarily with one other refinery in Hawaii, which is also located at Kapolei
and which has a rated capacity of 54,000 bpd of crude oil. Historically, the
other refinery produces lower volumes of jet fuel than the Hawaii refinery. The
Washington refinery competes with several refineries on the U.S. West Coast,
including refineries which are larger than the Washington refinery and which are
owned by companies substantially larger than the Company.
The Company is a major producer and distributor of gasoline in Alaska and
Hawaii through a network of Company-operated stations and branded and unbranded
dealers and jobbers. The Company supplies a major oil company through a product
exchange agreement, whereby gasoline in Alaska is provided in exchange for
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gasoline delivered to the Company on the U.S. West Coast. The Company also
supplies a major oil company in Alaska and Hawaii through a gasoline sales
agreement. The Washington refinery sells up to 35% of its gasoline to Equilon
and provides another major oil company with about 30% of its gasoline production
through a term sales agreement.
Competitive factors affecting the retail marketing of gasoline in Alaska,
Hawaii and the Pacific Northwest include such factors as product price, location
and quality together with station appearance and brand-name identification. The
Company competes with other petroleum companies, distributors and other
developers for new locations. The Company believes it is in a position to
compete effectively as a marketer of gasoline in Alaska and Hawaii because of
its strong presence in these markets. The Company's West Coast marketing
business sells to independent dealers and jobbers, including 54 branded gasoline
stations on the West Coast. The Company competes against independent marketing
companies and integrated oil companies when engaging in these marketing
operations.
The Company's jet fuel sales in Alaska are concentrated in Anchorage, where
it is one of the principal suppliers to the Anchorage International Airport, a
major hub for air cargo traffic between manufacturing regions in the Far East
and consuming regions in the United States and Europe. In Hawaii, jet fuel sales
are concentrated in Honolulu, where the Company is the principal supplier to the
Honolulu International Airport. The Company also serves four airports on other
islands in Hawaii. In Washington, jet fuel sales are concentrated at the
Seattle/Tacoma International Airport. The Company also supplies jet fuel
customers in Portland, Oregon, and in Los Angeles and San Francisco, California.
Other refiners and marketers compete for sales at all of these airports.
The Company's Refining and Marketing segment sells its diesel fuel
primarily on a wholesale basis, competing with other refiners and marketers in
all of its market areas. Refined products from foreign sources also compete for
distillate markets in the Company's market areas.
Demand for services and products offered by the Company's Marine Services
segment is significantly affected by the level of oil and gas exploration,
development and production in the Gulf of Mexico. Various factors, including
general economic conditions, demand for and prices of natural gas, availability
of equipment and materials, and government regulations and energy policies cause
exploration and development activity to fluctuate and directly impact the
revenues of the Marine Services segment. Management believes that the principal
competitive factors affecting the Marine Services operations are location of
facilities, availability of logistical support services, experience of personnel
and dependability of service. The market for the Marine Services segment's
products and services, particularly diesel fuel, is price sensitive. The Company
competes with several independent operators, and in certain locations with one
or more major mud companies who maintain their own marine terminals.
GOVERNMENT REGULATION AND LEGISLATION
ENVIRONMENTAL CONTROLS
Federal, state, area and local laws, regulations and ordinances relating to
the protection of the environment affect all operations of the Company to some
degree. An example of a federal environmental law that will require operational
additions and modifications is the Clean Air Act, which was amended in 1990.
While the Company believes that its facilities generally are in substantial
compliance with current regulatory standards for air emissions, over the next
several years the Company's facilities will be required to comply with the new
requirements being adopted and promulgated by the U.S. Environmental Protection
Agency ("EPA") and the states in which the Company operates. These regulations
will necessitate the installation of additional controls or other modifications
or changes in use for certain emission sources, such as gasoline tank roof seal
replacements. As part of these requirements, the Company's refineries as well as
certain other Company facilities submitted applications for Clean Air Act
Amendment Title V permits. Each application has subsequently been deemed
complete by the respective state agencies, and most applications are expected to
undergo technical review in 2000 or 2001. The Company also will be affected by
changes in fuel manufacturing standards, including those related to allowable
sulfur concentrations in gasoline. The Company
10
<PAGE> 11
believes it can comply with these new requirements, and in some cases already
has done so, without adversely affecting operations.
Additional Federal environmental regulations promulgated on August 21,
1990, and effective on October 1, 1993, set limits on the quantity of sulfur in
on-highway diesel fuels which the Company produces. The State of Alaska filed an
application with the federal government in February 1993 for a waiver from this
requirement since only 5% of the diesel fuel sold in Alaska was for on-highway
vehicles. On March 14, 1994, the EPA granted the State of Alaska a waiver from
the requirements of the EPA's low sulfur diesel fuel program, permanently
exempting Alaska's remote areas and providing a temporary exemption for areas
served by the Federal Aid Highway System until October 1, 1996. The EPA has
since extended the temporary exemption to January 1, 2004. If the State of
Alaska is unable to obtain a permanent waiver from the federal regulations, the
Company would produce lower sulfur diesel fuel for on-highway use based on
market demand. The Company estimates that such sales accounted for less than 1%
of its refined product sales in Alaska. While the Company is unable to predict
the outcome of these matters, their ultimate resolution should not have a
material impact on its operations.
OIL SPILL PREVENTION AND RESPONSE
The Federal Oil Pollution Act of 1990 ("OPA 90") and related state
regulations include requirements that most oil refining, transport and storage
companies maintain and update various oil spill prevention and oil spill
contingency plans. The Company has submitted these plans and received federal
and state approvals necessary to comply with OPA 90 and related regulations. The
Company's oil spill prevention plans and procedures are frequently reviewed and
modified to prevent oil releases and to minimize potential impacts should a
release occur.
The Company currently charters, on a long-term and short-term basis,
tankers and barges for shipment of crude oil from foreign and domestic sources
to its Alaska, Hawaii and Washington refineries. OPA 90 requires, as a condition
of operation, that the Company demonstrate the capability to respond to the
"worst case discharge" to the maximum extent practicable. As an example, the
State of Alaska requires the Company to provide spill-response capability to
contain or control and cleanup, an amount equal to 50,000 barrels for a tanker
carrying fewer than 500,000 barrels of crude oil or 300,000 barrels for a tanker
carrying more than 500,000 barrels. To meet such requirements, the Company has
entered into contracts with various parties to provide spill response services.
The Company has entered into spill response agreements with (i) Cook Inlet Spill
Prevention and Response, Incorporated and Alyeska Pipeline Service Company for
spill response services in Alaska; (ii) Clean Islands Council for response
services throughout the State of Hawaii; and (iii) Clean Sound Incorporated for
response actions associated with the Puget Sound, Washington operations. In
addition, for larger spill contingency capabilities the Company has entered into
contracts with Marine Spill Response Corporation in Hawaii and in the Gulf Coast
region. The Company believes these contracts, and those with other regional
spill response organizations that are in place on a location by location basis,
provide the additional services necessary to meet spill response requirements
established by state and federal law.
Regulations promulgated by the Alaska Department of Environmental
Conservation ("ADEC") require the installation of liners in secondary
containment systems for petroleum storage tanks. On December 18, 1996, ADEC
approved the Company's alternative compliance schedule which allows the Company
until the year 2002 to line secondary containment systems for all of the
Company's existing petroleum storage tank facilities in Alaska. The total
remaining estimated cost of these improvements is approximately $5 million,
which is expected to be spent over the next three years.
TOTAL ENVIRONMENTAL EXPENDITURES
The Company's total capital expenditures for environmental control purposes
were $8 million during 1999. Capital expenditures in 1999 included approximately
$2 million for the secondary containment systems discussed above, $2 million for
servicing components of the Alaska refinery wastewater and groundwater
collection and treatment systems, $2 million for tank vapor control seals at the
Washington refinery, and
11
<PAGE> 12
$1 million for upgrading storage tanks at the Hawaii refinery. Remaining
environmental capital expenditures in 1999 were for miscellaneous projects,
including wastewater system upgrades at the Washington refinery and improving
underground storage tanks at retail locations in Alaska.
To comply with environmental laws and regulations, the Company anticipates
that it will make capital improvements of approximately $8 million in 2000 and
$10 million in 2001. The Company is currently evaluating certain proposed
revisions to the Clean Air Act regulations which would require a reduction in
the sulfur content in gasoline fuel manufactured at its refineries. The Company
expects that it will make capital improvements to certain equipment at its
Washington refinery to meet the revised gasoline standard. Additional proposed
changes to the Clean Air Act regulations may include new emission controls at
certain processing units at each of the Company's refineries. The Company
anticipates that the revisions to the Clean Air Act will become effective over
the next three to five years and that, based on known current technology, it
could spend approximately $25 million to $30 million to comply with these
proposed revisions.
For further information on environmental matters, see Legal Proceedings in
Item 3.
EMPLOYEES
At December 31, 1999, the Company employed approximately 2,020 persons.
Approximately 185 employees at the Washington refinery are covered by a
collective bargaining agreement. The Company considers its relations with its
employees to be satisfactory.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the Company's executive officers, their ages and
their positions with the Company at March 20, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION POSITION HELD SINCE
---- --- -------- -------------------
<S> <C> <C> <C>
Bruce A. Smith....................... 56 Chairman of the Board of Directors, June 1996
President and Chief Executive
Officer
William T. Van Kleef................. 48 Executive Vice President and Chief July 1998
Operating Officer
James C. Reed, Jr. .................. 55 Executive Vice President, General September 1995
Counsel and Secretary
Thomas E. Reardon.................... 53 Executive Vice President, Corporate November 1999
Resources
Faye W. Kurren....................... 49 President, Tesoro Hawaii Corporation May 1998
Donald A. Nyberg..................... 48 President, Tesoro Marine Services, November 1996
Inc.
Stephen M. Ricks..................... 53 President, Tesoro Alaska Company August 1998
Joseph E. Sparano.................... 52 President, Tesoro West Coast Company March 2000
Stephen L. Wormington................ 55 Executive Vice President and Chief May 1998
Operating Officer, Tesoro Refining,
Marketing & Supply Company
Gregory A. Wright.................... 50 Senior Vice President, Financial November 1999
Resources
Don E. Beere......................... 59 Vice President, Information May 1998
Technology Projects
Bobby J. Culpepper................... 50 Vice President, Information July 1998
Technology
Don M. Heep.......................... 50 Vice President, Controller May 1998
Sharon L. Layman..................... 46 Vice President and Treasurer November 1999
Richard M. Parry..................... 46 Vice President, Retail, June 1999
Tesoro West Coast Company
</TABLE>
12
<PAGE> 13
There are no family relationships among the officers listed, and there are
no arrangements or understandings pursuant to which any of them were elected as
officers. Officers are elected annually by the Board of Directors at its first
meeting following the Annual Meeting of Stockholders, each to hold office until
the corresponding meeting of the Board in the next year or until a successor
shall have been elected or shall have qualified.
The Company's executive officers have been employed by the Company or its
subsidiaries in an executive capacity for at least the past five years, except
for those named below who have had the business experience indicated during that
period. Positions, unless otherwise specified, are with the Company.
<TABLE>
<S> <C>
Thomas E. Reardon............................ Executive Vice President, Corporate Resources
since November 1999. Senior Vice President,
Corporate Resources from May 1998 to November
1999. Vice President, Human Resources and
Environmental, from September 1995 to May
1998. Vice President, Human Resources and
Environmental Services, of Tesoro Petroleum
Companies, Inc., a subsidiary of the Company,
from October 1994 to September 1995.
Faye W. Kurren............................... President of Tesoro Hawaii Corporation, a
subsidiary of the Company, since May 1998.
Vice President, Operations Planning, Supply
and International Marketing of BHP Hawaii
Inc. from March 1996 to May 1998. Vice
President, General Counsel of BHP Hawaii Inc.
from February 1995 to March 1996.
Donald A. Nyberg............................. President of Tesoro Marine Services, Inc., a
subsidiary of the Company, since November
1996. Vice President, Strategic Planning, of
MAPCO Inc. from January 1996 to November
1996. President and Chief Executive Officer
of Marya Resources from August 1994 to
January 1996.
Stephen M. Ricks............................. President of Tesoro Alaska Company, a
subsidiary of the Company, since August 1998.
Manager, Design Engineering of Jacobs
Engineering from August 1995 to August 1998.
Alliance Projects Manager of Litwin/Raytheon
E&C from June 1991 to August 1995.
Joseph E. Sparano............................ President of Tesoro West Coast Company, a
subsidiary of the Company, since March 2000.
President of Sparano Consulting from August
1995 to March 2000. Chairman and CEO of
Pacific Refining Company from September 1990
to August 1995.
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C>
Stephen L. Wormington........................ Executive Vice President and Chief Operating
Officer of Tesoro Refining, Marketing &
Supply Company, a subsidiary of the Company,
since May 1998. President of Tesoro Alaska
Petroleum Company, a subsidiary of the
Company, from September 1995 to August 1998.
Vice President, Supply and Operations
Coordination, of Tesoro Alaska Petroleum
Company from April 1995 to September 1995.
General Manager, Strategic Projects, of
Tesoro Alaska Petroleum Company, from January
1995 to April 1995. Executive Vice President,
Special Projects, of MG Refining & Marketing,
Inc. from January 1994 to January 1995.
Bobby J. Culpepper........................... Vice President, Information Technology since
July 1998. Vice President, Information
Technology, of Tesoro Petroleum Companies,
Inc., a subsidiary of the Company, since June
1998. Vice President, Operations of Microage
Integration Group from July 1997 to May 1998.
Vice President, Information Technology, of
Phillips 66 Company, a division of Phillips
Petroleum Company from May 1991 to June 1997.
Don M. Heep.................................. Vice President, Controller since May 1998.
Senior Vice President, Administration for
Tesoro Alaska Petroleum Company, a subsidiary
of the Company, from November 1996 to May
1998. Senior Vice President and Chief
Financial Officer of Valero Energy
Corporation from 1994 to 1996.
Sharon L. Layman............................. Vice President and Treasurer since November
1999. Assistant Treasurer from February 1990
to November 1999.
Richard M. Parry............................. Vice President, Retail of Tesoro West Coast
Company, a subsidiary of the Company, since
June 1999. Vice President, Marketing & Sales
of Tesoro Hawaii Corporation, a subsidiary of
the Company, from May 1998 to June 1999. Vice
President, Marketing & Sales of BHP Hawaii
Inc. from December 1997 to May 1998. Vice
President, Trading and Marketing, of BHP
Hawaii Inc. from December 1994 to December
1997.
</TABLE>
RISK FACTORS AND INVESTMENT CONSIDERATIONS
VOLATILITY OF PRICES; EFFECT ON EARNINGS AND CASH FLOWS
The Company's refining and marketing earnings and cash flows from
operations are dependent upon the margin above fixed and variable expenses
(including the cost of crude oil feedstocks) at which the Company is able to
sell refined products. In recent years, the prices of crude oil and refined
products have fluctuated substantially. These prices depend on numerous factors
beyond the Company's control, including the demand for crude oil, gasoline and
other refined products, which in turn depend on, among other factors, changes in
the economy, the level of foreign and domestic production of crude oil and
refined products, worldwide political conditions, the availability of imports of
crude oil and refined products, the marketing of alternative and competing fuels
and the extent of government regulations. The prices received by the Company for
its refined
14
<PAGE> 15
products are also affected by local factors such as local market conditions and
the level of operations of other refineries in the Company's markets.
The prices at which the Company can sell its refined products are
influenced by the commodity price of crude oil. Generally, an increase or
decrease in the price of crude oil results in a corresponding increase or
decrease in the price of gasoline and other refined products; however, the
timing of the relative movement of the prices, as well as the overall reduction
in product prices, can reduce profit margins and could have a significant impact
on the Company's refining operations and the earnings and cash flows of the
Company as a whole. In addition, the Company maintains inventories of crude oil,
intermediate products and refined products, the value of each of which is
subject to rapid fluctuation in market prices. In addition, crude oil supply
contracts are generally contracts with market-responsive pricing provisions. The
Company purchases its refinery feedstock prior to selling the refined products
manufactured. Price level changes during the period between purchasing
feedstocks and selling the manufactured refined products from such feedstocks
could have a material effect on the Company's financial results. The Company
also purchases refined products manufactured by others. Price level changes
during the periods between purchasing and selling such products could have a
material effect on financial results.
CRUDE OIL SUPPLY
The Company believes an adequate supply of crude oil will be available to
its three refineries to sustain the Company's refining operations for the
foreseeable future at substantially the levels currently being experienced.
However, there can be no assurance that this situation will continue. If
additional supplemental crude oil becomes necessary at one or more of its
refineries, the Company intends to implement available alternatives that are
most advantageous under then prevailing conditions. Implementation of some
alternatives could require the consent or cooperation of third parties and other
considerations beyond the control of the Company. If the Company is unable to
obtain such supplemental crude oil volumes, or is only able to obtain such
volumes at uneconomic prices, the Company's results from operations could be
materially adversely affected.
ENVIRONMENTAL
The Company's operations are inherently subject to accidental spills,
discharges or other releases of petroleum or hazardous substances which may give
rise to liability to governmental entities or private parties under Federal,
state or local environmental laws, as well as under common law. Although the
Company has invested substantial resources to prevent future accidental
discharges and to remediate contamination resulting from prior discharges, there
can be no assurance that accidental discharges will not occur in the future,
that future action will not be taken in connection with past discharges, that
governmental agencies will not assess penalties against the Company in
connection with any past or future contamination, or that third parties will not
assert claims against the Company for damages allegedly arising out of any past
or future contamination. See Item 3, Legal Proceedings, contained herein.
TRANSPORTATION
The Company's Washington refinery receives all of its Canadian crude oil
and ships 90% of its clean refined products through pipelines operated by third
parties. In addition, the Alaska and Hawaii refineries receive most of their
crude oil and transport a substantial portion of refined products through ships
and barges. In addition to environmental risks, discussed above, the Company
could experience an interruption of supply or an increased cost to deliver
refined products to market in the event of any upset in the ability of the
pipelines or vessels to transport crude or refined product, whether because of
accident, governmental regulation or third-party action. Should such an upset in
the ability of a pipeline or vessels to transport crude oil or product persist
for an extended time, it could have a material adverse effect on the Company.
15
<PAGE> 16
OPERATING HAZARDS AND UNINSURED RISKS
The Company's operations are subject to hazards and risks inherent in
refining operations and in transporting and storing crude oil and refined
products, such as fires, natural disasters, explosions, pipeline ruptures and
spills, any of which can result in environmental pollution, personal injury
claims and other damage to properties of the Company and others. As protection
against operating hazards, the Company maintains insurance coverage against
some, but not all, potential losses. The Company's coverages include, but are
not limited to, physical damage on certain assets, employer's liability,
comprehensive general liability, automobile, workers' compensation and business
interruption insurance. The Company believes that its insurance is adequate and
customary for companies of a similar size engaged in operations similar to those
of the Company, but losses could occur for uninsurable or uninsured risks or in
amounts in excess of existing insurance coverage. The occurrence of an event
that is not fully covered by insurance could have an adverse impact on the
Company's financial condition and results of operations.
CONCENTRATION OF OPERATIONS
The Company's refining operations are conducted at its three refineries in
Alaska, Hawaii and Washington. The refineries are three of the Company's
principal operating assets. As a result, the operations of the Company and its
ability to service debt and other obligations are subject to significant
interruption if one or more of the refineries were to experience a major
accident, be damaged by severe weather or other natural disaster, or otherwise
be forced to shut down. Although the Company maintains business interruption
insurance against some types of risks in amounts which the Company believes to
be economically prudent, if the refineries were to experience an unplanned
interruption in operations, the Company's business could be materially adversely
affected. See "Refining and Marketing" discussed above.
OTHER
For information on competitive factors affecting the Company's business,
see "Competition and Other" discussed above. A discussion of environmental
factors and controls are included in "Government Regulation and Legislation"
discussed above.
ITEM 2. PROPERTIES
See information appearing under Item 1, Business herein and Notes C and E
of Notes to Consolidated Financial Statements in Item 8.
ITEM 3. LEGAL PROCEEDINGS
Environmental. The Company is currently involved with the U.S.
Environmental Protection Agency ("EPA") regarding a waste disposal site near
Abbeville, Louisiana, at which the Company has been named a potentially
responsible party ("PRP") under the Federal Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA" or "Superfund"). Although the
Superfund law might impose joint and several liability upon each party at the
site, the extent of the Company's allocated financial contributions for cleanup
is expected to be de minimis based upon the number of companies, volumes of
waste involved and total estimated costs to close the site. The Company
believes, based on these considerations and discussions with the EPA, that its
liability at the Abbeville site will not exceed $25,000.
On October 2, 1998, the Alaska Department of Environmental Conservation
("ADEC") issued a Notice of Violation ("NOV") against Tesoro Alaska Company, a
subsidiary of the Company, for non-compliance with its refinery air quality
permit. This NOV alleges that an air emission treatment unit at the Alaska
refinery did not maintain the air contaminant removal efficiency rate required
in the facility air quality permit. The Company has entered into a Compliance
Order by Consent with ADEC until a new air quality permit is issued. The Company
believes that the resolution of this matter will not have a material adverse
effect on the Company.
16
<PAGE> 17
As previously reported, on October 19, 1998, the Company received notice
from the EPA that it had been identified as a PRP under CERCLA at the Casmalia
Disposal Site ("Site") in Santa Barbara County, California. The Site is being
remediated by the EPA pursuant to CERCLA Superfund law and the Resource
Conservation and Recovery Act ("RCRA"). On December 3, 1999, the Company
accepted a revised settlement offer from the EPA and executed the Order on
Consent to resolve the Company's liability at the Site for less than $80,000.
On May 14, 1999, the San Joaquin Valley Unified Air Pollution Control
District ("District") issued an NOV of its rules and regulations in connection
with the operation of an oil water separator at the Company's Stockton,
California diesel and gasoline terminal. The District alleges that the separator
was operated without a permit. While the Company believes the separator is
exempt from permitting requirements, it has been removed from service. The
Company believes the resolution of this matter will not have a material adverse
effect on the Company.
On September 16, 1999, the EPA issued a letter to the Company's subsidiary,
Tesoro Hawaii Corporation, alleging certain violations of the facility response
plan ("FRP") regulations under the Clean Water Act at the Hawaii refinery. The
EPA alleges the refinery failed to revise its FRP to include certain material
changes at the facility; to resubmit the revisions for agency approval in a
timely manner; and, as a result, to properly implement its FRP. The EPA proposed
a civil penalty assessment of $99,600. The parties subsequently reached
tentative agreement to resolve all of the allegations for $39,500. Pending
finalization of a consent decree and payment of the settlement sum, the Company
believes the resolution of this matter will not have a material adverse effect
on the Company.
On March 3, 2000, the ADEC issued a NOV to Tesoro Alaska Company related to
alleged non-compliance at one of its two Anchorage terminals. The allegations
concern the operation of the vapor collection and recovery system at the
facility. The Company is reviewing the NOV to respond to ADEC, but does not
believe the resolution of this matter will have a material adverse effect on the
Company.
Other. As previously reported, on October 1, 1998, the Attorney General for
the State of Hawaii filed a lawsuit in the U.S. District Court for the District
of Hawaii ("Court") against thirteen oil companies, including Tesoro Petroleum
Corporation and Tesoro Hawaii Corporation, alleging anti-competitive marketing
practices in violation of federal and state anti-trust laws, and seeking
injunctive relief and compensatory and treble damages and civil penalties
against all defendants in an amount in excess of $500 million. On March 25,
1999, the Attorney General filed an amended complaint with the U.S. District
Court seeking damages against all defendants for such alleged anti-competitive
marketing practices in an amount in excess of $1.5 billion. On January 28, 2000,
the U.S. District Court for the District of Hawaii approved a Settlement
Agreement and Mutual Release ("Settlement Agreement") reached between Tesoro
Hawaii Corporation, the Company, BHP Hawaii Inc. and BHP Petroleum Americas
Refining Inc. (the "Settling Defendants") and the State of Hawaii which
dismissed the Settling Defendants from the lawsuit. Pursuant to the Settlement
Agreement, the Company and Tesoro Hawaii Corporation, without admitting any
liability for claims alleged in the lawsuit, paid $3 million on March 1, 2000 to
the Court in complete settlement of the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed under the symbol "TSO" on the New York
Stock Exchange and the Pacific Stock Exchange. The per share market price ranges
for the Company's Common Stock on the New York Stock Exchange during 1999 and
1998 are summarized below:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
QUARTERS ENDED HIGH LOW HIGH LOW
-------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31.............................................. $12 5/8 $ 7 7/16 $17 7/8 $14 3/4
June 30............................................... $15 15/16 $10 1/16 $21 3/8 $15 5/8
September 30.......................................... $18 13/16 $14 7/8 $19 13/16 $11 3/4
December 31........................................... $16 3/8 $ 9 3/4 $16 1/4 $ 9 1/16
</TABLE>
At March 20, 2000, there were approximately 3,000 holders of record of the
Company's 31,718,115 outstanding shares of Common Stock. The Company has not
paid dividends on its Common Stock since 1986.
For information regarding a stock repurchase program and restrictions on
future dividend payments, see Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 and Note F of Notes to
Consolidated Financial Statements in Item 8. The Board of Directors has no
present plans to pay dividends on Common Stock. However, from time to time, the
Board of Directors reevaluates the feasibility of declaring future dividends on
Common Stock.
The 2000 annual meeting of stockholders will be held at 10:00 A.M. Central
time on Thursday, May 25, 2000, at the Company's corporate offices located at
300 Concord Plaza Drive in San Antonio, Texas. Holders of Common Stock of record
at the close of business on April 5, 2000, are entitled to notice of and to vote
at the annual meeting.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 and the Company's Consolidated Financial Statements,
including the notes thereto, in Item 8. Financial results of acquired operations
have been included in the amounts below since their respective acquisition dates
(see Note E of Notes to Consolidated Financial Statements in Item 8). Amounts
prior to 1999 have been restated to reflect the exploration and production
business as discontinued operations (see Note D of Notes to Consolidated
Financial Statements in Item 8.).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------ -------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
REVENUES
Gross operating revenues:
Refining and Marketing
Refined products............................. $2,739.5 $1,198.2 $ 643.7 $620.8 $ 664.5
Other, primarily merchandise and crude oil
resales.................................... 79.9 69.8 77.2 124.6 106.5
Marine Services................................. 180.9 118.6 132.2 122.5 74.5
-------- -------- ------- ------ -------
Total revenues............................... $3,000.3 $1,386.6 $ 853.1 $867.9 $ 845.5
======== ======== ======= ====== =======
SUMMARY OF OPERATIONS
Segment Operating Profit (Loss)(a):
Refining and Marketing.......................... $ 122.4 $ 69.7 $ 20.5 $ 6.0 $ 0.7
Marine Services................................. 8.6 8.6 6.3 6.1 (4.4)
-------- -------- ------- ------ -------
Total Segment Operating Profit (Loss)........ 131.0 78.3 26.8 12.1 (3.7)
General and administrative........................ (34.1) (19.7) (13.6) (12.7) (16.4)
Interest and financing costs...................... (37.6) (25.2) (8.1) (13.8) (16.3)
Other expense, net(a)............................. (8.1) (21.3) (1.7) (5.9) (4.3)
-------- -------- ------- ------ -------
Earnings (loss) from continuing operations
before income taxes and extraordinary
items........................................ 51.2 12.1 3.4 (20.3) (40.7)
Income tax provision (benefit).................... 19.0 4.5 1.0 (5.9) (0.9)
-------- -------- ------- ------ -------
Earnings (loss) from continuing operations, net
of income taxes.............................. 32.2 7.6 2.4 (14.4) (39.8)
Earnings (loss) from discontinued operations, net
of income taxes(b).............................. 42.8 (22.6) 28.3 91.2 97.3
Extraordinary items, net of income taxes(c)....... -- (4.4) -- (2.3) (2.9)
-------- -------- ------- ------ -------
Net earnings (loss)............................. 75.0 (19.4) 30.7 74.5 54.6
Preferred dividend requirements................... 12.0 6.0 -- -- --
-------- -------- ------- ------ -------
Net earnings (loss) applicable to common
stock........................................ $ 63.0 $ (25.4) $ 30.7 $ 74.5 $ 54.6
======== ======== ======= ====== =======
EARNINGS (LOSS) PER SHARE
Continuing Operations
Basic........................................ $ 0.62 $ 0.05 $ 0.09 $(0.55) $ (1.62)
Diluted...................................... $ 0.62 $ 0.05 $ 0.09 $(0.55) $ (1.62)
Net Earnings
Basic........................................ $ 1.94 $ (0.86) $ 1.16 $ 2.87 $ 2.22
Diluted...................................... $ 1.92 $ (0.86) $ 1.14 $ 2.81 $ 2.18
Weighted Average Common Shares -- Basic
(millions)...................................... 32.4 29.4 26.4 26.0 24.6
Weighted Average Common Shares and Potentially
Dilutive Common Shares -- Diluted (millions).... 32.8 29.9 26.9 26.5 25.1
EBITDA(d)
Continuing...................................... $ 131.7 $ 65.9 $ 26.6 $ 8.1 $ (11.4)
Discontinued.................................... 110.3 87.0 77.2 166.7 139.2
-------- -------- ------- ------ -------
Total EBITDA................................. $ 242.0 $ 152.9 $ 103.8 $174.8 $ 127.8
======== ======== ======= ====== =======
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------ -------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN)
Operating....................................... $ 112.7 $ 121.8 $ 91.0 $177.7 $ 35.0
Investing....................................... 166.3 (718.6) (151.5) (94.2) 2.4
Financing....................................... (149.2) 606.6 41.5 (75.9) (37.8)
-------- -------- ------- ------ -------
Increase (Decrease) in Cash and Cash
Equivalents................................ $ 129.8 $ 9.8 $ (19.0) $ 7.6 $ (0.4)
======== ======== ======= ====== =======
CAPITAL EXPENDITURES(e)
Refining and Marketing.......................... $ 71.2 $ 38.0 $ 43.9 $ 11.1 $ 9.3
Marine Services................................. 2.7 4.2 9.4 6.9 0.4
Other........................................... 10.8 7.8 1.3 0.4 0.8
-------- -------- ------- ------ -------
Total from Continuing Operations............. 84.7 50.0 54.6 18.4 10.5
Discontinued Operations......................... 56.5 135.1 92.9 66.6 53.4
-------- -------- ------- ------ -------
Total Capital Expenditures................... $ 141.2 $ 185.1 $ 147.5 $ 85.0 $ 63.9
======== ======== ======= ====== =======
BALANCE SHEET
Current Assets.................................. $ 611.6 $ 370.2 $ 153.2 $196.1 $ 161.7
Property, Plant and Equipment, Net.............. $ 731.6 $ 691.4 $ 236.0 $197.0 $ 182.1
Net Assets of Discontinued Operations........... $ -- $ 212.7 $ 191.6 $138.5 $ 143.4
Total Assets.................................... $1,486.5 $1,406.4 $ 610.4 $558.8 $ 508.1
Current Liabilities............................. $ 321.6 $ 187.8 $ 91.7 $114.7 $ 94.5
Total Long-Term Debt and Other Obligations(f)... $ 417.6 $ 543.9 $ 132.3 $ 89.3 $ 164.5
Stockholders' Equity(f)(g)...................... $ 623.1 $ 559.2 $ 333.0 $304.1 $ 216.5
Current Ratio................................... 1.9:1 2.0:1 1.7:1 1.7:1 1.7:1
Working Capital................................. $ 290.0 $ 182.4 $ 61.5 $ 81.4 $ 67.2
Total Debt to Capitalization (f)................ 40% 49% 28% 23% 43%
Common Stock Outstanding (million shares)
(f)(g)....................................... 32.4 32.3 26.3 26.4 24.8
Book Value Per Common Share..................... $ 14.14 $ 12.19 $ 12.66 $11.51 $ 8.74
</TABLE>
- ---------------
(a) Segment operating profit (loss) equals gross operating revenues, gains and
losses on asset sales and other income less applicable segment costs of
sales, operating expenses, depreciation and other items. Income taxes,
interest expense and corporate general and administrative and other
expenses are not included in determining segment operating profit. In 1998,
a charge of $19 million for special incentive compensation, of which $7
million related to operating segments, was classified as corporate other
expense and not charged to segment operating profit. See Notes C and L of
Notes to Consolidated Financial Statement in Item 8.
(b) In December 1999, the Company sold its U.S. and Bolivian exploration and
production operations and recorded an aftertax gain of $39.1 million ($1.19
per diluted share) from the sale of these operations (see Note D of Notes
to Consolidated Financial Statements in Item 8). In 1998, these operations
incurred pretax write-downs of oil and gas properties of $68.3 million
($43.2 million aftertax or $1.47 per diluted share) and recognized pretax
income from receipt of contingency funds of $21.3 million ($13.4 million
aftertax or $0.45 per diluted share). The discontinued operations included
$60 million pretax income ($42 million aftertax or $1.58 per diluted share)
from termination of a natural gas contract in 1996 and a $33.5 million
pretax gain ($33.5 million aftertax or $1.33 per diluted share) from the
sale of certain interests in the Bob West Field in 1995.
(c) Extraordinary losses on debt extinguishments, net of income tax benefits,
were $4.4 million ($0.15 per basic and diluted share), $2.3 million ($0.09
per basic and diluted share) and $2.9 million ($0.12 per basic share, $0.11
per diluted share) in 1998, 1996 and 1995, respectively. See Note F of
Notes to Consolidated Financial Statements in Item 8.
(d) EBITDA represents earnings before extraordinary items, interest and
financing costs, income taxes and depreciation, depletion and amortization
(including oil and gas property write-downs in 1998). While not purporting
to reflect any measure of the Company's operations or cash flows, EBITDA is
presented for additional analysis.
(e) Excluding amounts to fund acquisitions in the Refining and Marketing
segment in 1998 and the Marine Services segment in 1996.
(f) In conjunction with the acquisitions in 1998, the Company refinanced its
existing indebtedness and issued senior subordinated notes and additional
equity securities, including $165 million of 7.25% Mandatorily Convertible
Preferred Stock which is included in stockholders' equity. See Note F of
Notes to Consolidated Financial Statements in Item 8.
(g) The Company has not paid dividends on its Common Stock since 1986.
20
<PAGE> 21
ITEM 7. 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 35 for discussion
of the factors which could cause actual results to differ materially from those
projected in such statements.
OVERVIEW
The Company's strategy is to (i) maximize earnings, cash flows and return
on capital employed and increase its competitiveness by reducing costs,
increasing efficiencies and optimizing existing assets and (ii) expand its
overall market presence through a combination of internal growth initiatives and
selective acquisitions which are both accretive to earnings and provide
significant operational synergies. The Company is further improving
profitability in the Refining and Marketing segment by enhancing processing
capabilities, strengthening marketing channels and improving supply and
transportation functions. The Marine Services segment pursues opportunities for
expansion, as well as optimizing existing operations through development of
customer services and cost management. As part of this strategy, the Company
continues to assess its existing asset base in order to maximize returns and
financial flexibility through diversification, acquisitions and divestitures.
Through redeployment of capital, the Company believes it will create new
shareholder value.
A major step of this strategy was completed in December 1999 when the
Company sold its exploration and production operations. Although both the
Refining and Marketing and Exploration and Production segments had growth
opportunities, given the Company's strategic objectives and its desire to
improve financial flexibility, management believed that it would not be able to
prudently fund all these opportunities. The sale of the exploration and
production operations generated over $300 million in cash proceeds at closing,
which have been used to repay debt and for other corporate purposes, and allows
the Company to focus on its downstream businesses.
In 1999, the Company completed its first full year of operating the
refining and marketing assets in Hawaii (acquired in May 1998) and in Washington
(acquired in August 1998). These acquisitions significantly increased Tesoro's
annual revenues and the scope of its Refining and Marketing operations. The
acquisitions positioned Tesoro to participate actively in the atypical market
conditions experienced on the U.S. West Coast which contributed significantly to
profitability in the 1999 second quarter and first half of the 1999 third
quarter. Management believes that, in the first nine months of 1999, the Company
generated synergies among its three refineries of approximately $25 million,
primarily through improvements in marketing, logistics and manufacturing
processes which will continue to benefit Tesoro in the future. As part of the
Company's acquisition strategy, the Company will continue to pursue other
opportunities that are operationally and geographically complementary with its
asset base.
Management has also developed programs to improve profitability from its
existing asset base. These improvements are focused on manufacturing, marketing
and cost reduction. In manufacturing, management believes that improvements,
such as the installation of a distillate treater in 1999 and the commencement of
a heavy oil conversion project in 2000 at the Washington refinery, will shift
the margin structure of this refinery to a higher, more competitive level. In
addition, marketing improvements, such as forming alliances with high-volume
retail operations like Wal-Mart, will move the Company's products into
higher-value market channels. The Company has initiated an evaluation of its
cost structure, with specific emphasis on the Alaska operations. Concurrent with
the broad-based cost review, a full range of options relative to marketing
products in Alaska, such as supplying the Alaska market from other sources, will
be evaluated as well as a restructuring that could include the sale, or closure
of part, or all, of the Alaskan assets. Management expects to complete this
review by April 30, 2000.
21
<PAGE> 22
BUSINESS ENVIRONMENT
The Company operates in an environment where its results and cash flows are
sensitive to volatile changes in energy prices. Fluctuations in the cost of
crude oil used for refinery feedstocks and the price of refined products can
result in changes in margins from the Refining and Marketing operations, as
prices received for refined products may or may not keep pace with changes in
crude oil costs. The Company also purchases refined products manufactured by
others that are later resold; changes in price levels of refined products can
result in changes in margins on such activities. 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 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.
Changes in crude oil and natural gas prices also influence the level of
drilling activity in the Gulf of Mexico. The Company's Marine Services segment,
whose customers include offshore drilling contractors and related industries,
can be impacted by significant fluctuations in natural gas, condensate and oil
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.
RESULTS OF OPERATIONS
SUMMARY
Tesoro's earnings from continuing operations for 1999 were $32.2 million
($0.62 per basic and diluted share), compared with $7.6 million ($0.05 per basic
and diluted share) in 1998 and $2.4 million ($0.09 per basic and diluted share)
in 1997. On a per share basis, net earnings for 1999 and 1998 were impacted by
the issuance of preferred stock and additional shares of common stock in
mid-1998. The improvement in 1999 earnings was mainly due to higher operating
profit from the Company's Refining and Marketing segment. Increased throughput
and sales volumes from operations acquired in mid-1998, refinery efficiency and
reliability, and profits from purchasing and selling products manufactured by
others contributed to the Refining and Marketing results. Partially offsetting
these improvements were increased general and administrative expenses and
interest and financing costs during 1999. See table below for significant items
affecting comparability which occurred in 1998.
Tesoro's net earnings for 1999 were $75.0 million ($1.94 per basic share
and $1.92 per diluted share), compared to a net loss of $19.4 million ($0.86 per
basic and diluted share) in 1998 and net earnings of $30.7 million ($1.16 per
basic share and $1.14 per diluted share) in 1997. In 1998, the Company incurred
an aftertax extraordinary loss of $4.4 million for early extinguishment of debt.
During 1999, discontinued operations contributed $42.8 million to net earnings,
including an aftertax gain of $39.1 million from the sale of these operations.
In 1998, discontinued operations incurred a net loss of $22.6 million, which
included $43.2 million in aftertax write-downs of oil and gas properties and
$13.4 million in aftertax income from receipt of contingency funds related to
these operations.
22
<PAGE> 23
SIGNIFICANT ITEMS AFFECTING COMPARABILITY
Significant items affecting the comparability between results for the years
ended December 31, 1999, 1998 and 1997 are highlighted in the table below (in
millions except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
----- ------ -----
<S> <C> <C> <C>
Net Earnings (Loss) as Reported............................. $75.0 $(19.4) $30.7
Deduct Significant Items, Aftertax:
Operating results from discontinued operations............ 3.7 (22.6) 28.3
Gain from sales of discontinued operations................ 39.1 -- --
Extraordinary loss on debt extinguishment................. -- (4.4) --
Charge for special incentive compensation................. -- (12.0) --
----- ------ -----
Earnings from Continuing Operations Excluding Significant
Items..................................................... 32.2 19.6 2.4
Preferred Dividend Requirements............................. 12.0 6.0 --
----- ------ -----
Earnings from Continuing Operations Applicable to Common
Stock Excluding Significant Items......................... $20.2 $ 13.6 $ 2.4
===== ====== =====
Earnings (Loss) Per Share -- Basic:
As Reported............................................... $1.94 $(0.86) $1.16
Deduct Significant Items, Aftertax:
Operating results from discontinued operations......... 0.11 (0.76) 1.07
Gain from sales of discontinued operations............. 1.21 -- --
Extraordinary loss..................................... -- (0.15) --
Effect of other significant items...................... -- (0.41) --
----- ------ -----
From Continuing Operations Excluding Significant Items.... $0.62 $ 0.46 $0.09
===== ====== =====
Earnings (Loss) Per Share -- Diluted:
As Reported............................................... $1.92 $(0.86) $1.14
Deduct Significant Items, Aftertax:
Operating results from discontinued operations......... 0.11 (0.76) 1.05
Gain from sales of discontinued operations............. 1.19 -- --
Extraordinary loss..................................... -- (0.15) --
Effect of other significant items...................... -- (0.40) --
----- ------ -----
From Continuing Operations Excluding Significant Items.... $0.62 $ 0.45 $0.09
===== ====== =====
</TABLE>
A discussion and analysis of the factors contributing to results of
operations are presented below. The accompanying consolidated financial
statements and related notes, together with the following information, are
intended to provide shareholders and other investors with a reasonable basis for
assessing the Company's operations, but should not serve as the sole criterion
for predicting the future performance of the Company. The Company conducts its
operations in two business segments: (1) Refining and Marketing and (2) Marine
Services.
23
<PAGE> 24
REFINING AND MARKETING
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- -------
(DOLLARS IN MILLIONS EXCEPT PER
BARREL AMOUNTS)
<S> <C> <C> <C>
GROSS OPERATING REVENUES
Refined products.......................................... $2,739.5 $1,198.2 $643.7
Other, primarily merchandise and crude oil resales........ 79.9 69.8 77.2
-------- -------- ------
Gross Operating Revenues............................. $2,819.4 $1,268.0 $720.9
======== ======== ======
SEGMENT OPERATING PROFIT
Gross margin:
Refinery (a)........................................... $ 494.1 $ 307.3 $116.9
Non-refinery (b)....................................... 62.4 22.6 13.0
-------- -------- ------
Total gross margin................................... 556.5 329.9 129.9
Operating expenses and other.............................. 396.3 235.1 96.7
Depreciation and amortization............................. 37.8 25.1 12.7
-------- -------- ------
Segment Operating Profit............................. $ 122.4 $ 69.7 $ 20.5
======== ======== ======
CAPITAL EXPENDITURES........................................ $ 71.2 $ 38.0 $ 43.9
======== ======== ======
REFINERY THROUGHPUT (thousands of barrels per day)(c)
Alaska.................................................... 48.7 57.6 50.2
Hawaii.................................................... 86.9 48.3 --
Washington................................................ 98.1 42.6 --
-------- -------- ------
Total Refinery Throughput............................ 233.7 148.5 50.2
======== ======== ======
REFINED PRODUCTS MANUFACTURED (thousands of barrels per
day)(c)
Gasoline and gasoline blendstocks......................... 92.9 50.9 12.8
Jet fuel.................................................. 58.3 40.6 15.4
Diesel fuel............................................... 32.7 18.8 6.2
Heavy oils and residual products.......................... 42.9 33.5 14.8
Other, including liquefied petroleum gas.................. 17.0 9.7 2.3
-------- -------- ------
Total Refined Products Manufactured.................. 243.8 153.5 51.5
======== ======== ======
REFINERY SYSTEM PRODUCT SPREAD ($/barrel)(d)(e)............. $ 5.79 $ 5.67 $ 6.38
======== ======== ======
SEGMENT PRODUCT SALES (thousands of barrels per day)(c)(f)
Gasoline and gasoline blendstocks......................... 123.7 58.4 17.4
Jet fuel.................................................. 75.5 45.9 19.7
Diesel fuel............................................... 47.1 24.2 10.9
Heavy oils, residual products and other................... 47.2 39.3 17.9
-------- -------- ------
Total Product Sales.................................. 293.5 167.8 65.9
======== ======== ======
SEGMENT PRODUCT SALES PRICES ($/barrel)
Gasoline.................................................. $ 29.62 $ 24.22 $33.71
Middle distillates........................................ $ 25.18 $ 19.79 $28.36
Heavy oils and residual products.......................... $ 16.09 $ 12.12 $17.30
SEGMENT GROSS MARGINS ON PRODUCT SALES ($/barrel)(g)
Average sales price....................................... $ 25.57 $ 19.56 $26.76
Average costs of sales.................................... 20.59 14.49 21.92
-------- -------- ------
Gross Margin......................................... $ 4.98 $ 5.07 $ 4.84
======== ======== ======
</TABLE>
- ---------------
(a) Represents throughput at the Company's refineries times refinery system
product spread.
24
<PAGE> 25
(b) Non-refinery margin includes merchandise margins, margins on products
purchased and resold, and adjustments due to selling a volume and mix of
product that is different than actual volumes manufactured.
(c) Volumes for 1999 and 1998 include amounts from the Hawaii operations
(acquired in May 1998) and the Washington refinery (acquired in August 1998)
averaged over the periods presented. Certain amounts have been reclassified
to conform with the current presentation.
(d) Refinery system product spread represents an average for the Company's three
refineries. For 1999, the Company's refinery spread per barrel by refinery
was approximately $4.74 for Alaska, $4.80 for Hawaii and $6.41 for
Washington.
(e) Beginning in the fourth quarter of 1999, the Company identified
industry-posted price information to calculate an indicator margin. This
indicator margin is an analytical tool which may provide an indication of
the direction and magnitude of changes in market conditions that may be
representative of market changes which impact Tesoro's refinery system. It
is a component, but not a predictor, of Tesoro's actual refinery spread.
Other factors including, but not limited to, throughput volumes and mix,
yield percentages and inventory changes, determine actual refinery spread.
For 1999, the indicator margin was approximately equal to Tesoro's actual
refinery system product spread of $5.79 per barrel. The indicator margin
utilizes industry-posted prices, such as Pacific Northwest gasoline and
diesel fuel prices; Los Angeles jet fuel prices; Seattle industrial fuel oil
prices; Alaska North Slope crude oil prices; and West Texas intermediate
crude oil prices. The indicator margin is posted weekly on the Company's
website at www.tesoropetroleum.com/investor/indicator_margin.html.
(f) Sources of total product sales included products manufactured at the
Company's refineries, products drawn from inventory balances and products
purchased from third parties.
(g) Gross margins on product sales included margins on sales of manufactured and
purchased products and the effects of inventory changes.
1999 Compared with 1998. Segment operating profit for the Company's
Refining and Marketing operations was $122.4 million in 1999, an increase of
$52.7 million from segment operating profit of $69.7 million in 1998.
Contributing to the increase was a full year of results from the Washington
refinery and related marketing operations in 1999, compared to five months in
1998. Similarly, the Hawaii refinery and operations contributed to operating
profit for the full year in 1999; however, the 1999 results were lower than in
the seven months included in 1998.
Segment operating profit increased significantly during the 1999 second
quarter and first half of the 1999 third quarter due primarily to stronger than
normal market conditions on the West Coast. Refining margins during this period
were strong in the western U.S. due to seasonal demand, product supply
disruptions caused by operating problems at other refineries, and a rupture of
the major refined products pipeline which serves the Pacific Northwest region.
However, in the fourth quarter of 1999, margins were adversely impacted as
industry refining capacity on the West Coast came back on-line, refined product
imports into the West Coast continued, and crude costs escalated rapidly. The
Company's refinery-system product spread, which averaged approximately $8.07 per
barrel in the month of July 1999 and $7.16 per barrel in the month of August
1999, dropped precipitously during the 1999 fourth quarter to approximately
$4.30 per barrel in the month of December 1999. In addition, during the 1999
fourth quarter, lower refinery throughputs, caused primarily by the scheduled
turnaround of the Washington refinery's crude distillation and catalytic
reformer units for 25 days in October, reduced overall system throughput to an
average of 208,100 barrels per day. Management estimates that, had the Company
been able to operate the Washington refinery during the turnaround, an
additional $8 million in segment operating profit would have been realized
during the 1999 fourth quarter.
Revenues from sales of refined products in the Refining and Marketing
segment increased in 1999, primarily due to the higher sales volumes from the
acquisitions, higher product prices and increased sales volumes of purchased
product. The increase in other revenues during 1999 included higher retail
merchandise sales, primarily from the Hawaii acquisition, and $4.5 million in
revenues from the sub-charter of vessels to
25
<PAGE> 26
third parties, partially offset by lower crude oil resales. The increase in
costs of sales reflected higher volumes associated with the acquisitions,
increased prices for feedstock and products, and higher purchased product
volumes. During 1999, the Company reduced inventory levels by approximately 2.5
million barrels from the prior year-end level, resulting in a liquidation of
LIFO inventory quantities carried at lower costs prevailing in previous years.
This LIFO liquidation resulted in a decrease in costs of sales of $8.4 million
pretax in 1999.
During 1999, the Refining and Marketing segment benefited from the
Company's focus on manufacturing efficiency and reliability, as well as
distribution costs and marketing flexibility. The Company maintained a flexible
supply of crude oils and other feedstocks and operated the refineries at
economic rates, which all contributed to the improvement in operating profit.
Throughput for the Company's refinery-system averaged 233,700 barrels per day
during 1999, which included 39% foreign crude oil, 28% Alaska North Slope crude
oil, 18% Canadian crude oil, 13% Alaska Cook Inlet crude oil and 2% intermediate
feedstocks. Overall refinery gross margin increased to $494.1 million in 1999
due to the higher throughput volumes and an increase in average refinery system
product spread per barrel to $5.79 in 1999 compared to $5.67 per barrel in 1998.
During 1999, products from the Company's refineries accounted for approximately
83% of its sales volume, compared with 91% in 1998.
Margins from non-refinery activities increased to $62.4 million in 1999 due
primarily to higher sales of purchased refined products and increased
merchandise sales. Included in non-refinery margin was approximately $32.5
million from sales of purchased refined product compared to $3.8 million in the
prior year. Operating expenses and depreciation and amortization increased in
1999 primarily due to the acquisitions.
Outlook and Other Factors. During the 1999 fourth quarter, the Company
completed the installation of a distillate treater at the Washington refinery
which will enable the refinery to increase its production of low-sulfur diesel
fuel and jet fuel beginning in the first quarter of 2000. The distillate treater
installation, together with licensing fees and supporting infrastructure, cost
approximately $13 million. Management believes that the distillate treater
installation will add between $6 million to $8 million to annual operating
profit. Other significant investment projects and capital spending plans to
improve the Company's profitability are discussed in "Liquidity and Capital
Resources -- Capital Spending."
In 1999, the Company entered into a charter for a double-hull tanker to be
used for transporting crude oil and refined products. Under the terms of the new
charter, Tesoro will receive one of the new Lightship Class tankers. The new
charter, which has a three-year primary term beginning in May 2000 and two
one-year options, will require future minimum annual lease payments of
approximately $10 million. The new charter will save the Company approximately
$6 million annually when it replaces the Chesapeake Trader, which goes off
charter to Tesoro in May 2000. Tesoro has another ship under charter, the
Potomac Trader, which goes off charter to Tesoro in September 2000. Management
is continuing to evaluate the Company's requirements for chartered vessels and
believes that, based on current market conditions, shipping costs will be
further reduced in 2000 and 2001.
For the year 2000, management estimates, based on current operations, that
the Company's refinery-system throughput will average approximately 260,000
barrels per day and refined products manufactured will average 270,000 barrels
per day, subject to seasonality experienced during the interim periods. One
maintenance turnaround is scheduled in 2000 for the hydrocracker and catalytic
reformer units at the Hawaii refinery. Feedstock for the refineries is expected
to consist of approximately 42% crude oil from foreign sources, 25% crude oil
from Alaska's North Slope, 15% crude oil from Canada, 12% crude oil from
Alaska's Cook Inlet and 6% intermediate feedstocks. The Company's
refinery-system yield, based on current operations, is expected to consist of
approximately 36% gasoline, 26% jet fuel, 15% diesel fuel and 23% heavy oils and
other products during 2000.
The Company improved the fundamental earnings potential of its Refining and
Marketing segment with the acquisitions in 1998 and the realization of synergies
in 1999. The Company is further improving profitability by enhancing processing
capabilities, strengthening marketing channels and improving supply and
transportation functions. In addition, the Company has initiated an evaluation
of its cost structure, with specific emphasis on the Alaska operations. Future
profitability of this segment, however, will continue to be
26
<PAGE> 27
influenced, either positively or negatively, by market conditions and other
additional factors that are beyond the control of the Company.
1998 Compared with 1997. Segment operating profit from the Refining and
Marketing operations totaled $69.7 million in 1998, an increase of $49.2 million
from segment operating profit of $20.5 million in 1997. The increase in segment
operating profit was primarily due to higher throughput and sales volumes from
the acquired refineries and improved refined product yields in Alaska. Financial
results from the acquired operations have been included since the dates of
acquisition. The Hawaii acquisition was completed on May 29, 1998, and the
Washington acquisition was completed on August 10, 1998. These acquisitions
contributed positively to the segment's operating profit in 1998; however, on a
consolidated basis, these results were largely offset by increased corporate
interest and financing costs.
During 1998, the Company's refined product yields in Alaska benefited from
an expansion of the hydrocracker unit completed in October 1997. The expansion,
which increased the unit's capacity by approximately 25%, enables production of
more jet fuel. Segment results were favorably impacted by this expansion
beginning in the fourth quarter of 1997. During 1998, average throughput at the
Alaska refinery increased by 7,400 barrels per day, a 15% increase over 1997
which included a 30-day maintenance turnaround. Production of jet fuel at this
refinery increased by approximately 30% over 1997 due to the hydrocracker
expansion and higher throughput levels.
The Alaska hydrocracker expansion and the acquisitions contributed to an
increase in the proportion of higher value gasoline and middle distillates
manufactured by the Company in 1998. Conversely, the proportion of lower value
heavy oils and residual products manufactured by the Company decreased in 1998.
The higher-value mix of product partly offset market pressures which decreased
year-to-year refinery product spreads to $5.67 per barrel in 1998 from $6.38 per
barrel in 1997. Increased gross margin of $5.07 per barrel in 1998, which
compare to $4.84 per barrel in 1997, reflected the higher-value mix of
manufactured product and a reduction in products purchased and resold. In 1998,
products from the Company's refineries accounted for approximately 91% of its
sales volume, compared with 78% in 1997.
Revenues from sales of refined products in the Refining and Marketing
segment increased during 1998 primarily due to the higher sales volumes from the
acquisitions, partially offset by lower sales prices. Export sales of refined
products increased to $35.5 million in 1998, compared with $16.1 million in
1997, primarily due to sales from Hawaii to Asia partly offset by a decrease in
exports from the Alaska refinery to the Far East. Other revenues included crude
oil resales of $29.9 million in 1998 compared to $44.4 million in 1997.
Merchandise sales, also included in other revenues, increased in 1998 due to the
Hawaii acquisition which included 30 Company-operated retail stations. The
increase in costs of sales reflected higher volumes associated with the
acquisitions, partly offset by lower feedstock prices. Margins from non-refinery
activities increased to $22.6 million in 1998, compared with $13.0 million in
1997, primarily due to the higher merchandise sales. Operating expenses and
depreciation and amortization were higher in 1998 primarily due to the
acquisitions.
27
<PAGE> 28
MARINE SERVICES
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Gross Operating Revenues
Fuels..................................................... $155.7 $ 91.1 $104.5
Lubricants and other...................................... 13.5 15.9 16.4
Services.................................................. 11.7 11.6 11.3
------ ------ ------
Gross Operating Revenues............................... 180.9 118.6 132.2
Costs of Sales.............................................. 135.4 79.0 96.7
------ ------ ------
Gross Profit.............................................. 45.5 39.6 35.5
Operating Expenses and Other................................ 34.2 28.6 27.5
Depreciation and Amortization............................... 2.7 2.4 1.7
------ ------ ------
Segment Operating Profit.................................. $ 8.6 $ 8.6 $ 6.3
====== ====== ======
Sales Volumes (millions of gallons):
Fuels, primarily diesel................................... 291.0 180.8 156.4
Lubricants................................................ 2.0 2.3 2.7
Capital Expenditures........................................ $ 2.7 $ 4.2 $ 9.4
</TABLE>
1999 Compared with 1998. Total segment operating profit for Marine Services
was $8.6 million for 1999, unchanged from 1998. Of this operating profit, $0.6
million was earned in the first half of 1999 and $8.0 million was earned in the
last half of 1999. The Marine Services operations in the Gulf of Mexico, which
are largely dependent on the level of oil and gas drilling, workover,
construction and seismic activity in the Gulf, were negatively impacted by the
low level of drilling activity during the first half of 1999. However, the
business climate improved during the latter half of 1999 with the number of
drilling rigs served by Tesoro's terminals increasing to a high of 35 as
compared to eight in March 1999. The recovery by the Company in the last half of
1999 was due in part to the increased drilling activity and better cost
management.
Also contributing to the segment's operating profit primarily in the last
half of 1999 were the West Coast marine operations which the Company purchased
on June 17, 1999. This purchase of the U.S. West Coast marine fuels operations
of BP Marine, a division of BP Amoco PLC, included inventory and leased
facilities at Port Angeles and Seattle, Washington, and Portland, Oregon, and
expanded the Marine Services segment's presence on the West Coast. These
operations, which were included in the Marine Services segment since the date of
purchase, contributed $62.3 million to revenues, 126.9 million gallons to fuel
sales volumes and $2.6 million to segment operating profit in 1999.
Excluding the impact of the new West Coast operations, revenues for Marine
Services would have been unchanged and segment operating profit would have
declined by $2.6 million in 1999 as compared with 1998. The effect of higher
spot fuel prices on revenues was offset by declines in volumes. The decline in
Gulf of Mexico operating profit was mainly due to lower fuel sales volumes and
other product margins. The increase in the segment's operating expenses and
other during 1999 reflected the additional West Coast operations. In 1999, both
the West Coast and Gulf of Mexico operations benefited from low costs of
inventories.
In March 2000, management commenced a realignment of its operational
organization which includes the transfer of the Marine Services segment's West
Coast operations to the Refining and Marketing segment.
1998 Compared with 1997. Gross operating revenues decreased 10% from $132.2
million in 1997 to $118.6 million in 1998, reflecting a $13.4 million decline in
fuel revenues from lower market prices partly offset by a 16% increase in fuel
sales volumes. The increase in fuel volumes was attributable to operations in
the Gulf of Mexico and the transfer of three West Coast terminals from the
Company's Refining and Marketing segment to Marine Services in January 1998. The
decrease in costs of sales also reflected lower fuel prices, partly offset by
increased volumes. Gross profit, which improved by $4.1 million due to higher
volumes, was partly offset by additional operating expenses from the West Coast
terminals and higher depreciation and
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<PAGE> 29
amortization resulting from upgrades to facilities. Despite lower rig activity
in the Gulf of Mexico, total segment operating profit increased by $2.3 million
largely due to the Company's ability to emphasize customer service, control
expenses and increase sales volumes.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $34.1 million in 1999, compared
with $19.7 million in 1998 and $13.6 million in 1997. The $14.4 million increase
in 1999 was primarily due to costs related to the implementation of an
integrated enterprise-wide information system and higher employee costs
associated with business development and personnel realignment. When comparing
1998 to 1997, the increase was primarily due to higher employee costs and
professional fees partly due to the design phases of the system implementation
which commenced in 1998.
INTEREST AND FINANCING COSTS
Interest and financing costs totaled $37.6 million in 1999, compared with
$25.2 million in 1998 and $8.1 million in 1997. The $12.4 million increase in
1999, compared to 1998, was primarily due to a full year's interest on the 9%
Senior Subordinated Notes, which were issued to finance the acquisitions in
1998. The $17.1 million increase in 1998, compared to 1997, was primarily due to
higher borrowings under the Company's credit arrangements and the issuance of
debt securities in July 1998 which were used to fund acquisitions, to refinance
debt and obligations and for other corporate purposes (see Note F of Notes to
Consolidated Financial Statements in Item 8.)
Corporate interest expense allocated to discontinued operations was based
on net assets and amounted to $10.6 million, $7.8 million and $0.2 million in
1999, 1998 and 1997, respectively. See Note D of Notes to Consolidated Financial
Statements in Item 8. Interest and financing costs reported in the Company's
Statements of Consolidated Operations is after the allocation to discontinued
operations.
OTHER EXPENSE
Other expense totaled $9.3 million in 1999, compared with $23.3 million in
1998 and $3.3 million in 1997. In 1999, other expense included a $3 million
provision for settlement of claims by the State of Hawaii (see Note M of Notes
to Consolidated Financial Statements in Item 8) and increased corporate
depreciation. In 1998, the Company incurred a charge for special incentive
compensation which was earned in the second quarter when the market price of the
Company's Common Stock achieved a specific performance target (see Note L of
Notes to Consolidated Financial Statements in Item 8). This charge totaled $19
million, of which $7 million related to operating segment employees. There was
no material comparable charge recorded in 1997.
INCOME TAX PROVISION
Income taxes on continuing operations increased to $19.0 million in 1999,
from $4.5 million in 1998 and $1.0 million in 1997. This increase was due to the
higher pretax earnings from continuing operations. The Company's effective
income tax rates were 37%, 37% and 32% in 1999, 1998 and 1997, respectively. See
Note G of Notes to Consolidated Financial Statements in Item 8 for further
information on income taxes and Note D for income taxes related to discontinued
operations.
DISCONTINUED OPERATIONS
Earnings from discontinued operations in 1999 of $42.8 million (net of
income tax expense of $29.6 million), or $1.30 per diluted share, included
aftertax operating results of $3.7 million from the Company's U.S. and Bolivian
exploration and production operations up until the closing dates of the sales of
these operations and a $39.1 million aftertax gain on the sale of these
operations in December 1999. Prior periods have been restated to reflect the
exploration and production business as discontinued operations. In 1998,
discontinued operations had a net loss of $22.6 million, or $0.76 per diluted
share, which included aftertax write-downs of oil and gas properties of $43.2
million and aftertax income of $13.4 million for the
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<PAGE> 30
receipt of contingency funds from an operator. Discontinued operations
contributed $28.3 million to net earnings in 1997. See Note D of Notes to
Consolidated Financial Statements in Item 8 for further information on allocated
interest expense and income taxes related to discontinued operations.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
The Company's primary sources of liquidity are cash flows from operations
and borrowing availability under a revolving line of credit. Capital
requirements are expected to include capital expenditures, working capital, debt
service and preferred dividend requirements. Based upon current needs,
management believes that the available capital resources will be adequate to
meet its capital requirements.
The Company operates in an environment where its liquidity and capital
resources are impacted by changes in supply of and demand for crude oil 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, 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.
CAPITALIZATION
The Company's capital structure at December 31, 1999, was comprised of the
following (in millions):
<TABLE>
<S> <C>
Debt and obligations outstanding, including current
maturities:
Senior Credit Facility
Revolver............................................... $ --
Tranche B Term Loan.................................... 81
9% Senior Subordinated Notes.............................. 297
BHP Note.................................................. 24
Other senior debt and obligations......................... 16
------
Total debt and obligations........................ 418
Mandatorily Convertible Preferred Stock..................... 165
Common stockholders' equity................................. 458
------
Total Capitalization.............................. $1,041
======
</TABLE>
In addition, at December 31, 1999, the Company had cash and cash
equivalents of $142 million, which included a portion of the proceeds from the
sale of the exploration and production operations. At December 31, 1999, the
Company's total debt to capitalization ratio was 40%, while debt, net of cash,
to capitalization was 31%. In March 2000, the Company repaid the Tranche B Term
Loan and the BHP Note.
The Senior Credit Facility, Senior Subordinated Notes and Preferred Stock,
as defined below, impose various restrictions and covenants on the Company that
could potentially limit the Company's ability to respond to market conditions,
to provide for anticipated capital investments, to raise additional debt or
equity capital or to take advantage of business opportunities.
For further information on the Company's capital structure, see Note F of
Notes to Consolidated Financial Statements in Item 8.
CREDIT ARRANGEMENTS
The Company has financing and credit arrangements under a three-year senior
credit facility ("Senior Credit Facility"), dated July 2, 1998, with a
consortium of banks. The Senior Credit Facility was comprised of term loan
facilities aggregating $200 million ("Term Loans") and a $300 million revolving
credit and letter of credit facility ("Revolver"). In April 1999, the Company
reduced commitments under the Revolver from
30
<PAGE> 31
$300 million to $175 million, reducing commitment fees. The Company used a
portion of the proceeds from the sale of its exploration and production
operations to prepay $97.4 million of the Term Loans in December 1999 and $80.9
million of Term Loans in March 2000. Based on current needs, the Company
believes that the remaining credit capacity of $175 million under the Revolver,
together with existing cash and internally-generated cash flows, is sufficient
to fund capital expenditures and working capital requirements. At December 31,
1999, unused availability under the Senior Credit Facility was approximately
$172 million.
The Senior Credit Facility requires the Company to maintain specified
levels of consolidated leverage and interest coverage and contains other
covenants and restrictions customary in credit arrangements of this kind. The
Company was in compliance with these covenants at December 31, 1999. The terms
of the Senior Credit Facility allow for payment of cash dividends on the
Company's Common Stock not to exceed an aggregate of $10 million in any year and
also allow for payment of required dividends on its 7.25% Mandatorily
Convertible Preferred Stock. The Senior Credit Facility is guaranteed by
substantially all of the Company's active direct and indirect subsidiaries
("Guarantors") and is secured by substantially all of the domestic assets of the
Company and each of the Guarantors.
For further information concerning debt maturities and restrictions and
covenants, see Note F of Notes to Consolidated Financial Statements in Item 8.
DEBT SERVICE AND PREFERRED DIVIDENDS
The Company's funded debt obligations as of December 31, 1999 totaled $418
million. After the repayments in March 2000, discussed above, the Company's
total debt was reduced to approximately $313 million, primarily consisting of
the 9% Senior Subordinated Notes due 2008, Series B ("Senior Subordinated
Notes"). The Senior Subordinated Notes, which were issued in 1998 at an
aggregate principal amount of $300 million, have a ten-year maturity without
sinking fund requirements and are subject to optional redemption by the Company
after five years at declining premiums. The indenture for the Senior
Subordinated Notes contains covenants and restrictions which are customary for
notes of this nature. These covenants and restrictions are less restrictive than
those under the Senior Credit Facility.
The Company has 10,350,000 Premium Income Equity Securities ("PIES")
outstanding, which represent fractional interests in the Company's 7.25%
Mandatorily Convertible Preferred Stock ("Preferred Stock"). Holders of PIES are
entitled to receive a cash dividend. The PIES will automatically convert into
shares of Common Stock on July 1, 2001, at a rate based upon a formula dependent
upon the market price of Common Stock at the time of conversion. Before July 1,
2001, each PIES is convertible, at the option of the holder thereof, into 0.8455
shares of Common Stock, subject to adjustment in certain events.
COMMON STOCK SHARE REPURCHASE PROGRAM
In February 2000, the Company's Board of Directors authorized the
repurchase of up to 3 million shares of Tesoro Common Stock, which represents
approximately 9% of the 32.4 million shares then outstanding. Under the program,
the Company will repurchase Tesoro Common Stock from time to time in the open
market and through privately negotiated transactions. Purchases will depend on
price, market conditions and other factors and will be made primarily from
internally-generated cash flow. The stock may be used to meet employee benefit
plan requirements and other corporate purposes. Under the program, the Company
has repurchased 718,600 shares of Common Stock for approximately $6.8 million
through March 20, 2000.
CAPITAL SPENDING
During 1999, the Company's capital expenditures totaled $141 million ($85
million for continuing operations and $56 million for discontinued operations)
that were funded primarily with internally-generated cash flows. Capital
improvements for the Refining and Marketing segment during 1999 totaled $71
million, which included the installation of a distillate treater at the
Washington refinery, acquisition of a terminal in Alaska, retail gas station
projects and various other refinery and terminal improvements. Other capital
spending for continuing operations during 1999 was primarily related to the
implementation of an integrated enterprise-wide information system and purchase
of the West Coast marine fuel operations. Capital
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<PAGE> 32
expenditures for the discontinued exploration and production operations were
primarily for drilling wells in the U.S. and Bolivia.
For 2000, the Company has initiated two significant capital investment
projects. First, Tesoro's Board of Directors has approved funding for a heavy
oil conversion project at the Washington refinery. Management believes that this
project, which has an estimated total cost of $75 million to $80 million, will
be completed in late 2001. Management expects to spend approximately $28 million
of the total cost in the year 2000. Secondly, the Company has entered into an
agreement with Wal-Mart Stores, Inc. to build and operate retail fueling
facilities on sites at selected existing and future Wal-Mart store locations in
eleven western states. In the initial phase of this program, the Company plans
to build 30 to 40 facilities, each with an estimated cost of approximately
$500,000. On March 2, 2000, the Company accepted the first 14 sites offered by
Wal-Mart. See Note M of Notes to Consolidated Financial Statements in Item 8.
The Company's total capital program for 2000 is $115 million. Tesoro plans
to spend $72 million for projects at its refineries, including $28 million for
the conversion project, $20 million for other economic projects, $13 million for
sustaining capital, $8 million for environmental projects and $3 million for
health and safety projects. Tesoro's retail capital program is planned at $36
million, of which $32 million is for economic projects. The retail capital
program will fund new station construction under the terms of the agreement with
Wal-Mart, improvements to existing company-owned and operated stations at other
sites, expansion of Tesoro's dealer/jobber network, and construction of other
new company-owned and operated sites. Tesoro's retail program will target growth
in the western U.S. The Marine Services segment has a $5 million capital budget,
which includes $2 million of economic capital. Corporate capital expenditures
are planned at $2 million, primarily for upgrades to information systems
software and technology.
Management plans to fund its capital program in 2000 with existing cash and
internally-generated cash flows, which should preserve the Company's financial
condition and permit the Company to pursue other growth opportunities.
MAJOR MAINTENANCE COSTS
In 1999, the Company incurred a total of $22 million in major maintenance
costs and catalyst changes associated with two refinery turnarounds. In May
1999, the Company incurred $9 million at its Alaska refinery. The costs of this
turnaround are being amortized over a 24-month period until the next turnaround
which is projected to occur in 2001. In October 1999, the Company incurred $13
million of turnaround costs at its Washington refinery. The costs of this
turnaround, which included the Washington refinery's crude distillation and
catalytic reformer units, are being amortized over a 48-month period until the
next turnaround of these units which is projected to occur in 2003. Amortization
of turnaround costs, other major maintenance projects and catalysts totaled $27
million in 1999.
For 2000, the Company has scheduled a turnaround, including catalyst
change, for certain units at its Hawaii refinery. The total cost is estimated at
$8 million. Amortization of turnaround costs, other major maintenance costs and
catalysts for 2000 are projected to total $24 million.
CASH FLOW SUMMARY
Components of the Company's cash flows are set forth below (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Cash Flows From (Used In):
Operating Activities.................................... $112.7 $121.8 $ 91.0
Investing Activities.................................... 166.3 (718.6) (151.5)
Financing Activities.................................... (149.2) 606.6 41.5
------ ------ -------
Increase (Decrease) in Cash and Cash Equivalents.......... $129.8 $ 9.8 $ (19.0)
====== ====== =======
</TABLE>
During 1999, net cash from operating activities totaled $113 million, $85
million from continuing operations and $28 million from discontinued operations.
Continuing operations provided cash flows from earnings (discussed in "Results
of Operations" above) before depreciation and amortization and other non-cash
charges partially offset by increased working capital requirements. During 1999,
working capital
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<PAGE> 33
requirements increased due to higher receivables arising in part from higher
commodity prices, partially offset by correlating changes in payables and a
reduction in inventory levels. Net cash from investing activities of $166
million in 1999 was provided by net proceeds of $309 million from the sale of
assets, primarily the exploration and production operations, partially offset by
capital expenditures of $85 million for continuing operations and $56 million
for discontinued operations. Net cash used in financing activities of $149
million in 1999 primarily represented repayments of debt, including $123 million
of Term Loans and other obligations, $61 million of net repayments under the
Revolver, and payments of dividends on Preferred Stock of $15 million. These
uses of cash in financing activities were partially offset by the issuance of
$50 million of Term Loans in January 1999. Gross repayments under the Revolver
amounted to $550 million, while gross borrowings amounted to $489 million.
Working capital totaled $290 million at December 31, 1999, compared to $182
million at year-end 1998. Included in working capital at year-end 1999 were cash
and cash equivalents of $142 million, which included remaining proceeds received
from the sale of discontinued operations that were being held by the Company for
general corporate purposes. Subsequent to year-end 1999, proceeds have been used
to repay debt.
During 1998, net cash from operating activities totaled $122 million, $51
million from continuing operations and $71 million from discontinued operations.
Continuing operations provided cash flows from earnings before depreciation and
amortization and other non-cash charges and from changes in working capital and
other net assets. Cash flows from discontinued operations were due to positive
earnings before depreciation, depletion and amortization and write-downs of oil
and gas properties together with the receipt of $21 million pretax from an
operator, representing contingency funds from an operator that were no longer
needed. Net cash used in investing activities of $719 million in 1998 included
$536 million for acquisitions and $185 million for capital expenditures ($50
million for continuing operations and $135 million for discontinued operations).
Net cash from financing activities of $607 million in 1998 primarily included
net proceeds of $533 million from the issuance of equity and debt securities and
$150 million from Term Loans, partially offset by net repayments of other debt.
Gross borrowings under revolving credit lines and interim credit facility
amounted to $944 million, while repayments totaled $916 million. Payments of
dividends on Preferred Stock totaled $3 million in 1998. At December 31, 1998,
the Company's working capital totaled $182 million, including cash and cash
equivalents of $12 million, compared with working capital of $62 million at
year-end 1997.
During 1997, net cash from operating activities totaled $91 million, $14
million from continuing operations and $77 million from discontinued operations.
Continuing operations provided cash flows from earnings before depreciation and
amortization and other non-cash charges partially offset by working capital and
other requirements. Cash flows from discontinued operations were generated by
positive earnings before depreciation, depletion and amortization. Net cash used
in investing activities of $151 million in 1997 included capital expenditures of
$93 million for discontinued operations, $44 million for refining and marketing
projects and $9 million for upgrades in marine services. Net cash from financing
activities of $41 million in 1997 included net borrowings of $28 million under a
former credit facility and receipt of $16 million under a loan for the
hydrocracker expansion, partially offset by payments of other long-term debt and
repurchases of Common Stock. During 1997, gross borrowings under the Company's
former credit facility were $150 million, with $122 million of repayments.
ENVIRONMENTAL
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which change frequently, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites or install additional controls
or other modifications or changes in use for certain emission sources. The
Company is currently involved in remedial responses and has incurred cleanup
expenditures associated with environmental matters at a number of sites,
including certain of its own properties. At December 31, 1999, the Company's
accruals for environmental expenses amounted to $13.6 million. 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
33
<PAGE> 34
environmental laws and regulations, the Company anticipates that it will make
capital improvements of approximately $8 million in 2000 and $10 million in
2001. The Company is currently evaluating certain proposed revisions to the
Clean Air Act regulations which would require a reduction in the sulfur content
in gasoline fuel manufactured at its refineries. The Company expects that it
will make capital improvements to certain equipment at its Washington refinery
to meet the revised gasoline standard. Additional proposed changes to the Clean
Air Act regulations may include new emission controls at certain processing
units at each of the Company's refineries. The Company anticipates that the
revisions to the Clean Air Act will become effective over the next three to five
years and that, based on known current technology, it could spend approximately
$25 million to $30 million to comply with these proposed revisions.
Conditions that require additional expenditures may exist for various
Company sites, including, but not limited to, the Company's refineries, retail
gasoline stations (operating and closed locations) and petroleum product
terminals, and for compliance with the Clean Air Act and other state and federal
regulations. The amount of such future expenditures cannot currently be
determined by the Company. For further information on environmental
contingencies, see Note M of Notes to Consolidated Financial Statements in Item
8.
YEAR 2000 READINESS DISCLOSURE
The efficient operation of the Company's business is dependent on its
computer hardware, operating systems and software programs (collectively,
"Systems and Programs"). These Systems and Programs are used in several key
areas of the Company's business, including production and distribution,
information management services and financial reporting, as well as in various
administrative functions. The goal of the Company's Year 2000 program was to
prevent any disruption to the Company's business process or its ability to
conduct business resulting from Year 2000 computer issues.
To identify and eliminate potential disruptions, the Company developed a
Year 2000 compliance plan ("Compliance Plan") with respect to those Systems and
Programs that were deemed to be critical to the Company's operations and safety.
The Company utilized both internal and external resources in evaluating its
Systems and Programs, as well as manual processes, external interfaces with
customers and services supplied by vendors, to identify potential Year 2000
compliance problems. The Company identified and replaced a number of Systems and
Programs that were not Year 2000 compliant. Modification or replacement of the
Company's Systems and Programs was performed in-house by Company personnel and
external consultants.
The Company's total cost associated with the Compliance Plan was
approximately $3.8 million, of which approximately $1.0 million was spent in
1998. Of the total cost, $2.2 million was capitalized. The costs of implementing
the integrated enterprise-wide information system are excluded as this system
implementation was undertaken primarily to improve business processes.
As a result of the Company's plans and preparations, the Company did not
experience any significant malfunctions or errors in its Systems and Programs
when the date changed from 1999 to 2000. Based on operations since January 1,
2000, the Company does not expect any significant impact to its ongoing business
as a result of the Year 2000 issue. However, it is possible that the full impact
of the date change has not been fully recognized. The Company believes that any
such problems are likely to be minor and correctable. In addition, the Company
could still be negatively affected if its key suppliers, vendors and customers
are adversely affected by the Year 2000 or similar issues. The Company currently
is not aware of any significant Year 2000 or similar problems that have arisen
for its key suppliers, vendors and customers.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
SFAS No. 133, as amended, is effective for the Company
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<PAGE> 35
on January 1, 2001 and cannot be applied retroactively to financial statements
of prior periods. The Company enters into derivatives activities, on a limited
basis, as part of its programs to provide services for suppliers and customers.
The programs assist the Company in accessing refinery feedstocks at reasonable
costs and to hedge margins on sales to certain customers. Gains or losses on
hedging activities are recognized when the related physical transactions are
recognized as sales or purchases. Transactions, other than hedges, are marked to
market. The Company also engages in limited trading activities through the use
of derivatives. Management believes that any potential adverse impact from these
activities would not result in a material adverse effect on the Company's
financial results or financial position. The Company is evaluating the effects
that this statement will have on its financial condition, results of operations
and financial reporting and disclosures.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain statements that are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements include, among other things,
discussions of estimated future revenue enhancements and cost savings, the
Company's business strategy and expectations concerning the Company's market
position, future operations, margins, profitability, liquidity and capital
resources, expenditures for capital projects and attempts to reduce costs.
Although the Company believes that the assumptions upon which the
forward-looking statements contained in this Form 10-K are based are reasonable,
any of the assumptions could prove to be inaccurate and, as a result, the
forward-looking statements based on those assumptions also could be incorrect.
All phases of the operations of the Company involve risks and uncertainties,
many of which are outside the control of the Company and any one of which, or a
combination of which, could materially affect the results of the Company's
operations and whether the forward-looking statements ultimately prove to be
correct. Actual results and trends in the future may differ materially depending
on a variety of factors including, but not limited to, the timing and extent of
changes in commodity prices and underlying demand and availability of crude oil,
other refinery feedstocks and refined products; changes in the cost or
availability of third-party vessels, pipelines and other means of transporting
feedstocks and products; execution of planned capital projects; results of
management's evaluation of the Company's cost structure, specifically the Alaska
operations; adverse changes in the credit ratings assigned to the Company's
trade credit; 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; adverse rulings,
judgments, or settlements in litigation or other legal matters, including
unexpected environmental remediation costs in excess of any reserves; actions of
customers and competitors; weather conditions affecting the Company's operations
or the areas in which the Company's products are marketed; earthquakes or other
natural disasters affecting operations; political developments in foreign
countries; and the conditions of the capital markets and equity markets during
the periods covered by the forward-looking statements. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the foregoing.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company utilizes various financial instruments and enters into
agreements which inherently have some degree of market risk. The primary sources
of market risk include fluctuations in commodity prices and interest rate
fluctuations.
PRICE FLUCTUATIONS
The Company's refining and marketing earnings and cash flows from
operations are dependent upon the margin above fixed and variable expenses
(including the cost of crude oil feedstocks) at which the Company is able to
sell refined products. In recent years, the prices of crude oil and refined
products have fluctuated substantially. These prices depend on numerous factors
beyond the Company's control, including the demand
35
<PAGE> 36
for crude oil, gasoline and other refined products, which in turn depend on,
among other factors, changes in the economy, the level of foreign and domestic
production of crude oil and refined products, worldwide political conditions,
the availability of imports of crude oil and refined products, the marketing of
alternative and competing fuels and the extent of government regulations. The
prices received by the Company for its refined products are also affected by
local factors such as local market conditions and the level of operations of
other refineries in the Company's markets.
The prices at which the Company can sell its refined products are
influenced by the commodity price of crude oil. Generally, an increase or
decrease in the price of crude oil results in a corresponding increase or
decrease in the price of gasoline and other refined products; however, the
timing of the relative movement of the prices, as well as the overall reduction
in product prices, can reduce profit margins and could have a significant impact
on the Company's refining operations and the earnings and cash flows of the
Company as a whole. In addition, the Company maintains inventories of crude oil,
intermediate products and refined products, the value of each of which is
subject to rapid fluctuation in market prices. At December 31, 1999 and 1998,
the Company's inventories of refinery feedstocks and refined products totaled
8.6 million barrels and 11.1 million barrels, respectively. In addition, crude
oil supply contracts are generally contracts with market-responsive pricing
provisions. The Company purchases its refinery feedstock prior to selling the
refined products manufactured. Price level changes during the period between
purchasing feedstocks and selling the manufactured refined products from such
feedstocks could have a material effect on the Company's financial results. The
Company also purchases refined products manufactured by others. Price level
changes during the periods between purchasing and selling such products could
have a material effect on financial results.
From time to time, the Company enters into derivatives activities, on a
limited basis, as part of its programs to provide services for suppliers and
customers. These programs assist the Company in accessing refinery feedstocks at
reasonable costs and to hedge margins on sales to certain customers. The Company
also engages in limited trading activities through the use of derivatives.
Management believes that any potential adverse impact from these activities
would not result in a material adverse effect on the Company's financial results
or financial position. At December 31, 1999, the Refining and Marketing segment
held the following derivative commodity instruments:
- Crude oil futures contracts to purchase 25,000 barrels in February 2000
at a weighted average price of $25.70 per barrel. The total amount of the
contracts was $0.6 million and the fair value approximated the contract
amount.
- Contingent obligations to purchase 150,000 barrels of crude oil in
February 2000 at a weighted average strike price of $27.17 per barrel
under put options sold by the Company. The amount received for the
options was approximately $0.2 million, and the market value of the
options was an unrealized loss of $0.3 million at year-end 1999. None of
these options, which expired in January 2000, were exercised.
At December 31, 1999, the Marine Services segment held the following
derivative commodity instruments as part of its fuel acquisition program:
- Heating oil futures contracts to purchase 3.4 million gallons from
February through June 2000, at a weighted average price of $0.417 per
gallon. The total contract amount was $1.4 million, and the fair value
was $2.1 million at year-end 1999.
INTEREST RATE RISK
Total debt at December 31, 1999 included $81 million of floating-rate debt
attributed to the Tranche B Term Loan and $337 million of fixed-rate debt.
Although the floating rate debt was repaid in March 2000, the Company will
continue to have exposure to short-term interest rate fluctuations based on
borrowings under its Revolver. See Note F of Notes to Consolidated Financial
Statements in Item 8.
36
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Tesoro Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Tesoro
Petroleum Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related statements of consolidated operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Tesoro Petroleum Corporation
and subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Antonio, Texas
February 7, 2000
(March 13, 2000 as to Note F and
March 2, 2000 as to Note M)
37
<PAGE> 38
TESORO PETROLEUM CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998* 1997*
-------- -------- ------
<S> <C> <C> <C>
REVENUES
Refining and marketing.................................... $2,819.4 $1,268.0 $720.9
Marine services........................................... 180.9 118.6 132.2
-------- -------- ------
Total Revenues....................................... 3,000.3 1,386.6 853.1
-------- -------- ------
OPERATING COSTS AND EXPENSES
Refining and marketing.................................... 2,659.2 1,172.9 687.2
Marine services........................................... 169.6 107.9 124.7
Depreciation, depletion and amortization.................. 40.5 27.5 14.4
-------- -------- ------
Total Operating Costs and Expenses................... 2,869.3 1,308.3 826.3
-------- -------- ------
SEGMENT OPERATING PROFIT.................................... 131.0 78.3 26.8
General and administrative.................................. (34.1) (19.7) (13.6)
Interest and financing costs, net of capitalized interest... (37.6) (25.2) (8.1)
Interest income............................................. 1.2 2.0 1.6
Other expense............................................... (9.3) (23.3) (3.3)
-------- -------- ------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM........................................ 51.2 12.1 3.4
Income tax expense.......................................... 19.0 4.5 1.0
-------- -------- ------
EARNINGS FROM CONTINUING OPERATIONS, NET.................... 32.2 7.6 2.4
Earnings (loss) from discontinued operations, net of income
taxes..................................................... 42.8 (22.6) 28.3
-------- -------- ------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM................... 75.0 (15.0) 30.7
Extraordinary loss on extinguishment of debt (net of income
tax benefit of $2.6)...................................... -- (4.4) --
-------- -------- ------
NET EARNINGS (LOSS)......................................... 75.0 (19.4) 30.7
Preferred dividend requirements............................. 12.0 6.0 --
-------- -------- ------
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK.............. $ 63.0 $ (25.4) $ 30.7
======== ======== ======
EARNINGS PER SHARE FROM CONTINUING OPERATIONS
Basic..................................................... $ 0.62 $ 0.05 $ 0.09
======== ======== ======
Diluted................................................... $ 0.62 $ 0.05 $ 0.09
======== ======== ======
NET EARNINGS (LOSS) PER SHARE
Basic..................................................... $ 1.94 $ (0.86) $ 1.16
======== ======== ======
Diluted................................................... $ 1.92 $ (0.86) $ 1.14
======== ======== ======
WEIGHTED AVERAGE COMMON SHARES -- BASIC..................... 32.4 29.4 26.4
======== ======== ======
WEIGHTED AVERAGE COMMON SHARES AND POTENTIALLY
DILUTIVE COMMON SHARES -- DILUTED......................... 32.8 29.9 26.9
======== ======== ======
</TABLE>
- ---------------
* Amounts for the years ended prior to December 31, 1999 have been restated to
reflect the exploration and production business as discontinued operations.
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE> 39
TESORO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998*
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 141.8 $ 12.0
Receivables, less allowance for doubtful accounts......... 280.7 138.8
Inventories............................................... 182.2 207.7
Prepayments and other..................................... 6.9 11.7
-------- --------
Total Current Assets................................. 611.6 370.2
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Refining and marketing.................................... 904.3 841.0
Marine services........................................... 50.0 50.8
Corporate................................................. 21.8 21.4
-------- --------
976.1 913.2
Less accumulated depreciation and amortization............ 244.5 221.8
-------- --------
Net Property, Plant and Equipment...................... 731.6 691.4
-------- --------
NET ASSETS OF DISCONTINUED OPERATIONS....................... -- 212.7
-------- --------
OTHER ASSETS, NET........................................... 143.3 132.1
-------- --------
Total Assets...................................... $1,486.5 $1,406.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 214.2 $ 112.1
Accrued liabilities....................................... 80.0 63.2
Current maturities of long-term debt and other
obligations............................................ 27.4 12.5
-------- --------
Total Current Liabilities............................ 321.6 187.8
-------- --------
DEFERRED INCOME TAXES....................................... 85.8 69.9
-------- --------
OTHER LIABILITIES........................................... 65.8 58.1
-------- --------
LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS CURRENT
MATURITIES................................................ 390.2 531.4
-------- --------
COMMITMENTS AND CONTINGENCIES (Note M)
STOCKHOLDERS' EQUITY
Preferred stock, no par value; authorized 5,000,000
shares: 7.25% Mandatorily Convertible Preferred Stock,
103,500 shares issued and outstanding.................. 165.0 165.0
Common stock, par value $0.16 2/3; authorized 100,000,000
shares; 32,704,856 shares issued (32,654,138 in
1998).................................................. 5.4 5.4
Additional paid-in capital................................ 279.0 278.6
Retained earnings......................................... 178.6 115.6
Treasury stock, 292,881 common shares (320,022 in 1998),
at cost................................................ (4.9) (5.4)
-------- --------
Total Stockholders' Equity........................... 623.1 559.2
-------- --------
Total Liabilities and Stockholders' Equity........ $1,486.5 $1,406.4
======== ========
</TABLE>
- ---------------
* Amounts for December 31, 1998 have been restated to reflect the exploration
and production business as discontinued operations.
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE> 40
TESORO PETROLEUM CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
--------------- --------------- ADDITIONAL RETAINED ---------------
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL EARNINGS SHARES AMOUNT
------ ------ ------ ------ --------------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1997.......................... -- $ -- 26.4 $4.4 $189.4 $110.3 -- $ --
Net earnings.................. -- -- -- -- -- 30.7 -- --
Shares repurchased............ -- -- -- -- -- -- (0.2) (3.7)
Other......................... -- -- 0.1 -- 1.5 -- -- 0.4
--- ------ ---- ---- ------ ------ ---- -----
BALANCE AT DECEMBER 31, 1997.... -- -- 26.5 4.4 190.9 141.0 (0.2) (3.3)
Net loss...................... -- -- -- -- -- (19.4) -- --
Preferred dividend
requirements............... -- -- -- -- -- (6.0) -- --
Issuance of Common Stock...... -- -- 5.7 0.9 85.8 -- -- --
Issuance of Preferred Stock... 0.1 165.0 -- -- (5.7) -- -- --
Other, primarily related to
shares issued under special
incentive strategy......... -- -- 0.4 0.1 7.6 -- (0.1) (2.1)
--- ------ ---- ---- ------ ------ ---- -----
BALANCE AT DECEMBER 31, 1998.... 0.1 165.0 32.6 5.4 278.6 115.6 (0.3) (5.4)
Net earnings.................. -- -- -- -- -- 75.0 -- --
Preferred dividend
requirements............... -- -- -- -- -- (12.0) -- --
Other......................... -- -- 0.1 -- 0.4 -- -- 0.5
--- ------ ---- ---- ------ ------ ---- -----
BALANCE AT DECEMBER 31, 1999.... 0.1 $165.0 32.7 $5.4 $279.0 $178.6 (0.3) $(4.9)
=== ====== ==== ==== ====== ====== ==== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE> 41
TESORO PETROLEUM CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998* 1997*
---- ----- -----
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Continuing operations --
Earnings from continuing operations before
extraordinary item................................... $ 32.2 $ 7.6 $ 2.4
Adjustments to reconcile earnings from continuing
operations before extraordinary item to net cash from
operating activities:
Depreciation and amortization........................ 42.9 28.6 15.1
Other non-cash items................................. 8.2 10.7 1.5
Changes in operating assets and liabilities:
Receivables....................................... (132.9) (33.1) 42.5
Inventories....................................... 25.5 1.0 (11.5)
Other assets...................................... 1.0 (5.4) (4.9)
Accounts payable and accrued liabilities.......... 89.5 34.8 (30.6)
Deferred income taxes............................. 12.7 9.2 1.0
Other liabilities and obligations................. 5.6 (2.4) (1.3)
------- ------- -------
Total from continuing operations.................. 84.7 51.0 14.2
Discontinued operations................................... 28.0 70.8 76.8
------- ------- -------
Net cash from operating activities................ 112.7 121.8 91.0
------- ------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures --
Continuing operations.................................. (84.7) (50.0) (54.6)
Discontinued operations................................ (56.5) (135.1) (92.9)
Proceeds from sales of assets, including discontinued
operations............................................. 309.4 3.2 0.1
Acquisitions.............................................. -- (536.5) (5.1)
Other..................................................... (1.9) (0.2) 1.0
------- ------- -------
Net cash from (used in) investing activities...... 166.3 (718.6) (151.5)
------- ------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Refinancing and repayments of debt and obligations........ (123.4) (93.3) (4.1)
Repayments under revolving credit and interim facilities,
net of borrowings...................................... (61.2) 27.6 32.7
Borrowings under term loans and other..................... 50.0 150.0 16.2
Payment of dividends on Preferred Stock................... (15.0) (3.0) --
Proceeds from equity offerings, net....................... -- 246.0 --
Proceeds from debt offerings, net......................... -- 286.7 --
Repurchase of Common Stock................................ -- -- (3.7)
Financing costs and other................................. 0.4 (7.4) 0.4
------- ------- -------
Net cash from (used in) financing activities...... (149.2) 606.6 41.5
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 129.8 9.8 (19.0)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 12.0 2.2 21.2
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 141.8 $ 12.0 $ 2.2
======= ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid, net of capitalized interest of $0.6 in
1999, $0.1 in 1998 and $0.4 in 1997.................... $ 58.0 $ 12.0 $ 2.1
======= ======= =======
Income taxes paid......................................... $ 34.4 $ 16.4 $ 22.4
======= ======= =======
</TABLE>
- ---------------
* Amounts for the years ended prior to December 31, 1999 have been restated to
reflect the exploration and production business as discontinued operations.
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE> 42
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of
Tesoro Petroleum Corporation and its subsidiaries (collectively, the "Company"
or "Tesoro"). All significant intercompany accounts and transactions have been
eliminated. Tesoro is an independent refiner and marketer of petroleum products
and provider of marine logistics services.
Use of Estimates and Presentation
Preparation of the Company's Consolidated Financial Statements in
conformity with generally accepted accounting principles requires 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 year. Actual results could differ from those estimates.
Unless otherwise stated, the Notes to Consolidated Financial Statements
exclude discontinued operations (see Note D). Certain reclassifications have
been made to information previously reported to conform to current presentation.
The Company did not have any material amounts which would be reported separately
from net earnings as "other comprehensive income."
Cash and Cash Equivalents
Cash equivalents consist of highly-liquid debt instruments such as
commercial paper and certificates of deposit purchased with an original maturity
date of three months or less. Cash equivalents are stated at cost, which
approximates market value. The Company's policy is to invest cash in
conservative, highly-rated instruments and to invest in various institutions to
limit the amount of credit exposure in any one institution. The Company monitors
the credit standing of these financial institutions.
Financial Instruments
The carrying amounts of financial instruments, including cash and cash
equivalents, receivables, accounts payable and certain accrued liabilities,
approximate fair value because of the short maturity of these instruments. The
carrying amounts of the Company's long-term debt and other obligations
approximate the Company's estimates of the fair value of such items.
Inventories
Inventories are stated at the lower of cost or market. The last-in,
first-out ("LIFO") method is used to determine the cost of the Company's
refining and marketing inventories of crude oil and refined products. The cost
of fuel at the Company's marine services terminals is determined on the
first-in, first-out ("FIFO") method. The carrying value of petroleum inventories
is sensitive to volatile market prices. Merchandise and materials and supplies
are valued at average cost, not in excess of market value. See Note I.
Property, Plant and Equipment
Additions to property, plant and equipment and major improvements and
modifications are capitalized at cost. Depreciation of property, plant and
equipment is generally computed on the straight-line method based upon the
estimated useful life of each asset. The weighted average lives range from 6 to
30 years for refining, marketing and pipeline assets, 14 to 15 years for service
equipment and marine fleets, and three to ten years for corporate and other
assets.
42
<PAGE> 43
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company follows the American Institute of Certified Public Accountants
Statement of Position No. 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use," to determine when to capitalize or
expense costs incurred to develop or obtain internal-use software. Under this
guidance, the Company expenses costs incurred in the preliminary project stage
and, thereafter, capitalizes costs incurred in developing or obtaining internal
use software. Certain costs, such as maintenance and training, are expensed as
incurred.
Environmental Expenditures
Environmental expenditures that extend the life or increase the capacity of
facilities, or expenditures that mitigate or prevent environmental contamination
that is yet to occur, are capitalized. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. Liabilities are recorded when
environmental assessments and/or remedial efforts are probable. Cost estimates
are based on the expected timing and extent of remedial actions required by
applicable governing agencies, experience gained from similar sites on which
environmental assessments or remediation have been completed, and the amount of
the Company's anticipated liability considering the proportional liability and
financial abilities of other responsible parties. Generally, the timing of these
accruals coincides with the completion of a feasibility study or the Company's
commitment to a formal plan of action. Estimated liabilities are not discounted
to present value.
Other Assets
The cost over the fair value of net assets acquired (goodwill) is amortized
by the straight-line method over 28 years for refining and marketing assets and
20 years for marine services assets. At December 31, 1999 and 1998, goodwill
amounted to $67.5 million (net of accumulated amortization of approximately $4.9
million) and $55.6 million (net of accumulated amortization of approximately
$1.7 million), respectively.
Refinery processing units are shut down periodically for major scheduled
maintenance (turnarounds). Certain catalysts are used in refinery process units
for periods exceeding one year. Also, ships, tugs and barges are drydocked for
periodic maintenance. Costs for turnarounds, catalyst and drydock are deferred
and amortized on a straight-line basis over the expected periods of benefit
generally ranging from 24 to 48 months.
Debt issue costs are deferred and amortized using the effective interest
method over the estimated terms of each instrument.
Revenue Recognition
Revenues from product sales are recognized upon delivery to the customer.
Income Taxes
Deferred tax assets and liabilities are recognized for future income tax
consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases. Measurement of
deferred tax assets and liabilities is based on enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes
the enactment date.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
43
<PAGE> 44
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
quoted market price of the Company's Common Stock at the date of grant over the
amount an employee must pay to acquire the stock, except for stock options
granted under the special incentive compensation which became fully vested in
May 1998 (see Note L).
New Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
SFAS No. 133, as amended, is effective for the Company on January 1, 2001 and
cannot be applied retroactively to financial statements of prior periods. The
Company enters into derivatives activities, on a limited basis, as part of its
programs to provide services for suppliers and customers. The programs assist
the Company in accessing refinery feedstocks at reasonable costs and to hedge
margins on sales to certain customers. Gains or losses on hedging activities are
recognized when the related physical transactions are recognized as sales or
purchases. Transactions, other than hedges, are marked to market. The Company
also engages in limited trading activities through the use of derivatives.
Management believes that any potential adverse impact from these activities
would not result in a material adverse effect on the Company's financial results
or financial position. The Company is evaluating the effects that this statement
will have on its financial condition, results of operations and financial
reporting and disclosures.
44
<PAGE> 45
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- EARNINGS PER SHARE
Basic earnings per share are determined by dividing net earnings applicable
to Common Stock by the weighted average number of common shares outstanding
during the period. The Company's calculation of diluted earnings per share takes
into account the effect of potentially dilutive shares, principally stock
options, outstanding during the period. The assumed conversion of Preferred
Stock to 10.35 million shares of Common Stock produced anti-dilutive results in
1999 and 1998 and, in accordance with SFAS No. 128, was not included in the
dilutive calculation. Earnings (loss) per share calculations for the years ended
December 31, 1999, 1998 and 1997 are presented below (in millions except per
share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
----- ------ -----
<S> <C> <C> <C>
BASIC:
Numerator:
Continuing operations before extraordinary item........ $32.2 $ 7.6 $ 2.4
Discontinued operations, aftertax...................... 42.8 (22.6) 28.3
Extraordinary loss on extinguishment of debt,
aftertax............................................. -- (4.4) --
----- ------ -----
Net earnings (loss).................................... 75.0 (19.4) 30.7
Less preferred dividends............................... 12.0 6.0 --
----- ------ -----
Net earnings (loss) applicable to common............... $63.0 $(25.4) $30.7
===== ====== =====
Denominator:
Weighted average common shares outstanding............. 32.4 29.4 26.4
===== ====== =====
Basic earnings (loss) per share:
Continuing operations before extraordinary item........ $0.62 $ 0.05 $0.09
Discontinued operations, aftertax...................... 1.32 (0.76) 1.07
Extraordinary loss, aftertax........................... -- (0.15) --
----- ------ -----
Net.................................................... $1.94 $(0.86) $1.16
===== ====== =====
DILUTED:
Numerator:
Net earnings (loss) applicable to common shares........ $63.0 $(25.4) $30.7
Plus income impact of assumed conversion of Preferred
Stock (only if dilutive)............................. -- -- --
----- ------ -----
Net earnings (loss).................................... $63.0 $(25.4) $30.7
===== ====== =====
Denominator:
Weighted average common shares outstanding............. 32.4 29.4 26.4
Add potentially dilutive securities:
Incremental dilutive shares from assumed conversion
of stock options and other (only if dilutive)..... 0.4 0.5 0.5
Incremental dilutive shares from assumed conversion
of Preferred Stock (only if dilutive)............. -- -- --
----- ------ -----
Total diluted shares................................... 32.8 29.9 26.9
===== ====== =====
Diluted earnings (loss) per share:
Continuing operations before extraordinary item........ $0.62 $ 0.05 $0.09
Discontinued operations, aftertax...................... 1.30 (0.76) 1.05
Extraordinary loss, aftertax........................... -- (0.15) --
----- ------ -----
Net.................................................... $1.92 $(0.86) $1.14
===== ====== =====
</TABLE>
45
<PAGE> 46
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- OPERATING SEGMENTS
The Company's revenues are derived from two operating segments: Refining
and Marketing and Marine Services. Management has identified these segments for
managing operations and investing activities in 1999.
Refining and Marketing
Refining and Marketing operates three petroleum refineries located in
Alaska, Hawaii and Washington which manufacture gasoline and gasoline
blendstocks, jet fuel, diesel fuel, heavy oils and other refined products. These
products, together with products purchased from third parties, are sold at
wholesale through terminal facilities and other locations in Alaska and Hawaii
and on the U.S. West Coast. In addition, Refining and Marketing markets
gasoline, other petroleum products and convenience store items through Company-
operated retail stations in Alaska and Hawaii. Refining and Marketing also
markets petroleum products through branded and unbranded stations located in
Alaska, Hawaii, Washington, Oregon, Idaho, Nevada and northern California and
will occasionally export products to other markets, principally in East Asia.
The Company at times resells previously purchased crude oil, sales of which
amounted to $16.6 million, $29.9 million and $44.4 million in 1999, 1998 and
1997, respectively. See Note E for information related to acquisitions in this
segment during 1998.
Marine Services
The Marine Services segment markets and distributes petroleum products,
water, drilling mud and other supplies and services primarily to the marine and
offshore exploration and production industries operating in the Gulf of Mexico.
This segment operated through terminals along the Texas and Louisiana Gulf Coast
and on the U.S. West Coast in 1999. See Note E for information related to an
acquisition in this segment during 1999.
Other
Segment operating profit includes those revenues and expenses that are
directly attributable to management of the respective segment. For the years
presented, revenues were generated from sales to external customers, and
intersegment revenues were not significant. Income taxes, interest and financing
costs, interest income and corporate general and administrative expenses are not
included in determining segment operating profit. Corporate and unallocated
costs in 1998 included $19.1 million for special incentive compensation, of
which $7.1 million related to the operating segments (see Note L).
EBITDA represents earnings before extraordinary items, interest and
financing costs, income taxes, and depreciation, depletion and amortization.
While not purporting to reflect any measure of the Company's operations or cash
flows, EBITDA is presented for additional analysis. Operating segment EBITDA is
equal to segment operating profit before depreciation and amortization related
to each segment.
Identifiable assets are those assets utilized by the segment. Corporate
assets are principally cash and other assets that are not directly associated
with the operations of a business segment. For the years prior to 1999,
46
<PAGE> 47
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
segment information has been restated to reflect the exploration and production
business as discontinued operations. Segment information for the three years
ended December 31, 1999 is as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
REVENUES
Refining and Marketing:
Refined products................................... $2,739.5 $1,198.2 $643.7
Other, primarily merchandise and crude oil
resales.......................................... 79.9 69.8 77.2
Marine Services....................................... 180.9 118.6 132.2
-------- -------- ------
Total Revenues................................... $3,000.3 $1,386.6 $853.1
======== ======== ======
SUMMARY OF OPERATIONS
Segment Operating Profit:
Refining and Marketing............................. $ 122.4 $ 69.7 $ 20.5
Marine Services.................................... 8.6 8.6 6.3
-------- -------- ------
Total Segment Operating Profit................... 131.0 78.3 26.8
Corporate and Unallocated Costs....................... (79.8) (66.2) (23.4)
-------- -------- ------
Earnings from Continuing Operations Before Income
Taxes
and Extraordinary Item............................. $ 51.2 $ 12.1 $ 3.4
======== ======== ======
EBITDA
Continuing Operations:
Refining and Marketing............................. $ 160.2 $ 94.8 $ 33.2
Marine Services.................................... 11.3 11.0 8.0
-------- -------- ------
Total Segment EBITDA............................. 171.5 105.8 41.2
Corporate and Unallocated............................. (39.8) (39.9) (14.6)
-------- -------- ------
Total Continuing EBITDA.......................... 131.7 65.9 26.6
Depreciation and Amortization from Continuing
Operations......................................... (42.9) (28.6) (15.1)
Interest and Financing Costs.......................... (37.6) (25.2) (8.1)
-------- -------- ------
Earnings from Continuing Operations Before Income
Taxes and Extraordinary Item....................... $ 51.2 $ 12.1 $ 3.4
======== ======== ======
IDENTIFIABLE ASSETS
Refining and Marketing................................ $1,204.2 $1,077.7 $337.4
Marine Services....................................... 85.9 59.2 59.3
Corporate............................................. 196.4 56.8 22.1
Net Assets of Discontinued Operations................. -- 212.7 191.6
-------- -------- ------
Total Assets..................................... $1,486.5 $1,406.4 $610.4
======== ======== ======
DEPRECIATION, DEPLETION AND AMORTIZATION
Continuing Operations:
Refining and Marketing............................. $ 37.8 $ 25.1 $ 12.7
Marine Services.................................... 2.7 2.4 1.7
Corporate.......................................... 2.4 1.1 0.7
-------- -------- ------
Total Continuing Operations...................... 42.9 28.6 15.1
Discontinued Operations............................... 27.3 106.8 31.3
-------- -------- ------
Total Depreciation, Depletion and Amortization... $ 70.2 $ 135.4 $ 46.4
======== ======== ======
</TABLE>
47
<PAGE> 48
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Continuing Operations:
Refining and Marketing(1).......................... $ 71.2 $ 38.0 $ 43.9
Marine Services.................................... 2.7 4.2 9.4
Corporate.......................................... 10.8 7.8 1.3
-------- -------- ------
Total Continuing Operations...................... 84.7 50.0 54.6
Discontinued operations............................... 56.5 135.1 92.9
-------- -------- ------
Total Capital Expenditures....................... $ 141.2 $ 185.1 $147.5
======== ======== ======
</TABLE>
- ---------------
(1) Excluding acquisitions of $536.5 million in 1998.
NOTE D -- DISCONTINUED OPERATIONS
On December 17, 1999, the Company completed the sale of its domestic
exploration and production business to EEX Corporation effective July 1, 1999.
The business sold included Tesoro's four core areas of domestic exploration and
production operations located in Texas and Louisiana and all of Tesoro's acreage
in those areas, together with Tesoro's interests in other miscellaneous
exploration and production properties and gas transportation facilities. The
cash sale prices in the purchase agreements totaled $222 million, which were
adjusted on a preliminary basis for revenues, expenses, capital expenditures,
working capital changes and certain other items after the effective date to
approximately $214.8 million in cash received at closing. Under the terms of the
purchase agreements, these transactions were structured as sales of stock in
subsidiary corporations and membership interests in subsidiary limited liability
companies. The consideration received, which was determined through a
competitive bidding process and negotiations with EEX Corporation, is subject to
post-closing adjustments for operations between July 1, 1999, the effective
date, and December 17, 1999, the closing date, on or before April 15, 2000.
On December 29, 1999, the Company completed the sale of its Bolivian
exploration and production operations to BG International, Ltd., a subsidiary of
BG plc, effective July 1, 1999. The business sold included five shared-risk
contracts with an agency of the Bolivian government to explore for and produce
hydrocarbons on more than one million gross acres in two producing blocks and
three non-producing blocks. The cash sale price in the purchase agreement
totaled $100 million, which was adjusted on a preliminary basis for revenues,
expenses, capital expenditures, working capital changes and certain other items
after the effective date to approximately $100.8 million in cash received at
closing. Under the terms of the purchase agreement, this transaction was
structured as a sale of stock in a subsidiary corporation. The consideration
received, which was determined through a competitive bidding process and
negotiations with BG International, Ltd., is subject to post-closing adjustments
for operations between July 1, 1999, the effective date, and December 29, 1999,
the closing date, on or before May 27, 2000.
The total cash proceeds of $307.5 million, after transaction costs of $8.1
million, were used in December 1999 to reduce term loans outstanding under the
Company's senior credit facility by $97.4 million and prepay certain
liabilities. The remaining cash proceeds, which were held by the Company for
general corporate purposes at December 31, 1999, have been substantially used
subsequent to year-end to repay additional debt (see Note F).
The Company's consolidated financial statements for periods prior to the
sales have been restated to report the net assets, results of operations and
cash flows of the exploration and production business as
48
<PAGE> 49
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discontinued operations. Earnings (loss) from discontinued operations for the
years ended December 31, 1999, 1998 and 1997, were as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
----- ------ -----
<S> <C> <C> <C>
Operating Results from Discontinued Operations:
Revenues.................................................. $65.4 $104.0 $90.4
Costs and expenses........................................ 44.6 123.8 44.5
Allocated interest expense................................ 10.6 7.8 0.2
----- ------ -----
Results of operations, pretax.......................... 10.2 (27.6) 45.7
Income tax expense (benefit).............................. 6.5 (5.0) 17.4
----- ------ -----
Results of operations, aftertax........................ 3.7 (22.6) 28.3
----- ------ -----
Gain from Sales of Discontinued Operations:
Gain, pretax.............................................. 62.2 -- --
Income tax expense........................................ 23.1 -- --
----- ------ -----
Gain, aftertax......................................... 39.1 -- --
----- ------ -----
Total Discontinued Operations..................... $42.8 $(22.6) $28.3
===== ====== =====
</TABLE>
In 1998, revenues from discontinued operations included receipt of $21.3
million from an operator, representing funds that were no longer needed as a
contingency reserve for litigation. Costs and expenses in 1998 included
write-downs of oil and gas properties of $68.3 million. Interest expense on
corporate debt was allocated to discontinued operations based on net assets.
Income tax expense (benefit) on discontinued operations included foreign income
tax expense of $2.7 million, $5.2 million and $4.9 million for 1999, 1998 and
1997, respectively.
Net assets of discontinued operations were composed of the following at
December 31, 1998 (in millions):
<TABLE>
<S> <C>
Current assets.............................................. $ 20.4
Property, plant and equipment, net.......................... 203.2
Other assets................................................ 11.1
Current liabilities......................................... (20.4)
Other liabilities........................................... (1.6)
------
Net Assets........................................ $212.7
======
</TABLE>
NOTE E -- ACQUISITIONS AND EXPANSIONS
Acquisitions of Hawaii Refinery and Washington Refinery
On May 29, 1998, the Company acquired (the "Hawaii Acquisition") all of the
outstanding capital stock of two affiliates of The Broken Hill Proprietary
Company Limited ("BHP"). The Hawaii Acquisition included a 95,000-barrel per day
refinery (the "Hawaii Refinery") and 32 retail gasoline stations in Hawaii.
Tesoro and a BHP affiliate entered into a crude supply agreement pursuant to
which the BHP affiliate will assist Tesoro in acquiring crude oil feedstocks
sourced outside of North America and arrange for the transportation of such
crude oil to the Hawaii Refinery through May 2000. Tesoro paid $252.2 million in
cash for the Hawaii Acquisition, including $77.2 million for working capital. In
addition, Tesoro issued an unsecured, non-interest bearing, promissory note
("BHP Note") for $50 million. The estimated present value of the BHP Note was
recorded as part of the purchase price.
On August 10, 1998, the Company acquired (the "Washington Acquisition" and
together with the Hawaii Acquisition, the "Acquisitions") all of the outstanding
stock of an affiliate of Shell Oil Company
49
<PAGE> 50
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("Shell"). The Washington Acquisition included a 108,000-barrel per day refinery
(the "Washington Refinery") in Anacortes, Washington and related assets. The
total cash purchase price for the Washington Acquisition was $280.1 million,
including $43.1 million for working capital.
The Acquisitions were accounted for as purchases whereby the purchase
prices were allocated to the assets acquired and liabilities assumed based upon
their respective fair market values at the dates of acquisition. Under purchase
accounting, financial results of the Acquisitions have been included in Tesoro's
consolidated financial statements since the dates of acquisition.
See Note F for information related to financing the Acquisitions and Note M
for related environmental matters.
Other Refining and Marketing Expansions
In addition to normal capital improvements in 1999, the Company completed
the installation of a distillate treater at its Washington Refinery in December
which enables the refinery to increase its production of low-sulfur diesel fuel
and jet fuel. The distillate treater installation, together with licensing fees
and supporting infrastructure, cost approximately $13 million.
In August 1999, the Company purchased a refined products terminal in
Anchorage, Alaska for approximately $8 million in cash. This terminal, which is
near the Company's existing terminal in Anchorage, provides the Company with
additional storage and purchasing flexibility.
In October 1997, the Company completed an expansion of its Alaska refinery
hydrocracker unit which enabled the Company to increase its jet fuel production.
The expansion, together with the addition of a new, high-yield jet fuel
hydrocracker catalyst, was completed at a cost of approximately $19 million.
Marine Services
In June 1999, the Company purchased the U.S. West Coast marine fuels
operations of BP Marine, a division of BP Amoco PLC. The purchase, which
included inventory and leased facilities at Port Angeles and Seattle,
Washington, and Portland, Oregon, expanded the Company's presence on the West
Coast.
NOTE F -- CAPITALIZATION
Long-term debt and other obligations at December 31, 1999 and 1998
consisted of the following (in millions):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Credit Facilities:
Revolver.................................................. $ -- $ 61.2
Tranche A Term Loan....................................... -- 50.0
Tranche B Term Loan....................................... 80.9 99.5
9% Senior Subordinated Notes (net of discount of $2.9 in
1999 and $3.1 in 1998)................................. 297.1 296.9
BHP Note (net of discount of $22.4 in 1999 and $31.8 in
1998)..................................................... 24.0 18.2
Liability to Department of Energy........................... 6.6 7.9
Other, primarily capital leases............................. 9.0 10.2
------ ------
417.6 543.9
Less current maturities..................................... 27.4 12.5
------ ------
Long-term debt, less current maturities..................... $390.2 $531.4
====== ======
</TABLE>
50
<PAGE> 51
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, aggregate maturities of outstanding long-term debt
and other obligations, including the BHP Note and Tranche B Term Loan, for each
of the five years following December 31, 1999 were as follows: 2000 -- $27.4
million; 2001 -- $4.7 million; 2002 -- $4.7 million; 2003 -- $2.1 million; and
2004 -- $78.3 million. The Company prepaid the $24.0 million BHP Note on March
1, 2000 and the remaining $80.9 million balance of the Tranche B Term Loan on
March 13, 2000. After giving effect to these prepayments, aggregate maturities
of long-term debt thereafter will be as follows: 2000 -- $2.4 million; 2001
-- $3.7 million; 2002 -- $3.7 million; 2003 -- $1.1 million; and 2004 -- $1.4
million.
Credit Facility
On July 2, 1998, and in connection with the Notes Offering (defined below)
and the Washington Acquisition, the Company entered into a senior credit
facility ("Senior Credit Facility") in the amount of $500 million. The Senior
Credit Facility was comprised of term loan facilities aggregating $200 million
(the "Tranche A Term Loans" and the "Tranche B Term Loan"), and a $300 million
revolving credit and letter of credit facility ("Revolver"). In January 1999,
the final $50 million under the Tranche A Term Loans was borrowed and used to
reduce borrowings under the Revolver. In April 1999, the Company reduced
commitments under the Revolver from $300 million to $175 million, reducing
commitment fees. The Company used a portion of the proceeds from the sale of its
exploration and production operations (see Note D) to prepay all of the
remaining $79.8 million in Tranche A Term Loans and reduce the Tranche B Term
Loan by $17.6 million in December 1999. At year-end, the Company had outstanding
borrowings of $80.9 million under the Tranche B Term Loan and no borrowings
under the Revolver. Subsequent to year-end 1999, the Company concluded that
available cash was not required for other corporate purposes, and on March 13,
2000, the Company prepaid the remaining $80.9 million balance on the Tranche B
Term Loan. Based on current needs, the remaining capacity of $175 million under
the Revolver, together with internally-generated cash flows and existing cash,
is expected to be sufficient to fund capital expenditures and working capital
requirements. Outstanding letters of credit totaled $3.4 million and unused
availability under the Senior Credit Facility was approximately $171.6 million
at December 31, 1999.
The Revolver, which terminates on July 2, 2001, bears interest, at the
Company's election, at either the Base Rate (as defined in the Senior Credit
Facility) plus a margin ranging from 0.00% to 0.625% or the Eurodollar Rate (as
defined in the Senior Credit Facility) plus a margin ranging from 1.125% to
2.125%. At December 31, 1999, the interest rate on borrowings under the Senior
Credit Facility was 9.0%.
The Senior Credit Facility requires the Company to maintain specified
levels of consolidated leverage and interest coverage and contains other
covenants and restrictions customary in credit arrangements of this kind. The
Company was in compliance with these covenants at December 31, 1999. The terms
of the Senior Credit Facility allow for payment of cash dividends on the
Company's Common Stock not to exceed an aggregate of $10 million in any year and
also allow for payment of required dividends on its 7.25% Mandatorily
Convertible Preferred Stock. The Senior Credit Facility is guaranteed by
substantially all of the Company's active direct and indirect subsidiaries
("Guarantors") and is secured by substantially all of the domestic assets of the
Company and each of the Guarantors.
In conjunction with closing the Hawaii Acquisition (see Note E) in May
1998, Tesoro refinanced substantially all of its then-existing indebtedness and
recorded an extraordinary loss on early extinguishment of debt of $7.0 million
pretax ($4.4 million aftertax, or $0.15 per basic and diluted share) for the
refinancing during the second quarter of 1998.
Senior Subordinated Notes
On July 2, 1998, concurrently with the syndication of the Senior Credit
Facility, the Company issued $300 million aggregate principal amount of 9%
senior subordinated notes due 2008 through a private offering ("Notes
Offering"). Each $1,000 principal amount of its unregistered and outstanding
senior subordinated
51
<PAGE> 52
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
notes due 2008 was exchanged for $1,000 principal amount of the Company's
registered 9% Senior Subordinated Notes due 2008, Series B ("Senior Subordinated
Notes") in September 1998. The Senior Subordinated Notes have a ten-year
maturity without sinking fund requirements and are subject to optional
redemption by the Company after five years at declining premiums. The indenture
("Indenture") for the Senior Subordinated Notes contains covenants and
restrictions which are customary for notes of this nature. The restrictions
under the Indenture are less restrictive than those in the Senior Credit
Facility. To the extent the Company's fixed charge coverage ratio, as defined in
the Indenture, allows for the incurrence of additional indebtedness, the Company
will be allowed to pay cash dividends on Common Stock and repurchase shares of
Common Stock. The effective interest rate on the Senior Subordinated Notes is
9.16%, after giving effect to the discount at the date of issue.
Common Stock and Preferred Stock
In May 1998, the Company filed a universal shelf registration statement
("Shelf Registration") for $600 million of debt or equity securities for
acquisitions or general corporate purposes. The Company offered Premium Income
Equity Securities ("PIES") and Common Stock (collectively, the "Equity
Offerings" and together with the Notes Offering, the "Offerings") from the Shelf
Registration to provide partial funding for the Acquisitions discussed in Note
E. In July 1998, the Company issued 10,350,000 PIES, representing fractional
interests in the Company's 7.25% Mandatorily Convertible Preferred Stock
("Preferred Stock"), with gross proceeds of approximately $165 million, and
5,750,000 shares of Common Stock, with gross proceeds of $91.6 million. Holders
of PIES are entitled to receive a cash dividend. The PIES will automatically
convert into shares of Common Stock on July 1, 2001, at a rate based upon a
formula dependent upon the market price of Common Stock. Before July 1, 2001,
each PIES is convertible, at the option of the holder thereof, into 0.8455
shares of Common Stock, subject to adjustment in certain events, such as Common
Stock splits and stock dividends.
In February 2000, the Company's Board of Directors authorized the
repurchase of up to 3 million shares of Tesoro Common Stock, which represents
approximately 9% of the 32.4 million shares then outstanding. Under the program,
the Company will repurchase Tesoro Common Stock from time to time in the open
market and through privately negotiated transactions. Purchases will depend on
price, market conditions and other factors and will be made primarily from
internally-generated cash flow. The stock may be used to meet employee benefit
plan requirements and other corporate purposes. Under a similar program, in 1997
the Company repurchased 236,800 shares of Common Stock for approximately $3.7
million.
For information relating to stock-based compensation and Common Stock
reserved for exercise of options and conversion of Preferred Stock, see Note L.
BHP Note
In connection with the Hawaii Acquisition (Note E), Tesoro issued an
unsecured, non-interest bearing, promissory note ("BHP Note") for the purchase
in the amount of $50 million, payable in five equal annual installments of $10
million each, beginning in 2009. The BHP Note provided for early payments based
on earnings from the Hawaii Acquisition, as specified in the BHP Note. Based on
1998 earnings from the Hawaii Acquisition, an early principal payment of $3.6
million was made on the BHP Note in 1999. The present value of the BHP Note,
discounted at 10% and including the effect of the early principal payment, was
recorded as part of the purchase price of the Hawaii Acquisition. The carrying
value of the note, approximately $24 million at December 31, 1999, approximated
its estimated present value and was paid to BHP on March 1, 2000, in complete
satisfaction of the BHP Note.
52
<PAGE> 53
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Department of Energy
A Consent Order entered into by the Company with the Department of Energy
("DOE") in 1989 settled all issues relating to the Company's compliance with
federal petroleum price and allocation regulations from 1973 through decontrol
in 1981. At December 31, 1999, the Company's remaining obligation is to pay the
DOE $6.6 million, plus interest at 6%, over the next three years.
Capital Leases
Capital leases are primarily for tugs and barges used in transportation of
petroleum products within Hawaii. At December 31, 1999 and 1998, the cost of
capital leases included in fixed assets was $10.4 million gross (accumulated
amortization of $2.0 million) and $9.3 million gross (accumulated amortization
of $0.9 million), respectively. Capital lease obligations included in long-term
debt totaled $8.7 million and $9.8 million at December 31, 1999 and 1998,
respectively.
NOTE G -- INCOME TAXES
The income tax provision (benefit) on continuing operations for the years
ended December 31, 1999, 1998 and 1997 included the following (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Current:
Federal................................................... $ 5.9 $(5.6) $0.3
State and other........................................... 0.4 -- --
Deferred:
Federal................................................... 10.5 10.0 0.7
State and other........................................... 2.2 0.1 --
----- ----- ----
Income Tax Provision................................... $19.0 $ 4.5 $1.0
===== ===== ====
</TABLE>
Deferred income taxes and benefits are provided for differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases. Temporary differences and the resulting deferred tax
liabilities and assets at December 31, 1999 and 1998 are summarized as follows
(in millions):
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
Deferred Federal Tax Liabilities:
Accelerated depreciation and property-related items....... $ 85.9 $76.0
Deferred turnaround costs................................. 12.9 11.8
Deferred charges and other................................ 5.1 --
------ -----
Total Deferred Federal Tax Liabilities................. 103.9 87.8
------ -----
Deferred Federal Tax Assets:
Accrued postretirement benefits........................... 20.0 17.2
Accrued environmental costs............................... 4.8 3.3
Liability to the Department of Energy..................... 2.3 2.8
Other..................................................... 7.6 5.9
------ -----
Total Deferred Federal Tax Assets...................... 34.7 29.2
------ -----
Net Deferred Federal Tax Liability.......................... 69.2 58.6
State Income and Other Taxes................................ 16.6 11.3
------ -----
Net Deferred Tax Liability............................. $ 85.8 $69.9
====== =====
</TABLE>
53
<PAGE> 54
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1999, earnings from discontinued operations increased the net
deferred tax liability by $3.2 million. At year-end 1999, the Company had no
loss or credit carryforwards available for future years.
The following tables set forth earnings from continuing operations (in
millions) and a reconciliation of the normal statutory federal income tax rate
with the Company's effective tax rate (percent):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Earnings from Continuing Operations Before Income Taxes and
Extraordinary Item........................................ $51.2 $12.1 $3.4
===== ===== ====
Statutory U.S. Corporate Tax Rate........................... 35% 35% 35%
Effect of:
State income taxes, net of tax benefit.................... 3 1 1
Other..................................................... (1) 1 (4)
----- ----- ----
Effective Income Tax Rate................................... 37% 37% 32%
===== ===== ====
</TABLE>
NOTE H -- RECEIVABLES
Concentrations of credit risk with respect to accounts receivable are
limited, due to the large number of customers comprising the Company's customer
base and their dispersion across the Company's industry segments and geographic
areas of operations. The Company performs ongoing credit evaluations of its
customers' financial condition and in certain circumstances requires letters of
credit or other collateral arrangements. The Company's allowance for doubtful
accounts is reflected as a reduction of receivables in the Consolidated Balance
Sheets and amounted to $1.7 million and $1.6 million at December 31, 1999 and
1998, respectively.
NOTE I -- INVENTORIES
Components of inventories at December 31, 1999 and 1998 were as follows (in
millions):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Crude oil and refined products, at LIFO..................... $147.8 $182.4
Refined products, at FIFO................................... 9.9 4.1
Merchandise and other....................................... 6.0 6.4
Materials and supplies...................................... 18.5 14.8
------ ------
Total inventories...................................... $182.2 $207.7
====== ======
</TABLE>
At December 31, 1999, inventories valued using LIFO were lower than
replacement cost by approximately $89 million. During 1999, certain inventory
quantities were reduced, resulting in a liquidation of applicable LIFO inventory
quantities carried at lower costs prevailing in previous years. This LIFO
liquidation resulted in a decrease in cost of sales of $8.4 million and an
increase in earnings from continuing operations of approximately $5.3 million
aftertax ($0.16 per share) during 1999.
54
<PAGE> 55
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- ACCRUED LIABILITIES
The Company's current accrued liabilities and noncurrent other liabilities
as shown in the Consolidated Balance Sheets at December 31, 1999 and 1998
included the following (in millions):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Accrued Liabilities -- Current:
Accrued taxes other than income taxes, primarily excise
taxes.................................................. $26.5 $11.6
Accrued employee costs.................................... 23.5 20.7
Accrued environmental costs............................... 11.3 6.9
Accrued interest.......................................... 0.8 16.8
Other..................................................... 17.9 7.2
----- -----
Total Accrued Liabilities -- Current................... $80.0 $63.2
===== =====
Other Liabilities -- Noncurrent:
Accrued postretirement benefits........................... $57.2 $49.1
Accrued environmental costs............................... 2.3 2.4
Other..................................................... 6.3 6.6
----- -----
Total Other Liabilities -- Noncurrent.................. $65.8 $58.1
===== =====
</TABLE>
NOTE K -- BENEFIT PLANS
Pension Benefits and Other Postretirement Benefits
The Company sponsors defined benefit pension plans, including an employee
retirement plan, executive security plans and a non-employee director retirement
plan.
For all eligible employees, the Company provides a qualified
noncontributory retirement plan ("Retirement Plan"). Plan benefits are based on
years of service and compensation. The Company's funding policy is to make
contributions at a minimum in accordance with the requirements of applicable
laws and regulations, but no more than the amount deductible for income tax
purposes. Retirement plan assets are primarily comprised of common stock and
bond funds.
The Company's executive security plans ("ESP Plans") provide executive
officers and other key personnel with supplemental death or retirement plans.
Such benefits are provided by two nonqualified, noncontributory plans and are
based on years of service and compensation. The Company makes contributions to
one plan based upon estimated requirements. Assets of the funded plan consist of
a group annuity contract.
The Company had previously established an unfunded non-employee director
retirement plan ("Director Retirement Plan") which provided eligible directors
retirement payments upon meeting certain age or other requirements. However, in
March 1997, the Board of Directors elected to freeze the Director Retirement
Plan and transfer accrued benefits of current directors to the Tesoro Petroleum
Corporation Board of Directors Phantom Stock Plan (see Note L). After the
amendment and transfer, only those retired directors or beneficiaries who had
begun to receive benefits remained participants in the Director Retirement Plan.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," requires the Company to disclose the aggregate
projected benefit obligations, accumulated benefit obligations and fair value of
plan assets for pension plans with accumulated benefit obligations in excess of
plan assets. At December 31, 1999, the projected benefit obligation and
accumulated benefit obligation aggregated for the unfunded ESP plan and the
Director Retirement Plan were $2.4 million and $1.5 million, respectively. At
December 31, 1998, the projected benefit obligation and accumulated benefit
obligation aggregated for these two plans were $3.7 million and $1.7 million,
respectively. In addition, at December 31, 1998, the Retirement Plan's
accumulated benefit obligation exceeded plan assets. The Retirement Plan's
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets were $82.0 million, $64.5 million and $59.1 million, respectively,
at December 31, 1998. The assets of the Retirement Plan exceeded its accumulated
benefit obligation at December 31, 1999.
55
<PAGE> 56
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company provides health care and life insurance benefits to retirees
who were participating in the Company's group insurance program at retirement.
Health care is provided to qualified dependents of participating retirees. These
benefits are provided through unfunded, defined benefit plans or through
contracts with area health-providers on a premium basis. The health care plans
are contributory, with retiree contributions adjusted periodically, and contain
other cost-sharing features such as deductibles and coinsurance. The life
insurance plan is noncontributory. The Company funds its share of the cost of
postretirement health care and life insurance benefits on a pay-as-you go basis.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care and life insurance plans. A
one-percentage-point change in assumed health care cost trend rates could have
the following effects (in millions):
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost components... $0.9 $(0.7)
Effect on postretirement benefit obligations.............. $5.2 $(4.3)
</TABLE>
Financial information related to the Company's pension plans and other
postretirement benefits is presented below (in millions except percentages):
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- ---------------
1999 1998 1999 1998
------- ------- ------ ------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year......... $ 94.6 $ 61.8 $ 41.6 $ 27.1
Service cost.................................... 6.6 4.2 1.9 1.2
Interest cost................................... 6.2 4.9 2.8 2.2
Actuarial (gain) loss........................... (6.5) 20.3 (7.7) 5.0
Benefits paid................................... (5.6) (5.8) (1.2) (1.3)
Acquisitions (see Note E)....................... -- 9.1 -- 7.4
Curtailments, special termination benefits and
other........................................ (0.9) 0.1 0.7 --
------ ------ ------ ------
Benefit obligation at end of year............ 94.4 94.6 38.1 41.6
------ ------ ------ ------
Change in plan assets:
Fair value of plan assets at beginning of
year......................................... 69.1 58.7 -- --
Actual return on plan assets.................... 10.7 8.4 -- --
Employer contributions.......................... 5.7 8.4 -- --
Administrative expenses......................... (0.8) (0.6) -- --
Benefits paid................................... (5.5) (5.8) -- --
------ ------ ------ ------
Fair value of plan assets at end of year..... 79.2 69.1 -- --
------ ------ ------ ------
Benefit obligations in excess of plan assets...... (15.2) (25.5) (38.1) (41.6)
Unrecognized prior service cost................... 0.5 0.6 0.7 --
Unrecognized net transition asset................. 0.2 (0.5) -- --
Unrecognized net actuarial (gain) loss............ 10.5 23.9 (6.8) 2.2
------ ------ ------ ------
Accrued benefit cost......................... $ (4.0) $ (1.5) $(44.2) $(39.4)
====== ====== ====== ======
Amounts recognized in consolidated balance sheets:
Accrued liabilities............................. $(13.0) $ (9.7) $(44.2) $(39.4)
Prepaid benefit cost............................ 9.0 8.2 -- --
------ ------ ------ ------
Net amount recognized........................ $ (4.0) $ (1.5) $(44.2) $(39.4)
====== ====== ====== ======
</TABLE>
56
<PAGE> 57
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------------ ------------------------
1999 1998 1997 1999 1998 1997
------------ ------------ ------------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Weighted average assumptions as
of December 31(%):
Discount rate................ 8.25 6.75 7.50 8.25 6.75 7.50
Rate of compensation
increase.................. 5.00 to 5.75 4.25 to 5.00 5.00 5.75 4.25 5.00
Expected return on plan
assets.................... 7.00 to 8.50 7.00 to 8.50 7.00 to 8.50 -- -- --
</TABLE>
For measurement purposes, the weighted average annual assumed rate of
increase in the per capita cost of covered health care benefits was assumed to
be 7.3% for 1999, decreasing gradually to 5% by the year 2010 and remaining
level thereafter.
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------- ------------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost.............................. $ 6.6 $ 4.2 $ 2.0 $1.9 $1.2 $0.8
Interest cost............................. 6.2 4.9 4.1 2.8 2.2 1.9
Expected return on plan assets............ (5.0) (4.2) (3.9) -- -- --
Amortization of unrecognized transition
asset.................................. (0.6) (1.1) (1.1) -- -- --
Recognized net actuarial loss............. 1.5 1.0 0.9 -- -- --
Curtailments, settlements and special
termination benefits................... (0.4) 0.5 1.1 -- -- --
----- ----- ----- ---- ---- ----
Net periodic benefit cost............ $ 8.3 $ 5.3 $ 3.1 $4.7 $3.4 $2.7
===== ===== ===== ==== ==== ====
</TABLE>
Thrift Plan
The Company sponsors an employee thrift plan ("Thrift Plan") which provides
for contributions, subject to certain limitations, by eligible employees into
designated investment funds with a matching contribution by the Company.
Employees may elect tax deferred treatment in accordance with the provisions of
Section 401(k) of the Internal Revenue Code. Effective September 1, 1998, the
Thrift Plan was amended to change the Company's 100% matching contribution, from
a maximum of 4% to 6% of the employee's eligible contribution, with at least 50%
of the Company's matching contribution invested in Common Stock of the Company.
In addition, the maximum employee contribution changed from 10% to 15%. The
Company's contributions amounted to $6.8 million, $1.7 million and $1.2 million
during 1999, 1998 and 1997, respectively.
NOTE L -- STOCK-BASED COMPENSATION
Incentive Stock Plans
The Company has three employee incentive stock plans, the Key Employee
Stock Option Plan ("1999 Plan"), the Amended and Restated Executive Long-Term
Incentive Plan ("1993 Plan") and Amended Incentive Stock Plan of 1982 ("1982
Plan"). In addition, the Company has the 1995 Non-Employee Director Stock Option
Plan ("1995 Plan").
In November 1999, the Company's Board of Directors approved the 1999 Plan
which provides for the granting of stock options to eligible persons employed by
the Company who are not executive officers of the Company. Under the 1999 Plan,
the total number of stock options which may be granted is 200,000 shares, of
which 98,000 shares were granted in 1999. Stock options may be granted at not
less than the fair market value on the date the options are granted and
generally become exercisable after one year in 25% increments. The options
expire after ten years from the date of grant. The Board of Directors may amend,
terminate or suspend
57
<PAGE> 58
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the 1999 Plan at any time. At December 31, 1999, the Company had 102,000 shares
available for future grants under the 1999 Plan.
Under the 1993 Plan, shares of Common Stock may be granted in a variety of
forms, including restricted stock, incentive stock options, nonqualified stock
options, stock appreciation rights and performance share and performance unit
awards. In 1998, the aggregate number of shares of Common Stock which can be
granted under the 1993 Plan was increased from 2,650,000 to 4,250,000. Stock
options may be granted at exercise prices not less than the fair market value on
the date the options are granted. The options granted generally become
exercisable after one year in 20%, 25% or 33% increments per year and expire ten
years from the date of grant. The 1993 Plan will expire, unless earlier
terminated, as to the issuance of awards in the year 2003. At December 31, 1999,
the Company had 153,553 shares available for future grants under the 1993 Plan.
The 1982 Plan expired in 1994 as to issuance of stock appreciation rights,
stock options and stock awards; however, grants made before the expiration date,
that have not been fully exercised, remain outstanding pursuant to their terms.
The 1995 Plan provides for the grant of up to an aggregate of 150,000
nonqualified stock options to eligible non-employee directors of the Company.
These automatic, non-discretionary stock options are granted at an exercise
price equal to the fair market value per share of the Company's Common Stock as
of the date of grant. The term of each option is ten years, and an option first
becomes exercisable six months after the date of grant. The 1995 Plan will
terminate as to issuance of stock options in February 2005. At December 31,
1999, the Company had 65,000 options outstanding and 62,000 shares available for
future grants under the 1995 Plan.
A summary of stock option activity for all plans is set forth below (shares
in thousands):
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Outstanding January 1, 1997............................... 1,856.7 $11.05
Granted................................................. 431.0 16.73
Exercised............................................... (43.8) 8.45
Forfeited and expired................................... (36.0) 8.40
-------
Outstanding December 31, 1997............................. 2,207.9 12.26
Granted................................................. 801.2 15.94
Exercised............................................... (34.1) 10.42
Forfeited and expired................................... (23.4) 12.16
-------
Outstanding December 31, 1998............................. 2,951.6 13.28
Granted................................................. 940.0 12.85
Exercised............................................... (42.5) 10.86
Forfeited and expired................................... (95.7) 14.63
-------
Outstanding December 31, 1999............................. 3,753.4 13.17
=======
</TABLE>
At December 31, 1999, 1998 and 1997, exercisable stock options totaled 2.0
million, 1.4 million and 0.7 million, respectively.
58
<PAGE> 59
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
under all plans at December 31, 1999 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.92 to $ 7.59 175.7 3.2 years $ 4.50 175.7 $ 4.50
$ 7.60 to $11.27 510.7 5.5 years 8.63 454.3 8.69
$11.28 to $14.95 1,902.8 8.2 years 13.26 950.8 13.66
$14.96 to $18.63 1,164.2 8.5 years 16.32 443.8 16.45
------- -------
$ 3.92 to $18.63 3,753.4 7.7 years 13.17 2,024.6 12.36
======= =======
</TABLE>
Phantom Stock Agreement and Phantom Stock Plan
In 1997, the Compensation Committee of the Board of Directors granted
175,000 phantom stock options to an executive officer of the Company at 100% of
the fair market value of the Company's Common Stock on the grant date, or
$16.9844 per share. These phantom stock options vest in 15% increments in each
of the first three years and the remaining 55% increment vests in the fourth
year. At December 31, 1999, 52,500 of these phantom stock options were
exercisable. Upon exercise, the executive officer would be entitled to receive
in cash the difference between the fair market value of the Common Stock on the
date of the phantom stock option grant and the fair market value of Common Stock
on the date of exercise. At the discretion of the Compensation Committee, these
phantom stock options may be converted to traditional stock options under the
1993 Plan.
To more closely align director compensation with shareholders' interests,
in March 1997, the lump-sum accrued benefit of each of the current non-employee
directors was transferred from the Director Retirement Plan (see Note K) into an
account ("Account") in the Company's Board of Directors Deferred Phantom Stock
Plan ("Phantom Stock Plan"). Under the Phantom Stock Plan, a yearly credit of
$7,250 (prorated to $6,042 for 1997) is made to the Account of each director in
units, based upon the closing market price of the Company's Common Stock on the
date of credit. In addition, a director may elect to have the value of his cash
retainer fee deposited quarterly into the Account in units. The value of each
Account balance, which is a function of the amount, if any, by which the market
value of the Company's Common stock changes, is payable in cash at termination,
if vested, with three years of service, or at retirement, death or disability.
In 1999 and 1997, the Company recorded expense of approximately $44,000 and
$127,000, respectively, related to phantom stock. In 1998, the Company credited
expense for approximately $110,000 related to phantom stock due to the net
depreciation in the market price of the Company's Common Stock.
Incentive Compensation
In October 1998, the Company's Board of Directors unanimously approved the
1998 Performance Incentive Compensation Plan ("1998 Performance Plan"), which is
intended to advance the best interests of the Company and its stockholders by
directly targeting Company performance to align with the ninetieth percentile
historical stock-price growth rate for the Company's peer group. In addition,
the 1998 Performance Plan will provide the Company's employees with additional
compensation, contingent upon achievement of the targeted objectives, thereby
encouraging them to continue in the employ of the Company. Under the 1998
Performance Plan, targeted objectives are comprised of the fair market value of
the Company's Common Stock equaling or exceeding an average of $35 per share
("First Performance Target") and $45 per share ("Second Performance Target") on
any 20 consecutive trading days during a period commencing on October 1, 1998
and ending on the earlier of September 30, 2002, or the date on which the Second
Performance Target is achieved ("Performance Period"). The 1998 Performance Plan
has several tiers of
59
<PAGE> 60
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
awards, with the award generally determined by job level. Most eligible
employees have contingent cash bonus opportunities of 25% of their annual "basic
compensation" (as defined in the 1998 Performance Plan) and three executive
officers have contingent awards totaling 655,000 shares of phantom stock which
will be payable solely in cash. Upon achievement of the First Performance
Target, one-fourth of the contingent award will be earned, with payout deferred
until the end of the Performance Period. The remaining 75% will be earned only
upon achievement of the Second Performance Target, with payout occurring 30 days
thereafter. Employees will need to have at least one year of regular, full-time
service at the time the Performance Period ends in order to be eligible for a
payment. No costs will be recorded until the First Performance Target is
reached. The Company estimates that it will incur costs of approximately 2% of
the total aggregate increase in shareholder value if the First Performance
Target is reached and will incur an additional 4% charge if the Second
Performance Target is reached.
In May 1998, under a previous special incentive compensation strategy, the
Company incurred a pretax charge of approximately $19.1 million, of which $7.1
million related to operating segments, when the market price of the Company's
Common Stock achieved a specific performance target. Of this charge,
approximately $10 million related to noncash vesting of restricted stock awards
and stock options and $9 million related to cash bonuses.
Pro Forma Information
The Company applies APB No. 25 and related interpretations in accounting
for its stock-based compensation. Had compensation cost been determined based on
the fair value at the grant dates for awards in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's pro forma results in
1999, 1998 and 1997 would have been net earnings of $71.4 million ($1.83 per
basic share, $1.81 per diluted share), a net loss of approximately $22.3 million
($0.96 per basic and diluted share) and net earnings of $28.5 million ($1.08 per
basic share, $1.06 per diluted share), respectively. The fair value of each
option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: expected
volatility of 48%, 49% and 32%; risk free interest rates of 6.1%, 4.7% and 6.7%;
expected lives of seven years; and no dividend yields for 1999, 1998 and 1997,
respectively. The estimated average fair value per share of options granted
during 1999, 1998 and 1997 were $7.48, $7.85 and $5.96, respectively. The fair
value of phantom stock awards in 1998 was $0.82 per share.
Shares Reserved
Shares of unissued Common Stock reserved for the employee incentive stock
plans and non-employee director plan totaled 4,079,952 at December 31, 1999. In
addition, at December 31, 1999, 8,750,925 shares of unissued Common Stock were
reserved for the conversion of Preferred Stock (see Note F).
NOTE M -- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has various noncancellable operating leases related to
buildings, equipment, property and other facilities. These long-term leases have
remaining primary terms generally up to ten years, with terms of certain
rights-of-way extending up to 31 years, and generally contain multiple renewal
options. Future
60
<PAGE> 61
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum annual lease payments as of December 31, 1999, for operating leases
having initial or remaining noncancelable lease terms in excess of one year,
excluding marine charters, were as follows (in millions):
<TABLE>
<S> <C>
2000........................................................ $ 15.9
2001........................................................ 14.8
2002........................................................ 13.5
2003........................................................ 13.4
2004........................................................ 13.2
Remainder................................................... 141.8
------
Total Minimum Lease Payments.............................. $212.6
======
</TABLE>
In addition to the long-term lease commitments above, the Company charters
two double-bottomed vessels, the Chesapeake Trader and the Potomac Trader, to
transport crude oil and refined products. The Chesapeake Trader and the Potomac
Trader are chartered under five-year agreements expiring in May 2000 and
September 2000, respectively. At December 31, 1999, future minimum lease
payments remaining for these two vessels totaled approximately $17 million
through their term expirations in 2000. The Company also enters into various
month-to-month and other short-term rentals of vessels to transport refined
products from the Company's refineries to markets. Total marine charter expense
was $37 million in 1999 and $34 million in each of 1998 and 1997. During 1999,
the Company received $4.5 million in revenues from the sub-charter of vessels to
third parties.
In 1999, the Company entered into a charter for a double-hull tanker to be
used for transporting crude oil and refined products which will replace the
Chesapeake Trader. Under the terms of the new charter, Tesoro will receive one
of the new Lightship Class tankers. The new charter, which has a three-year
primary term beginning in May 2000 and two one-year options, will require
minimum annual lease payments of approximately $10 million, saving the Company
approximately $6 million annually. At December 31, 1999, total future minimum
annual payments (which include operating costs) for long-term marine charters
totaled $23 million in 2000, $10 million in 2001, $10 million in 2002 and $3
million in 2003, reflecting the replacement of the Chesapeake Trader in May 2000
and the term expiration of the Potomac Trader in September 2000. The Company
also leases tugs and barges for its Hawaii operations under capital leases (see
Note F) whereby the Company pays operating costs, such as personnel, repairs,
maintenance and drydocking costs, estimated to total $8 million in 2000.
Total rental expense for short-term and long-term leases, excluding marine
charters, amounted to approximately $27 million, $20 million and $11 million for
1999, 1998 and 1997, respectively.
In January 2000, the Company entered into an agreement with Wal-Mart
Stores, Inc., in which Wal-Mart has agreed to offer no less than 40 sites at
Wal-Mart stores in eleven states in the western U.S. at which the Company can
build and operate retail gasoline stations. Under the agreement, each site will
be subject to a lease with a ten-year primary term and an option, exercisable at
the Company's discretion, to extend a site for two additional terms of five
years each. On March 2, 2000, the Company accepted the first 14 sites offered by
Wal-Mart. The minimum annual lease commitments for these 14 sites is
approximately $0.3 million, and the total commitment is approximately $3 million
over the initial ten-year term.
Other Commitments
Under an agreement with the State of Alaska reached in June 1998, the State
released the Company from all payment obligations and all mortgages, liens and
security interests in connection with a 1993 agreement settling a contract
dispute with the State. The Company is obligated to pay the State of Alaska a
throughput charge of $0.32 per barrel in 2000 and $0.33 per barrel in 2001 with
respect to barrels of feedstock
61
<PAGE> 62
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
processed at the Alaska refinery which exceed 50,000 barrels per day on a
monthly basis, subject to available credits (as defined in the agreement). No
payments were required in 1999.
Environmental and Other
The Company is a party to various litigation and contingent loss
situations, including environmental matters, arising in the ordinary course of
business. The Company has made accruals in accordance with SFAS No. 5,
"Accounting for Contingencies," in order to provide for these matters. The
ultimate effects of these matters cannot be predicted with certainty, and
related accruals are based on management's best estimates, subject to future
developments. Although the resolution of certain of these matters could have a
material adverse impact on interim or annual results of operations, the Company
believes that the outcome of these matters will not result in a material adverse
effect on its liquidity or consolidated financial position.
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 the Environmental Protection Agency
("EPA") regarding a waste disposal site near Abbeville, Louisiana. The Company
has been named a potentially responsible party ("PRP") under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"
or "Superfund") at this location. Although the Superfund law might impose joint
and several liability upon each party at the site, the extent of the Company's
allocated financial contribution for cleanup is expected to be de minimis based
upon the number of companies, volumes of waste involved and total estimated
costs to close the site. The Company believes, based on these considerations and
discussions with the EPA, that its liability at the Abbeville site will not
exceed $25,000.
In connection with the Hawaii Acquisition discussed in Note E, affiliates
of BHP and the Company executed a separate environmental agreement, whereby the
BHP affiliates indemnified the Company for environmental costs arising out of
conditions which existed at or prior to closing. This indemnification, which is
in effect until 2008, is subject to a maximum limit of $9.5 million ($8.2
million remaining as of December 31, 1999). Under the environmental agreement,
the first $5.0 million of these liabilities will be the responsibility of the
BHP affiliates and the next $6.0 million will be shared on the basis of 75% by
the BHP affiliates and 25% by the Company. Certain environmental claims arising
out of prior operations will not be subject to the $9.5 million limit or the
ten-year time limit. The indemnity obligation of the BHP affiliates are
guaranteed by BHP.
Under the agreement related to the Washington Acquisition discussed in Note
E, an affiliate of Shell generally 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 and identified by the Company
prior to August 1, 2001. The Company is responsible for environmental costs up
to the first $0.5 million each year, after which the Shell affiliate will be
responsible for annual environmental costs up to $1.0 million. Annual costs
greater than $1.0 million will be shared equally between the Company and the
Shell affiliate, subject to an aggregate maximum of $5.0 million and a ten-year
term. The indemnity obligation of Shell's affiliate is guaranteed by Shell.
The Company is also involved in remedial responses and has incurred cleanup
expenditures associated with environmental matters at a number of sites,
including certain of its own properties. At December 31, 1999, the Company's
accruals for environmental expenses totaled $13.6 million. Based on currently
available information, including the participation of other parties or former
owners in remediation actions, the Company believes these accruals are adequate.
62
<PAGE> 63
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
To comply with environmental laws and regulations, the Company anticipates
that it will make capital improvements of approximately $8 million in 2000 and
$10 million in 2001. The Company is currently evaluating certain proposed
revisions to the Clean Air Act regulations which would require a reduction in
the sulfur content in gasoline fuel manufactured at its refineries. The Company
expects that it will make capital improvements to certain equipment at its
Washington Refinery to meet the revised gasoline standard. Additional proposed
changes to the Clean Air Act regulations may include new emission controls at
certain processing units at each of the Company's refineries. The Company
anticipates that the revisions to the Clean Air Act will become effective over
the next three to five years and that, based on known current technology, it
could spend approximately $25 million to $30 million to comply with these
proposed revisions.
Conditions that require additional expenditures may exist for various
Company sites, including, but not limited to, the Company's refineries, retail
gasoline stations (operating and closed locations) and petroleum product
terminals, and for compliance with the Clean Air Act and other state and federal
regulations. The amount of such future expenditures cannot currently be
determined by the Company.
On October 1, 1998, the Attorney General for the State of Hawaii filed a
lawsuit in the U.S. District Court for the District of Hawaii ("Court") against
thirteen oil companies, including Tesoro Petroleum Corporation and Tesoro Hawaii
Corporation, alleging anti-competitive marketing practices in violation of
federal and state anti-trust laws, and seeking injunctive relief and
compensatory and treble damages and civil penalties against all defendants in an
amount in excess of $500 million. On March 25, 1999, the Attorney General filed
an amended complaint with the U.S. District Court seeking damages against all
defendants for such alleged anti-competitive marketing practices in an amount in
excess of $1.5 billion. On January 28, 2000, the U.S. District Court for the
District of Hawaii approved a Settlement Agreement and Mutual Release
("Settlement Agreement") reached between Tesoro Hawaii Corporation, the Company,
BHP Hawaii Inc. and BHP Petroleum Americas Refining Inc. (the "Settling
Defendants") and the State of Hawaii which dismissed the Settling Defendants
from the lawsuit. Pursuant to the Settlement Agreement, the Company and Tesoro
Hawaii Corporation, without admitting any liability for claims alleged in the
lawsuit, paid $3 million (which was provided for in the third quarter of 1999)
on March 1, 2000 to the Court in complete settlement of the lawsuit.
63
<PAGE> 64
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS
--------------------------------- TOTAL
FIRST SECOND THIRD FOURTH YEAR
------ ------ ------ ------ --------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1999
Revenues:
As originally stated........................ $508.6 $754.1 $913.0 $874.6 $3,000.3
Reclassification of discontinued
operations................................ (15.2) (15.3) (19.5) * *
------ ------ ------ ------ --------
As restated................................. $493.4 $738.8 $893.5 $874.6 $3,000.3
====== ====== ====== ====== ========
Segment Operating Profit (Loss):
As originally stated........................ $ 21.6 $ 72.0 $ 67.5 $(15.5) $ 131.0
Reclassification of discontinued
operations................................ (3.7) (3.2) (7.7) * *
------ ------ ------ ------ --------
As restated................................. $ 17.9 $ 68.8 $ 59.8 $(15.5) $ 131.0
====== ====== ====== ====== ========
Earnings (Loss) From Continuing Operations,
Net......................................... $ 0.2 $ 32.6 $ 23.0 $(23.6) $ 32.2
Earnings (Loss) From Discontinued Operations,
Net......................................... 0.1 (0.1) 2.3 40.5 42.8
------ ------ ------ ------ --------
Net Earnings................................... $ 0.3 $ 32.5 $ 25.3 $ 16.9 $ 75.0
====== ====== ====== ====== ========
Continuing Earnings (Loss) Per Share
Basic....................................... $(0.09) $ 0.92 $ 0.62 $(0.82) $ 0.62
Diluted..................................... $(0.09) $ 0.76 $ 0.53 $(0.82) $ 0.62
Net Earnings (Loss) Per Share
Basic....................................... $(0.08) $ 0.91 $ 0.69 $ 0.43 $ 1.94
Diluted..................................... $(0.08) $ 0.76 $ 0.58 $ 0.43 $ 1.92
1998
Revenues:
As originally stated........................ $196.0 $278.9 $472.7 $542.7 $1,490.3
Reclassification of discontinued
operations................................ (23.0) (42.2) (19.5) (19.0) (103.7)
------ ------ ------ ------ --------
As restated................................. $173.0 $236.7 $453.2 $523.7 $1,386.6
====== ====== ====== ====== ========
Segment Operating Profit (Loss):
As originally stated........................ $ 17.9 $ 50.8 $ 28.6 $(38.0) $ 59.3
Reclassification of discontinued
operations................................ (9.6) (29.2) (6.4) 64.2 19.0
------ ------ ------ ------ --------
As restated................................. $ 8.3 $ 21.6 $ 22.2 $ 26.2 $ 78.3
====== ====== ====== ====== ========
Earnings (Loss) From Continuing Operations,
Net......................................... $ 1.3 $ (4.9) $ 6.9 $ 4.3 $ 7.6
Earnings (Loss) From Discontinued Operations,
Net......................................... 4.8 15.7 0.9 (44.0) (22.6)
Extraordinary Loss on Debt Extinguishment,
Net......................................... -- (4.6) -- 0.2 (4.4)
------ ------ ------ ------ --------
Net Earnings (Loss)............................ $ 6.1 $ 6.2 $ 7.8 $(39.5) $ (19.4)
====== ====== ====== ====== ========
Continuing Earnings (Loss) Per Share
Basic....................................... $ 0.05 $(0.18) $ 0.12 $ 0.04 $ 0.05
Diluted..................................... $ 0.05 $(0.18) $ 0.12 $ 0.04 $ 0.05
Net Earnings (Loss) Per Share
Basic....................................... $ 0.23 $ 0.23 $ 0.15 $(1.32) $ (0.86)
Diluted..................................... $ 0.23 $ 0.23 $ 0.15 $(1.32) $ (0.86)
</TABLE>
- ---------------
* Periods prior to the fourth quarter of 1999 have been restated to reflect the
exploration and production business as discontinued operations.
In the 1999 third quarter, the Company accrued a liability of $3.0 million
pretax related to a litigation settlement with the State of Hawaii (Note M). A
liquidation of LIFO inventory quantities resulted in a
64
<PAGE> 65
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
decrease in cost of sales of $8.4 million and an increase in net earnings from
continuing operations of approximately $5.3 million ($0.16 per share) during the
fourth quarter of 1999 (Note I). Also in the fourth quarter of 1999, the Company
recorded an aftertax gain of $39.1 million in discontinued operations for the
sale of its exploration and production business (Note D).
The 1998 second quarter included a pretax charge of $19.1 million for
special incentive compensation (Note L). In addition, an aftertax extraordinary
loss of $4.6 million was recorded in the 1998 second quarter for the early
extinguishment of debt (Note F). Results from discontinued operations included
aftertax income from receipt of contingency funds of $13.4 million in the 1998
second quarter and aftertax write-downs of oil and gas properties of $43.2
million in the 1998 fourth quarter (Note D).
Earnings per share in the four quarters of 1999 and the 1998 third and
fourth quarters were reduced by the effects of dividends on Preferred Stock
issued in July 1998 (Note F).
65
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this Item will be contained in the Company's
2000 Proxy Statement, incorporated herein by reference. See also Executive
Officers of the Registrant under Business in Item 1 hereof.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the Company's
2000 Proxy Statement, incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item will be contained in the Company's
2000 Proxy Statement, incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item will be contained in the Company's
2000 Proxy Statement, incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements of Tesoro Petroleum
Corporation and its subsidiaries are included in Part II, Item 8 of this Form
10-K:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 37
Statements of Consolidated Operations -- Years Ended
December 31, 1999, 1998 and 1997.......................... 38
Consolidated Balance Sheets -- December 31, 1999 and 1998... 39
Statements of Consolidated Stockholders' Equity -- Years
Ended December 31, 1999, 1998 and 1997.................... 40
Statements of Consolidated Cash Flows -- Years Ended
December 31, 1999, 1998 and 1997.......................... 41
Notes to Consolidated Financial Statements.................. 42
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are submitted because of the absence of
the conditions under which they are required or because the required information
is included in the Consolidated Financial Statements or notes thereto.
66
<PAGE> 67
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 -- Stock Sale Agreement, dated March 18, 1998, among the
Company, BHP Hawaii Inc. and BHP Petroleum Pacific
Islands Inc. (incorporated by reference herein to Exhibit
2.1 to Registration Statement No. 333-51789).
2.2 -- Stock Sale Agreement, dated May 1, 1998, among Shell
Refining Holding Company, Shell Anacortes Refining
Company and the Company (incorporated by reference herein
to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1998, File No. 1-3473).
2.3 -- Stock Purchase Agreement, dated as of October 8, 1999,
but effective as of July 1, 1999 among the Company,
Tesoro Gas Resources Company, Inc., EEX Operating LLC and
EEX Corporation (incorporated by reference herein to
Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on January 3, 2000, File No. 1-3473).
2.4 -- First Amendment to Stock Purchase Agreement dated
December 16, 1999, but effective as of October 8, 1999,
among the Company, Tesoro Gas Resources Company, Inc.,
EEX Operating LLC and EEX Corporation (incorporated by
reference herein to Exhibit 2.2 to the Company's Current
Report on Form 8-K filed on January 3, 2000, File No.
1-3473).
2.5 -- Purchase Agreement dated as of December 17, 1999 among
the Company, Tesoro Gas Resources Company, Inc. and EEX
Operating LLC (Membership Interests in Tesoro Grande LLC)
(incorporated by reference herein to Exhibit 2.3 to the
Company's Current Report on Form 8-K filed on January 3,
2000, File No. 1-3473).
2.6 -- Purchase Agreement dated as of December 17, 1999 among
the Company, Tesoro Gas Resources Company, Inc. and EEX
Operating LLC (Membership Interests in Tesoro Reserves
Company LLC) (incorporated by reference herein to Exhibit
2.4 to the Company's Current Report on Form 8-K filed on
January 3, 2000, File No. 1-3473).
2.7 -- Purchase Agreement dated as of December 17, 1999 among
the Company, Tesoro Gas Resources Company, Inc. and EEX
Operating LLC (Membership Interests in Tesoro Southeast
LLC) (incorporated by reference herein to Exhibit 2.5 to
the Company's Current Report on From 8-K filed on January
3, 2000, File No. 1-3473).
2.8 -- Stock Purchase Agreement, dated as of November 19, 1999,
by and between the Company and BG International Limited
(incorporated by reference herein to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on January 13,
2000, File No. 1-3473).
3.1 -- Restated Certificate of Incorporation of the Company
(incorporated by reference herein to Exhibit 3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, File No. 1-3473).
3.2 -- By-Laws of the Company, as amended through June 6, 1996
(incorporated by reference herein to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, File No. 1-3473).
3.3 -- Amendment to Restated Certificate of Incorporation of the
Company adding a new Article IX limiting Directors'
Liability (incorporated by reference herein to Exhibit
3(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, File No. 1-3473).
</TABLE>
67
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.4 -- Certificate of Designation Establishing a Series of $2.20
Cumulative Convertible Preferred Stock, dated as of
January 26, 1983 (incorporated by reference herein to
Exhibit 3(c) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, File No.
1-3473).
3.5 -- Certificate of Designation Establishing a Series A
Participating Preferred Stock, dated as of December 16,
1985 (incorporated by reference herein to Exhibit 3(d) to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, File No. 1-3473).
3.6 -- Certificate of Amendment, dated as of February 9, 1994,
to Restated Certificate of Incorporation of the Company
amending Article IV, Article V, Article VII and Article
VIII (incorporated by reference herein to Exhibit 3(e) to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, File No. 1-3473).
3.7 -- Certificate of Amendment, dated as of August 3, 1998, to
Certificate of Incorporation of the Company, amending
Article IV, increasing the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000 (incorporated
by reference herein to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the period ended
September 30, 1998, File No. 1-3473.)
3.8 -- Certificate of Designation of 7.25% Mandatorily
Convertible Preferred Stock (incorporated by reference
herein to Exhibit 4.1 to the Company's Current Report on
Form 8-K filed on July 1, 1998, File No. 1-3473).
4.1 -- Form of Coastwide Energy Services Inc. 8% Convertible
Subordinated Debenture (incorporated by reference herein
to Exhibit 4.3 to Post-Effective Amendment No. 1 to
Registration No. 333-00229).
4.2 -- Debenture Assumption and Conversion Agreement dated as of
February 20, 1996, between the Company, Coastwide Energy
Services, Inc. and CNRG Acquisition Corp. (incorporated
by reference herein to Exhibit 4.4 to Post-Effective
Amendment No. 1 to Registration No. 333-00229).
4.3 -- Form of Cancellation/Substitution Agreement by and
between the Company, Coastwide Energy Services, Inc. and
Optionee (incorporated by reference herein to Exhibit 4.6
to Post-Effective Amendment No. 1 to Registration No.
333-00229).
4.4 -- Indenture, dated as of July 2, 1998, between Tesoro
Petroleum Corporation and U.S. Bank Trust National
Association, as Trustee (incorporated by reference herein
to Exhibit 4.4 to Registration Statement No. 333-59871).
4.5 -- Form of 9% Senior Subordinated Notes due 2008 and 9%
Senior Subordinated Notes due 2008, Series B (filed as
part of Exhibit 4.4 hereof) (incorporated by reference
herein to Exhibit 4.5 to Registration Statement No.
333-59871).
4.6 -- Third Amended and Restated Credit Agreement ("Senior
Credit Facility"), dated as of July 2, 1998, among the
Company, the Lenders parties thereto, Lehman Brothers
Inc., as Arranger, Lehman Commercial Paper Inc., as
Syndication Agent, the First National Bank of Chicago, as
Co-Administrative Agent and as General Administrative
Agent, Paribas, as Co-Administrative Agent and as
Collateral Agent and The Bank of Nova Scotia, as
Documentation Agent (incorporated by reference herein to
Exhibit 4.6 to Registration Statement No. 333-59871).
4.7 -- Consent and Confirmation, dated as of July 2, 1998, with
respect to the Senior Credit Facility, dated as of July
2, 1998 (incorporated by reference herein to Exhibit 4.7
to Registration Statement No. 333-59871).
</TABLE>
68
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.8 -- Amended and Restated First Amendment and Consent, dated
as of November 10, 1999, to the Senior Credit Facility,
dated as of July 2, 1998 (incorporated by reference
herein to Exhibit 4.1 to the Company's Current Report on
Form 8-K filed on January 3, 2000, File No. 1-3473).
*4.9 -- Second Amendment, dated as of February 22, 2000, to the
Senior Credit Facility, dated as of July 2, 1998.
4.10 -- Deposit Agreement among the Company, The Bank of New York
and the holders from time to time of depository receipts
executed and delivered thereunder (incorporated by
reference to Exhibit 4.2 to the Company's Current Report
on Form 8-K filed on July 1, 1998, File No. 1-3473).
4.11 -- Form of depository receipt evidencing ownership of
Premium Income Equity Securities (filed as a part of
Exhibit 4.10 hereof) incorporated by reference herein to
Exhibit 4.9 to Registration Statement No. 333-59871).
10.1 -- Registration Rights Agreement, dated as of July 2, 1998,
among Tesoro Petroleum Corporation, Lehman Brothers Inc.,
Bear, Stearns & Co. Inc. and Salomon Smith Barney
(incorporated by reference herein to Exhibit 10.1 to
Registration Statement No. 333-59871).
+10.2 -- The Company's Amended Executive Security Plan, as amended
through November 13, 1989, and Funded Executive Security
Plan, as amended through February 28, 1990, for executive
officers and key personnel (incorporated by reference
herein to Exhibit 10(f) to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1990,
File No. 1-3473).
+10.3 -- Sixth Amendment to the Company's Amended Executive
Security Plan and Seventh Amendment to the Company's
Funded Executive Security Plan, both dated effective
March 6, 1991 (incorporated by reference herein to
Exhibit 10(g) to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1991, File No.
1-3473).
+10.4 -- Seventh Amendment to the Company's Amended Executive
Security Plan and Eighth Amendment to the Company's
Funded Executive Security Plan, both dated effective
December 8, 1994 (incorporated by reference herein to
Exhibit 10(f) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, File No.
1-3473).
+10.5 -- Eighth Amendment to the Company's Amended Executive
Security Plan and Ninth Amendment to the Company's Funded
Executive Security Plan, both dated effective June 6,
1996 (incorporated by reference herein to Exhibit 10.5 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, File No. 1-3473).
+10.6 -- Ninth Amendment to the Company's Amended Executive
Security Plan and Tenth Amendment to the Company's Funded
Executive Security Plan, both dated effective October 1,
1998 (incorporated by reference herein to Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, File No. 1-3473).
+10.7 -- Amended and Restated Employment Agreement between the
Company and Bruce A. Smith dated November 1, 1997
(incorporated by reference therein to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, File No. 1-3473).
</TABLE>
69
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
+10.8 -- First Amendment dated October 28, 1998 to Amended and
Restated Employment Agreement between the Company and
Bruce A. Smith dated November 1, 1997 (incorporated by
reference herein to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998, File No. 1-3473).
+10.9 -- Amendment and Restated Employment Agreement between the
Company and William T. Van Kleef dated as of October 28,
1998 (incorporated by reference herein to Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, File No. 1-3473).
+10.10 -- Amended and Restated Employment Agreement between the
Company and James C. Reed, Jr. dated as of October 28,
1998 (incorporated by reference herein to Exhibit 10.10
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, File No. 1-3473).
+10.11 -- Management Stability Agreement between the Company and
Don M. Heep dated December 12, 1996 (incorporated by
reference herein to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998, File No. 1-3473).
+10.12 -- Management Stability Agreement between the Company and
Donald A. Nyberg dated December 12, 1996 (incorporated by
reference herein to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997, File No. 1-3473).
+10.13 -- Management Stability Agreement between the Company and
Steve Wormington dated September 27, 1995 (incorporated
by reference herein to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-3473).
*+10.14 -- Management Stability Agreement between the Company and
Sharon L. Layman dated December 14, 1994.
+10.15 -- Management Stability Agreement between the Company and
Thomas E. Reardon dated December 14, 1994 (incorporated
by reference herein to Exhibit 10(w) to Registration
Statement No. 333-00229).
+10.16 -- Management Stability Agreement between the Company and
Gregory A. Wright dated February 23, 1995 (incorporated
by reference herein to Exhibit 10(p) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-3473).
+10.17 -- Management Stability Agreement between the Company and
Don E. Beere dated December 14, 1994 (incorporated by
reference herein to Exhibit 10(o) to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1994, File No. 1-3473).
+10.18 -- The Company's Amended Incentive Stock Plan of 1982, as
amended through February 24, 1988 (incorporated by
reference herein to Exhibit 10(t) to the Company's Annual
Report on Form 10-K for the fiscal year ended September
30, 1988, File No. 1-3473).
+10.19 -- Resolution approved by the Company's stockholders on
April 30, 1992 extending the term of the Company's
Amended Incentive Stock Plan of 1982 to February 24, 1994
(incorporated by reference herein to Exhibit 10(o) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, File No. 1-3473).
</TABLE>
70
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
+10.20 -- Copy of the Company's Amended and Restated Executive
Long-Term Incentive Plan, as amended through July 29,
1998 (incorporated by reference herein to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1998, File No. 1-3473).
+10.21 -- Copy of the Company's 1998 Performance Incentive
Compensation Plan (incorporated by reference herein to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1998, File No.
1-3473).
+10.22 -- Copy of the Company's Non-Employee Director Retirement
Plan dated December 8, 1994 (incorporated by reference
herein to Exhibit 10(t) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994,
File No. 1-3473).
+10.23 -- Copy of the Company's Board of Directors Deferred
Compensation Plan dated February 23, 1995 (incorporated
by reference herein to Exhibit 10(u) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-3473).
+10.24 -- Copy of the Company's Board of Directors Deferred
Compensation Trust dated February 23, 1995 (incorporated
by reference herein to Exhibit 10(v) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-3473).
+10.25 -- Copy of the Company's Board of Directors Deferred Phantom
Stock Plan (incorporated by reference herein to Exhibit
10 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997, File No. 1-3473).
+10.26 -- Phantom Stock Option Agreement between the Company and
Bruce A. Smith dated effective October 29, 1997
(incorporated by reference herein to Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, File No. 1-3473).
10.27 -- Copy of Settlement Agreement dated effective January 19,
1993, between Tesoro Petroleum Corporation, Tesoro Alaska
Petroleum Company and the State of Alaska (incorporated
by reference herein to Exhibit 10(q) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, File No. 1-3473).
10.28 -- Form of Indemnification Agreement between the Company and
its officers and directors (incorporated by reference
herein to Exhibit B to the Company's Proxy Statement for
the Annual Meeting of Stockholders held on February 25,
1987, File No. 1-3473).
*21 -- Subsidiaries of the Company
*23 -- Consent of Deloitte & Touche LLP
**27.1 -- Financial Data Schedule (December 31, 1999)
**27.2 -- Restated Financial Data Schedule (September 30, 1999)
**27.3 -- Restated Financial Data Schedule (June 30, 1999)
**27.4 -- Restated Financial Data Schedule (March 31, 1999)
**27.5 -- Restated Financial Data Schedule (December 31, 1998)
**27.6 -- Restated Financial Data Schedule (September 30, 1998)
**27.7 -- Restated Financial Data Schedule (June 30, 1998)
**27.8 -- Restated Financial Data Schedule (March 31, 1998)
**27.9 -- Restated Financial Data Schedule (December 31, 1997)
</TABLE>
71
<PAGE> 72
- ---------------
* Filed herewith.
+ Identifies management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto pursuant to Item 14(c) of Form
10-K.
** The Financial Data Schedules shall not be deemed "filed" for purposes of
Section 11 of the Securities Act of 1933 or Section 18 of the Securities
Exchange of 1934, and are included as exhibits only to the electronic filing
of this From 10-K in accordance with Item 601(c) of Regulation S-K and
Section 401 of Regulation S-T.
Copies of exhibits filed as part of this Form 10-K may be obtained by
stockholders of record at a charge of $0.15 per page, minimum $5.00 each
request. Direct inquiries to the Corporate Secretary, Tesoro Petroleum
Corporation, 300 Concord Plaza Drive, San Antonio, Texas, 78216-6999.
(b) REPORTS ON FORM 8-K
On January 3, 2000, the Company filed a Current Report on Form 8-K
reporting under Item 2 the sale of its domestic exploration and production
business on December 17, 1999. The Company also reported under Item 5 the
closing of the sale of its Bolivian exploration and production operations on
December 29, 1999. Unaudited pro forma condensed financial statements and
related exhibits were filed under Item 7.
On January 13, 2000, the Company filed a Current Report on Form 8-K
reporting under Item 2 the sale of its Bolivian exploration and production
operations on December 29, 1999 and a related exhibit under Item 7. The
unaudited pro forma condensed financial statements had been previously filed in
the Company's Current Report on Form 8-K dated December 17, 1999 and filed on
January 3, 2000.
72
<PAGE> 73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ BRUCE A. SMITH
----------------------------------
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BRUCE A. SMITH Chairman of the Board of Directors March 29, 2000
- ----------------------------------------------------- and Director, President and
(Bruce A. Smith) Chief Executive Officer
(Principal Executive Officer)
/s/ GREGORY A. WRIGHT Senior Vice President, Financial March 29, 2000
- ----------------------------------------------------- Resources (Principal Financial
(Gregory A. Wright) Officer)
/s/ DON M. HEEP Vice President, Controller March 29, 2000
- ----------------------------------------------------- (Principal Accounting Officer)
(Don M. Heep)
/s/ STEVEN H. GRAPSTEIN Vice Chairman of the Board of March 29, 2000
- ----------------------------------------------------- Directors and Director
(Steven H. Grapstein)
/s/ WILLIAM J. JOHNSON Director March 29, 2000
- -----------------------------------------------------
(William J. Johnson)
/s/ RAYMOND K. MASON, SR. Director March 29, 2000
- -----------------------------------------------------
(Raymond K. Mason, Sr.)
/s/ DONALD H. SCHMUDE Director March 29, 2000
- -----------------------------------------------------
(Donald H. Schmude)
/s/ PATRICK J. WARD Director March 29, 2000
- -----------------------------------------------------
(Patrick J. Ward)
/s/ MURRAY L. WEIDENBAUM Director March 29, 2000
- -----------------------------------------------------
(Murray L. Weidenbaum)
</TABLE>
73
<PAGE> 74
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 -- Stock Sale Agreement, dated March 18, 1998, among the
Company, BHP Hawaii Inc. and BHP Petroleum Pacific
Islands Inc. (incorporated by reference herein to Exhibit
2.1 to Registration Statement No. 333-51789).
2.2 -- Stock Sale Agreement, dated May 1, 1998, among Shell
Refining Holding Company, Shell Anacortes Refining
Company and the Company (incorporated by reference herein
to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1998, File No. 1-3473).
2.3 -- Stock Purchase Agreement, dated as of October 8, 1999,
but effective as of July 1, 1999 among the Company,
Tesoro Gas Resources Company, Inc., EEX Operating LLC and
EEX Corporation (incorporated by reference herein to
Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on January 3, 2000, File No. 1-3473).
2.4 -- First Amendment to Stock Purchase Agreement dated
December 16, 1999, but effective as of October 8, 1999,
among the Company, Tesoro Gas Resources Companies, Inc.,
EEX Operating LLC and EEX Corporation (incorporated by
reference herein to Exhibit 2.2 to the Company's Current
Report on Form 8-K filed on January 3, 2000, File No.
1-3473).
2.5 -- Purchase Agreement dated as of December 17, 1999 among
the Company, Tesoro Gas Resources Company, Inc. and EEX
Operating LLC (Membership Interests in Tesoro Grande LLC)
(incorporated by reference herein to Exhibit 2.3 to the
Company's Current Report on Form 8-K filed on January 3,
2000, File No. 1-3473).
2.6 -- Purchase Agreement dated as of December 17, 1999 among
the Company, Tesoro Gas Resources Company, Inc. and EEX
Operating LLC (Membership Interests in Tesoro Reserves
Company LLC) (incorporated by reference herein to Exhibit
2.4 to the Company's Current Report on Form 8-K filed on
January 3, 2000, File No. 1-3473).
2.7 -- Purchase Agreement dated as of December 17, 1999 among
the Company, Tesoro Gas Resources Company, Inc. and EEX
Operating LLC (Membership Interests in Tesoro Southeast
LLC) (incorporated by reference herein to Exhibit 2.5 to
the Company's Current Report on From 8-K filed on January
3, 2000, File No. 1-3473).
2.8 -- Stock Purchase Agreement, dated as of November 19, 1999,
by and between the Company and BG International Limited
(incorporated by reference herein to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on January 13,
2000, File No. 1-3473).
3.1 -- Restated Certificate of Incorporation of the Company
(incorporated by reference herein to Exhibit 3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993, File No. 1-3473).
3.2 -- By-Laws of the Company, as amended through June 6, 1996
(incorporated by reference herein to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, File No. 1-3473).
3.3 -- Amendment to Restated Certificate of Incorporation of the
Company adding a new Article IX limiting Directors'
Liability (incorporated by reference herein to Exhibit
3(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, File No. 1-3473).
</TABLE>
74
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.4 -- Certificate of Designation Establishing a Series of $2.20
Cumulative Convertible Preferred Stock, dated as of
January 26, 1983 (incorporated by reference herein to
Exhibit 3(c) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, File No.
1-3473).
3.5 -- Certificate of Designation Establishing a Series A
Participating Preferred Stock, dated as of December 16,
1985 (incorporated by reference herein to Exhibit 3(d) to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, File No. 1-3473).
3.6 -- Certificate of Amendment, dated as of February 9, 1994,
to Restated Certificate of Incorporation of the Company
amending Article IV, Article V, Article VII and Article
VIII (incorporated by reference herein to Exhibit 3(e) to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, File No. 1-3473).
3.7 -- Certificate of Amendment, dated as of August 3, 1998, to
Certificate of Incorporation of the Company, amending
Article IV, increasing the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000 (incorporated
by reference herein to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the period ended
September 30, 1998, File No. 1-3473.)
3.8 -- Certificate of Designation of 7.25% Mandatorily
Convertible Preferred Stock (incorporated by reference
herein to Exhibit 4.1 to the Company's Current Report on
Form 8-K filed on July 1, 1998, File No. 1-3473).
4.1 -- Form of Coastwide Energy Services Inc. 8% Convertible
Subordinated Debenture (incorporated by reference herein
to Exhibit 4.3 to Post-Effective Amendment No. 1 to
Registration No. 333-00229).
4.2 -- Debenture Assumption and Conversion Agreement dated as of
February 20, 1996, between the Company, Coastwide Energy
Services, Inc. and CNRG Acquisition Corp. (incorporated
by reference herein to Exhibit 4.4 to Post-Effective
Amendment No. 1 to Registration No. 333-00229).
4.3 -- Form of Cancellation/Substitution Agreement by and
between the Company, Coastwide Energy Services, Inc. and
Optionee (incorporated by reference herein to Exhibit 4.6
to Post-Effective Amendment No. 1 to Registration No.
333-00229).
4.4 -- Indenture, dated as of July 2, 1998, between Tesoro
Petroleum Corporation and U.S. Bank Trust National
Association, as Trustee (incorporated by reference herein
to Exhibit 4.4 to Registration Statement No. 333-59871).
4.5 -- Form of 9% Senior Subordinated Notes due 2008 and 9%
Senior Subordinated Notes due 2008, Series B (filed as
part of Exhibit 4.4 hereof) (incorporated by reference
herein to Exhibit 4.5 to Registration Statement No.
333-59871).
4.6 -- Third Amended and Restated Credit Agreement ("Senior
Credit Facility"), dated as of July 2, 1998, among the
Company, the Lenders parties thereto, Lehman Brothers
Inc., as Arranger, Lehman Commercial Paper Inc., as
Syndication Agent, the First National Bank of Chicago, as
Co-Administrative Agent and as General Administrative
Agent, Paribas, as Co-Administrative Agent and as
Collateral Agent and The Bank of Nova Scotia, as
Documentation Agent (incorporated by reference herein to
Exhibit 4.6 to Registration Statement No. 333-59871).
4.7 -- Consent and Confirmation, dated as of July 2, 1998, with
respect to the Senior Credit Facility, dated as of July
2, 1998 (incorporated by reference herein to Exhibit 4.7
to Registration Statement No. 333-59871).
</TABLE>
75
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
4.8 -- Amended and Restated First Amendment and Consent, dated
as of November 10, 1999, to the Senior Credit Facility,
dated as of July 2, 1998 (incorporated by reference
herein to Exhibit 4.1 to the Company's Current Report on
Form 8-K filed on January 3, 2000, File No. 1-3473).
*4.9 -- Second Amendment, dated as of February 22, 2000, to the
Senior Credit Facility, dated as of July 2, 1998.
4.10 -- Deposit Agreement among the Company, The Bank of New York
and the holders from time to time of depository receipts
executed and delivered thereunder (incorporated by
reference to Exhibit 4.2 to the Company's Current Report
on Form 8-K filed on July 1, 1998, File No. 1-3473).
4.11 -- Form of depository receipt evidencing ownership of
Premium Income Equity Securities (filed as a part of
Exhibit 4.10 hereof) incorporated by reference herein to
Exhibit 4.9 to Registration Statement No. 333-59871).
10.1 -- Registration Rights Agreement, dated as of July 2, 1998,
among Tesoro Petroleum Corporation, Lehman Brothers Inc.,
Bear, Stearns & Co. Inc. and Salomon Smith Barney
(incorporated by reference herein to Exhibit 10.1 to
Registration Statement No. 333-59871).
+10.2 -- The Company's Amended Executive Security Plan, as amended
through November 13, 1989, and Funded Executive Security
Plan, as amended through February 28, 1990, for executive
officers and key personnel (incorporated by reference
herein to Exhibit 10(f) to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1990,
File No. 1-3473).
+10.3 -- Sixth Amendment to the Company's Amended Executive
Security Plan and Seventh Amendment to the Company's
Funded Executive Security Plan, both dated effective
March 6, 1991 (incorporated by reference herein to
Exhibit 10(g) to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1991, File No.
1-3473).
+10.4 -- Seventh Amendment to the Company's Amended Executive
Security Plan and Eighth Amendment to the Company's
Funded Executive Security Plan, both dated effective
December 8, 1994 (incorporated by reference herein to
Exhibit 10(f) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, File No.
1-3473).
+10.5 -- Eighth Amendment to the Company's Amended Executive
Security Plan and Ninth Amendment to the Company's Funded
Executive Security Plan, both dated effective June 6,
1996 (incorporated by reference herein to Exhibit 10.5 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, File No. 1-3473).
+10.6 -- Ninth Amendment to the Company's Amended Executive
Security Plan and Tenth Amendment to the Company's Funded
Executive Security Plan, both dated effective October 1,
1998 (incorporated by reference herein to Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, File No. 1-3473).
+10.7 -- Amended and Restated Employment Agreement between the
Company and Bruce A. Smith dated November 1, 1997
(incorporated by reference therein to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, File No. 1-3473).
</TABLE>
76
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
+10.8 -- First Amendment dated October 28, 1998 to Amended and
Restated Employment Agreement between the Company and
Bruce A. Smith dated November 1, 1997 (incorporated by
reference herein to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998, File No. 1-3473).
+10.9 -- Amendment and Restated Employment Agreement between the
Company and William T. Van Kleef dated as of October 28,
1998 (incorporated by reference herein to Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, File No. 1-3473).
+10.10 -- Amended and Restated Employment Agreement between the
Company and James C. Reed, Jr. dated as of October 28,
1998 (incorporated by reference herein to Exhibit 10.10
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, File No. 1-3473).
+10.11 -- Management Stability Agreement between the Company and
Don M. Heep dated December 12, 1996 (incorporated by
reference herein to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998, File No. 1-3473).
+10.12 -- Management Stability Agreement between the Company and
Donald A. Nyberg dated December 12, 1996 (incorporated by
reference herein to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997, File No. 1-3473).
+10.13 -- Management Stability Agreement between the Company and
Steve Wormington dated September 27, 1995 (incorporated
by reference herein to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-3473).
*+10.14 -- Management Stability Agreement between the Company and
Sharon L. Layman dated December 14, 1994.
+10.15 -- Management Stability Agreement between the Company and
Thomas E. Reardon dated December 14, 1994 (incorporated
by reference herein to Exhibit 10(w) to Registration
Statement No. 333-00229).
+10.16 -- Management Stability Agreement between the Company and
Gregory A. Wright dated February 23, 1995 (incorporated
by reference herein to Exhibit 10(p) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-3473).
+10.17 -- Management Stability Agreement between the Company and
Don E. Beere dated December 14, 1994 (incorporated by
reference herein to Exhibit 10(o) to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1994, File No. 1-3473).
+10.18 -- The Company's Amended Incentive Stock Plan of 1982, as
amended through February 24, 1988 (incorporated by
reference herein to Exhibit 10(t) to the Company's Annual
Report on Form 10-K for the fiscal year ended September
30, 1988, File No. 1-3473).
+10.19 -- Resolution approved by the Company's stockholders on
April 30, 1992 extending the term of the Company's
Amended Incentive Stock Plan of 1982 to February 24, 1994
(incorporated by reference herein to Exhibit 10(o) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, File No. 1-3473).
</TABLE>
77
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
+10.20 -- Copy of the Company's Amended and Restated Executive
Long-Term Incentive Plan, as amended through July 29,
1998 (incorporated by reference herein to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1998, File No. 1-3473).
+10.21 -- Copy of the Company's 1998 Performance Incentive
Compensation Plan (incorporated by reference herein to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1998, File No.
1-3473).
+10.22 -- Copy of the Company's Non-Employee Director Retirement
Plan dated December 8, 1994 (incorporated by reference
herein to Exhibit 10(t) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994,
File No. 1-3473).
+10.23 -- Copy of the Company's Board of Directors Deferred
Compensation Plan dated February 23, 1995 (incorporated
by reference herein to Exhibit 10(u) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-3473).
+10.24 -- Copy of the Company's Board of Directors Deferred
Compensation Trust dated February 23, 1995 (incorporated
by reference herein to Exhibit 10(v) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-3473).
+10.25 -- Copy of the Company's Board of Directors Deferred Phantom
Stock Plan (incorporated by reference herein to Exhibit
10 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997, File No. 1-3473).
+10.26 -- Phantom Stock Option Agreement between the Company and
Bruce A. Smith dated effective October 29, 1997
(incorporated by reference herein to Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, File No. 1-3473).
10.27 -- Copy of Settlement Agreement dated effective January 19,
1993, between Tesoro Petroleum Corporation, Tesoro Alaska
Petroleum Company and the State of Alaska (incorporated
by reference herein to Exhibit 10(q) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, File No. 1-3473).
10.28 -- Form of Indemnification Agreement between the Company and
its officers and directors (incorporated by reference
herein to Exhibit B to the Company's Proxy Statement for
the Annual Meeting of Stockholders held on February 25,
1987, File No. 1-3473).
*21 -- Subsidiaries of the Company
*23 -- Consent of Deloitte & Touche LLP
**27.1 -- Financial Data Schedule (December 31, 1999)
**27.2 -- Restated Financial Data Schedule (September 30, 1999)
**27.3 -- Restated Financial Data Schedule (June 30, 1999)
**27.4 -- Restated Financial Data Schedule (March 31, 1999)
**27.5 -- Restated Financial Data Schedule (December 31, 1998)
**27.6 -- Restated Financial Data Schedule (September 30, 1998)
**27.7 -- Restated Financial Data Schedule (June 30, 1998)
**27.8 -- Restated Financial Data Schedule (March 31, 1998)
**27.9 -- Restated Financial Data Schedule (December 31, 1997)
</TABLE>
78
<PAGE> 79
- ---------------
* Filed herewith.
+ Identifies management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto pursuant to Item 14(c) of Form
10-K.
** The Financial Data Schedules shall not be deemed "filed" for purposes of
Section 11 of the Securities Act of 1933 or Section 18 of the Securities
Exchange of 1934, and are included as exhibits only to the electronic filing
of this From 10-K in accordance with Item 601(c) of Regulation S-K and
Section 401 of Regulation S-T.
79
<PAGE> 1
EXHIBIT 4.9
SECOND AMENDMENT
SECOND AMENDMENT, dated as of February 22, 2000 (this
"Amendment"), to the THIRD AMENDED AND RESTATED CREDIT AGREEMENT, dated as of
July 2, 1998 (the "Credit Agreement"), as amended by the Amended and Restated
First Amendment and Consent, dated as of November 10, 1999, among TESORO
PETROLEUM CORPORATION, a Delaware corporation (the "Borrower"), the several
banks and other financial institutions or entities from time to time parties
thereto (the "Lenders"), LEHMAN BROTHERS INC. ("LBI"), as advisor and arranger
thereunder (in such capacity, the "Arranger"), LEHMAN COMMERCIAL PAPER INC.
("LCPI"), as syndication agent thereunder (in such capacity, the "Syndication
Agent"), PARIBAS and BANK ONE, NA (formerly known as The First National Bank of
Chicago), as co-administrative agents thereunder (in such capacity, the
"Co-Administrative Agents"), BANK ONE, NA (formerly known as The First National
Bank of Chicago), as general administrative agent thereunder (in such capacity,
the "General Administrative Agent"), PARIBAS, as collateral agent thereunder (in
such capacity, the "Collateral Agent"), and THE BANK OF NOVA SCOTIA, as
documentation agent thereunder (in such capacity, the "Documentation Agent").
W I T N E S S E T H:
WHEREAS, the Borrower intends to repurchase (the "Repurchase")
up to 3,000,000 shares of its common stock in open market transactions or
privately negotiated transactions;
WHEREAS, the Repurchase would constitute a Restricted Payment
under the Credit Agreement; and
WHEREAS, the Borrower has requested that the Lenders agree to
amend certain provisions of the Credit Agreement, upon the terms and subject to
the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual
agreements contained herein, and for other valuable consideration the receipt of
which is hereby acknowledged, the Borrower and the Lenders hereby agree as
follows:
1. Definitions. Capitalized terms used herein and not otherwise defined
shall have the meanings assigned to such terms in the Credit Agreement.
2. Amendment to Credit Agreement. Subsection 7.6 of the Credit Agreement is
hereby amended by adding at the end thereof the following:
"Notwithstanding the foregoing, the Borrower may repurchase up
to 3,000,000 shares of its common stock in open market transactions or privately
negotiated
<PAGE> 2
transactions so long as no Default or Event of Default shall be in existence at
the time of such repurchase."
3. Conditions to Effectiveness. This Amendment shall become effective as of
the date first written above, upon receipt by the General Administrative Agent
of (i) counterparts of this Amendment duly executed by the Borrower and the
Required Lenders, and (ii) counterparts of the Acknowledgment and Consent
attached hereto executed by each Subsidiary of the Borrower.
4. Representations and Warranties. On and as of the date hereof, and after
giving effect to this Amendment, the Borrower confirms, reaffirms and restates
that the representations and warranties set forth in Section 4 of the Credit
Agreement are true and correct in all material respects, provided that the
references to the Credit Agreement therein shall be deemed to be references to
the Credit Agreement as amended by this Amendment.
5. Limited Amendment. Except as expressly amended hereby, the Credit
Agreement is, and shall remain, in full force and effect. This Amendment shall
not be deemed to be a waiver of, or consent to, or a modification or amendment
of, any other term or condition of the Credit Agreement or to prejudice any
other right or rights which the Lenders may now have or may have in the future
under or in connection with the Credit Agreement or any of the instruments or
agreements referred to therein, as the same may be amended from time to time.
6. Counterparts. This Amendment may be executed by one or more of the
parties hereto in any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their respective duly authorized
officers as of the date first above written.
TESORO PETROLEUM CORPORATION
By: /s/ SHARON L. LAYMAN
---------------------------------
Name: Sharon L. Layman
Title: Vice President and
Treasurer
LEHMAN BROTHERS INC.,
as Arranger
By: /s/ MICHELE SWANSON
---------------------------------
Name: Michele Swanson
Title: Authorized Signatory
LEHMAN COMMERCIAL PAPER INC.,
SYNDICATED LOAN FUNDING TRUST as Syndication Agent and as a
BY: LEHMAN COMMERCIAL PAPER INC. Lender
NOT IN ITS INDIVIDUAL
CAPACITY BUT SOLELY AS ASSET
MANAGER By: /s/ MICHELE SWANSON
---------------------------------
/s/ MICHELE SWANSON Name: Michele Swanson
- -------------------------------- Title: Authorized Signatory
NAME: MICHELE SWANSON
TITLE: AUTHORIZED SIGNATORY
BANK ONE, NA (formerly known as The
First National Bank of Chicago), as
Co-Administrative Agent, General
Administrative Agent and as a
Lender
By: /s/ THOMAS E. BOTH
---------------------------------
Name: Thomas E. Both
Title: First Vice President
<PAGE> 4
PARIBAS,
as Co-Administrative Agent,
Collateral Agent and as a Lender
By: /s/ BRIAN M. MALONE
----------------------------------
Name: Brian M. Malone
Title: Director
By: /s/ BETSY JOCHER
----------------------------------
Name: Betsy Jocher
Title: Vice President
THE BANK OF NOVA SCOTIA,
as Documentation Agent and as a
Lender
By: /s/ F.C.H. ASHBY
----------------------------------
Name: F.C.H. ASHBY
Title: SENIOR MANAGER LOAN
OPERATIONS
ABN AMRO BANK N.V.
By: /s/ ALLEN V. POOLE By: /s/ DANA L. MONTGOMERY
---------------------------------- ----------------------------------
Name: Allen V. Poole Name: Dana L. Montgomery
Title: Senior Vice President Title: Assistant Vice President
BANK LEUMI USA
By: /s/ JOUNG HEE HONG
----------------------------------
Name: Joung Hee Hong
Title: Vice President
BANK OF HAWAII
By: /s/ BRENDA K. TESTERMAN
----------------------------------
Name: Brenda Testerman
Title: Vice President
<PAGE> 5
BANK OF SCOTLAND
By: /s/ ANNIE GLYNN
-----------------------------------
Name: ANNIE GLYNN
Title: SENIOR VICE PRESIDENT
THE BANK OF TOKYO-MITSUBISHI, LTD.
By: /s/ MICHAEL MEISS
-----------------------------------
Name: Michael Meiss
Title: VP & Manager
BALANCED HIGH YIELD FUND I, LTD. by BHF
(USA) Capital corporation acting as
attorney-in-fact
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
BHF (USA) Capital Corporation
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
<PAGE> 6
CIBC INC
By: /s/ M. BETH MILLER
-----------------------------------
Name: M. BETH MILLER
Title: AUTHORIZED SIGNATORY
COMERICA BANK
By:
-----------------------------------
Name:
Title:
CREDIT LYONNAIS
By:
-----------------------------------
Name:
Title:
FIRST HAWAIIAN BANK
By: /s/ CHARLES L. JENKINS
-----------------------------------
Name: Charles L. Jenkins
Title: Vice President, Manager
FIRST UNION NATIONAL BANK
By: /s/ PAUL N. RIDDLE
-----------------------------------
Name: Paul N. Riddle
Title: Senior Vice President
<PAGE> 7
FROST NATIONAL BANK
By: /s/ JIM CROSBY
-----------------------------------
Name: Jim Crosby
Title: Senior Vice President
THE FUJI BANK, LIMITED
By: /s/ JACQUES AZAGURY
-----------------------------------
Name: JACQUES AZAGURY
Title: SENIOR VICE PRESIDENT
& MANAGER
GUARANTY FEDERAL BANK
By: /s/ JIM R. HAMILTON
-----------------------------------
Name: Jim R. Hamilton
Title: Vice President
HIBERNIA NATIONAL BANK
By: /s/ NANCY G. MORAGAS
-----------------------------------
Name: Nancy G. Moragas
Title: Assistant Vice President
THE INDUSTRIAL BANK OF JAPAN, LTD.
NEW YORK BRANCH
By: /s/ MICHAEL N. OAKES
-----------------------------------
Name: Michael N. Oakes
Title: Senior Vice President,
HOUSTON OFFICE
MEESPIERSON CAPITAL CORP.
By: /s/ DEIRDRE SANBORN
-----------------------------------
Name: Deirdre Sanborn
Title: Vice President
By: /s/ DARRELL W. HOLLEY
-----------------------------------
Name: Darrell W. Holley
Title: Managing Director
<PAGE> 8
NATIONAL BANK OF ALASKA
By: /s/ PATRICIA JELLEY BENZ
-----------------------------------
Name: PATRICIA JELLEY BENZ
Title: VICE PRESIDENT
NATIONAL BANK OF CANADA
By: /s/ LARRY L. SEARS/DOUG CLARK
-----------------------------------
Name: Larry L. Sears/Doug Clark
Title: VP/Manager/VP
THE ROYAL BANK OF SCOTLAND
By:
-----------------------------------
Name:
Title:
SOCIETE GENERALE
By: /s/ RICHARD A. GOULD
-----------------------------------
Name: Richard A. Gould
Title: Director
THE SUMITOMO BANK, LTD.
By:
-----------------------------------
Name:
Title:
THE TORONTO-DOMINION BANK
By:
-----------------------------------
Name:
Title:
The Acknowledgment and Consent has been omitted. The Registrant will furnish a
copy of this omitted document to the Securities and Exchange Commission upon
request.
<PAGE> 1
EXHIBIT 10.14
MANAGEMENT STABILITY AGREEMENT
This Management Stability Agreement is dated December 14, 1994, between
Tesoro Petroleum Corporation, a Delaware corporation (the "Company"), and Sharon
L. Layman ("Employee").
Recitals:
WHEREAS, the Board of Directors of the Company has determined that it
is in the best interest of the Company to reduce uncertainty to certain key
employees of the Company in the event of certain fundamental events involving
the control or existence of the Company;
WHEREAS, the Board of Directors of the Company has determined that an
agreement protecting certain interests of key employees of the Company in the
event of certain fundamental events involving the control or existence of the
Company is in the best interest of the Company because it will assist the
Company in attracting and retaining key employees such as this Employee; and
WHEREAS, the Employee is relying on this Agreement and the obligations
of the Company hereunder in continuing to work for the Company.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Termination Following Change of Control.
Should Employee at any time within two years of a change of control
cease to be an employee of the Company (or its successor), by reason of (i)
involuntary termination by the Company (or its successor) other than for "cause"
(following a change of control), "cause" shall be limited to the conviction of
or a plea of nolo contendere to the charge of a felony (which, through lapse of
time or otherwise, is not subject to appeal), a material breach of fiduciary
duty to the Company through the misappropriation of Company funds or property)
or (ii) voluntary termination by Employee for "good reason upon change of
control" (as defined below), the Company (or its successor) shall pay to
Employee within ten days of such termination the following severance payments
and benefits:
(a) A lump-sum payment equal to the base salary of the
Employee at the then current rate; and
(b) A lump-sum payment equal to (i) the sum of the target
bonuses under all of the Company's incentive bonus plans
applicable to the Employee for the year in which the
termination occurs or the year in which the change of control
occurred,
<PAGE> 2
whichever is greater, and (ii) if termination occurs in the
fourth quarter of a calendar year, the sum of the target
bonuses under all of the Company's incentive bonus plans
applicable to Employee for the year in which the termination
occurs prorated daily based on the number of days from the
beginning of the calendar year in which the termination occurs
to and including the date of termination.
The Company (or its successor) shall also provide continuing coverage and
benefits comparable to all life, health and disability plans of the Company for
a period of 12 months from the date of termination.
For purposes of this Agreement, a "change of control"
shall be deemed to have occurred if (i) there shall be
consummated (A) any consolidation or merger of the Company in
which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's
Common Stock would be converted into cash, securities or other
property, other than a merger of the Company where a majority
of the Board of Directors of the surviving corporation are,
and for a two year period after the merger continue to be,
persons who were directors of the Company immediately prior to
the merger or were elected as directors, or nominated for
election as directors, by a vote of at least two-thirds of the
directors then still in office who were directors of the
Company immediately prior to the merger, or (B) any sale,
lease, exchange or transfer (in one transaction or a series of
related transactions) of all or substantially all of the
assets of the Company, or (ii) the shareholders of the Company
shall approve any plan or proposal for the liquidation or
dissolution of the Company, or (iii) (A) any "person" (as such
term is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), other
than the Company or a subsidiary thereof or any employee
benefit plan sponsored by the Company or a subsidiary thereof,
shall become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of securities of the Company
representing 20 percent or more of the combined voting power
of the Company's then outstanding securities ordinarily (and
apart from rights accruing in special circumstances) having
the right to vote in the election of directors, as a result of
a tender or exchange offer, open market purchases, privately
negotiated purchases or
2
<PAGE> 3
otherwise, and (B) at any time during a period of one year
thereafter, individuals who immediately prior to the beginning
of such period constituted the Board of Directors of the
Company shall cease for any reason to constitute at least a
majority thereof, unless the election or the nomination by the
Board of Directors for election by the Company's shareholders
of each new director during such period was approved by a vote
of at least two-thirds of the directors then still in office
who were directors at the beginning of such period.
For purposes of this Section 1, "good reason upon change of
control" shall exist if any of the following occurs:
(i) without Employee's express written consent, the assignment
to Employee of any duties inconsistent with the employment of
Employee immediately prior to the change of control, or a
significant diminution of Employee's positions, duties,
responsibilities and status with the Company from those
immediately prior to a change of control or a diminution in
Employee's titles or offices as in effect immediately prior to
a change of control, or any removal of Employee from, or any
failure to reelect Employee to, any of such positions;
(ii) a reduction by the Company in Employee's base salary in
effect immediately prior to a change of control;
(iii) the failure by the Company to continue in effect any
thrift, stock ownership, pension, life insurance, health,
dental and accident or disability plan in which Employee is
participating or is eligible to participate at the time of the
change of control (or plans providing Employee with
substantially similar benefits), except as otherwise required
by the terms of such plans as in effect at the time of any
change of control or the taking of any action by the Company
which would adversely affect Employee's participation in or
materially reduce Employee's benefits under any of such plans
or deprive Employee of any material fringe benefits enjoyed by
Employee at the time of the change of control or the failure
by the Company to provide the Employee with the number of paid
vacation days to which Employee is entitled in accordance with
the
3
<PAGE> 4
vacation policies of the Company in effect at the time of a
change of control;
(iv) the failure by the Company to continue in effect any
incentive plan or arrangement (including without limitation,
the Company's Incentive Compensation Plan and similar
incentive compensation benefits) in which Employee is
participating at the time of a change of control (or to
substitute and continue other plans or arrangements providing
the Employee with substantially similar benefits), except as
otherwise required by the terms of such plans as in effect at
the time of any change of control;
(v) the failure by the Company to continue in effect any plan
or arrangement with respect to securities of the Company
(including, without limitation, any plan or arrangement to
receive and exercise stock options, stock appreciation rights,
restricted stock or grants thereof or to acquire stock or
other securities of the Company) in which Employee is
participating at the time of a change of control (or to
substitute and continue plans or arrangements providing the
Employee with substantially similar benefits), except as
otherwise required by the terms of such plans as in effect at
the time of any change of control or the taking of any action
by the Company which would adversely affect Employee's
participation in or materially reduce Employee's benefits
under any such plan;
(vi) the relocation of the Company's principal executive
offices to a location outside the San Antonio, Texas, area, or
the Company's requiring Employee to be based anywhere other
than at the location of the Company's principal executive
offices, except for required travel on the Company's business
to an extent substantially consistent with Employee's present
business travel obligations, or, in the event Employee
consents to any such relocation of the Company's principal
executive or divisional offices, the failure by the Company to
pay (or reimburse Employee for) all reasonable moving expenses
incurred by Employee relating to a change of Employee's
principal residence in connection with such relocation and to
indemnify Employee against any loss (defined as the difference
between the actual sale price of such residence and the higher
of (a) Employee's aggregate investment in such residence or
4
<PAGE> 5
(b) the fair market value thereof as determined by a real
estate appraiser reasonably satisfactory to both Employee and
the Company at the time the Employee's principal residence is
offered for sale in connection with any such change of
residence;
(vii) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company;
In the event of a change of control as "change of control" is defined
in any stock option plan or stock option agreement pursuant to which the
Employee holds options to purchase common stock of the Company, Employee shall
retain the rights to all accelerated vesting and other benefits under the terms
thereof.
The Company shall pay any attorney fees incurred by Employee in
reasonably seeking to enforce the terms of this Paragraph 1.
2. Complete Agreement.
This Agreement constitutes the entire agreement between the parties and
cancels and supersedes all other agreements between the parties which may have
related to the subject matter contained in this Agreement.
3. Modification; Amendment; Waiver.
No modification, amendment or waiver of any provisions of this
Agreement shall be effective unless approved in writing by both parties. The
failure at any time to enforce any of the provisions of this Agreement shall in
no way be construed as a waiver of such provisions and shall not affect the
right of either party thereafter to enforce each and every provision hereof in
accordance with its terms.
4. Governing Law; Jurisdiction.
This Agreement and performance under it, and all proceedings that may
ensue from its breach, shall be construed in accordance with and under the laws
of the State of Texas.
5. Severability.
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity,
5
<PAGE> 6
without invalidating the remainder of such provision or the remaining provisions
of this Agreement.
6. Assignment.
The rights and obligations of the parties under this Agreement shall be
binding upon and inure to the benefit of their respective successors, assigns,
executors, administrators and heirs, provided, however, that the Company may not
assign any duties under this Agreement without the prior written consent of the
Employee.
7. Limitation.
This Agreement shall not confer any right or impose any obligation on
the Company to continue the employment of Employee in any capacity, or limit the
right of the Company or Employee to terminate Employee's employment.
8. Notices.
All notices and other communications under this Agreement shall be in
writing and shall be given in person or by telegraph, facsimile or first class
mail, certified or registered with return receipt requested, and shall be deemed
to have been duly given when delivered personally or three days after mailing or
one day after transmission of a telegram or facsimile, as the case may be, to
the representative persons named below:
If to the Company: Corporate Secretary
Tesoro Petroleum Corporation
8700 Tesoro Drive
San Antonio, Texas 78217
If to the Employee: Sharon L. Layman
8 Inwood Knoll
San Antonio, Texas 78248
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY: TESORO PETROLEUM CORPORATION
By /s/ MICHAEL D. BURKE
------------------------------------------
Michael D. Burke
President and Chief Executive Officer
EMPLOYEE:
/s/ SHARON L. LAYMAN
--------------------------------------------
Sharon L. Layman
7
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Tesoro Petroleum Corporation is publicly held and has no parent. The
subsidiaries listed below are wholly-owned. Small or inactive subsidiaries are
omitted from the list below. Such omitted subsidiaries, considered in the
aggregate as a single subsidiary, would not constitute a "significant
subsidiary" at the end of the year ended December 31, 1999.
<TABLE>
<CAPTION>
INCORPORATED
OR ORGANIZED
NAME OF SUBSIDIARY (a) UNDER LAWS OF
- --------------------- -------------
<S> <C>
Tesoro Alaska Company...................................................... Delaware
Tesoro Financial Services Holding Company.................................. Delaware
Victory Finance Company.................................................. Delaware
Tesoro Gas Resources Company, Inc.......................................... Delaware
Tesoro Hawaii Corporation.................................................. Hawaii
Tesoro Maritime Company.................................................... Delaware
Gold Star Maritime Company............................................... Delaware
Tesoro Marine Services Holding Company..................................... Delaware
Tesoro Marine Services, Inc.............................................. Delaware
Tesoro Petroleum Companies, Inc............................................ Delaware
Tesoro Refining, Marketing & Supply Company................................ Delaware
Tesoro West Coast Company.................................................. Delaware
</TABLE>
- ----------
(a) Where the name of a subsidiary is indented, it is wholly-owned by its
immediate parent listed at the margin above it.
<PAGE> 1
ITEM 14(a)3, EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Board of Directors and Stockholders
Tesoro Petroleum Corporation
We consent to the incorporation by reference in Registration Statements No.
333-25379 and No. 333-51789 of Tesoro Petroleum Corporation on Form S-8 and Form
S-3, respectively, of our report dated February 7, 2000 (March 13, 2000 as to
Note F and March 2, 2000 as to Note M), appearing in this Annual Report on Form
10-K of Tesoro Petroleum Corporation for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
San Antonio, Texas
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TESORO
PETROLEUM CORPORATION'S FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 141,800
<SECURITIES> 0
<RECEIVABLES> 282,400
<ALLOWANCES> 1,700
<INVENTORY> 182,200
<CURRENT-ASSETS> 611,600
<PP&E> 976,100
<DEPRECIATION> 244,500
<TOTAL-ASSETS> 1,486,500
<CURRENT-LIABILITIES> 321,600
<BONDS> 390,200
0
165,000
<COMMON> 5,400
<OTHER-SE> 452,700
<TOTAL-LIABILITY-AND-EQUITY> 1,486,500
<SALES> 3,000,300
<TOTAL-REVENUES> 3,000,300
<CGS> 2,828,800
<TOTAL-COSTS> 2,828,800
<OTHER-EXPENSES> 42,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,600
<INCOME-PRETAX> 51,200
<INCOME-TAX> 19,000
<INCOME-CONTINUING> 32,200
<DISCONTINUED> 42,800
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,000
<EPS-BASIC> 1.94<F1>
<EPS-DILUTED> 1.92<F1>
<FN>
<F1>Represents net earnings per share. Earnings per share from continuing
operations were $0.62 basic and diluted.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,000
<SECURITIES> 0
<RECEIVABLES> 234,400
<ALLOWANCES> 1,600
<INVENTORY> 197,200
<CURRENT-ASSETS> 451,500
<PP&E> 960,500
<DEPRECIATION> 250,400
<TOTAL-ASSETS> 1,542,100
<CURRENT-LIABILITIES> 292,000
<BONDS> 491,000
0
165,000
<COMMON> 5,400
<OTHER-SE> 438,800
<TOTAL-LIABILITY-AND-EQUITY> 1,542,100
<SALES> 2,125,700
<TOTAL-REVENUES> 2,125,700
<CGS> 1,949,900
<TOTAL-COSTS> 1,949,900
<OTHER-EXPENSES> 30,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,800
<INCOME-PRETAX> 88,500
<INCOME-TAX> 32,700
<INCOME-CONTINUING> 55,800
<DISCONTINUED> 2,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,100
<EPS-BASIC> 1.52<F1>
<EPS-DILUTED> 1.35<F1>
<FN>
<F1>Represents net earnings per share. Earnings per share from continuing
operations were $1.44 basic and $1.29 diluted.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,800
<SECURITIES> 0
<RECEIVABLES> 204,600
<ALLOWANCES> 1,600
<INVENTORY> 228,000
<CURRENT-ASSETS> 446,900
<PP&E> 934,700
<DEPRECIATION> 240,800
<TOTAL-ASSETS> 1,508,100
<CURRENT-LIABILITIES> 262,100
<BONDS> 524,000
0
165,000
<COMMON> 5,400
<OTHER-SE> 415,600
<TOTAL-LIABILITY-AND-EQUITY> 1,508,100
<SALES> 1,232,200
<TOTAL-REVENUES> 1,232,200
<CGS> 1,126,300
<TOTAL-COSTS> 1,126,300
<OTHER-EXPENSES> 20,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,400
<INCOME-PRETAX> 50,100
<INCOME-TAX> 17,300
<INCOME-CONTINUING> 32,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,800
<EPS-BASIC> 0.83<F1>
<EPS-DILUTED> 0.76<F1>
<FN>
<F1>Represents net earnings per share. Earnings per share from continuing
operations were $0.83 basic and $0.76 diluted.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,200
<SECURITIES> 0
<RECEIVABLES> 151,300
<ALLOWANCES> 1,600
<INVENTORY> 214,200
<CURRENT-ASSETS> 379,500
<PP&E> 926,700
<DEPRECIATION> 230,900
<TOTAL-ASSETS> 1,426,800
<CURRENT-LIABILITIES> 243,900
<BONDS> 495,400
0
165,000
<COMMON> 5,400
<OTHER-SE> 386,100
<TOTAL-LIABILITY-AND-EQUITY> 1,426,800
<SALES> 493,400
<TOTAL-REVENUES> 493,400
<CGS> 466,000
<TOTAL-COSTS> 466,000
<OTHER-EXPENSES> 10,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,100
<INCOME-PRETAX> 200
<INCOME-TAX> 0
<INCOME-CONTINUING> 200
<DISCONTINUED> 100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 300
<EPS-BASIC> (0.08)<F1>
<EPS-DILUTED> (0.08)<F1>
<FN>
<F1>Represents net loss per share. Loss per share from continuing operations were
$0.09 basic and diluted.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,000
<SECURITIES> 0
<RECEIVABLES> 140,400
<ALLOWANCES> 1,600
<INVENTORY> 207,700
<CURRENT-ASSETS> 370,200
<PP&E> 913,200
<DEPRECIATION> 221,800
<TOTAL-ASSETS> 1,406,400
<CURRENT-LIABILITIES> 187,800
<BONDS> 531,400
0
165,000
<COMMON> 5,400
<OTHER-SE> 388,800
<TOTAL-LIABILITY-AND-EQUITY> 1,406,400
<SALES> 1,386,600
<TOTAL-REVENUES> 1,386,600
<CGS> 1,280,800
<TOTAL-COSTS> 1,280,800
<OTHER-EXPENSES> 28,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,200
<INCOME-PRETAX> 12,100
<INCOME-TAX> 4,500
<INCOME-CONTINUING> 7,600
<DISCONTINUED> (22,600)
<EXTRAORDINARY> (4,400)
<CHANGES> 0
<NET-INCOME> (19,400)
<EPS-BASIC> (0.86)<F1>
<EPS-DILUTED> (0.86)<F1>
<FN>
<F1>Represents net loss per share. Earnings per share from continuing operations
before extraordinary item were $0.05 basic and diluted. The extraordinary loss
was $0.15 per basic and diluted share. See Note B of Notes to Consolidated
Financial Statements in Item 8 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,400
<SECURITIES> 0
<RECEIVABLES> 149,000
<ALLOWANCES> 1,500
<INVENTORY> 224,600
<CURRENT-ASSETS> 382,200
<PP&E> 902,900
<DEPRECIATION> 207,200
<TOTAL-ASSETS> 1,462,800
<CURRENT-LIABILITIES> 237,700
<BONDS> 483,200
0
165,000
<COMMON> 5,400
<OTHER-SE> 431,200
<TOTAL-LIABILITY-AND-EQUITY> 1,462,800
<SALES> 862,900
<TOTAL-REVENUES> 862,900
<CGS> 793,800
<TOTAL-COSTS> 793,800
<OTHER-EXPENSES> 17,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,500
<INCOME-PRETAX> 4,600
<INCOME-TAX> 1,300
<INCOME-CONTINUING> 3,300
<DISCONTINUED> 21,400
<EXTRAORDINARY> (4,600)
<CHANGES> 0
<NET-INCOME> 20,100
<EPS-BASIC> 0.60<F1>
<EPS-DILUTED> 0.59<F1>
<FN>
<F1>Represent net earnings per share. Earnings per share from continuing operations
before extraordinary item were $0.01 basic and diluted. Loss from extraordinary
item was $0.15 per basic and diluted share.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 25,400
<SECURITIES> 0
<RECEIVABLES> 96,900
<ALLOWANCES> 1,800
<INVENTORY> 175,000
<CURRENT-ASSETS> 303,200
<PP&E> 656,600
<DEPRECIATION> 198,800
<TOTAL-ASSETS> 1,024,400
<CURRENT-LIABILITIES> 144,800
<BONDS> 451,700
0
0
<COMMON> 4,400
<OTHER-SE> 346,000
<TOTAL-LIABILITY-AND-EQUITY> 1,024,400
<SALES> 409,700
<TOTAL-REVENUES> 409,700
<CGS> 371,400
<TOTAL-COSTS> 371,400
<OTHER-EXPENSES> 8,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,500
<INCOME-PRETAX> (5,800)
<INCOME-TAX> (2,200)
<INCOME-CONTINUING> (3,600)
<DISCONTINUED> 20,500
<EXTRAORDINARY> (4,600)
<CHANGES> 0
<NET-INCOME> 12,300
<EPS-BASIC> 0.47<F1>
<EPS-DILUTED> 0.46<F1>
<FN>
<F1>Represent net earnings per share. Loss per share from continuing operations
before extraordinary items were $0.14 basic and diluted. Extraordinary loss
was $0.17 per basic and diluted share.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 47,800
<ALLOWANCES> 1,200
<INVENTORY> 95,100
<CURRENT-ASSETS> 149,100
<PP&E> 430,200
<DEPRECIATION> 194,700
<TOTAL-ASSETS> 622,700
<CURRENT-LIABILITIES> 74,100
<BONDS> 136,300
0
0
<COMMON> 4,400
<OTHER-SE> 335,000
<TOTAL-LIABILITY-AND-EQUITY> 622,700
<SALES> 173,000
<TOTAL-REVENUES> 173,000
<CGS> 161,100
<TOTAL-COSTS> 161,100
<OTHER-EXPENSES> 3,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,400
<INCOME-PRETAX> 1,900
<INCOME-TAX> 600
<INCOME-CONTINUING> 1,300
<DISCONTINUED> 4,800
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,100
<EPS-BASIC> 0.23<F1>
<EPS-DILUTED> 0.23<F1>
<FN>
<F1>REPRESENTS NET EARNINGS PER SHARE. EARNINGS PER SHARE FROM CONTINUING
OPERATIONS WERE $0.05 BASIC AND DILUTED.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,200
<SECURITIES> 0
<RECEIVABLES> 56,900
<ALLOWANCES> 1,400
<INVENTORY> 86,200
<CURRENT-ASSETS> 153,200
<PP&E> 426,900
<DEPRECIATION> 190,900
<TOTAL-ASSETS> 610,400
<CURRENT-LIABILITIES> 91,700
<BONDS> 115,300
0
0
<COMMON> 4,400
<OTHER-SE> 328,600
<TOTAL-LIABILITY-AND-EQUITY> 610,400
<SALES> 853,100
<TOTAL-REVENUES> 853,100
<CGS> 811,900
<TOTAL-COSTS> 811,900
<OTHER-EXPENSES> 15,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,100
<INCOME-PRETAX> 3,400
<INCOME-TAX> 1,000
<INCOME-CONTINUING> 2,400
<DISCONTINUED> 28,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,700
<EPS-BASIC> 1.16<F1>
<EPS-DILUTED> 1.14<F1>
<FN>
<F1>Represents net earnings per share. Earnings per share from continuing
operations were $0.09 basic and diluted.
</FN>
</TABLE>
