<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________ TO ___________________
COMMISSION FILE NUMBER 1-3473
TESORO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-0862768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 CONCORD PLAZA DRIVE, SAN ANTONIO, TEXAS 78216-6999
(Address of principal executive offices) (Zip Code)
210-828-8484
(Registrant's telephone number, including area code)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
----------------------------------
There were 30,814,895 shares of the registrant's Common
Stock outstanding at July 31, 2000.
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<PAGE> 2
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2000 and December 31, 1999......................... 3
Condensed Statements of Consolidated Operations - Three Months and Six Months Ended
June 30, 2000 and 1999............................................................................ 4
Condensed Statements of Consolidated Cash Flows - Six Months Ended
June 30, 2000 and 1999............................................................................ 5
Notes to Condensed Consolidated Financial Statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 25
Item 6. Exhibits and Reports on Form 8-K............................................................. 25
SIGNATURES................................................................................................. 26
EXHIBIT INDEX.............................................................................................. 27
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................... $ 8.6 $ 141.8
Receivables, less allowance for doubtful accounts ........................... 320.3 280.7
Inventories ................................................................. 282.3 182.2
Prepayments and other ....................................................... 8.0 6.9
-------- --------
Total Current Assets ...................................................... 619.2 611.6
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Refining and marketing ...................................................... 924.3 906.6
Marine services ............................................................. 49.6 47.7
Corporate ................................................................... 22.4 21.8
-------- --------
996.3 976.1
Less accumulated depreciation and amortization .............................. 262.7 244.5
-------- --------
Net Property, Plant and Equipment ......................................... 733.6 731.6
-------- --------
OTHER ASSETS ................................................................... 131.1 143.3
-------- --------
Total Assets ............................................................ $1,483.9 $1,486.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................................ $ 268.7 $ 214.2
Accrued liabilities ......................................................... 78.9 80.0
Current maturities of long-term debt and other obligations .................. 3.7 27.4
-------- --------
Total Current Liabilities ................................................. 351.3 321.6
-------- --------
DEFERRED INCOME TAXES .......................................................... 91.5 85.8
-------- --------
OTHER LIABILITIES .............................................................. 70.1 65.8
-------- --------
LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS CURRENT
MATURITIES ................................................................. 345.3 390.2
-------- --------
COMMITMENTS AND CONTINGENCIES (Note F)
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;
32,735,176 shares issued (32,704,856 in 1999) ............................. 5.4 5.4
Additional paid-in capital .................................................. 279.2 279.0
Retained earnings ........................................................... 196.5 178.6
Treasury stock, 1,920,281 common shares (292,881 in 1999), at cost .......... (20.4) (4.9)
-------- --------
Total Stockholders' Equity ................................................ 625.7 623.1
-------- --------
Total Liabilities and Stockholders' Equity .............................. $1,483.9 $1,486.5
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 4
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Operating Revenues
Refining and marketing ..................................... $ 1,176.0 $ 716.4 $ 2,188.2 $ 1,188.6
Marine services ............................................ 42.2 22.4 84.1 43.6
Other Income .................................................. -- -- 1.2 --
--------- --------- --------- ---------
Total Revenues ............................................. 1,218.2 738.8 2,273.5 1,232.2
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES
Refining and marketing ....................................... 1,126.2 638.5 2,098.9 1,084.4
Marine services .............................................. 39.6 21.8 78.3 41.9
Depreciation and amortization ................................ 9.9 9.7 19.8 19.2
--------- --------- --------- ---------
Total Segment Operating Costs and Expenses ................. 1,175.7 670.0 2,197.0 1,145.5
--------- --------- --------- ---------
SEGMENT OPERATING PROFIT ........................................ 42.5 68.8 76.5 86.7
General and administrative ...................................... (8.9) (8.4) (17.6) (15.3)
Interest and financing costs, net of capitalized interest ....... (8.3) (9.3) (17.9) (19.4)
Interest income ................................................. 0.3 0.3 1.8 0.4
Other expense ................................................... (1.5) (1.5) (3.4) (2.3)
--------- --------- --------- ---------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ................................................. 24.1 49.9 39.4 50.1
Income tax provision ............................................ 9.5 17.3 15.5 17.3
--------- --------- --------- ---------
EARNINGS FROM CONTINUING OPERATIONS, NET ........................ 14.6 32.6 23.9 32.8
Loss from discontinued operations, net of income taxes .......... -- (0.1) -- --
--------- --------- --------- ---------
NET EARNINGS .................................................... 14.6 32.5 23.9 32.8
Preferred dividend requirements ................................. 3.0 3.0 6.0 6.0
--------- --------- --------- ---------
NET EARNINGS APPLICABLE TO COMMON STOCK ......................... $ 11.6 $ 29.5 $ 17.9 $ 26.8
========= ========= ========= =========
EARNINGS PER SHARE FROM CONTINUING
OPERATIONS
Basic ...................................................... $ 0.37 $ 0.92 $ 0.57 $ 0.83
========= ========= ========= =========
Diluted .................................................... $ 0.35 $ 0.76 $ 0.56 $ 0.76
========= ========= ========= =========
NET EARNINGS PER SHARE
Basic ...................................................... $ 0.37 $ 0.91 $ 0.57 $ 0.83
========= ========= ========= =========
Diluted .................................................... $ 0.35 $ 0.76 $ 0.56 $ 0.76
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES - BASIC .......................... 31.1 32.3 31.6 32.3
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND POTENTIALLY
DILUTIVE COMMON SHARES - DILUTED ............................. 41.7 43.0 31.8 42.9
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 5
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
2000 1999
------ ------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Continuing operations:
Earnings from continuing operations, net ..................................... $ 23.9 $ 32.8
Adjustments to reconcile earnings from continuing operations
to net cash from operating activities:
Depreciation and amortization ............................................ 21.0 20.1
Amortization of refinery turnarounds and other non-cash charges .......... 11.6 9.3
Deferred income taxes .................................................... 5.7 2.2
Changes in operating assets and liabilities:
Receivables ............................................................ (39.6) (64.2)
Inventories ............................................................ (100.1) (19.4)
Accounts payable and accrued liabilities ............................... 53.4 62.8
Other assets and liabilities ........................................... 1.4 4.1
------ ------
Total from (used in) continuing operations ........................... (22.7) 47.7
Discontinued operations ......................................................... -- 14.1
------ ------
Net cash from (used in) operating activities ............................... (22.7) 61.8
------ ------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures:
Continuing operations ........................................................ (23.5) (25.1)
Discontinued operations ...................................................... -- (37.4)
Other ........................................................................... 1.6 0.4
------ ------
Net cash used in investing activities ..................................... (21.9) (62.1)
------ ------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit facility ..................... 38.0 (28.2)
Repayments of other debt ........................................................ (105.3) (20.7)
Issuance of other long-term debt ................................................ -- 50.0
Purchases of Common Stock ....................................................... (15.5) --
Payment of dividends on Preferred Stock ......................................... (6.0) (6.0)
Other ........................................................................... 0.2 --
------ ------
Net cash used in financing activities ..................................... (88.6) (4.9)
------ ------
DECREASE IN CASH AND CASH EQUIVALENTS ............................................... (133.2) (5.2)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................................... 141.8 12.0
------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................ $ 8.6 $ 6.8
====== ======
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid ................................................................ $ 3.7 $ 22.9
====== ======
Income taxes paid ............................................................ $ 8.1 $ 11.1
====== ======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE> 6
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The interim condensed consolidated financial statements and notes thereto of
Tesoro Petroleum Corporation and its subsidiaries (collectively, the "Company"
or "Tesoro") have been prepared by management without audit pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, the accompanying financial statements reflect all adjustments that,
in the opinion of management, are necessary for a fair presentation of results
for the periods presented. Such adjustments are of a normal recurring nature.
The balance sheet at December 31, 1999 has been condensed from the audited
consolidated financial statements at that date. Certain information and notes
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
SEC's rules and regulations. However, management believes that the disclosures
presented herein are adequate to make the information not misleading. The
accompanying condensed consolidated financial statements and notes should be
read in conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
The preparation of these condensed consolidated financial statements required
the use of management's best estimates and judgment that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods. Actual results could differ from those
estimates. The results of operations for any interim period are not necessarily
indicative of results for the full year.
Certain amounts for the three months and six months ended June 30, 1999 have
been reclassified to reflect the transfer of the West Coast marine fuel
operations from the Marine Services segment to the Refining and Marketing
segment in 2000. Certain other reclassifications have been made to information
previously reported to conform to current presentation.
NOTE B -- INVENTORIES
Components of inventories were as follows (in millions):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Crude oil and refined products, at LIFO ..... $ 256.6 $ 147.8
Refined products, at FIFO ................... 4.0 9.9
Merchandise and other ....................... 5.7 6.0
Materials and supplies ...................... 16.0 18.5
------- -------
Total inventories ....................... $ 282.3 $ 182.2
======= =======
</TABLE>
NOTE C -- LONG-TERM DEBT
The Company has a revolving credit and letter of credit facility ("Senior Credit
Facility") which provides for $175 million in total commitments from a
consortium of banks. At June 30, 2000, the Company had $38 million in borrowings
and $3.7 million in letters of credit outstanding, resulting in availability
under the Senior Credit Facility of $133 million. The Senior Credit Facility was
amended in February 2000 to permit the Company to repurchase up to 3 million
shares of its Common Stock.
The Senior Credit Facility contains covenants which require, among other things,
that the Company maintain specified levels of leverage and fixed charge
coverages, as defined. Under the fixed charge coverage requirement, the Company
is to maintain coverage of at least 3.25 to 1.00 for the four-quarter periods
ending June 30 and September 30, 2000, increasing to 3.50 to 1.00 thereafter.
The Company's actual fixed charge coverage, as defined, for the four-quarter
period ended June 30, 2000 was 3.09 to 1.00. The Company obtained a waiver from
compliance with the fixed charge coverage requirement from its lenders for the
four-quarter period ended June 30, 2000. There is no assurance that the Company
will be able to satisfy the fixed charge coverage requirement in the future.
However, the Company is in discussions with certain of its lenders to replace
the Senior
6
<PAGE> 7
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Credit Facility, which expires on July 2, 2001. Based on these discussions,
management expects that a new credit facility will be in place during the fourth
quarter of 2000 which will provide more favorable terms and conditions and will
allow the Company to finance its operations and capital spending requirements
throughout the next three years. If the Senior Credit Facility is not replaced,
the Company may be required to either amend the Senior Credit Facility or seek
additional waivers from its lenders. Management believes it would be able to
negotiate an amendment or obtain additional waivers from its lenders.
During the first quarter of 2000, the Company used a portion of the proceeds
from the December 1999 sales of its exploration and production operations to
repay debt. The Company prepaid a $24.0 million note on March 1, 2000 and repaid
the remaining $80.9 million balance of term loans under the Senior Credit
Facility on March 13, 2000.
NOTE D -- 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 represented approximately
9% of the 32.4 million shares then outstanding. Under the program, the Company
repurchases Tesoro Common Stock from time to time in the open market and through
privately negotiated transactions. Purchases depend on price, market conditions
and other factors. The stock may be used to meet employee benefit plan
requirements and other corporate purposes. During the six months ended June 30,
2000, the Company repurchased 1,627,400 shares of Common Stock for approximately
$15.5 million.
NOTE E -- OPERATING SEGMENTS
The Company's revenues are derived from two operating segments: Refining and
Marketing and Marine Services. In March 2000, management commenced a realignment
of its operational organization which included the transfer of the Marine
Services segment's West Coast operations to the Refining and Marketing segment,
effective January 1, 2000. Identifiable assets as of December 31, 1999 and
segment information for the three months and six months ended June 30, 1999 have
been restated to reflect the transfer.
Segment operating profit includes those revenues and expenses that are directly
attributable to management of the respective segment. 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.
EBITDA represents earnings before interest and financing costs, income taxes,
and depreciation 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.
7
<PAGE> 8
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Segment information is as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Operating Revenues
Refining and Marketing ................................ $ 1,176.0 $ 716.4 $ 2,188.2 $ 1,188.6
Marine Services ....................................... 42.2 22.4 84.1 43.6
Other Income - Marine Services .......................... -- -- 1.2 --
--------- --------- --------- ---------
Total Revenues ...................................... $ 1,218.2 $ 738.8 $ 2,273.5 $ 1,232.2
========= ========= ========= =========
SEGMENT OPERATING PROFIT
Refining and Marketing .................................. $ 40.5 $ 68.8 $ 70.7 $ 86.3
Marine Services ......................................... 2.0 -- 5.8 0.4
--------- --------- --------- ---------
Total Segment Operating Profit ...................... 42.5 68.8 76.5 86.7
Corporate and Unallocated Costs ......................... (18.4) (18.9) (37.1) (36.6)
--------- --------- --------- ---------
Earnings from Continuing Operations Before Income
Taxes ................................................ $ 24.1 $ 49.9 $ 39.4 $ 50.1
========= ========= ========= =========
EBITDA
Refining and Marketing .................................. $ 49.8 $ 77.9 $ 89.3 $ 104.2
Marine Services ......................................... 2.6 0.6 7.0 1.7
--------- --------- --------- ---------
Total Segment EBITDA ................................ 52.4 78.5 96.3 105.9
Corporate and Unallocated ............................... (9.5) (9.2) (18.0) (16.3)
--------- --------- --------- ---------
Total EBITDA - Continuing Operations ................ 42.9 69.3 78.3 89.6
Depreciation and Amortization from Continuing
Operations ............................................ (10.5) (10.1) (21.0) (20.1)
Interest and Financing Costs ............................ (8.3) (9.3) (17.9) (19.4)
--------- --------- --------- ---------
Earnings from Continuing Operations Before Income
Taxes ................................................ $ 24.1 $ 49.9 $ 39.4 $ 50.1
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION
Continuing Operations:
Refining and Marketing ................................ $ 9.3 $ 9.1 $ 18.6 $ 17.9
Marine Services ....................................... 0.6 0.6 1.2 1.3
Corporate ............................................. 0.6 0.4 1.2 0.9
--------- --------- --------- ---------
Total Continuing Operations ......................... 10.5 10.1 21.0 20.1
Discontinued Operations ................................. -- 6.8 -- 14.2
--------- --------- --------- ---------
Total Depreciation and Amortization ................... $ 10.5 $ 16.9 $ 21.0 $ 34.3
========= ========= ========= =========
CAPITAL EXPENDITURES
Continuing Operations:
Refining and Marketing ................................ $ 13.6 $ 9.0 $ 21.0 $ 20.1
Marine Services ....................................... 0.5 0.5 1.9 0.7
Corporate ............................................. 0.1 2.2 0.6 4.3
--------- --------- --------- ---------
Total Continuing Operations ......................... 14.2 11.7 23.5 25.1
Discontinued Operations ................................. -- 14.0 -- 37.4
--------- --------- --------- ---------
Total Capital Expenditures ............................ $ 14.2 $ 25.7 $ 23.5 $ 62.5
========= ========= ========= =========
</TABLE>
8
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TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Identifiable assets are those assets utilized by the segment. Corporate assets
are principally cash, property and other assets that are not directly associated
with the operations of an operating segment. Segment assets were as follows (in
millions):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
IDENTIFIABLE ASSETS
Refining and Marketing.......................................................... $ 1,352.6 $ 1,223.6
Marine Services................................................................. 72.3 66.5
Corporate....................................................................... 59.0 196.4
--------- ---------
Total Assets ................................................................. $ 1,483.9 $ 1,486.5
========= =========
</TABLE>
NOTE F -- COMMITMENTS AND CONTINGENCIES
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 Statement of Financial Accounting
Standard ("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.
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 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 under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"
or "Superfund"). Although the Superfund law may 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.
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 owned properties. At June 30, 2000, the Company's
accruals for environmental expenses totaled approximately $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.
The Company is currently evaluating certain newly-promulgated revisions to the
Clean Air Act regulations which will require a reduction in the sulfur content
in gasoline manufactured at its Washington refinery by January 1, 2004. To meet
the revised gasoline standard, the Company expects to make capital improvements
of approximately $30 million at its Washington refinery. Additionally, the
Company expects to spend approximately $15 million over the next three to five
years to comply with proposed Maximum Available Control Technology ("MACT II")
regulations for refineries. Management expects that the proposed MACT II
regulations will be finalized in late 2000 and would require new emission
controls at certain processing units at each of the Company's refineries.
9
<PAGE> 10
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
To comply with environmental laws and regulations, the Company anticipates it
will make other capital improvements of approximately $10 million in 2000 and
$10 million in 2001. During the six months ended June 30, 2000, the Company
spent approximately $4 million, primarily for tank and tank farm secondary
containment improvements at the Alaska, Hawaii and Washington refineries.
Conditions that require additional expenditures may exist for various Company
sites, including, but not limited to, the Company's refineries, retail stations
(operating and closed locations) and petroleum product terminals, and for
compliance with the Clean Air Act and other state and federal requirements. The
amount of such future expenditures cannot currently be determined by the
Company.
For further information regarding environmental and other legal matters, see
Legal Proceedings in Part II, Item 1, included herein.
INCENTIVE COMPENSATION
In October 1998, the Company's Board of Directors unanimously approved the 1998
Performance Incentive Compensation Plan ("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
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 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. No costs will be recorded until the First
Performance Target is reached.
10
<PAGE> 11
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G -- 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 calculation of diluted earnings per share takes into account the
effects of potentially dilutive shares outstanding during the period,
principally stock options and the maximum shares, if dilutive, which would have
been issued assuming conversion of Preferred Stock at the beginning of the
period. The assumed conversion of Preferred Stock to 10.35 million shares of
Common Stock for the six months ended June 30, 2000 produced an anti-dilutive
result and, in accordance with SFAS No. 128, was not included in the dilutive
calculation. Earnings per share calculations are presented below (in millions
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
BASIC:
Numerator:
Earnings from continuing operations, aftertax .............. $ 14.6 $ 32.6 $ 23.9 $ 32.8
Discontinued operations, aftertax .......................... -- (0.1) -- --
------ ------ ------ ------
Net earnings ............................................... 14.6 32.5 23.9 32.8
Less dividends on preferred stock .......................... 3.0 3.0 6.0 6.0
------ ------ ------ ------
Net earnings applicable to common shares ................... $ 11.6 $ 29.5 $ 17.9 $ 26.8
====== ====== ====== ======
Denominator:
Weighted average common shares outstanding ................. 31.1 32.3 31.6 32.3
====== ====== ====== ======
Basic Earnings Per Share:
Earnings from continuing operations ........................ $ 0.37 $ 0.92 $ 0.57 $ 0.83
====== ====== ====== ======
Net earnings ............................................... $ 0.37 $ 0.91 $ 0.57 $ 0.83
====== ====== ====== ======
DILUTED:
Numerator:
Net earnings applicable to common shares ................... $ 11.6 $ 29.5 $ 17.9 $ 26.8
Plus impact of assumed conversion of
preferred stock (only if dilutive) ....................... 3.0 3.0 -- 6.0
------ ------ ------ ------
Total ...................................................... $ 14.6 $ 32.5 $ 17.9 $ 32.8
====== ====== ====== ======
Denominator:
Weighted average common shares outstanding ................. 31.1 32.3 31.6 32.3
Add potentially dilutive securities:
Incremental dilutive shares from assumed exercise
of stock options and other ............................. 0.3 0.4 0.2 0.3
Incremental dilutive shares from assumed conversion
of preferred stock (only if dilutive) .................. 10.3 10.3 -- 10.3
------ ------ ------ ------
Total diluted shares ....................................... 41.7 43.0 31.8 42.9
====== ====== ====== ======
Diluted Earnings Per Share:
Earnings from continuing operations ........................ $ 0.35 $ 0.76 $ 0.56 $ 0.76
====== ====== ====== ======
Net earnings ............................................... $ 0.35 $ 0.76 $ 0.56 $ 0.76
====== ====== ====== ======
</TABLE>
11
<PAGE> 12
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H -- NEW ACCOUNTING STANDARDS AND DISCLOSURES
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," and in June
2000, the FASB amended SFAS No. 133 by issuing SFAS No. 138. These statements
establish accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. These statements require an entity to 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 and No. 138 are 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 in hedging margins on sales to certain customers. The
Company also engages in limited petroleum trading activities through the use of
derivatives. 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. 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 implementation of SFAS No.
133 and No. 138 will have on its financial condition, results of operations, and
financial reporting and disclosures.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101")
on revenue recognition in financial statements. The Company recognizes revenues
from product sales and services upon delivery to customers. Management believes
that the Company's revenue recognition practices conform with those described in
SAB 101 and that no significant change in its policy is required at this time.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THOSE STATEMENTS IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS THAT ARE NOT
HISTORICAL IN NATURE SHOULD BE DEEMED FORWARD-LOOKING STATEMENTS THAT ARE
INHERENTLY UNCERTAIN. SEE "FORWARD-LOOKING STATEMENTS" ON PAGE 22 FOR DISCUSSION
OF THE FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED IN SUCH STATEMENTS.
STRATEGY
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. Management's goal is to
achieve a 12% aftertax return on capital employed.
To improve profitability from the Company's existing asset base, management has
developed self-help programs focused on manufacturing enhancements, marketing
growth and cost reduction. Management believes that these self-help programs,
which are further discussed below, will significantly improve EBITDA.
In manufacturing, the Company has commenced a heavy oil conversion project at
its Washington refinery. The estimated project cost was increased from the $75
million to $80 million range to approximately $85 million to $95 million, based
on more detailed engineering. The project is expected to be completed in
conjunction with the refinery's turnaround in late 2001. The licensor agreement
and the process design work have been completed, and the procurement and
permitting processes are progressing. Management believes that this improvement
to the Washington refinery will substantially increase annual EBITDA beginning
in 2002. In addition, management believes that a new $13 million distillate
treater, which was placed in service at the Washington refinery in December
1999, has performed ahead of expectations for the first half of 2000 and will
exceed its originally projected annual EBITDA contribution of $6 million to $8
million.
The Company has initiated several improvements in its marketing programs,
including expansion of its retail operations. The Company 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
the western United States. During the 2000 second quarter, the Company acquired
eight retail sites, seven of which are located on Wal-Mart properties. These
retail sites were rebranded under the Company's recently introduced Mirastar
brand which will be used exclusively in the Company's program with Wal-Mart. In
addition to the seven operating Mirastar stations, two Mirastar stations are
under construction and over 60 Mirastar sites are in various stages of
development or evaluation. Management expects to have approximately 30 Mirastar
sites operating by the end of January 2001. The Company has also entered into
two unbranded, high-volume retail agreements in the Pacific Northwest. In
addition, the Company is adding branded stations operated by independent
jobbers. Currently, the Company has 75 branded jobber locations in the western
U.S., excluding Alaska and Hawaii, as compared to 54 at the beginning of 2000.
Tesoro's total retail capital spending program is planned at $36 million for
2000.
Other product marketing programs are focused on increasing margins by moving
certain volumes into higher-value channels of trade. The Company's specific
goals include: (i) shifting 6,000 barrels per day ("Bpd") of gasoline from bulk
markets to unbranded rack sales to increase margins by $2 million to $3 million
annually; (ii) increasing jet fuel margins on 6,000 Bpd by $1 million to $2
million annually; (iii) moving 10,000 Bpd of diesel fuel from bulk markets to
rack sales to increase margins by $1 million to $2 million annually; and (iv)
changing channels for 10,000 Bpd of other products to increase margins by $6
million to $7 million annually. During the first six months of 2000, the
Company's West Coast volumes to branded jobbers averaged 3,600 Bpd and unbranded
rack volumes averaged 42,000 Bpd, increases of approximately 60% and 25%,
respectively, compared to the first six months of 1999.
13
<PAGE> 14
The Company is conducting an evaluation of its cost structure. In connection
with the evaluation of the Alaska operations, a full range of options relative
to products in Alaska, such as supplying the Alaska market from other sources,
were evaluated as well as a restructuring that could have included the sale, or
closure of part, or all, of the Alaskan assets. The results of the Alaska
evaluation were presented to the Company's Board of Directors in April 2000 with
management's recommendation to continue to operate the refinery and marketing
assets in Alaska. The evaluation showed that this option has more potential
benefit for shareholders than other alternatives. To achieve an acceptable
financial return on these assets, however, management believes that it must
implement programs to reduce controllable costs and make other improvements. The
Company does not intend to commit any significant capital to these operations,
beyond that required for maintenance, safety and environmental responsibility,
while the Company evaluates whether higher financial goals can be achieved.
As part of the Alaska initiatives, the Company has reorganized the
administrative and marketing functions and eliminated positions in Alaska by
consolidating them into the Company's West Coast office. In addition, nine of
the 31 Company-owned and operated retail sites in Alaska were identified as
candidates for closure. In combination, the annual savings from these two
programs is expected to be between $3 million and $4 million. Additionally,
several new marketing and processing initiatives have been identified for
Alaska. The Company has implemented the cost reduction programs and expects to
have other plans substantially in place by the end of 2000. If these efforts are
successful, the financial impact of these initiatives could bring Alaska's
return on capital employed into a targeted range of approximately 8% to 10%. The
Alaska operations were profitable during the first half of 2000.
The Company's profit improvement programs also include cost reductions in
domestic shipping and other costs. One of the Company's two above-market ship
charters was terminated in late April 2000 and was replaced by a new charter for
a double-hull tanker which has a three-year primary term beginning in May 2000
and two one-year options. The Company is terminating the remaining above-market
charter during the third quarter of 2000. This new shipping program, based on
the new term charter for a single ship, will result in annual cost savings of
approximately $20 million compared to the previous domestic shipping program.
However, the Company's freight rates for foreign flagged vessels increased from
last year's levels, offsetting savings from domestic shipping in the second
quarter of 2000.
Management has targeted additional cost reductions of $10 million to $20 million
per year, including the savings related to the Alaska realignment.
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 not keep pace with changes in crude oil
costs. The Company also purchases refined products manufactured by others that
are later resold, and 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 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 crude oil and natural gas prices. The
Marine Services segment uses the first-in, first-out ("FIFO") method of
accounting for inventories of fuels. Changes in fuel prices can significantly
affect inventory valuations and costs of sales.
14
<PAGE> 15
RESULTS OF OPERATIONS - THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000
COMPARED WITH THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999
SUMMARY
Tesoro's net earnings were $14.6 million ($0.37 per basic share or $0.35 per
diluted share) for the three months ended June 30, 2000 ("2000 Quarter"),
compared with net earnings of $32.5 million ($0.91 per basic share or $0.76 per
diluted share) for the three months ended June 30, 1999 ("1999 Quarter"). For
the year-to-date periods, net earnings were $23.9 million ($0.57 per basic share
or $0.56 per diluted share) for the six months ended June 30, 2000 ("2000
Period"), compared with net earnings of $32.8 million ($0.83 per basic share or
$0.76 per diluted share) for the six months ended June 30, 1999 ("1999 Period").
The decrease in earnings in the 2000 Quarter, compared to the 1999 Quarter,
reflected lower operating profits from the Refining and Marketing segment due
to significant changes in market conditions on the West Coast as discussed
below.
A discussion and analysis of the factors contributing to the Company's 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 only criteria
for predicting the future performance of the Company.
Certain amounts for the three months and six months ended June 30, 1999 have
been reclassified to reflect the transfer of the West Coast marine fuel
operations from the Marine Services segment to the Refining and Marketing
segment in 2000. Certain other reclassifications have been made to information
previously reported to conform to current presentation.
15
<PAGE> 16
REFINING AND MARKETING
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
(Dollars in millions except per barrel amounts) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating Revenues:
Refined products ............................................... $ 1,066.5 $ 701.5 $ 2,022.5 $ 1,155.1
Other revenues (primarily crude oil resales and
merchandise) ................................................ 109.5 14.9 165.7 33.5
--------- --------- --------- ---------
Total Operating Revenues ................................... $ 1,176.0 $ 716.4 $ 2,188.2 $ 1,188.6
========= ========= ========= =========
Segment Operating Profit:
Gross margin:
Refinery (a) ................................................. $ 144.3 $ 160.7 $ 271.2 $ 263.3
Non-refinery:
Merchandise ................................................ 6.8 5.6 13.4 10.6
Other product and crude oil marketing (b) .................. 8.1 12.5 18.0 20.3
--------- --------- --------- ---------
Total gross margins ...................................... 159.2 178.8 302.6 294.2
Operating expenses and other ................................... (109.4) (100.9) (213.3) (190.0)
Depreciation and amortization .................................. (9.3) (9.1) (18.6) (17.9)
--------- --------- --------- ---------
Segment Operating Profit ..................................... $ 40.5 $ 68.8 $ 70.7 $ 86.3
========= ========= ========= =========
Refinery Throughput (thousands of barrels per day):
Alaska ......................................................... 50.8 46.7 44.9 45.5
Hawaii ......................................................... 80.7 92.9 83.2 90.2
Washington ..................................................... 121.4 112.8 113.5 105.0
--------- --------- --------- ---------
Total Refinery System Throughput ............................. 252.9 252.4 241.6 240.7
========= ========= ========= =========
% Heavy crude oil of total refinery system throughput .......... 42.4% 40.4% 44.1% 35.8%
========= ========= ========= =========
Refined Products Manufactured (thousands of barrels per day):
Gasoline and gasoline blendstocks ............................ 100.0 98.7 95.5 94.4
Jet fuel ..................................................... 57.5 62.8 55.7 60.4
Diesel fuel .................................................. 41.8 35.5 35.9 33.3
Heavy oils, residual products and other ...................... 60.5 65.4 61.8 63.0
--------- --------- --------- ---------
Total Refined Products Manufactured ...................... 259.8 262.4 248.9 251.1
========= ========= ========= =========
Total Refinery System Product Spread ($/barrel) (c) ............... $ 6.27 $ 6.98 $ 6.17 $ 6.04
========= ========= ========= =========
Segment Product Sales (thousands of barrels per day) (d):
Gasoline and gasoline blendstocks .............................. 145.3 138.1 134.8 124.0
Jet fuel ....................................................... 76.2 75.0 76.6 72.4
Diesel fuel .................................................... 52.0 46.0 47.9 42.4
Heavy oils, residual products and other ........................ 58.8 53.4 59.2 56.5
--------- --------- --------- ---------
Total Product Sales .......................................... 332.3 312.5 318.5 295.3
========= ========= ========= =========
Segment Gross Margins on Product Sales ($/barrel) (e):
Average sales price ............................................ $ 35.54 $ 24.67 $ 35.04 $ 21.62
Average costs of sales ......................................... 30.34 18.60 29.69 16.31
--------- --------- --------- ---------
Gross Margin ................................................. $ 5.20 $ 6.07 $ 5.35 $ 5.31
========= ========= ========= =========
</TABLE>
----------
(a) Approximates throughput at the Company's refineries times refinery product
spread.
(b) Primarily includes margins on products and crude oil purchased and resold,
and the effects of selling a volume and mix of product that is different
than actual volumes manufactured.
(c) Refinery system product spread represents an average for the Company's
three refineries.
(d) Sources of total product sales include products manufactured at the
refineries, products drawn from inventory balances and products purchased
from third parties.
(e) Gross margins on total product sales include margins on sales of
manufactured and purchased products and the effect of inventory changes.
16
<PAGE> 17
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999.
Segment operating profit for the Refining and Marketing segment was $40.5
million in the 2000 Quarter, a decrease of $28.3 million from segment operating
profit of $68.8 million in the 1999 Quarter. The decline was primarily due to
lower West Coast refinery margins, compared with the 1999 Quarter. Refining
margins in the western United States were unusually high in the 1999 Quarter due
to product supply disruptions caused by operating problems at other refineries
and a rupture of a major refined products pipeline which serves the Pacific
Northwest region. Management estimates that the 1999 second quarter disruptions
contributed up to $0.75 per barrel to the Company's average refinery product
spread of $6.98 per barrel. In addition, the pricing volatility during the 1999
Quarter increased profitability for the Company's other product and crude oil
marketing by $4.4 million, compared with the 2000 Quarter. West Coast margins
have returned to more normal levels during the 2000 Quarter, largely due to the
correction of last year's product supply disruptions, and the market has
adapted to the pipeline shutdown resulting in a decrease of $0.71 per barrel to
the Company's average refinery spread compared to the 1999 Quarter.
Revenues from sales of refined products in the Refining and Marketing segment
increased in the 2000 Quarter, compared to the 1999 Quarter, due to higher
product prices and sales volumes. Total product sales averaged 332,300 barrels
per day (Bpd) in the 2000 Quarter, an increase of 19,800 Bpd from 312,500 Bpd in
the 1999 Quarter. Other revenues increased in the 2000 Quarter primarily due to
crude oil resales of approximately $85 million in the 2000 Quarter. There were
no crude oil resales in the 1999 Quarter. The increase in cost of sales
reflected higher costs of crude oil and purchased products due to higher prices
as well as higher volumes.
Refinery gross margin decreased $16.4 million to $144.3 million in the 2000
Quarter due primarily to the decrease in average refinery product spread per
barrel to $6.27 in the 2000 Quarter compared to $6.98 in the 1999 Quarter.
Non-refinery margins decreased by $3.2 million to $14.9 million in the 2000
Quarter due primarily to lower profits for other product and crude oil marketing
activities, partly offset by increased margins from merchandise sales through
Company-owned retail stations.
Operating expenses and other, excluding depreciation, increased by $8.5 million
to $109.4 million in the 2000 Quarter, primarily due to higher refinery fuel and
utility costs, increased state and local taxes due to higher product values, and
increased non-cash amortization cost due to an acceleration in the timing of the
Hawaii crude unit turnaround and the turnaround at the Washington refinery. If
energy and product prices remain at high levels, operating expenses will be
similarly impacted in the future. Operating expenses included non-cash
amortization of refinery turnaround costs of $5.1 million in the 2000 Quarter
and $3.5 million in the 1999 Quarter.
The Hawaii crude unit turnaround has been moved from 2001 and combined with the
hydrocracker turnaround in the third quarter of 2000, which will avoid a
temporary reduction in throughput in 2001. Management expects combined refinery
throughput to average approximately 260,000 Bpd in the third quarter of 2000,
even with the Hawaii turnaround. The Washington refinery turnaround, originally
planned for 2002, has been moved to coincide with the completion of the heavy
oil conversion project expected in late 2001.
As previously discussed in "Strategy" on page 13 of this Management's Discussion
and Analysis, the Company has developed self-help programs to improve the
fundamental earnings potential of the Refining and Marketing segment. Future
profitability of this segment, however, will continue to be influenced, either
positively or negatively, by market conditions and other factors that are beyond
the control of the Company.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999.
Segment operating profit for the Company's Refining and Marketing operations was
$70.7 million in the 2000 Period, a decrease of $15.6 million from segment
operating profit of $86.3 million in the 1999 Period. The change in operating
profit was primarily due to increased operating costs of $23.3 million, partly
offset by higher sales volumes and refinery margins, as discussed below. The
refineries ran a higher percentage of heavy crude oil which provided better
values than higher-priced light crude oil during the 2000 Period. Refinery
feedstocks for the 2000 Period consisted of 32% crude oil from foreign sources,
35% crude oil from Alaska's North Slope, 15% crude oil from Canada, 14% crude
oil from Alaska's Cook Inlet, and 4% other feedstocks.
Revenue increased significantly from the 1999 Period, reflecting higher product
prices and sales volumes. Total product sales averaged 318,500 Bpd in the 2000
Period, an increase of 23,200 Bpd from 295,300 Bpd in the 1999 Period. Other
revenues increased in the 2000 Period primarily due to higher crude oil resales,
which were approximately $134 million in the 2000 Period and $6 million in the
1999 Period. The increase in cost of sales reflected higher costs of crude oil
and purchased products due to higher prices, as well as higher volumes.
17
<PAGE> 18
Refinery gross margin increased $7.9 million to $271.2 million in the 2000
Period due primarily to the increase in average refinery product spread per
barrel to $6.17 in the 2000 Period compared to $6.04 in the 1999 Period.
Non-refinery margins increased $0.5 million to $31.4 million in the 2000 Period
due primarily to increased merchandise sales through Company-owned retail
stations, partly offset by lower margins on other product and crude oil
marketing.
Operating expenses and other, excluding depreciation, increased by $23.3 million
to $213.3 million in the 2000 Period primarily due to higher refinery fuel and
utility costs, increased state and local taxes due to higher product values, and
increased non-cash amortization cost due to an acceleration in timing for the
Hawaii crude unit turnaround and the turnaround of the Washington refinery
referred to above. Operating expenses included non-cash amortization of
refinery turnaround costs of $10.3 million in the 2000 Period and $7.7 million
in the 1999 Period.
MARINE SERVICES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(Dollars in millions) 2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating Revenues:
Fuels .................................... $ 35.3 $ 16.7 $ 70.2 $ 32.3
Lubricants and Other ..................... 3.8 3.4 7.6 6.7
Services ................................. 3.1 2.3 6.3 4.6
------ ------ ------ ------
Operating Revenues ..................... 42.2 22.4 84.1 43.6
Costs of Sales .............................. 32.0 14.9 63.0 27.8
------ ------ ------ ------
Gross Profit ........................... 10.2 7.5 21.1 15.8
Other Income ................................ -- -- 1.2 --
Operating Expenses and Other ................ (7.6) (6.9) (15.3) (14.1)
Depreciation and Amortization ............... (0.6) (0.6) (1.2) (1.3)
------ ------ ------ ------
Segment Operating Profit ................. $ 2.0 $ -- $ 5.8 $ 0.4
====== ====== ====== ======
Sales Volumes (millions of gallons):
Fuels, primarily diesel .................. 42.5 32.6 84.0 69.5
Lubricants ............................... 0.6 0.5 1.1 1.0
</TABLE>
Segment operating profit improved by $2.0 million and $5.4 million during the
2000 Quarter and 2000 Period, respectively, primarily due to higher fuel sales
volumes and service revenues. The higher fuel sales volumes and service revenues
reflected increased exploration and development activity in the U.S. Gulf of
Mexico compared with 1999. Operating revenues increased $19.8 million and $40.5
million from the 1999 Quarter and 1999 Period, respectively, reflecting higher
fuel prices, fuel sales volumes, and service revenues. In addition, the Company
received other income of $1.2 million from settlement of a service contract in
the first quarter of 2000. The increase in cost of sales reflected higher fuel
sales volumes and prices.
The Marine Services segment's business is largely dependent upon the volume of
oil and gas drilling, workover, construction and seismic activity in the U.S.
Gulf of Mexico.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by $0.5 million and $2.3 million
during the 2000 Quarter and 2000 Period, respectively. The year-to-date increase
was primarily due to higher professional fees and employee costs associated with
business development and organizational realignment in the first quarter of
2000.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased by $1.0 million and $1.5 million during
the 2000 Quarter and 2000 Period, respectively, reflecting lower borrowings
partly offset by higher interest rates on floating-rate debt. Proceeds from the
sales of the Company's exploration and production operations were used to repay
debt in December 1999 and in March 2000 (see Note C of Notes to Condensed
Consolidated Financial Statements). The benefits from these debt reductions were
largely offset by higher interest rates on variable-rate debt and additional
borrowings to finance working capital. Increases in inventories and receivables
were due to higher crude oil and product inventory volumes, petroleum prices and
sales activities which were financed by borrowings and trade payables.
18
<PAGE> 19
INTEREST INCOME
Interest income increased by $1.4 million during the 2000 Period due to
temporary investment of a portion of the proceeds from December 1999 sales of
exploration and production operations. A substantial portion of those proceeds
was used to repay debt in March 2000, as discussed above.
OTHER EXPENSE
The increase of $1.1 million in other expense during the 2000 Period was due
primarily to costs of acquisition strategies and an increase in environmental
provisions related to former operations.
INCOME TAX PROVISION
The decrease of $7.8 million in the income tax provision in the 2000 Quarter,
compared with the 1999 Quarter, reflected the decrease in pretax earnings,
primarily from the Refining and Marketing segment. Similarly, the income tax
provision decreased $1.8 million to $15.5 million in the 2000 Period due to
lower pretax earnings.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
The Company's primary sources of liquidity are its cash flows from operations
and borrowing availability under a revolving line of credit ("Revolver").
Capital requirements are expected to include capital expenditures, working
capital, debt service and preferred dividend payments. Based upon current needs,
management believes that available capital resources will be adequate to meet
the Company's future capital requirements.
The Company operates in an environment where its liquidity and capital resources
are impacted by changes in the supply of and demand for crude oil 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 June 30, 2000 was comprised of the following
(in millions):
<TABLE>
<S> <C>
Debt and other obligations outstanding, including current maturities:
Senior Credit Facility - Revolver......................................... $ 38
9% Senior Subordinated Notes, due 2008.................................... 297
Other senior debt and other obligations................................... 14
-----
Total debt and other obligations....................................... 349
Mandatorily Convertible Preferred Stock..................................... 165
Common stockholders' equity ................................................ 461
-----
Total Capitalization................................................... $ 975
=====
</TABLE>
At June 30, 2000, the Company's total debt to capitalization ratio was 36%,
compared with 40% at year-end 1999. In March 2000, the Company repaid $81
million of term loans under the Senior Credit Facility and prepaid a $24 million
note, which were outstanding at year-end 1999.
The Senior Credit Facility, Senior Subordinated Notes and Preferred Stock 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.
CREDIT ARRANGEMENTS
The Company has a revolving credit and letter of credit facility ("Senior Credit
Facility") which provides for $175 million in total commitments from a
consortium of banks. At June 30, 2000, the Company had $38 million
19
<PAGE> 20
in borrowings and $3.7 million in letters of credit outstanding, resulting in
availability under the Senior Credit Facility of $133 million. The Senior Credit
Facility was amended in February 2000 to permit the Company to repurchase up to
3 million shares of its Common Stock.
The Senior Credit Facility contains covenants which require, among other things,
that the Company maintain specified levels of leverage and fixed charge
coverages, as defined. Under the fixed charge coverage requirement, the Company
is to maintain coverage of at least 3.25 to 1.00 for the four-quarter periods
ending June 30 and September 30, 2000, increasing to 3.50 to 1.00 thereafter.
The Company's actual fixed charge coverage, as defined, for the four-quarter
period ended June 30, 2000 was 3.09 to 1.00. The Company obtained a waiver from
compliance with the fixed charge coverage requirement from its lenders for the
four-quarter period ended June 30, 2000. There is no assurance that the Company
will be able to satisfy the fixed charge coverage requirement in the future.
However, the Company is in discussions with certain of its lenders to replace
the Senior Credit Facility, which expires on July 2, 2001. Based on these
discussions, management expects that a new credit facility will be in place
during the fourth quarter of 2000 which will provide more favorable terms and
conditions and will allow the Company to finance its operations and capital
spending requirements throughout the next three years. If the Senior Credit
Facility is not replaced, the Company may be required to either amend the Senior
Credit Facility or seek additional waivers from its lenders. Management believes
it would be able to negotiate an amendment or obtain additional waivers from its
lenders.
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 represented approximately
9% of the 32.4 million shares then outstanding. Under the program, the Company
repurchases Tesoro Common Stock from time to time in the open market and through
privately negotiated transactions. Purchases depend on price, market conditions
and other factors. The stock may be used to meet employee benefit plan
requirements and other corporate purposes. During the six months ended June 30,
2000, the Company repurchased 1,627,400 shares of Common Stock for approximately
$15.5 million.
CAPITAL SPENDING
The Company has a total capital spending program of $115 million for the year
2000. Tesoro plans to spend $72 million for projects at its refineries,
including $28 million for a heavy oil conversion project, $20 million for other
economic projects, $13 million for sustaining capital, and $11 million for
environmental, health and safety projects. Tesoro's retail capital program is
planned at $36 million, which includes 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 targets growth in the western U.S. The Marine Services segment has a $5
million capital budget. 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 supplemented with borrowings under the Senior
Credit Facility.
During the 2000 Period, the Company's capital expenditures totaled $24 million,
which included initial costs related to manufacturing improvements and marketing
programs. In this regard, the Company commenced a heavy oil conversion project
at the Washington refinery. The licensor agreement and process design work have
been completed, and the procurement and permitting processes are progressing.
Management believes that this project, which has an estimated total cost of $85
million to $95 million based on detailed engineering, will be completed in late
2001 and expects to spend approximately $28 million of the total cost in the
year 2000. As related to its marketing program, the Company has 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 the western
United States. During the 2000 second quarter, the Company acquired eight
retail sites, seven of which are located on Wal-Mart properties. These retail
sites were rebranded under the Company's recently introduced Mirastar brand
which will be used exclusively in the Company's program with Wal-Mart. In
addition to the seven operating Mirastar stations, two Mirastar stations are
under construction and over 60 Mirastar sites are in various stages of
development or evaluation.
MAJOR MAINTENANCE COSTS
The Company has scheduled a turnaround for certain units at its Hawaii refinery
in the third quarter of 2000. The total cost of this turnaround is estimated at
$11 million. Amortization of turnaround costs, other major
20
<PAGE> 21
maintenance costs and catalysts for the Company's three refineries are projected
to total approximately $25 million during the year 2000.
CASH FLOWS
Components of the Company's cash flows, including discontinued operations in
1999, are set forth below (in millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
2000 1999
-------- ------
<S> <C> <C>
Cash Flows From (Used In):
Operating Activities.................................................................. $ (22.7) $ 61.8
Investing Activities.................................................................. (21.9) (62.1)
Financing Activities.................................................................. (88.6) (4.9)
-------- ------
Decrease in Cash and Cash Equivalents..................................................... $ (133.2) $ (5.2)
======== ======
</TABLE>
Net cash used in operating activities totaled $22.7 million during the 2000
Period, compared to $61.8 million provided by operating activities for the 1999
Period. Cash flows from earnings from continuing operations before depreciation
and amortization, deferred income taxes, and other noncash charges decreased
$2.2 million in the 2000 Period, compared with the 1999 Period. Net increases in
operating assets and liabilities in the 2000 Period amounted to $84.9 million
which primarily included increases in inventories due to higher volumes and
prices. In comparison, operating assets and liabilities increased only $16.7
million during the 1999 Period. Net cash used in investing activities of $21.9
million during the 2000 Period included capital expenditures of $23.5 million,
partly offset by proceeds from sales of assets. Net cash used in financing
activities of $88.6 million in the 2000 Period included repayments of debt
totaling $105.3 million and purchases of common stock of $15.5 million. In
addition, payment of dividends on preferred stock totaled $6 million. These uses
of cash were partly offset by net borrowings under the Revolver of $38 million
(gross borrowings of $642.5 million offset by gross repayments of $604.5
million).
At June 30, 2000, the Company's working capital totaled $267.9 million, which
included cash and cash equivalents of $8.6 million. The working capital ratio
was 1.8 to 1 at June 30, 2000, compared to 1.9 to 1 at December 31, 1999.
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 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 June 30, 2000, the Company's
accruals for environmental expenses totaled approximately $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.
The Company is currently evaluating certain newly-promulgated revisions to the
Clean Air Act regulations which will require a reduction in the sulfur content
in gasoline manufactured at its Washington refinery by January 1, 2004. To meet
the revised gasoline standard, the Company expects to make capital improvements
of approximately $30 million at its Washington refinery. Additionally, the
Company expects to spend approximately $15 million over the next three to five
years to comply with proposed Maximum Available Control Technology ("MACT II")
regulations for refineries. Management expects that the proposed MACT II
regulations will be finalized in late 2000 and would require new emission
controls at certain processing units at each of the Company's refineries.
To comply with environmental laws and regulations, the Company anticipates it
will make other capital improvements of approximately $10 million in 2000 and
$10 million in 2001. During the six months ended June 30, 2000, the Company
spent approximately $4 million, primarily for tank and tank farm secondary
containment improvements at the Alaska, Hawaii and Washington refineries.
21
<PAGE> 22
Conditions that require additional expenditures may exist for various Company
sites, including, but not limited to, the Company's refineries, retail stations
(operating and closed locations) and petroleum product terminals, and for
compliance with the Clean Air Act and other state and federal requirements. The
amount of such future expenditures cannot currently be determined by the
Company.
For further information on environmental and other contingencies, see Note F of
Notes to Condensed Consolidated Financial Statements in Part I, Item 1, and
Legal Proceedings in Part II, Item 1, included herein.
NEW ACCOUNTING STANDARDS AND DISCLOSURES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (which was subsequently amended by SFAS No.
138 in June 2000). These statements establish accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company is evaluating the
effects that implementation of these statements will have on its financial
condition, results of operations, and financial reporting and disclosures.
The SEC issued Staff Accounting Bulletin No. 101 ("SAB 101") on revenue
recognition in December 1999. Management believes that the Company's revenue
recognition practices conform with SAB 101.
For further information related to SFAS No. 133, SFAS No. 138 and SAB 101, see
Note H of Notes to Condensed Consolidated Financial Statements in Part I, Item
I.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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-Q 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
and 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; disruptions due to equipment interruption or failure at
Company or third-party facilities; 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. Many of the factors are
described in greater detail in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 and other of the Company's filings with the SEC.
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.
22
<PAGE> 23
ITEM 3. 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, 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 products are also affected by
local factors such as local market conditions and the level of operations of
other refineries in the Company's market.
The price 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 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 June 30, 2000 and December 31,
1999, the Company's inventories of refinery feedstocks and refined products
totaled 12.2 million barrels and 8.6 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 petroleum 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 June 30, 2000, the Company held the following
derivative commodity instruments:
o Crude oil futures contracts to purchase 166,000 barrels in August 2000 at
a weighted average price of $32.04 per barrel. The total amount of the
contracts was $5.3 million and the fair value approximated the contract
amount.
o Contingent obligations to purchase 25,000 barrels of crude oil in August
2000 at a price of $30.50 per barrel under put options sold by the
Company. At June 30, 2000, the Company did not have a significant
unrealized gain or loss on the options.
INTEREST RATE RISK
Total debt at June 30, 2000 included $38 million of floating-rate debt under the
Revolver and $311 million of fixed-rate debt. The interest rate on the
floating-rate debt was 9.5% at June 30, 2000. The impact on annual cash flow of
a 10% change in the floating rate for the Revolver (95 basis points) would be
$361,000.
At June 30, 2000, the fair market value of the Company's fixed-rate debt was
approximately $11 million less than its book value of $311 million, based on
recent transactions and bid quotes for the Company's 9% Senior Subordinated
Notes. The floating-rate debt will mature in July 2001. Fixed-rate debt of $297
million will mature in 2008, while other fixed-rate capital leases, notes and
other obligations will mature over varying periods through 2013.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, on September 16, 1999, the U.S.
Environmental Protection Agency ("EPA") issued a letter to the
Company's subsidiary, Tesoro Hawaii Corporation ("Tesoro Hawaii"),
alleging certain violations of the facility response plan
regulations under the Clean Water Act at the Hawaii refinery. On
June 1, 2000, the EPA entered a consent decree in settlement of its
claim against Tesoro Hawaii for which Tesoro Hawaii paid a civil
penalty of $39,500 on June 16, 2000. In addition, the terms of the
consent decree settle all claims by the EPA of alleged violations
of the Clean Air Act, the Comprehensive Environmental Response,
Compensation, and Liability Act, the Emergency Planning and
Community Right-to-Know Act and the Federal Water Pollution Control
Act alleged against BHP Petroleum Americas Refining, Inc., prior to
the Company's purchase of the Hawaii refinery in 1998. The Company
was indemnified for all but $39,500 of the total civil penalty
amount in the consent decree pursuant to the separate environmental
agreement executed by The Broken Hill Proprietary Company Limited
and the Company in connection with the 1998 acquisition.
As previously reported, on March 3, 2000, the Alaska Department of
Environmental Conservation ("ADEC") issued a Notice of Violation
("NOV") to Tesoro Alaska Company ("Tesoro Alaska"), a subsidiary of
the 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. On July 5,
2000, Tesoro Alaska received an Offer of Settlement from the ADEC
in the amount of $604,000 for violations alleged in the NOV. Tesoro
Alaska is reviewing ADEC's offer, and settlement discussions are
continuing. The Company believes that the resolution of this matter
will not have a material adverse effect on the Company.
On May 31, 2000, the Company and certain of its officers were named
defendants in a lawsuit filed in the United States District Court,
Western District of Texas, San Antonio Division, brought by Group
One Limited which seeks to certify as a class, all persons or
entities who purchased the Company's securities during the period
from January 3, 2000 through May 3, 2000. Three other identical
lawsuits have also been filed in the same court. The lawsuits
allege that the defendants issued false and misleading information
regarding the Company's financial condition and operations, which
artificially inflated the market price of the Company's securities
during the period from January 3, 2000 through May 3, 2000. The
complaints seek unspecified damages. The Company believes that the
lawsuits are without merit, and the Company intends to vigorously
defend against the allegations contained in the complaints.
24
<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 2000 Annual Meeting of Stockholders of the Company was
held on May 25, 2000.
(b) The following directors were elected at the 2000 Annual
Meeting of Stockholders to hold office until the 2001 Annual
Meeting of Stockholders or until their successors are
elected and qualified. A tabulation of the number of votes
for or withheld with respect to each such director is set
forth below:
<TABLE>
<CAPTION>
Votes
Name For Withheld
---- --- --------
<S> <C> <C>
Steven H. Grapstein 23,665,494 2,394,031
William J. Johnson 23,668,168 2,391,357
Raymond K. Mason, Sr. 23,662,157 2,397,368
Donald H. Schmude 23,670,140 2,389,385
Bruce A. Smith 23,657,373 2,402,152
Patrick J. Ward 23,668,426 2,391,099
Murray L. Weidenbaum 23,660,932 2,398,593
</TABLE>
(c) With respect to the increase in the number of shares which
can be granted under the Amended and Restated Executive
Long-Term Incentive Plan, there were 16,002,411 votes for;
9,964,892 votes against; 92,222 abstentions; and no broker
non-votes.
(d) With respect to the ratification of the appointment of
Deloitte & Touche LLP as the Company's independent auditors
for fiscal year 2000, there were 25,913,769 votes for;
95,435 votes against; 50,321 abstentions; and no broker
non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (June 30, 2000).
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TESORO PETROLEUM CORPORATION
REGISTRANT
Date: August 14, 2000 /s/ BRUCE A. SMITH
--------------------------------------------
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: August 14, 2000 /s/ DON M. HEEP
--------------------------------------------
Don M. Heep
Senior Vice President, Controller
(Chief Accounting Officer)
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule (June 30, 2000).
</TABLE>
27
