UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 31,080,115 shares of the registrant's Common Stock outstanding at May
12, 2000.
<PAGE>
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2000 and
December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Consolidated Operations - Three Months Ended
March 31, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . 4
Condensed Statements of Consolidated Cash Flows - Three Months Ended
March 31, 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. . . . . . . . . . . . . . . . . . . . . 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 23
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
March 31, December 31
2000 1999 *
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 21.0 $ 141.8
Receivables, less allowance for doubtful accounts . . . . 309.3 280.7
Inventories . . . . . . . . . . . . . . . . . . . . . . . 268.3 182.2
Prepayments and other . . . . . . . . . . . . . . . . . . 11.0 6.9
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . 609.6 611.6
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Refining and marketing. . . . . . . . . . . . . . . . . . 914.0 906.6
Marine services . . . . . . . . . . . . . . . . . . . . . 48.9 47.7
Corporate . . . . . . . . . . . . . . . . . . . . . . . . 21.9 21.8
-------- --------
984.8 976.1
Less accumulated depreciation and amortization. . . . . . 254.3 244.5
-------- --------
Net Property, Plant and Equipment. . . . . . . . . . . . 730.5 731.6
-------- --------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . 131.5 143.3
-------- --------
Total Assets. . . . . . . . . . . . . . . . . . . . . . $ 1,471.6 $ 1,486.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 268.7 $ 214.2
Accrued liabilities . . . . . . . . . . . . . . . . . . . 67.9 80.0
Current maturities of long-term debt and other obligations 3.8 27.4
-------- --------
Total Current Liabilities. . . . . . . . . . . . . . . . 340.4 321.6
-------- --------
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . 87.9 85.8
-------- --------
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . 67.9 65.8
-------- --------
LONG-TERM DEBT AND OTHER OBLIGATIONS, LESS CURRENT
MATURITIES . . . . . . . . . . . . . . . . . . . . . . . 352.5 390.2
-------- --------
COMMITMENTS AND CONTINGENCIES (Note D)
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; 32,729,596 shares issued (32,704,856 in 1999). . 5.4 5.4
Additional paid-in capital. . . . . . . . . . . . . . . . 279.3 279.0
Retained earnings . . . . . . . . . . . . . . . . . . . . 184.9 178.6
Treasury stock, 1,011,481 common shares (292,881 in 1999),
at cost. . . . . . . . . . . . . . . . . . . . . . . . . (11.7) (4.9)
-------- --------
Total Stockholders' Equity . . . . . . . . . . . . . . . 622.9 623.1
-------- --------
Total Liabilities and Stockholders' Equity. . . . . . . $ 1,471.6 $ 1,486.5
======== ========
* The balance sheet at December 31, 1999 has been condensed from the audited consolidated
financial statements at that date.
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
---------------------
2000 1999
---- ----
<S> <C> <C>
REVENUES
Refining and marketing. . . . . . . . . . . . . . . . . . $ 1,012.8 $ 472.2
Marine services . . . . . . . . . . . . . . . . . . . . . 41.9 21.2
Other income. . . . . . . . . . . . . . . . . . . . . . . 0.6 -
-------- --------
Total Revenues . . . . . . . . . . . . . . . . . . . . . 1,055.3 493.4
-------- --------
OPERATING COSTS AND EXPENSES
Refining and marketing. . . . . . . . . . . . . . . . . . 972.7 445.9
Marine services . . . . . . . . . . . . . . . . . . . . . 38.7 20.1
Depreciation and amortization . . . . . . . . . . . . . . 9.9 9.5
-------- --------
Total Segment Operating Costs and Expenses . . . . . . . 1,021.3 475.5
-------- --------
SEGMENT OPERATING PROFIT . . . . . . . . . . . . . . . . . 34.0 17.9
General and administrative . . . . . . . . . . . . . . . . (8.7) (6.9)
Interest and financing costs, net of capitalized interest. (9.6) (10.1)
Interest income. . . . . . . . . . . . . . . . . . . . . . 1.5 0.1
Other expense. . . . . . . . . . . . . . . . . . . . . . . (1.9) (0.8)
-------- --------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 15.3 0.2
Income tax provision . . . . . . . . . . . . . . . . . . . 6.0 -
-------- --------
EARNINGS FROM CONTINUING OPERATIONS, NET . . . . . . . . . 9.3 0.2
Earnings from discontinued operations, net of income taxes - 0.1
-------- --------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . 9.3 0.3
Preferred dividend requirements. . . . . . . . . . . . . . 3.0 3.0
-------- --------
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK . . . . . . $ 6.3 $ (2.7)
======== ========
EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS -
BASIC AND DILUTED . . . . . . . . . . . . . . . . . . . . $ 0.20 $ (0.09)
======== ========
NET EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED. . . . . $ 0.20 $ (0.08)
======== ========
WEIGHTED AVERAGE COMMON SHARES - BASIC . . . . . . . . . . 32.2 32.3
======== ========
WEIGHTED AVERAGE COMMON AND POTENTIALLY
DILUTIVE COMMON SHARES - DILUTED. . . . . . . . . . . . . 32.3 32.3
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
Three Months Ended
March 31,
-------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Continuing operations:
Earnings from continuing operations, net . . . . . . . . . . . . . . . . . . $ 9.3 $ 0.2
Adjustments to reconcile earnings from continuing operations to net cash
from operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 10.5 10.0
Amortization of refinery turnarounds and other deferred costs . . . . . . . 5.4 5.6
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 (0.1)
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28.7) (10.8)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (86.1) (4.4)
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . 42.5 48.9
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . 1.8 3.5
------- -------
Total from continuing operations . . . . . . . . . . . . . . . . . . . . (43.2) 52.9
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9.3
------- -------
Net cash from (used in) operating activities . . . . . . . . . . . . . . . . (43.2) 62.2
------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Capital expenditures:
Continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.3) (13.4)
Discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . - (23.4)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 (0.4)
------- -------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . (8.1) (37.2)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit facilities . . . . . . . . 45.0 (61.2)
Repayments of other debt and obligations. . . . . . . . . . . . . . . . . . . (105.0) (16.5)
Issuance of other long-term debt. . . . . . . . . . . . . . . . . . . . . . . - 50.0
Repurchase of Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . (6.8) -
Payment of dividends on Preferred Stock . . . . . . . . . . . . . . . . . . . (3.0) (3.0)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 (0.1)
------- -------
Net cash used in financing activities. . . . . . . . . . . . . . . . . . (69.5) (30.8)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . (120.8) (5.8)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . 141.8 12.0
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD. . . . . . . . . . . . . . . . . . . . $ 21.0 $ 6.2
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.7 $ 20.4
======= =======
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 3.0
======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
<PAGE>
TESORO PETROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The interim condensed consolidated financial statements and notes thereto of
Tesoro Petroleum Corporation and its subsidiaries (collectively, the "Company"
or "Tesoro") have been prepared by management without audit pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, the accompanying financial statements reflect all adjustments that,
in the opinion of management, are necessary for a fair presentation of results
for the periods presented. Such adjustments are of a normal recurring nature.
Certain information and notes normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the SEC's rules and regulations. However, management
believes that the disclosures presented herein are adequate to make the
information not misleading. The accompanying condensed consolidated financial
statements and notes should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 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.
Information for the three months ended March 31, 1999 has been restated to
reflect the exploration and production business as discontinued operations.
Certain 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>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Crude oil and refined products, at LIFO. . . $ 240.6 $ 147.8
Refined products, at FIFO . . . . . .. . . . 4.8 9.9
Merchandise and other. . . . . . . . . . . . 6.3 6.0
Materials and supplies . . . . . . . . . . . 16.6 18.5
------ ------
Total inventories. . . . . . . . . . . . . $ 268.3 $ 182.2
====== ======
</TABLE>
NOTE C - 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
have been restated to reflect this transfer. There were no significant effects
from the transfer on revenues and segment operating profit for the three months
ended March 31, 1999.
Segment operating profit includes those revenues and expenses that are directly
attributable to management of the respective segment. For the periods
presented, revenues were generated from sales to external customers, and
intersegment revenues were not significant. Other income represented revenue of
$1.2 million from settlement of a contract in Marine Services partly offset by
other items in the Refining and Marketing segment. Income taxes, interest and
financing costs, interest income and corporate general and administrative
expenses are not included in determining segment operating profit.
6
<PAGE>
EBITDA represents earnings before 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.
Segment information is as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000 1999
---- ----
<S> <C> <C>
REVENUES
Refining and Marketing . . . . . . . . . . . . . . . . . . . $ 1,012.8 $ 472.2
Marine Services. . . . . . . . . . . . . . . . . . . . . . . 41.9 21.2
Other income . . . . . . . . . . . . . . . . . . . . . . . . 0.6 -
-------- --------
Total Revenues. . . . . . . . . . . . . . . . . . . . . $ 1,055.3 $ 493.4
======== ========
SEGMENT OPERATING PROFIT
Refining and Marketing . . . . . . . . . . . . . . . . . . . $ 30.2 $ 17.5
Marine Services. . . . . . . . . . . . . . . . . . . . . . . 3.8 0.4
-------- --------
Total Segment Operating Profit . . . . . . . . . . . . . . 34.0 17.9
Corporate and Unallocated Costs. . . . . . . . . . . . . . . . (18.7) (17.7)
-------- --------
Earnings from Continuing Operations Before Income Taxes. . . . $ 15.3 $ 0.2
======== ========
EBITDA
Refining and Marketing . . . . . . . . . . . . . . . . . . . $ 39.5 $ 26.3
Marine Services. . . . . . . . . . . . . . . . . . . . . . . 4.4 1.1
-------- --------
Total Segment EBITDA . . . . . . . . . . . . . . . . . . . 43.9 27.4
Corporate and Unallocated. . . . . . . . . . . . . . . . . . (8.5) (7.1)
-------- --------
Total EBITDA - Continuing Operations . . . . . . . . . . . 35.4 20.3
Depreciation and Amortization from Continuing Operations . . (10.5) (10.0)
Interest and Financing Costs . . . . . . . . . . . . . . . . (9.6) (10.1)
-------- --------
Earnings from Continuing Operations Before Income Taxes. . . $ 15.3 $ 0.2
======== ========
DEPRECIATION, DEPLETION AND AMORTIZATION
Continuing Operations:
Refining and Marketing . . . . . . . . . . . . . . . . . . $ 9.3 $ 8.8
Marine Services. . . . . . . . . . . . . . . . . . . . . . 0.6 0.7
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . 0.6 0.5
-------- --------
Total Continuing Operations . . . . . . . . . . . . . . 10.5 10.0
Discontinued Operations. . . . . . . . . . . . . . . . . . . - 7.4
-------- --------
Total Depreciation, Depletion and Amortization . . . . . . $ 10.5 $ 17.4
======== ========
CAPITAL EXPENDITURES
Continuing Operations:
Refining and Marketing . . . . . . . . . . . . . . . . . . $ 7.4 $ 11.1
Marine Services. . . . . . . . . . . . . . . . . . . . . . 1.4 0.2
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . 0.5 2.1
-------- --------
Total Continuing Operations . . . . . . . . . . . . . . 9.3 13.4
Discontinued Operations. . . . . . . . . . . . . . . . . . . - 23.4
-------- --------
Total Capital Expenditures: . . . . . . . . . . . . . . $ 9.3 $ 36.8
======== ========
</TABLE>
7
<PAGE>
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. Segment assets were as follows (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
IDENTIFIABLE ASSETS
Refining and Marketing . . . . . . . . . . . $ 1,285.5 $ 1,223.6
Marine Services. . . . . . . . . . . . . . . 75.9 66.5
Corporate. . . . . . . . . . . . . . . . . . 110.2 196.4
-------- ---------
Total Assets . . . . . . . . . . . . . . . $ 1,471.6 $ 1,486.5
======== =========
</TABLE>
NOTE D - COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
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.
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 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.
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 March 31, 2000, the Company's
accruals for environmental expenses totaled $13 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 environmental laws and regulations, the Company anticipates it
will make capital improvements of approximately $10 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 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.
8
<PAGE>
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 regulations. The
amount of such future expenditures cannot currently be determined by the
Company.
For further information regarding environmental 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 (the "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 ("Performance Period"). The Performance Plan has
several tiers of 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 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.
9
<PAGE>
NOTE E - EARNINGS PER SHARE
Basic earnings per share is 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 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 in both the 2000 and 1999 periods produced
anti-dilutive results and, in accordance with SFAS No. 128, was not included in
the dilutive calculations. Earnings per share calculations are presented below
(in millions except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
---- ----
<S> <C> <C>
BASIC:
Numerator:
Earnings from continuing operations, aftertax. . . $ 9.3 $ 0.2
Discontinued operations, aftertax. . . . . . . . . - 0.1
------ -------
Net earnings . . . . . . . . . . . . . . . . . . . 9.3 0.3
Less dividends on preferred stock. . . . . . . . . 3.0 3.0
------ -------
Net earnings (loss) applicable to common shares. . $ 6.3 $ (2.7)
====== =======
Denominator:
Weighted average common shares outstanding . . . . 32.2 32.3
====== =======
Basic Earnings (Loss) Per Share:
Earnings from continuing operations. . . . . . . . $ 0.20 $ (0.09)
====== =======
Net earnings (loss). . . . . . . . . . . . . . . . $ 0.20 $ (0.08)
====== =======
DILUTED:
Numerator:
Net earnings (loss) applicable to common shares. . $ 6.3 $ (2.7)
Plus earnings impact of assumed conversion of
Preferred Stock (only if dilutive). . . . . . . . - -
------ -------
Net earnings (loss). . . . . . . . . . . . . . . . $ 6.3 $ (2.7)
====== =======
Denominator:
Weighted average common shares outstanding . . . . 32.2 32.3
Add potentially dilutive securities:
Incremental dilutive shares from assumed exercise
of stock options and other (only if dilutive) . 0.1 -
Incremental dilutive shares from assumed conversion
of Preferred Stock (only if dilutive) . . . . . - -
------ -------
Total diluted shares . . . . . . . . . . . . . . . 32.3 32.3
====== =======
Diluted Earnings (Loss) Per Share:
Earnings from continuing operations. . . . . . . . $ 0.20 $ (0.09)
====== =======
Net earnings (loss). . . . . . . . . . . . . . . . $ 0.20 $ (0.08)
====== =======
</TABLE>
10
<PAGE>
NOTE F - CAPITALIZATION
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. At March 31, 2000, the Company had $45.0 million in
borrowings outstanding under the Senior Credit Facility revolving credit line.
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 three months ended March
31, 2000, the Company repurchased 718,600 shares for approximately $6.8 million.
Subsequently, the Company repurchased an additional 638,000 shares for
approximately $6.2 million through May 12, 2000.
The Senior Credit Facility was amended in February 2000 to permit the Company to
repurchase up to 3 million shares of its Common Stock.
11
<PAGE>
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 20 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. This conversion project, which is expected to cost $75
million to $80 million, is in the initial stages of design, procurement and
permitting. Management believes that this improvement to the Washington
refinery will substantially increase annual EBITDA beginning in 2002. In
addition, in December 1999, the installation of a new $13 million distillate
treater at the Washington refinery was completed, which management believes will
add $6 million to $8 million to annual EBITDA.
The Company has initiated several improvements in its marketing programs,
including expansion of its retail operations. 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. The Company has accepted 26 sites and is reviewing an
additional 12 sites. Management expects to open the first Wal-Mart site this
summer and have 30 to 40 sites operating in January 2001 when the Wal-Mart sites
are expected to begin contributing to operating profits. Management is also
working on additional unbranded, high-volume retail agreements in the Pacific
Northwest. Management expects to increase the number of West Coast retail
stations in 2000 by adding 30 to 50 branded stations operated by independent
dealers.
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.
The Company is conducting an evaluation of its cost structure, with specific
emphasis on the Alaska operations which incurred a 1999 operating loss of
approximately $4 million. Concurrent with the broad-based cost review, 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
12
<PAGE>
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 is reorganizing the
administrative and marketing functions to eliminate positions in Alaska by
consolidating them into the Company's West Coast office, which has resulted in
30 employee reductions. In addition, nine of the 31 Company-owned and operated
retail sites in Alaska have been identified 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 will immediately implement 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 in the
first quarter of 2000.
The Company's profit improvement programs also include cost reductions in
shipping and other costs. One of the Company's time chartered vessels went off
charter 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. Management believes that this new charter, combined with
other logistics improvements, will reduce annual shipping costs by $10 million
to $20 million. Management has targeted additional cost reductions of $10
million to $20 million per year, of which a significant portion relates 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; 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.
13
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE
MONTHS ENDED MARCH 31, 1999
SUMMARY
Tesoro's net earnings were $9.3 million for the three months ended March 31,
2000 ("2000 Quarter"), compared with net earnings of $0.3 million for the three
months ended March 31, 1999 ("1999 Quarter"). After dividends on preferred
stock, net earnings per share for the 2000 Quarter were $0.20 (basic and
diluted), compared to a net loss per share of $0.08 (basic and diluted) in the
1999 Quarter. The improvement in earnings reflected higher operating profits
from both the Refining and Marketing and Marine Services segments.
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.
REFINING AND MARKETING
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
(Dollars in millions except per barrel amounts) 2000 1999
---- ----
<S> <C> <C>
Revenues:
Refined products . . . . . . . . . . . . . . . . . . . . . . $ 956.0 $ 453.6
Other revenues (primarily crude oil resales and merchandise)
and income. . . . . . . . . . . . . . . . . . . . . . . . 56.2 18.6
------- -------
Total Revenues . . . . . . . . . . . . . . . . . . . . . . $ 1,012.2 $ 472.2
======= =======
Segment Operating Profit:
Gross margin:
Refinery <F1>. . . . . . . . . . . . . . . . . . . . . . . $ 126.9 $ 102.6
Non-refinery:
Other product and crude oil marketing <F2> . . . . . . . 9.9 7.8
Merchandise. . . . . . . . . . . . . . . . . . . . . . . 6.6 5.0
------- -------
Total gross margins. . . . . . . . . . . . . . . . . . 143.4 115.4
Operating expenses and other . . . . . . . . . . . . . . . . 103.9 89.1
Depreciation and amortization. . . . . . . . . . . . . . . . 9.3 8.8
------- -------
Segment Operating Profit. . . . . . . . . . . . . . . . . . $ 30.2 $ 17.5
======= =======
Refinery Throughput (thousands of barrels/day):
Alaska . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.0 44.4
Hawaii . . . . . . . . . . . . . . . . . . . . . . . . . . . 85.8 87.4
Washington . . . . . . . . . . . . . . . . . . . . . . . . . 105.6 97.2
------- -------
Total Refinery System Throughput. . . . . . . . . . . . . . 230.4 229.0
======= =======
% Heavy Crude Oil. . . . . . . . . . . . . . . . . . . . . . 46% 40%
Refined Products Manufactured (thousands of barrels per day):
Gasoline and gasoline blendstocks . . . . . . . . . . . . . 90.9 90.2
Jet fuel . . . . . . . . . . . . . . . . . . . . . . . . . . 54.0 57.9
Diesel fuel. . . . . . . . . . . . . . . . . . . . . . . . . 30.0 31.2
Heavy oils, residual products and other. . . . . . . . . . . 63.1 60.6
------- -------
Total Refined Products Manufactured . . . . . . . . . . . . 238.0 239.9
======= =======
Total Refinery System Product Spread ($/barrel) <F3> . . . . . $ 6.06 $ 4.98
======= =======
Segment Product Sales (thousands of barrels per day) <F4>:
Gasoline and gasoline blendstocks. . . . . . . . . . . . . . 124.2 109.6
Jet fuel . . . . . . . . . . . . . . . . . . . . . . . . . . 77.1 69.9
Diesel fuel. . . . . . . . . . . . . . . . . . . . . . . . . 43.9 38.7
Heavy oils, residual products and other. . . . . . . . . . . 59.5 59.6
------- -------
Total Product Sales . . . . . . . . . . . . . . . . . . . . 304.7 277.8
======= =======
Total Segment Gross Margins on Product Sales ($/barrel) <F5>:
Average sales price. . . . . . . . . . . . . . . . . . . . . $ 34.51 $ 18.14
Average costs of sales . . . . . . . . . . . . . . . . . . . 28.99 13.72
------- -------
Gross Margin. . . . . . . . . . . . . . . . . . . . . . . . $ 5.52 $ 4.42
======= =======
14
<PAGE>
<FN>
<F1> Represents throughput at the Company's refineries times refinery product spread.
<F2> 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.
<F3> Refinery system product spread represents an average for the Company's three
refineries.
<F4> Sources of total product sales include products manufactured at the refineries,
products drawn from inventory balances and products purchased from third parties.
<F5> Gross margins on total product sales include margins on sales of manufactured and
purchased products and the effects of inventory changes.
</TABLE>
Segment operating profit for the Refining and Marketing segment was $30.2
million in the 2000 Quarter, an increase of $12.7 million from segment operating
profit of $17.5 million in the 1999 Quarter. The improvement was primarily due
to higher sales volumes and increased West Coast and Alaska refinery margins,
compared with the 1999 Quarter. The Company's West Coast refinery margins
reached double-digit levels in March 2000. Improvements in market conditions
and changes in refinery feedstock resulted in an increase of $1.08 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. Other revenues increased in the 2000 Quarter
primarily due to higher crude oil resales, which were approximately $40.7
million in the 2000 Quarter and $5.8 million in the 1999 Quarter. The increase
in costs of sales reflected higher costs of crude oil and purchased products, as
well as higher volumes. The Company's total refinery system throughput, which
averaged 230,400 Bpd in the 2000 Quarter, was only slightly higher than in the
1999 Quarter, but the refineries ran a higher percentage of heavy crude oil
which provided better values than higher-priced light crude oil during this
period. Refinery feedstocks for the 2000 Quarter consisted of 28% crude oil
from foreign sources, 39% crude oil from Alaska's North Slope, 14% crude oil
from Canada, 15% crude oil from Alaska's Cook Inlet, and 4% other feedstocks.
Refinery gross margin increased $24.3 million to $126.9 million in the 2000
Quarter due primarily to the increase in average refinery product spread per
barrel to $6.06 in the 2000 Quarter compared to $4.98 in the 1999 Quarter.
Non-refinery margins increased by $3.7 million to $16.5 million in the 2000
Quarter due primarily to higher sales volumes of purchased products and
increased merchandise sales through Company-owned retail stations.
The improvement in the Company's margins was partially offset by a $14.8 million
increase in total operating expenses to $103.9 million in the 2000 Quarter,
primarily due to higher marketing expenses, higher state and local tax expense,
and an increase in refinery utility costs which reflected higher fuel prices.
Operating expenses included non-cash amortization of major maintenance costs of
$5.2 million in the 2000 Quarter and $4.2 million in the 1999 Quarter.
As previously discussed in "Strategy" on page 12 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.
15
<PAGE>
MARINE SERVICES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
(Dollars in millions) 2000 1999
---- ----
<S> <C> <C>
Gross Operating Revenues:
Fuels. . . . . . . . . . . . . . . . . . . . . $ 34.9 $ 15.6
Lubricants and other . . . . . . . . . . . . . 3.8 3.3
Services . . . . . . . . . . . . . . . . . . . 3.2 2.3
------ ------
Gross Operating Revenues . . . . . . . . . . 41.9 21.2
Costs of Sales . . . . . . . . . . . . . . . . . 31.0 12.9
------ ------
Gross Profit . . . . . . . . . . . . . . . . 10.9 8.3
Other Income . . . . . . . . . . . . . . . . . . 1.2 -
Operating Expenses . . . . . . . . . . . . . . . (7.7) (7.2)
Depreciation and Amortization. . . . . . . . . . (0.6) (0.7)
------ ------
Segment Operating Profit . . . . . . . . . $ 3.8 $ 0.4
====== ======
Sales Volumes (millions of gallons):
Fuels, primarily diesel. . . . . . . . . . . . 41.5 36.9
Lubricants . . . . . . . . . . . . . . . . . . 0.5 0.5
</TABLE>
Segment operating profit improved by $3.4 million in the 2000 Quarter due to a
gross profit increase of $2.6 million on higher sales volumes and service
revenues. In addition, the Company received income of $1.2 million from
settlement of a service contract. The higher volumes and service revenues
reflected increased exploration and development activity in the U.S. Gulf of
Mexico, compared with the 1999 Quarter. Gross operating revenues increased
$20.7 million from the 1999 Quarter, reflecting higher fuel prices, fuel sales
volumes and service revenues. The increase in costs of sales reflected the
higher fuel 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
The $1.8 million increase in general and administrative expenses, compared with
the 1999 Quarter, was due primarily to higher professional fees and employee
costs associated with business development and personnel realignment.
INTEREST AND FINANCING COSTS
Interest and financing costs decreased by $0.5 million from the 1999 Quarter,
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 late December 1999 and in March
2000. 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.
INTEREST INCOME
Interest income increased by $1.4 million due to temporary investment during the
2000 Quarter of a portion of the proceeds from the December 1999 sales of
exploration and production operations. A substantial portion of those proceeds
was used to repay additional debt in March 2000 (see Note F of Notes to
Condensed Consolidated Financial Statements).
16
<PAGE>
OTHER EXPENSE
The $0.9 million increase in other expense was due primarily to costs of
acquisition strategies and an increase in environmental provisions related to
former operations.
INCOME TAX PROVISION
The increase of $6.0 million in the income tax provision was mainly due to the
$15.1 million increase in pretax earnings from continuing operations.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
The Company's primary sources of liquidity are existing cash, 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 payments. Based upon current needs, management
believes that 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 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 March 31, 2000, was comprised of the
following (in millions):
Debt and other obligations outstanding, including current maturities:
Senior Credit Facility - Revolver . . . . $ 45
9% Senior Subordinated Notes. . . . . . . 297
Other senior debt and obligations . . . . 14
----
Total debt and obligations. . . . . . . 356
Mandatorily Convertible Preferred Stock . 165
Common stockholders' equity . . . . . . . 458
----
Total Capitalization. . . . . . . . . . $ 979
====
At March 31, 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 financing and credit arrangements under a three-year Senior
Credit Facility, dated July 2, 1998, with a consortium of banks. The Senior
Credit Facility is currently comprised of a $175 million revolving credit and
letter of credit facility ("Revolver"). Based on current needs, the Company
believes that the 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 March 31, 2000,
unused availability under the Senior Credit Facility was approximately $113
million.
17
<PAGE>
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 March 31, 2000. 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 was amended in February 2000 to permit the
Company to repurchase up to 3 million shares of its Common Stock.
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. Under the program, the Company
repurchased 718,600 shares of Common Stock for approximately $6.8 million
through March 31, 2000. Subsequently, the Company repurchased an additional
638,000 shares of Common Stock for $6.2 million through May 12, 2000.
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 will target 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 Quarter, the Company's capital expenditures totaled $9 million,
which included initial costs related to two significant capital investment
projects. First, the Company commenced a heavy oil conversion project at the
Washington refinery. The licensor agreement was completed and the design work
and initial procurement phase has commenced. Management believes that this
project, which has an estimated total cost of $75 million to $80 million, will
be completed in late 2001 and expects to spend approximately $28 million of the
total cost in the year 2000. Secondly, 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 eleven western states.
In the initial phase of this program, the Company plans to build 30 to 40
facilities. The Company has accepted 26 of the sites offered by Wal-Mart and is
reviewing an additional 12 sites.
MAJOR MAINTENANCE COSTS
The Company has scheduled a turnaround, including catalyst change, for certain
units at its Hawaii refinery in the third quarter of 2000. The total cost of
this turnaround is estimated at $8 million. Amortization of turnaround costs,
other major maintenance costs and catalysts for the Company's three refineries
are projected to total approximately $24 million during the year 2000.
18
<PAGE>
CASH FLOWS
Components of the Company's cash flows are set forth below (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000 1999
---- ----
<S> <C> <C>
Cash Flows From (Used In):
Operating Activities . . . . . . . . . . . . $ (43.2) $ 62.2
Investing Activities . . . . . . . . . . . . (8.1) (37.2)
Financing Activities . . . . . . . . . . . . (69.5) (30.8)
-------- --------
Decrease in Cash and Cash Equivalents. . . . . $ (120.8) $ (5.8)
======== ========
</TABLE>
Net cash used in operating activities totaled $43 million during the 2000
Quarter, compared to $62 million provided by operating activities for the 1999
Quarter. Cash flows from earnings from continuing operations before
depreciation and amortization, deferred income taxes and other noncash charges
were $27 million in the 2000 Quarter, compared with $16 million in the 1999
Quarter. Net increases in operating assets and liabilities in the 2000 Quarter
amounted to $70 million, primarily increases in receivables and inventories due
to higher volumes and prices. In comparison, working capital requirements
decreased in the 1999 Quarter by $37 million. Net cash used in investing
activities of $8 million during the 2000 Quarter included capital expenditures
of $9 million, partly offset by proceeds from asset sales. Net cash used in
financing activities of $70 million in the 2000 Quarter included repayments of
long-term debt totaling $105 million, repurchases of Common Stock of $7 million
and payment of dividends on Preferred Stock of $3 million. These uses of cash
were partly offset by net borrowings under the Revolver of $45 million (gross
borrowings of $333 million offset by gross repayments of $288 million).
At March 31, 2000, the Company's working capital totaled $269 million, which
included cash and cash equivalents of $21 million. The working capital ratio
was 1.8:1 at March 31, 2000, compared to 1.9:1 at December 31, 1999, reflecting
short-term fluctuations in components of working capital.
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 March 31, 2000, the Company's
accruals for environmental expenses totaled $13 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 environmental laws and regulations, the Company anticipates it
will make capital improvements of approximately $10 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 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.
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For further information on environmental and other contingencies, see Note D of
Notes to Condensed Consolidated Financial Statements in Part I, Item 1, and
Legal Proceedings in Part II, Item 1, included herein.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued 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 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. 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 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; 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.
20
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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, 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 March 31, 2000 and December 31, 1999, the
Company's inventories of refinery feedstocks and refined products totaled 11.9
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 March 31, 2000, the Refining and Marketing segment
held the following derivative commodity instruments:
. Crude oil futures contracts to purchase 165,000 barrels in May 2000 at a
weighted average price of $26.70 per barrel. The total amount of the
contracts was $4.4 million and the fair value approximated the contract
amount.
. Contingent obligations to purchase 200,000 barrels of crude oil in May 2000
at a weighted average strike price of $27.25 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
$0.2 million at March 31, 2000.
At March 31, 2000, the Marine Services segment held the following derivative
commodity instruments as part of its fuel acquisition program:
. Heating oil futures contracts to purchase 1.3 million gallons from May
through June 2000, at a weighted average price of $0.4118 per gallon. The
total contract amount was $0.6 million, and the fair value was $0.9 million
at March 31, 2000.
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INTEREST RATE RISK
Total debt at March 31, 2000 included $45 million of floating-rate debt under
the Revolver and $311 million of fixed-rate debt. The interest rate on the
floating-rate debt was 9.0% at March 31, 2000. The impact on annual cash flow
of a 10% change in the floating rate for the Revolver (90 basis points) would
be $0.4 million.
At March 31, 2000, the fair market value of the Company's fixed-rate debt
approximated its book value of $311 million. The floating-rate debt will mature
in 2001. Fixed-rate debt of $297 million will mature in 2008, while other
fixed-rate notes and obligations will mature over varying periods through 2013.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, on October 2, 1998, the Alaska Department of
Environmental Conservation ("ADEC") issued a Notice of Violation ("NOV") against
Tesoro Alaska Company ("Tesoro Alaska"), a subsidiary of the Company, for
non-compliance with its refinery air quality permit. This NOV alleged 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 had entered into a Compliance Order by Consent with ADEC until
issuance of a new air quality permit. On March 21, 2000, ADEC issued a new air
quality and construction permit to Tesoro Alaska. The permit, in part, allows
Tesoro Alaska to install an improved air emission control device at the Alaska
refinery. Upon issuance of the new permit, the Compliance Order by Consent
expired and the matter was resolved.
As previously reported, 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
alleged that the separator was operated without a permit. On April 20, 2000,
the Company and the District settled all outstanding issues related to the NOV,
which included payment of a civil penalty of $1,467.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Management Stability Agreement between the Company and Faye W.
Kurren dated March 15, 2000.
10.2 Management Stability Agreement between the Company and Richard
M. Parry dated March 15, 2000.
10.3 Management Stability Agreement between the Company and Joseph
E. Sparano dated March 15, 2000.
27.1 Financial Data Schedule (March 31, 2000).
(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.
23
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TESORO PETROLEUM CORPORATION
REGISTRANT
Date: May 15, 2000 /s/ BRUCE A. SMITH
Bruce A. Smith
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: May 15, 2000 /s/ DON M. HEEP
Don M. Heep
Vice President, Controller
(Chief Accounting Officer)
24
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EXHIBIT INDEX
Exhibit
Number
10.1 Management Stability Agreement between the Company and Faye W. Kurren
dated March 15, 2000.
10.2 Management Stability Agreement between the Company and Richard M.
Parry dated March 15, 2000.
10.3 Management Stability Agreement between the Company and Joseph E.
Sparano dated March 15, 2000.
27.1 Financial Data Schedule (March 31, 2000).
25
Exhibit 10.1
MANAGEMENT STABILITY AGREEMENT
This Management Stability Agreement is dated March 15, 2000, between Tesoro
Petroleum Corporation, a Delaware corporation (the "Company"), and Faye W.
Kurren ("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 two times the base salary of
the Employee at the then current rate; and
(b) A lump-sum payment equal to (i) two times 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,
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 24 months from the date of termination and shall receive two years
additional service credit under the current non-qualified supplemental pension
plans, or successors thereto, of the Company applicable to the Employee on 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
2
<PAGE>
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 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
3
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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 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 offices where Employee
is presently based to a location outside that office area, or
the Company's requiring Employee to be based anywhere other
than at the location of the Company's offices where Employee
is presently based, 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
4
<PAGE>
any such relocation of the Company's offices where Employee is
presently based, 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 (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.
5
<PAGE>
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, 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
300 Concord Plaza Drive
San Antonio, Texas 78216-6999
6
<PAGE>
If to the Employee: Faye W. Kurren
813 Hunakai Street
Honolulu, Hawaii 96816
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
COMPANY: TESORO PETROLEUM CORPORATION
By /s/ BRUCE A. SMITH
Bruce A. Smith,
Chairman of the Board of Directors,
President and Chief Executive Officer
EMPLOYEE: /s/ FAYE W. KURREN
Faye W. Kurren
7
Exhibit 10.2
MANAGEMENT STABILITY AGREEMENT
This Management Stability Agreement is dated March 15, 2000, between Tesoro
Petroleum Corporation, a Delaware corporation (the "Company"), and Richard M.
Parry ("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 two times the base salary of the
Employee at the then current rate; and
(b) A lump-sum payment equal to (i) two times 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,
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 24 months from the date of termination and shall receive two years
additional service credit under the current non-qualified supplemental pension
plans, or successors thereto, of the Company applicable to the Employee on 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
2
<PAGE>
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 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
3
<PAGE>
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 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 offices where Employee
is presently based to a location outside that office area, or
the Company's requiring Employee to be based anywhere other
than at the location of the Company's offices where Employee
is presently based, 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
4
<PAGE>
any such relocation of the Company's offices where Employee is
presently based, 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 (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.
5
<PAGE>
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, 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
300 Concord Plaza Drive
San Antonio, Texas 78216-6999
6
<PAGE>
If to the Employee: Richard M. Parry
4608 51st Avenue South
Seattle, Washington 98118
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
COMPANY: TESORO PETROLEUM CORPORATION
By /s/ BRUCE A. SMITH
Bruce A. Smith,
Chairman of the Board of Directors,
President and Chief Executive Officer
EMPLOYEE: /s/ RICHARD M. PARRY
Richard M. Parry
7
Exhibit 10.3
MANAGEMENT STABILITY AGREEMENT
This Management Stability Agreement is dated March 15, 2000, between Tesoro
Petroleum Corporation, a Delaware corporation (the "Company"), and Joseph E.
Sparano ("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 two times the base salary of
the Employee at the then current rate; and
(b) A lump-sum payment equal to (i) two times 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,
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 24 months from the date of termination and shall receive two years
additional service credit under the current non-qualified supplemental pension
plans, or successors thereto, of the Company applicable to the Employee on 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
2
<PAGE>
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 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
3
<PAGE>
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 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 offices where Employee
is presently based to a location outside that office area, or
the Company's requiring Employee to be based anywhere other
than at the location of the Company's offices where Employee
is presently based, 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
4
<PAGE>
any such relocation of the Company's offices where Employee is
presently based, 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 (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.
5
<PAGE>
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, 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
300 Concord Plaza Drive
San Antonio, Texas 78216-6999
6
<PAGE>
If to the Employee: Joseph E. Sparano
22192 Montellano
Mission Viejo, California 92691
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
COMPANY: TESORO PETROLEUM CORPORATION
By /s/ BRUCE A. SMITH
Bruce A. Smith,
Chairman of the Board of Directors,
President and Chief Executive Officer
EMPLOYEE: /s/ JOSEPH E. SPARANO
Joseph E. Sparano
7
<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 THREE MONTH
PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 21,000
<SECURITIES> 0
<RECEIVABLES> 310,900
<ALLOWANCES> 1,600
<INVENTORY> 268,300
<CURRENT-ASSETS> 609,600
<PP&E> 984,800
<DEPRECIATION> 254,300
<TOTAL-ASSETS> 1,471,600
<CURRENT-LIABILITIES> 340,400
<BONDS> 352,500
0
165,000
<COMMON> 5,400
<OTHER-SE> 452,500
<TOTAL-LIABILITY-AND-EQUITY> 1,471,600
<SALES> 1,054,700
<TOTAL-REVENUES> 1,055,300
<CGS> 1,011,400
<TOTAL-COSTS> 1,011,400
<OTHER-EXPENSES> 10,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,600
<INCOME-PRETAX> 15,300
<INCOME-TAX> 6,000
<INCOME-CONTINUING> 9,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,300
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
<FN>
</TABLE>
